Saturday, November 15, 2008

Should they bail out GM?

The Bush administration has balked at bailing out GM and now GM hopes to make it to Santa Claus' administration. This is going to be one of the great economic debates of all time and if GM makes it after a bailout, it will be used as proof that it should have been done. But, if you put your life savings on a roulette wheel number and win, is that proof you should have done it or is it merely the fact that luck separated a fool from a genius?

I know I don't understand what is going on when the statement prevails that if GM falls to $12 billion in cash they are out of business? That really doesn't make sense to me, but maybe I have lived on the edge for too long. If a company with $12 billion in cash is broke, then what is a family with $200 to make it until a week from now? This isn't the primary problem though.

The primary problem is that the figure of $25 billion that has been tossed around appears to not amount to much in this case. It is true that the loss of GM would be devastating, but a bankruptchy might work as well as a bailout from where I sit. It would force some changes in a company that is clearly broken. It isn't like they were blindsided with this economy, as they have known for the past 50 years that auto sales at the level we have witnessed for the past 15 years are an abnomoly and not the norm and that eventually something bad was going to happen, like a real recession.

My first instinct is to save GM. Mom, apple pie and Chevrolet, the symbol of American power and the backbone of many a local economy to boot. Then, the question moves to, what do you do with Ford? Do you save them as well? I don't see why not. It is clear that over the short term losing these operations would devastate the US and most likely roil the financial system more than anything that has gone down so far. Who has the CDS's on GM? Are we up for another bailout if they go down? It might be a good idea to walk them pst the window these swaps cover, if for no other reason than to disarm a devastating situation.

But, can you blindly save a company that has seen the handwriting on the wall if they continued to operate as they are? What are they going to do different than they have done over the past 20 years? It is clear they can't stand around and boast we are GM, get out of the way, can they? This company has not only made obligations they couldn't keep, but it appears they are run so purely inefficiently that it is a wonder they ever made a dime. I remember when they were the first company in the world to net a billion in profit. That has been a long time ago.

Here is what concerns me. They burned through $6 or $7 billion in cash last quarter. They supposedly have $20 billion right now. If I had that company, I think I could figure out how to get to January before I burned up $8 billion, but that is beside the point. The economy isn't going to get any better next year than it is now, as it has just recently gotten bad. This means that come January 2010, they are going to need another $25 billion if they don't do something. We are faced with 2 problems if they do get the money. One is that the current management of GM is incompetent. The second is that I doubt there is a group of managers that could be brought in to manage an auto company the next year that would be any better. And, heaven forbid you let the government bring in their people, as their people move on to companies like Fannie Mae and Freddie Mac and Wall Street firms where the pickings are easy, not to truly competitive situations. So, you put in $25 billion and hope a group of idiots can figure out how to be geniuses over the next year?

Does anyone have a clue how much money $25 billion is? It will pay 1 million people $25,000. GM is going to need another $25 billion next year if simple math means anything. Remember this group has been a deer in the headlights for a long time. In any case, the typical American probably pays no more than $5,000 a year in income taxes, so GM swallows the income taxes of 5 million working class Americans every year it is on life support.

This wasn't a sudden event. Back in 2003, GM borrowed a large chunk of money and its stock rallied. Anyone with a brain who noticed what GM paid on that money had to realize their credit rating at the time was a joke, as investment grade companies don't pay 9% on money. It also goes to show you how stupid the American investor has been. I will leave that for another writing, but GM is just one example of how poorly Americans have done investing their money. But, this example might also shed light onto what the same group of people might do in backing GM again.

Had you asked me a week ago if we should bail out GM, I would have said, do we have any choice. In fact, I thought guys like Dennis Kneale on CNBC were flat stupid saying it needed to go bust. I still believe we are looking at a disaster should they go under, but do we have any choice? Remember, this company knew it needed to pull its act together in 2003. Its labor force knew it needed to pull it together in 2003. They had 4 banner years of auto sales to allow them to get it together and now we have a company that is burning $20 billion a year in cash? This is like giving an alcoholic another case of whiskey and $5000 so he can get over a rough spell.

I can't begin to know all the details of GM's operations, but I believe I can spot a losing proposition when I see one. Ford is going to need a bailout to, especially if they bail out GM and it might only be because GM was bailed out that Ford will need help. Ford is in better shape than GM and it has fixed most of its quality problems to the point that the last I read, they were making cars on par with Toyota. Chrysler is also on life support and it appears to me that GM attempted an end run to merge with Chrysler so it would have more ammunition to get bailed out. Why does GM need Chrysler? Don't they already have the horizon covered with Buick, Pontiac, Chevrolet, Cadillac and GMC trucks, not to mention Saab and whatever else they own? Not only did that seem to be a political ploy, but I wouldnt be surprised if it wasn't to get Cerebus, their partner in GMAC some free money?

It is clear that Ovomit is coming to the rescue after the evil Bush has failed to respond. Bail out banks, but not union jobs? There is a difference between attempting to prevent trillions in systematic losses and saving a few hundred thousand union jobs. I am sure that Obama is going to attempt to reunionize the US and force the Japanese automakers to pay union wages as well, thereby polluting the entire US labor force. This will only be the death knell for the entire American auto industry as the jobs move to Korea.

So, for me, the question revolves around whether $25 billion will do the job? I don't believe it will and I believe the US consumer will begin to get very inferior automobiles out of GM should this occur. There will be no incentive to make GM work as long as Uncle Sam is standing there with all the money they could ever need. It is clear that American management has to change and the relationship between shareholders and management has to move more toward taking care of the investment made in the companies. I can't blame labor in this matter, as management negotiated these contracts. I blame Wall Street and the shareholders for not taking care of American business. It is clear that Ford is in better shape than GM, if for no other reason than a major shareholder, the Ford family is still involved with the company. Fail to bail out GM and Ford might not need a bailout.

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