Chrysler

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The Auto Industry: How Much Longer?

One last thing on what has been a very busy day: the end seems to be well and truly nigh for both GM and Chrysler.

Every other word out of a GM official’s mouth now suggests that the company is headed toward bankruptcy of some sort. The latest was the announcement by GM’s CFO that it would miss making the next payment on its debt. That’s a $1 billion default looming in the next few days. Yes it may all be a negotiating position: GM is clearly trying to extract as much as it can from its creditors. But these games cannot go on forever. Government and creditor patience is wearing thin and GM’s room to maneuver is getting ever smaller. Today’s leak that it is thinking of furloughing all its US plants for the entire summer surely cannot be a sign of health either.

I look for GM to fold sometime this summer.

The clinical part of me says ‘about time too’; the more sensitive side expresses sympathy and concern for the thousands of workers, families, and communities who will be inevitably swept up in the subsequent maelstrom.

Chrysler too is at the end. Today’s leak of the administration having asked the company to prepare a bankruptcy filing for use as early as next week is a negotiating gambit. So far Chrysler’s creditors are playing hardball and not cooperating with the government. I can see that they have to protect their interests, but they have a losing hand. Were the government to pull the plug the creditors would most likely end up with nothing. So the ‘crumbs’ the administration is offering now will seem like a great deal on Monday.

Look for Chrysler to slip into history within a few days. The deadline is next week. And the word is that the government wants to get this mess cleaned up so it can move onto bigger matters like GM and the banks.

So, we are at the end of American dominance of the auto industry. A sad moment. But one that could have, and should have, been avoided. A combination of hubris, incompetence, greed, and insularity brought both thee companies down. What happens to them from here is uncertain. What is not is the passing of the torch in auto manufacturing to Asia.

Yes there will be a big auto manufacturing presence still in states like Alabama and Tennessee, but the design, planning, profit and authority will all now be centered elsewhere.

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Oh What A Tangled Web

Call it annoying. Call it frustrating. Just call it a mess. The current negotiations, if that’s not too dignified a term, over the future of Chrysler is an apt example of just how tangled all the various threads of our economy-in-crisis are.

Chrysler, as you know, is on its last legs. It will assuredly not survive in its current form. The administration is forcing it into a shotgun marriage with Fiat as quickly as it can, with an April 30th deadline looming on the horizon.

Amongst all the details still to be worked out is the extent of the loss that Chrysler’s bondholders and other creditors will have to take in order for the economics of the deal to work out satisfactorily.

Well, today negotiations broke down because a group of those creditors rejected the government’s position and proposed a totally different one of their own. The government had wanted the creditors to take a loss of about $5.8 billion leaving them with a $1.1 billion stake in the reconstructed balance sheet – they have a $6.9 billion stake right now. Instead of this the creditors want to keep a $4.5 billion stake and take an additional $1 billion in preferred stock. In other words they don’t want to take that much of a loss at all.

I realize this is all the normal pushing and shoving associated with a forced reorganization such as Chrysler’s, but it was the names of the creditors arguing with the administration that caught my eye.

JP Morgan Chase; Citicorp; Goldman Sachs; and Morgan Stanley.

Now we see the entanglement.

On the one hand the government is furiously trying to keep banks like Citicorp afloat by handing over billions of taxpayer money. And on the other Citicorp is obstructing the reorganization and bailout of Chrysler.

Of course we want Citi et al to defend their positions strongly since that will mean they won’t take such a large loss and will thus protect their capital … so they can start lending. But naturally we also want them to take a big loss so that Chrysler can re-emerge as a viable company and we can preserve those auto industry jobs.

And, just to confuse things more: presumably if they take a big loss we will be called in to provide them with more capital to offset that loss … that they took to protect jobs and to limit taxpayer losses on Chrysler.

At the end of the day it seems the taxpayers will have to subsidize Chrysler, whose creditors will have to take some form of a loss, which will be paid for by the taxpayers.

Good luck figuring it all out.

Hopefully someone at the Treasury Department has a plan.

And equally hopefully, somewhere within that tangled web some jobs will be preserved and maybe even a bank bolstered.

Maybe.

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