The Long Crisis

Posts Tagged ‘GM’

The US government has taken on two exceedingly difficult tasks in attempting to manage two interventions with the bankruptcy of GM and the expansion of the war in Afghanistan.

How well has the Obama team thought out the endgame for these tasks? Does the Obama team even have an endgame?

Philip Zelikow takes on this issue in an article written for ForeignPolicy.Com .

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The U.S. government is now bankrolling two substantial enterprises — both too important to fail.

One is the automobile company, General Motors. The U.S. government appears to be putting up a total approaching $50 billion to keep the reduced company afloat. It is set to own 60 percent of the company.

The other is the Islamic Republic of Afghanistan, a sovereign government in central Asia. Purely by financial measures, the U.S. investment there is not quite as large as in General Motors. But since the prospects of getting the money back are not as good, perhaps the level of federal spending in this case can be regarded as roughly comparable. The federal government does not have a formal ownership stake in Afghanistan, but foreign donors pay more than 90 percent of the costs of operating the government. The United States foots most of this bill — especially in security spending. And there is no prospect of Afghanistan being able to afford the security forces it has now, much less those proposed for it, any time in the foreseeable future.

Ordinarily a common description for the first case is that the company has been nationalized by the United States government. And a common description for the second case is that the state has become a protectorate of the power that pays for the army. (The United States does this in Afghanistan to a much greater degree than was ever the case in Israel, and to a much greater degree than was even the case in Iraq in recent years. In this respect, the proportion of U.S. sponsorship is a bit reminiscent of South Vietnam.)

The United States government does not like to use terms like “nationalization” or “protectorate.” Why? Because these descriptions would make it sound like the U.S. government is in charge. Well, isn’t it? In both cases, the answer is: Not quite. And in both cases the question is worth pressing a bit harder.

In the first case, GM, the U.S. government will own the company. But it will not offer or defend a business model for GM’s success, since we disclaim any desire to run this company. (Though the government will impose certain new constraints on how the company can be run.) The argument is that, with the massive subsidy and the freedom from old constraints that will come from bankruptcy reorganization, the company should do fine. But some big questions arise:

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For the remainder of the thought provoking article go to ForeignPolicy.Com

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With General Motors and Chrysler looking into the deep dark hole of bankruptcy and the world economy in a tailspin you might wonder how any company anywhere can still grow as an automobile manufacturer. Warren Buffet was impressed that such a company exists and has quietly taken a 10% stake in that company, one that has in fact achieved an amazing growth record since its start up in 1995 as a manufacturer of batteries, cell phones, and since 2003 electric powered automobiles.

You can safely guess that it is not an American company. American automotive companies are still trying to restore the past, an impossible task. The company that Buffet has invested in is a company that is looking to the future by developing new breakthrough technologies. Oddly enough at the same time it has reverted to man power on assembly lines as opposed to expensive robots. As you may have guessed by now the company is located in low cost labor and low cost labor benefits heaven China.

Last fall Berkshire Hathaway quietly bought 10% of BYD for $230 million. The deal, which is awaiting final approval from the Chinese government, didn’t attract much attention at the time. It was announced in late September, as the global financial markets teetered on the abyss. But Buffett and Munger and Sokol think it is a very big deal indeed. They think BYD has a shot at becoming the world’s largest automaker, primarily by selling electric cars, as well as a leader in the fast-growing solar power industry.

The man behind BYD, Wang Chuan-Fu, is worth studying and paying a great deal of attention to. Compare the way that he thinks and conducts his business to the managers of GM, Chrysler, and even Ford, and you will see why America and Japan have lost the advantage that they once held in manufacturing operations.

To learn more about BYM, founded only in 1995 and already employing over 100,000 workers and generating annual sales of over $4 billion in 2008, visit the Money.CNN website.

You will quickly see that there is no way a company like GM will be able to compete in electric cars or anything else in the high technology at lower cost driven markets of the 21st century. It looks like the top level competition for the electric car market in Europe, Asia, and even America will be from a company based in China.

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Bloomberg has just reported that President Barack Obama has determined that a prepackaged bankruptcy is the best way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.

While Obama two days ago gave GM 60 days to come up with deeper cost and debt reductions than the biggest U.S. automaker proposed in a viability plan submitted last month, the “quick and surgical” bankruptcy his administration described as an option appears to be inevitable, according to Bloomberg’s sources.

“Our focus is on accelerating the speed of our operational restructuring and reducing liabilities and debt on the balance sheet,” GM spokeswoman Renee Rashid-Merem said in an e-mail. “GM will take whatever steps are necessary to successfully restructure our company.” However, it now looks like the exact way that GM restructures will be up to the Obama administration.

Of course, “operational restructuring” are really code words for plant closings and the elimination of expensive union auto workers from the GM payroll. In a bankruptcy many of the benefits of remaining auto workers as well as retirees and newly “redundant” workers will be eliminated or reduced.

The GM bondholders will also take a king sized haircut. The bondholders may have made a big mistake by playing hardball for so long. They refused to take substantial reductions in the principal amounts of the billions in dollars of the bonds they hold in their portfolios. Now they will be lucky to realize 20 to 30 cents on the dollar, maybe less.

This bondholder’s haircut will effect many of the nations largest financial institutions, such as insurance companies, college endowment funds, mutual funds, and pension funds, who thought that AAA rated bonds from a bell weather blue chip corporation like GM were prudent investments. The world of finance has been turned upside down by this deflationary implosion and the real carnage is still in front of us as each disaster sets off others. Losses in some of the portfolios will be in the billions of dollars.

The bankruptcy of GM is serious business. Not only will many thousands of autoworkers lose their jobs but the suppliers to GM will be severely effected and many of their employees will lose their jobs. In addition, businesses , large and small, in the communities near GM plants will be devastated.

Obama is making a tough love decision. However, when you look at the GM financial statements you will see even if you are not an accountant that there really is no hope for a workout at GM. A structured bankruptcy will lead to a lot of pain for a lot of people and further accelerate the decline of the economy. But it may lead to a vastly downsized GM that in time can manufacture fuel efficient automobiles that people may actually want to buy.

We as a nation are nowhere near the end of this long crisis. A GM bankruptcy may finally get that message across to all of the talking head cheerleaders.

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