Have you ever been in a situation where you’re running a company, and you’re lining up a round of financing, but you run short of time? And you need to complete some kind of near-term funding to avoid doing something really painful, like a layoff?
Welcome to bridge-loan hell. Bridge financing is pretty normal and standard in many cases, but when done out of necessity, it’s not something you ever want to face. You’re asking someone to put capital into a business which is in obvious distress. Speaking figuratively, you’ll have done well if you can get terms that only require you to give up your first child and not all the rest of them.
That’s kind of where General Motors is, right about now.
Every time we get into the subject of GM, and the US automakers generally, several points get made vociferously which I won’t engage here. First, their quality is said to suck (it doesn’t). Second, their health and pension costs are killing them (there’s some truth to that). Third, they can’t market their way out of a paper bag. (Except for one little thing: Americans love driving trucks and big SUVs, so who’s stupider? The people who demand those things, or the people who give them what they want?)
The problem facing GM is that they’re running out of cash. You can only lose money for so long before this happens, and they’ve done all the things they can think of to forestall this day. (Asset sales, a certain amount of debt restructuring, internal cost-cutting, marginal concessions from the UAW, etc.)
The auto business has run on a roughly five-to-seven year cycle for decades now. People are used to boom and bust in this industry. And in its recent history, GM has always played the game for cash flow rather than for profitability. Their operating costs and capital requirements (which include financing their customers) have always been so high that they’ve just cranked out as many vehicles as possible just to stay solvent. (Ford Motor has long played the same game, but they haven’t been as close to the edge. Although that may be changing.)
So now that the bottom is falling out of the consumer economy, the problem with GM’s high-wire act is becoming apparent: if North American unit vehicle sales crash along with consumer demand, you can’t generate enough cash flow to stay alive.
And this has happened with remarkable speed. A couple of months ago, many people (including myself) figured that GM had until maybe the third quarter of 2009 before they ran out of runway. And if an economic turnaround materialized in that time, GM would be able to muddle through.
But now GM’s CEO Rick Wagoner is being forced to admit that there is nothing potentially good which can happen to turn things around for GM in that time. They are no longer in control of their destiny.
A Chapter-11 bankruptcy (in which the business continues to operate under court protection from creditors) might have been an option for GM. Except for the impairment in cash flow. It appears they will not only will have trouble servicing their debt, but indeed may not even be able to keep their doors open.
That’s why I started this piece off talking about bridge financing. GM is facing a crash, in which they may possibly be forced to stop operating. There really isn’t any time to arrange sales of massive chunks of their capital-asset base to foreign automakers, who are facing their own credit-availability problems.
And besides, how do you think Congress would react if tomorrow’s headlines announced that GM was going to sell half of its production plants to Toyota and Volkswagen for one dollar plus assumption of debt and labor contracts? And even if they did that, it still would do nothing to address their cash squeeze.
So let’s take a look at the key stakeholders in this mess.
First, the common stockholders. Ordinarily they wouldn’t matter, except that many of them are pension funds that benefit state and local governments. These people already have the Federal government’s attention.
Then, the long-term debtholders. People who have lent money to GM need to come out of this with something. You never want to kick debt investors in the teeth, because in the game of Global Economy, they’re the kids who own the ball. You don’t want them to give up on the game and take the ball home with them. The world is already credit-crunched as it is.
Next, the unions. It’s easy to make these people the bad guys, because they’re patently overpaid. And being unions, they negotiate like children. To a certain extent, they’re happy to shoot themselves in the head if they can land a punch on management at the same time. Having said this, though, the UAW leadership is starting to see a certain amount of reason. They need to seriously consider the possibility of across-the-board reductions in pay and benefit levels. It’s not economically realistic for autoworkers to retain their current compensation.
Next, the three tiers of suppliers. Over the last 30 years or so, the large automakers have dealt with their top-heavy, union-driven cost structures by pushing as much value-creation down to smaller companies and contractors as possible. These companies, which dot nearly every square mile of the upper Midwest, operate on thin capitalization and thin margins in the best of times, and they often have no customers other than the big automakers. A major disruption at GM is going to make Christmas bleak for millions of people.
Finally, the taxpayers. We’re the people who have guaranteed GM’s pension and health-insurance obligations to their current workers, their vast army of retirees, and all their families and dependents.
Who’s going to bridge GM? It sure as hell won’t be any syndicate of banks that I can think of. And the lack of bank credit takes the private equity players out of the game too.
It’s going to be the Federal government. There’s really no way out of this.
And whenever you give someone a bridge loan that they absolutely need to survive, you bend them over and force them to accept truly onerous terms.
If I were handling this for the US Treasury, I’d insist on a total wipeout of GM’s shareholders and management, force them to liquidate assets over perhaps a two-year period, and take a slug of preferred stock with a very large annual interest rate. Because you know there will be no possibility of making money on this bailout. The auto industry has too much of the wrong kind of production capacity, and it needs to disappear.
Are there any crown jewels? Most emphatically yes. Do you happen to know who the largest-selling automaker in China is? None other than General Motors. Their overseas businesses (including Europe and LATAM) are strong and full of growth potential. American taxpayers need to be exposed to this upside as part of owning a reorganized GM.
Instead, what do you think Obama is likely to do?
As with all things Obama, we’ve heard every side of the argument, with no suggestion that he’s made up his mind what he actually thinks. But just judging from volume, it looks like he wants General Motors to become a ward of the state, and an investment platform for all kinds of alternative-energy-using vehicles. In the process, he’ll probably avoid rationalizing and shrinking GM’s antiquated labor contracts, healthcare obligations, and other cost structures.
Sorry to reach for a hackneyed metaphor, but there are two things you can do when someone has a life-threatening cancer. You can yank the cancer out. The patient either dies on the table, or he starts recovering. Or you can keep feeding the cancer and applying expensive palliatives for years and years until he just rots away.
It’s too soon to tell, but the latter course is the one that Obama appears inclined to follow with General Motors.
It’s also possible that GM’s management themselves will push the situation to a boil now, and force the outgoing Bush people to deal with it. That would probably suit Obama just fine, as it would allow him to keep looking graceful and not have to make a decision.
-Francis Cianfrocca
Moe Lane
Dan McLaughlin
Dan Spencer
Jeff Emanuel
Neil Stevens
Caleb Howe
Daniel Horowitz
Courage
jcincy Tuesday, November 11th at 10:04AM EDT (link)President-Elect Obama wants President Bush to move on this. Does this man have a spine? Has this man ever made a difficult decision in his life?
If President Bush pushes for a bailout of the Big 3 and they fail anyway, he will be the fall guy yet again. This decade has been all about one thing… blame George W. Bush for every failure and every made-up failure this country has faced.
If the bailout some how worked, guess who will receive the accolades?
The Sitting President needs to respectfully tell Pelosi, Reid, Obama, and Biden to come up with their own plan. If two-thirds of the House and Senate agree with their plan, it will be done. Otherwise, they can wait until January to work this out.
“Providence has given to our people the choice of their rulers, and it is the duty, as well as the privilege and interest of our Christian nation, to select and prefer Christians for their rulers.” — John Jay
Bush should do nothing
izoneguy (Diary) Tuesday, November 11th at 10:04AM EDT (link)GM needs to take a hoilday
until Obama becomes President.
Let the dems take the full 100% blame
when the wheels totally fall off, and they will.
Those who had once simpered: “I don’t want to destroy the rich, I only want to seize a little of their surplus to help the poor, just a little, they’ll never miss it!” – then, later, had snapped: “The tycoons can stand being squeezed; they’ve amassed enough to last them for three generations” – then, later, had yelled: “Why should the people suffer while businessmen have reserves to last a year?” – now were screaming: “Why should we starve while some people have reserves to last a week?” – Atlas Shrugged
We need to just say "no"
NightTwister (Diary) Tuesday, November 11th at 10:08AM EDT (link)To this bridge to nowhere.
“Baseball fits America well because it expresses our longing for the rule of law while licensing our resentment of law givers.” ― Major League Commissioner of Baseball A. Bartlett Giamatti
Used to work in bk at a big law firm
txchick57 (Diary) Tuesday, November 11th at 10:17AM EDT (link)Where’s GE Capital? LOL, they used to be the lender for this type of thing and man, did they make the debtors pay!
Yes!
Tversky Tuesday, November 11th at 10:19AM EDT (link)But of course! Only because Republicans have been in power for the last eight years — what does it matter!
Yea, quite sensible — if the bottom falls out just “wait and see”. That’s what’s meant with “country first”!
A question
scuffs Tuesday, November 11th at 10:31AM EDT (link)At the risk of starting another global warming argument, let me simply say that, as someone who believes that AGW is as serious as the scientific community is telling us, making an auto industry bailout dependent on it becoming “an investment platform for all kinds of alternative-energy-using vehicles” does not seem like a bad idea to me.
So that said, I’d be very interested to know (without getting too far into details) your position on AGW, Mr Cianfrocca, and to what extent it informs your views about these kinds of environmental conditions being included in a bailout. Would you see them as being absolutely incompatible with the kinds of conditions you propose above?
Thanks again for your analysis!
Oh, I dunno
RedFox84 Tuesday, November 11th at 10:41AM EDT (link)Maybe that making GM conform to some arbitrary ‘environmental’ standard is a part of what put GM in the position they’re in, in the first place (i.e. CAFE standards)?
Principles first.
Loren Heal (Diary) Tuesday, November 11th at 10:43AM EDT (link)The government should not bail out GM, because the government should not bail out any company. These are able-bodied and able-minded people who will find something else to which to turn a useful hand.
–
Join the Concord Project, and follow @lheal, if you dare.
blackhedd
red_oakster (Diary) Tuesday, November 11th at 10:45AM EDT (link)Will GM still be around by January 20th?
If I were Bush, I’d try to trade this for a five year extension of all of his tax cuts. That would be a real stimulus package.
If he can’t get a very sweet deal like that, we might as well move towards a bankruptcy. Whatever GM is, it’s not a systemic risk
One thing not being discussed
kowalski (Diary) Tuesday, November 11th at 10:47AM EDT (link)One thing not being discussed in this article is the present cost of the proposed loan versus the cost of not doing it.
We’re looking at $25 billion and if we can put a hard cap on that right now, I don’t think that’s too terrible.
If the automakers lay off a million workers or more and the supply chain disruptions toss another million people on to the unemployment and welfare rolls, the end cost will be more than $25 billion dollars. I don’t think the state and federal governments are going to be able to handle the influx of the newly unemployed welfare recipients. I haven’t done the analysis state-by-state but I can reasonably guess that it will lead to higher taxes and fees across the board if those very distributed businesses go south. Someone is going to have to pay, and in the end I think it is better to loan the automakers the $25 billion so they can continue operations rather than take what I think will be more like a $100 to $200 billion dollar economic hit for not doing so.
Defend Liberty — Join the NRA | Live in Massachusetts? Join GOAL.
Go back to the "bridge loan" analogy
Francis Cianfrocca (Diary) Tuesday, November 11th at 10:59AM EDT (link)When you shut a business down, there are always closing costs. (The biggest are usually severance and retraining for the displaced employees.)
That’s what the taxpayers will need to pick up here. We’re going to have to put billions of dollars into GM so that they will have the time to shut down a large amount of unneeded production capacity. It’s a bridge loan to get through the liquidation process.
There’s simply going to be no upside to this. But what I think would be far worse would be for the new administration to approach the auto industry as a workout situation.
In other words, that Detroit can actually be saved in something like its current form. That unfortunately is what I fear the government will try to do. It’s just like packing in lots of novocaine and antibiotics for the rest of your life instead of just yanking out the damned tooth.
No more bailouts.
Loren Heal (Diary) Tuesday, November 11th at 11:00AM EDT (link)The government has to stop meddling in the economy. People argue that something must be done to keep the economy moving, and I say: No! We’ve been spoiled by 20 years of good economies, except for hiccups, to the point where we think we’ve figured it out.
We can’t outlaw pain. Attempts to try are leading us to a situation in which the government, soon to be led by a Marxist, controls the strategic direction of our biggest industries.
I have no doubt that GM failing would have a ripple effect on the rest of the economy. I also have no doubt that some of that effect would be seen as positive, especially by those at Ford and Chrysler.
Something has to be done all right. Something needs to be done to turn around this notion that our elections are about the economy. Something needs to be done to separate government and business. Something needs to be done to return us to the understanding of success as the result of repeated failure, that learning from mistakes doesn’t happen unless we are forced to deal with the consequences of those mistakes.
GM has become too big to move quickly in response to changing market conditions. Their union membership, including retirees, is so large as to be its own voting bloc, exercising inertia of its own. Some say they have become too big to fail; I say they have become too big to succeed.
Pluck the cancer? That’s the wrong metaphor. The proper one is to let the students succeed or fail based on their abilities, not slip them answers to the test so they don’t fail.
Because in the end, none will study as hard or pay attention at lecture if they know that the teacher will bail them out in the end.
–
Join the Concord Project, and follow @lheal, if you dare.
Let it fail
Chris Farris (Diary) Tuesday, November 11th at 11:07AM EDT (link)Let it fail. Let the bankruptcy courts slice up GM’s North American operations from their China operations. Give the Pension Guarantee Corporation first dibs on liquidated assets, then debt holders, then shareholders. If there is upside potential to GM’s China Ops, then it should go to the taxpayers who are having to foot the bill for GM’s underfunding their pensions.
As for a bleak Christmas for millions, better now than later. And why should they get a bailout and not others who are going to have a bleak Christmas? Because they live in swing states?
Let GM & Ford fail. They deserve it. By stringing everyone along that their will be a bailout, the morons in DC are just making it harder on businesses. Americans still need cars. VW, Toyota and others will pick up the slack. Companies like Tesla will be able to get good deals from these midwestern suppliers. Capitalism will move on.
I agree
kowalski (Diary) Tuesday, November 11th at 11:26AM EDT (link)There have to be very strict terms for the way this is handled if they get the loans. When you take a bridge loan of this kind, you sign a promissory note, and you are expected to sign the note according to the terms of the bridge financier.
Those terms should include a redefinition of the industry along the lines you’re talking about. We know what has gotten Detroit into trouble, and it’s not the millions of people working in the supply chain, or the foreign companies that produce components for their cars.
If Detroit takes the money, they need to change the way their business is structured, not keep going the same way they have been.
Defend Liberty — Join the NRA | Live in Massachusetts? Join GOAL.
Capitalism will move on
izoneguy (Diary) Tuesday, November 11th at 11:30AM EDT (link)I would hope so. You lend the auto comapnies $25 billion now and then America would have to do so every election cycle. They will be back in 4 years in far worse shape and demand $50 Billion. It won’t stop. Now American Express wants a bail out.
I was against the first bail out for this very reason. Save one sector and they all want to be saved.
It will be messy and millions will have to eat their own crap sandwiches. American cannot afford to prop up dying business’s. Give every auto worker 20 cars as severence and call it a day.
Those who had once simpered: “I don’t want to destroy the rich, I only want to seize a little of their surplus to help the poor, just a little, they’ll never miss it!” – then, later, had snapped: “The tycoons can stand being squeezed; they’ve amassed enough to last them for three generations” – then, later, had yelled: “Why should the people suffer while businessmen have reserves to last a year?” – now were screaming: “Why should we starve while some people have reserves to last a week?” – Atlas Shrugged
They are already gone.
Steven Willis (Diary) Tuesday, November 11th at 11:38AM EDT (link)Looking at the GM public filings, I see it has negative equity to the tune of nearly $60,000,000,000.00 on 9/30/08. Even if we re-value the assets to fair market value and even if we assume they are worth more than historic cost (less depreciation)[probably a wild assumption], I do not see how this company is viable.
They have some cash. I understand it is sufficient for a few months.
Their market capitalization is less than $3,000,000,000; hence, if it goes under, little will be lost just from that. It is already gone. Those who rely on GM – supplies, customers, employees, local dealers, and such have known for at least a year of the serious problems. All they had to do was glance at the financial statements.
Your proposal – a capped loan with strong conditions, including wiping out shareholders and unions (at least to a degree) – is a good plan, in my opinion – but only if it were carried through.
I have no faith in the Obama Administration to do any such thing. I believe any actions we take now will be undone; yet, any blame for the ultimate failure will then fall on Bush and Republicans.
I say let the chips fall where they may.
The public will realize this came from three sources:
Failure is harsh, but the alternative is worse. Plus, I suspect GM will limp along until January 20, so anything Bush does now is irrelevant except to shift all risk to him and to the Republican Party.
“Let it be said, I fought the good fight, I finished the race, I kept the faith.”
Paul, Second Timothy 4:7, The New Covenant.
Steve Willis
Professor of Law
University of Florida College of Law
Agree
Tversky Tuesday, November 11th at 11:47AM EDT (link)Actually I agree – but of course they will bail out GM, and any politician would do it (except Ron Paul perhaps, but that’s the reason nobody votes for these guys)
Of course the government shouldn’t bail out any companies — but it also seems to me sensible to do the thing that’s most likely to do serious harm. The government shouldn’t spend taxpayers’ money on foreign wars either — but if it has to to guard it’s citizen than that’s surely the lesser evil.
I know a thing or two about Financial Markets and Institutions and post-Lehman the situation was really bleak – as far as I can judge it the intervention of the government was definitively the sensible thing to do. So is and was the rescue of AIG. Not for AIG’s or Goldman’s sake but for the sake of ordinary americans.
It is sensible to let banks fail — and that’s what’s happening all around the country (we are at 18 if I counted correct) — it is not sensible at all to let all major banks fail together, wipe out 2/3 of americans’ savings and drive a large bunch of american companies into bancruptcy because they can not get short-term financing to meet payments or access Money Markets. And actually I don’t even thing this kind of scenario is a major exaggeration. What we saw in October was really chilling.
The same is true more or less for AIG unfortunately: Letting AIG fail means wiping out large parts of already stressed banks, wiping out millions of insurance clients of AIG (life insurance, car insurance,…), and threatening a whole lot of companies who are very dependent on insurance contracts to run their business.
I agree, we need to let our local congress people know how we feel
izoneguy (Diary) Tuesday, November 11th at 11:53AM EDT (link)The only reason the $700 Bail Out passed is because McCain still had a shot – however long to be president. The new political reality is in front of us. Those congress people in auto states will have a hard time saying no. But there is no reason for Bush to do anything.
The ONLY thing Bush should do is pardon U.S. Border Patrol agents Jose Alonso Compean and Ignacio Ramos!!
Mexican Drug Smuggler Shot by Border Agents Indicted on Drug Smuggling Charges
Those who had once simpered: “I don’t want to destroy the rich, I only want to seize a little of their surplus to help the poor, just a little, they’ll never miss it!” – then, later, had snapped: “The tycoons can stand being squeezed; they’ve amassed enough to last them for three generations” – then, later, had yelled: “Why should the people suffer while businessmen have reserves to last a year?” – now were screaming: “Why should we starve while some people have reserves to last a week?” – Atlas Shrugged
Huh?
Tversky Tuesday, November 11th at 11:57AM EDT (link)huh? Surly no company reports negative equity in their public filings — if they do they are officially bancrupt (probably they are, but not yet according to their own records). So where did you find this number??
The key will be the UAW getting
Achance (Diary) Tuesday, November 11th at 11:59AM EDT (link)legal authority to run the trusts unilaterally and getting enough money in the trusts for their actuaries to be comfortable. President Bush should make them say what they really want and then tell them no. Let this be a Democrat problem.
We’re going to see a lot of this in the public sector and the legacy industries. Not even the best fund managers can keep up with government generated general inflation and spiraling inflation in health care costs, also in large measure generated by government mandates and government participation in health care. I haven’t looked at the numbers, but I suspect Alaska’s retirement fund, a very important fund for me, lost ten or more billion dollars in the last month or so. It was barely solvent even before the latest downturn and was remarkable in the Country for being among the better funded retirement funds.
In Vino Veritas
GM - bad business model
Thomas_Hauber Tuesday, November 11th at 12:02PM EDT (link)Don’t forget that for YEARS GM made poor quality cars. Now over the past few years that may not be true, but they are paying for their past mistakes. I had been so badly burned by GM cars that I will never touch one again. Their reputation for quality may not be deserved now, but they earned what the perception is.
Another point: the unions negotiated layoff pay. Basically if any of the Big 3 layoff a worker, they have to keep that person on the payroll for over a year with full pay and benefits. Who does that? Only the auto industry would agree to such stupid terms.
My analogy for GM and their situation is the drunken deadbeat brother-in-law who drinks his paycheck away and then comes for a loan. If you give him money all he will do is drink the loan away and be back for more.
We should let GM go thru bankruptcy. At least GM would gain time and the ability to break those union contracts that are slowly bleeding them dry.
Where does the operating capital come from?
Francis Cianfrocca (Diary) Tuesday, November 11th at 12:10PM EDT (link)A couple of months I would have more or less agreed with you. But a court-directed reorganization will take many years, especially with all the entrenched stakeholders.
Even if we go this way, how are you going to line up the operating capital to keep the doors open while the lawyers are all getting rich? This is shaping up to be a total disaster.
Detroit needs to be eaten by defense
crazy Tuesday, November 11th at 12:38PM EDT (link)Now that Detroit’s market value is less than the value of it’s assets it’s time to arrange for them to be swallowed as Bear was. Since the argument for keeping them open is that their industrial capability is a national security need then the logical acquirer would be the big defense contractors. It’s time for GM/Ford/Chrysler to be eaten by Boeing/Lock-Mart/Northrop. While not immediately obvious to the casual observer, the synergies that exist for rapid prototyping, CAD/CAM, advanced materials, etc would benefit both the defense and the auto companies.
The ancestors of these companies worked well together in the 40′s and 50′s before splitting up and they can again in order to maintain an essential level of domestic industrial manufacturing capability. The alternative is simply to watch this industrial capacity move overseas or to overseas control,sooner or later – take your pick.
Public reports.
Steven Willis (Diary) Tuesday, November 11th at 12:38PM EDT (link)If you check wsj.com, you can locate both annual and quarterly statements released by GM. You can also see SEC filings on Edgar.
These are the numbers for the past four quarters and for the prior year:
Retained Earnings (61,014) (58,470) (42,847) (39,392) (38,528)
Total Equity (59,939) (56,970) (41,043) (37,094) (41,771)
Figures in millions. Figures in parentheses are losses.
(http://online.wsj.com/quotes/qbalance.html?mod=20482&symbol+Fm&new-symbol=GM)
“Let it be said, I fought the good fight, I finished the race, I kept the faith.”
Paul, Second Timothy 4:7, The New Covenant.
Steve Willis
Professor of Law
University of Florida College of Law
Not sure what "officially bankrupt" means.
Steven Willis (Diary) Tuesday, November 11th at 12:47PM EDT (link)I am not a bankruptcy expert. That said, I understand either the company or a creditor must file. As long as GM has cash to operate, no creditor wants a filing. They are hoping for an infusion of government cash to keep the doors open.
GM does not want to file. It has the same hope.
The market still puts some positive value on the company, albeit small.
“Let it be said, I fought the good fight, I finished the race, I kept the faith.”
Paul, Second Timothy 4:7, The New Covenant.
Steve Willis
Professor of Law
University of Florida College of Law
The investment banks used to arrange bridge financing- when there were investment banks.
streetwise (Diary) Tuesday, November 11th at 1:04PM EDT (link)The large commercial banks are still around, but are busy aborbing other banks and are not in a position to make such a risky loan.
I'm sure GM would like to go bankrupt
Achance (Diary) Tuesday, November 11th at 1:08PM EDT (link)and would have if McCain had won so that they could get some Presidential protection from a wrathful Democrat Congress. Now they can try to force the issue with GWB as a lame duck and maybe get the trusts federally funded and get out from under them. The only other way out would be bankruptcy and if they did that, the UAW and the Democrats would kill them; no fleet purchases, no government business for fleet purchasers that buy GM, no defense work, targeted regulation, the toolkit is a big one.
If they can’t get it done by the lame duck, the price will be hideous come January 21. GM will simply become an instrument of Democrat policy as the price of staying alive at all.
In Vino Veritas
Just curious
johnCV (Diary) Tuesday, November 11th at 1:12PM EDT (link)Is the state of Michigan willing to grant tax benefits to the auto industry to help forstall the inevitable? Did the unions offer to help out?
No I didn’t think so. So our bailaout money will end up in Michigan’s and the UAW’s coffers.
I am a fan of US auto industry and know they are making world class cars. From the technical standpoint they are quite sound. However thier business model positively sucks. GM is a healthcare/financial company before it is a manufacturer.
Let them go down, clear the debris and watch the resurection of a stronger world beating industry unemcumbered by dibilitating legacy practices – unless of course some marxist regime steps in and forces unnatural business arrangements upon them…
I'm pretty sure you're right.
ReallyBored Tuesday, November 11th at 1:13PM EDT (link)IANAL either, but I’m pretty sure that you’re basically right. If the company is still paying interest and/or face value payments in full and on time, I don’t think the creditors can force bankruptcy unless there are specific provisions written into the debt contracts. Negative book equity just means that the book value of GM’s liabilities is higher than the book value of their assets. It’s not a good situation to be in and could easily turn into an actual bankruptcy (as blackhedd points out, they’re projected to run out of cash in a couple months).
Umm. Shareholder equity is carried as a liability on a balance sheet.
Francis Cianfrocca (Diary) Tuesday, November 11th at 1:14PM EDT (link)That may be why it’s negative.
Then let the Sierra Club put up the cash.
mbecker908 (Diary) Tuesday, November 11th at 1:17PM EDT (link)I'm not so sure
ReallyBored Tuesday, November 11th at 1:39PM EDT (link)A week or two ago, maybe, but Blackhedd’s point is that if they don’t get the bridge loan, GM won’t just be forced into bankruptcy, they’ll be forced to close down operations. It’s not a case of “We can’t pay back our creditors in full right now, so they get to fight it out to see who gets first call on payments as they trickle in.” That’s “normal” bankruptcy, where the company goes on while the bankruptcy court settles the question of who gets what from the company out of the available assets and future cash flows. GM is close to the point of saying “Not only can we not pay our creditors, but we can’t meet payroll, or pay the power bill, or the phone bill, or …” At that point, the company just stops operating, sends everyone home, and says “Ok, you can fight over the corpse now.”
What?
Steven Willis (Diary) Tuesday, November 11th at 1:40PM EDT (link)Yes, shareholder equity is on the right side of a balance sheet. But it is not a liability; instead, it is under “Liabilities plus Owner’s Equity.”
In a typical going concern, it is positive.
For GM, it is very very negative. That means, as said above, reported liabilities exceed reported assets.
Typically, liabilities are a hard number: we know exactly what we owe. For GM, much of the liability section comprises future costs for pension and medical expenditures. This is admittedly speculative.
Assets are typically a softer number: they are at historic cost less depreciation. They involve assumptions and myriad choices, such as inventory methods.
That said, a deficit of $60,000,000,000.00 is huge. If we were omniscient, we could put a real number on this. The market currently puts a positive $3,000,000,000; however, that is heavily colored by the prospect of a bailout, not just a bridge loan. As you say, the brand is valuable; and, the brand probably appears at far less than its true value. No way, however, that makes up for $60 billion of negative equity.
“Let it be said, I fought the good fight, I finished the race, I kept the faith.”
Paul, Second Timothy 4:7, The New Covenant.
Steve Willis
Professor of Law
University of Florida College of Law
Exactly
Steven Willis (Diary) Tuesday, November 11th at 1:49PM EDT (link)nt
“Let it be said, I fought the good fight, I finished the race, I kept the faith.”
Paul, Second Timothy 4:7, The New Covenant.
Steve Willis
Professor of Law
University of Florida College of Law
I agree!
DavidS1787 (Diary) Tuesday, November 11th at 2:00PM EDT (link)n/t
NO
finaljeopardy Tuesday, November 11th at 2:24PM EDT (link)A five-year extension means Obama will get credit for Bush’s tax cuts, be able to explain to voters why he wasn’t able to pay for their gas and mortgages, and then he will get reelected and really screw us in his second term.
No bailouts for companies that overpay their CEOs who should have been fired. There is no such thing as a company too big to fail, and we should resist nationalizing our industries. These labor unions and automakers just vote Dem, anyway. Why bail them out and then take the hit for that?
$25 Billion Welfare Package
jcincy Tuesday, November 11th at 2:24PM EDT (link)The Dems want a bailout simply to provide more corporate welfare to their voting bloc, the UAW. Obama wants Bush to back it, so he wash his hands of the matter when it fails.
Let GM sell their vision of the future to some PRIVATE entities, not the U.S. Taxpayer.
You’ll note two of the major system failures in the country are U.S. auto-manufacturing and the public school system. They share the same root problem: A UNIONIZED WORKFORCE.
“Providence has given to our people the choice of their rulers, and it is the duty, as well as the privilege and interest of our Christian nation, to select and prefer Christians for their rulers.” — John Jay
He must be busy,
Putter (Diary) Tuesday, November 11th at 2:25PM EDT (link)so I will take a shot. Let’s assume, for the sake of argument, that Al Gore is right. A mathematical impossibility, but hear me out. We are all doomed if Kyoto ever catches on. If CO2 is truly a greenhouse gas, then the worst thing that could be done is to carve out any exception for “developing countries” like India.
Nothing would be more destructive to the planet than our immediate cessation of the use of fossil fuels. If there was an economically viable alternate, it would already be here. The person who develops something cheaper will make Bill Gates look like a pauper. Until there is something cheaper, all this discussion is pointless.
Let’s just say we developed a car that cost a mere $2.00 to take a Ford Excursion 40 miles. Congress mandates that we adopt this technology for the good of the planet. We are well and truly screwed. World demand for oil just dropped 25%, where does the price go? It goes as far as it has to go to be profitable again. The middle East has little industry beyond oil. Yes, it really could go back to 50 cents for a gallon of gas if that is the sweet spot.
It is true that if oil is a finite resource, eventually the new technology will be more attractive. The problem is that the “developing” countries will burn the stuff until it is nearly exhausted. We at least have some clean air laws. In China, the air is already toxic. Imagine 20 years of bargain basement oil prices.
We are not as efficient as China, but we are about as efficient as we can be without killing our population. We are still the most efficient producers of food in the world. In short, fossil fuels will be consumed until near exhaustion. Unless developing countries have to follow the same rules as us, Kyoto would mean BOTH our economic and environmental doom. How many jobs go to India if their energy prices drop even 20%?? If fossil fuels must be burned, we are the best people to burn them. At least we will do it in a clean and efficient manner.
This is simple supply and demand. If it is not obvious by now, the only coherent argument in favor of the Kyoto Protocol is redistribution of wealth. Why else should we offer “incentives” (your money) for GM to build cars that may be cleaner, but will ultimately result in no world wide change whatever? We have a full house and the rest of the world wants a “new deal”. No thanks, I’ll stand on these.
Friends help you move. Real friends help you move bodies…
Brilliant - a 5-year extension of the Bush tax cuts
David123 (Diary) Tuesday, November 11th at 2:37PM EDT (link)in exchange for a Big 3 bailout now.
I love it.
If the Bush tax cuts expire, Obama raises taxes even if he takes no action to raise taxes, and raising taxes in a recession is unwise.
If Obama really wants a Big 3 bailout, it’s happening after Jan 20 anyway. If it happens now, Obama gets to share some of the credit or blame with Bush, kind of like voting present.
Bush won’t be running in 2012, so it won’t hurt Obama to share some credit with him. If a Big 3 bailout stinks, it will be to Obama’s benefit if he can blame it on Bush.
David123
YOU ARE RIGHT I AM WRONG
Tversky Tuesday, November 11th at 3:16PM EDT (link)Wow .. actually I find this hard to believe — but you are CORRECT. GM DOES report negative equity (they call it “Stockholders’ Deficit” -> best thing I ever read in a financial report!) and currently the stock has a book value of $-100 per share. outch
Which of course means they in fact are bancrupt: their liabilities are higher than their assets.
Actually I am very surprised this is even possible (without being in bancruptcy/chapter 11/whatever). Shocking!
Perhaps I should look into US bancruptcy laws and why this is even possible .. on the other hand.. perhaps not..
At RedState it is relatively easy to say "we know"
The_Gadfly (Diary) Tuesday, November 11th at 6:21PM EDT (link)because we generally subscribe to the same principles. In the political case of bailing out the Big 3 (because whatever we do for GM we’ll pretty much have to do for Chrysler and Ford as well, probably in that order), that isn’t true. Obama, Pelosi, and Reid clearly have a different view of what is wrong with the car industry. And as the guarantors of the bridge loan, they are going to dictate according to their vision. They are going to do their darndest to see that the unions are protected, and since Obama is only raising taxes on those making over $250,000/yr (and according to their philosophical framework these ae axiomatically greedy people not working for the common good) sticking it to the taxpayer won’t hurt anybody either.
That you and I and Fancis are diametrically opposed to their vision (at least in this instance) doesn’t affect whether or not it is their vision. And one of the few points of commonality that our diverse viewpoints have is that winning elections has consequences.
Another excellent summation
The_Gadfly (Diary) Tuesday, November 11th at 6:43PM EDT (link)Succinct as always. I can’t think of anything you left out of the analysis.
So, if the only upside is counting on the ChiComs to pay us money to be bailed out, I think I have to go with ‘Let it burn.’ I’ll grant the suggestion of having Bush offer to sign off on it if they’ll extend the tax breaks for 3-5 years is tempting. But the counterpoints against it are correct, no matter what he does Bush will only get blame for what goes wrong while all credit will be granted to the Marxist. It’s time for them to grow up and make their own decisions, then live or die by them.
And here it comes - Potential grows for lame-duck session of Congress
izoneguy (Diary) Tuesday, November 11th at 6:58PM EDT (link)I told Congress the $700 Bail Out would be an “endless well”.
Potential grows for lame-duck session of Congress
House Speaker Nancy Pelosi, in a statement released Tuesday afternoon, called on key congressional leaders to work with the Bush administration “to craft legislation to provide emergency and limited financial assistance to the automobile industry under the Emergency Economic Stabilization Act.”
According to spokesman Brendan Daly, Pelosi believes that the administration can assist the auto industry under its existing authority, but “in case [the administration doesn't], it needs to be done one way or another.”
In her statement, Pelosi directed House Financial Services Committee Chairman Barney Frank to draft legislation extending the Treasury Department’s authority to use bailout funds for the auto companies.
Those who had once simpered: “I don’t want to destroy the rich, I only want to seize a little of their surplus to help the poor, just a little, they’ll never miss it!” – then, later, had snapped: “The tycoons can stand being squeezed; they’ve amassed enough to last them for three generations” – then, later, had yelled: “Why should the people suffer while businessmen have reserves to last a year?” – now were screaming: “Why should we starve while some people have reserves to last a week?” – Atlas Shrugged
This truly is a bridge to nowhere
Raven (Diary) Tuesday, November 11th at 8:16PM EDT (link)You got it in one.
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
Between them, Sierra Club and Al Gore should have the money for it
Raven (Diary) Tuesday, November 11th at 8:19PM EDT (link)don’t you think?
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
We already do it to the tune of mere hundreds of millions
Raven (Diary) Tuesday, November 11th at 8:33PM EDT (link)Every 5-10 years, we’re bailing out at least 1 of the Big 3.
The only reasons this time is different are
1) the “B” at the beginning of “Billion”
2) The bailout we just authorized
3) we finally see that there is no saving these companies. They WILL die. It’s only a question of when and how expensive.
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
'Wacht am Rhein' vs. 'Sturm und Drang'
ss396 Tuesday, November 11th at 11:51PM EDT (link)That is a strategy to preserve the status quo. It does not actually address the problem. To use your metaphor of foreign wars: If the government is only interested in guarding its citizens, then it will embark on a long, never-ending commitment of watchfulness. This is what the bail out will do. If the government is interested in eliminating the threat, then it will attack the root of the threat and destroy it. This is what would be letting the market forces sort out the winners and losers.
Bailing out these industries and institutions fixes nothing and solves nothing. It merely kicks the problem 15 years down the road. It does not strengthen the entity; it enfeebles it. It adds great uncertainty to the rest of the markets, as other players line up at the door for their handouts, and investors lose sight of the industry strengths and weaknesses. This type of distortion generates far more havoc than it forestalls.
The government does not belong in that game. Its duties and obligations are different; its priorities are different. It is not obliged toward profitability or a healthy bottom line – nor should it be. That is why it has no business in business. Let the market work in its sphere without the government distortions.
Sola scriptura, Sola fide, Sola gratia
Actually, here is an idea
LonghairedConservative Wednesday, November 12th at 12:03AM EDT (link)Bush and Cheney both resign and give the job to Nancy Legosi, er Pelosi…
That way it becomes a pure Democrat thing…
No.
itrytobenice (Diary) Wednesday, November 12th at 12:25AM EDT (link)You can’t trust him. If he agreed to the tax cuts, there is nothing to say that next year they can’t simply raise them after the taxpayers have taken the hickey for the auto industry (union) bailout and after the ignorant environmentalists have stuck us with another pie in the sky plan for energy independence.
The reason this is even discussed is that the only way GWB could get a tax cut was to promise that it would expire at a certain date. That date is arriving soon, but if he had agreed to during his term, they could have moved the date to any date in history on a whim.
A congress can really only permanently fix tax rates for the term they are in. You can’t obligate future voters to any tax rate or tax plan.
Proper grammar saves lives.
Let’s eat Grandma.
Let’s eat, Grandma.
That would be interesting but...
izoneguy (Diary) Wednesday, November 12th at 12:28AM EDT (link)…I think Bush & Cheney will do a 2 month screw you to Pelosi & Reid for all the crap Pelosi & Reid have said about Bush.
Those who had once simpered: “I don’t want to destroy the rich, I only want to seize a little of their surplus to help the poor, just a little, they’ll never miss it!” – then, later, had snapped: “The tycoons can stand being squeezed; they’ve amassed enough to last them for three generations” – then, later, had yelled: “Why should the people suffer while businessmen have reserves to last a year?” – now were screaming: “Why should we starve while some people have reserves to last a week?” – Atlas Shrugged
exceptions are bad, but
duckhawk Wednesday, November 12th at 1:53AM EDT (link)This doesn’t seem quite right:
If there were an economically viable alternative to fossil fuels, it almost definitely would not already be here.
The cost of entry to the auto fuel market is colossal, and the first entrant bears all the risk without any guarantee on cornering the upside. On the other hand, it’s pretty easy for me to sell an alternative fuel if (a) the distribution network is already up and running, and (b) everyone’s car is already compatible.
I think proponents of alternative energy believe that network effects and economies of scale will be on their side, and that we’re basically facing a collective action problem in deciding who moves first. Forcing GM to move first could solve this problem.
Don't see it.
Achance (Diary) Wednesday, November 12th at 3:02AM EDT (link)The US Government won’t let GM go Chapter 7, and it really doesn’t matter if there’s an R, D, or Communist in the White House.
The game is and has been who’ll get the H&W trusts and attendent liability. UAW wants the power of having all that money, but they really don’t want the liability. Plus, Rs always underestimate the revenge factor in D politics. The joint trust is a creature of the Taft-Hartley Amendments to the National Labor Relations Act done by the Republican controlled 1948 Congress. Organized labor has never forgotten nor forgiven the Taft-Hartley Amendments. Doing away with Taft-Hartley trusts would be a monumental victory for them.
In Vino Veritas
GM's problems are primarily of their own making, not of onerous regulation
Jeff Walden (Diary) Wednesday, November 12th at 5:44AM EDT (link)GM’s problems aren’t ones of environmental standards, although they may not have helped matters. Rather, their problems are from not recognizing the potential for demand shifts in response to higher fuel prices; not diversifying their offerings enough to accommodate such potential shifts; chasing after fad vehicle designs rather than investing in back-to-basics vehicles that consistently sell well, if at lower volumes, but across a wider range of models; and overpaying workers due to union negotiations and mistrust borne of conflicts thirty and more years ago. Environmental standards don’t help, but notice it’s only the American industry that’s in such bad shape; the foreign companies aren’t in danger of going under. The depth of GM’s problems (likewise for the others in the once-Big Three) is the result of its own actions.
Some questions related to several threads above
bk (Diary) Wednesday, November 12th at 9:26AM EDT (link)I don’t at all understand the idea of tying this to future work on more fuel-efficient vehicles. If they are completely dead from a cash-flow perspective, how can they make any sort of commitment to additional investments that may or may not pay off years down the road? Other than Dems using that as an excuse for approving it as a “green” bailout, it seems to be a totally fallacious arrangement.
Did I follow this correctly? Is the UAW saying that they need $25B for medical coverage for 780K employees and their dependents? That comes out to something like $32K per retiree. If they have dependents other than maybe a spouse, why can’t they pay the full amount for coverage for the others? Is that supposed to be for one year? Does it cost $32K/year for medical coverage over and above what employee contribution there may be?
Kowalski talked about cost of doing it vs not. That’s valid to look at, but I know I’ve become jaded over always hearing this “investment” business used to describe any sort of welfare black hole. For example Head Start was going to reduce crime, improve scores, blah blah blah, and now we’ve got a $7B/year black hole that is soon to grow exponentially with nothing to show for it once kids are in school a couple of years. You could find dozens of “investments” that end up being just a permanent waste of taxpayer money when all is said and done.
Is either of these $25B pieces being called a loan vs a gift? At least with the housing bailout there is some chance of repayment if we wait long enough. Any money that in effect goes to the UAW would seem to be gone forever the instant the check is cut, and the prospects are so bleak for GM it’s hard to see them ever repaying anything either, even if their intention is supposedly to do so.
Lastly, where does the bailout business end? USPS is going to lay off 40K people, DHL is shutting down ops, etc. Why not bail everyone out? Perhaps newspapers wouldn’t need to do layoffs – let’s bail them out too.
There is also a $211 billion balance sheet at GMAC LLC backed by $9B of equity
ElliotE5 (Diary) Wednesday, November 12th at 3:10PM EDT (link)Good work here.
Lurking in the background is GMAC LLC in which the auto maker has a half interest.
Its financials as of Sept 30, 2008 are here http://www.sec.gov/Archives/edgar/data/40729/000095015208009024/g46784e10vq.htm
It’s a $211 billion balance sheet, supported by $9 billion of equity. As the firm’s funding runs off, either one of two things will happen:
New funding will be found costing less than income from the car loans, mortgages and leases; or
GMAC will flounder into reorganization itself.
Included here are
$43 billion of vehicle loans
$30 billion of residential mortgages
$26 billion of dealer financing.
Also,
$13 billion of debt is due within one year.
$72 billion of the long term debt of $160 billion is unsecured.
GE Capital
RedYankee Wednesday, November 12th at 11:44PM EDT (link)…their hiding under the table with the rest of the banks. They can’t fund the US Auto Industry mess…time to push GM over the cliff
Auto Industry is dyfunctional
RedYankee Wednesday, November 12th at 11:53PM EDT (link)…no bailout for this dyfunctional industry…time to push GM over the cliff…this industry has been a train wreck for 30 years now….taxpayers shouldn’t be supporting these organizations that don’t work in this modern era…GM meet Dr. Kevorkian!!!
Wait, are you saying
Sarkissius Saturday, November 15th at 11:53PM EDT (link)that American automakers would be in a stronger position right now if their products were LESS fuel efficient?