The Long Crisis

Posts Tagged ‘GM bankruptcy’

Yesterday stock market “investors” went wild in celebration of the General Motors bankruptcy. On the day of the largest bankruptcy in the history of the US the Dow soars to close up 221 points at 8721.44. The S & P took off early and never looked back as it closed at 942.87, well above its 200 day moving average of about 928, a level considered highly significant to technical traders.

While the fundamentals, reported green shoots notwithstanding, still look terrible the Obama administration’s efforts to get us back to 2006 by flooding the markets and economy with money seem to be giving the stock market a sugar high. As a fair percentage of the trillions of dollars being spent for all of the bailouts, and that are committed to be spent for questionable projects, make their way into financial markets a new bubble is being created.

One can easily wonder if the Wall Street gunslingers are still calling the shots. The bankers and privileged crowd at firms like Goldman Sachs must be howling with glee as tons of that super cheap money advanced to them by Uncle Ben’s FED and Uncle Tim’s Treasury are finding their way back into stock markets. Of course, if you throw enough trillions at markets you should be able to move them. However, in time as the trillions become more difficult to find there is a considerable risk of the retro 2006 bubble popping, the next time with truly devastating consequences.

But for now the bubble party is on. If the bankruptcy of GM is so wildly celebrated just think what kind of party will take place as the airline and trucking industries tank once again with the relentless push of oil and other commodities to boom time prices even with a nearly lifeless real economy.

Living in the United States of America in 2009 is one hell of an experience. Even the bankruptcy of an American icon doesn’t seem to matter. Thanks largely to our long suffering still investing in US treasuries Chinese friends Americans are determined to put off common sense and the responsible financing and consumption of scarce resources until the bitter end. The Obama con job is creating a sugar high and that high is driving markets.

Who knows how far the market rally can go? We have entered the twilight zone without a map, a compass , or a GPS device. Sure the demise of GM was old news. The company has been in a state of decline for generations and in recent weeks the drip, drip, drip of GM probable bankruptcy news was unrelenting. So it was no surprise that the news did not tank markets.

However, unfortunately for many years mainstreet America has been following GM. The degree of decline in once proud and well tended communities is becoming unceasingly noticeable. Even President Obama may have to speak to the truth of that unpleasant fact well before his first term has been completed.

Trillions of dollars are being thrown at firms like GM, Citigroup, AIG, along with the backdoor injection of billions, probably trillions of dollars, into financial markets. The contrast between the glee experienced by the elites by these actions and the pain that will be experienced by average Americans as interest rates increase, the dollar collapses, gasoline once again becomes a huge drag to the budget, and the real economy further tanks will be difficult for a politician even as gifted as President Obama to explain.

While stock market investors may love and celebrate the bankruptcy of GM now it is unlikely that they will enjoy the creation of Government Motors and the ruin and bankruptcy of America. If ever there was a sign of self defeating things to come it is the creation of Government Motors.

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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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While GM’s Chief Executive Officer Rick Wagoner probably deserved to be fired it is still alarming to know that the US government has further expanded its role and now is in the hiring and firing business at private sector firms. Who knows how far this will eventually go?

Two things are for sure. If you have accepted bailout money from Uncle Sam you had better ask how high when your generous Uncle demands that you jump. In addition, you should note that it is also a risky thing to fly to Washington in your corporate jet to beg for bailout money from congress. Wagoner received a very public toasting for that expensive jet trip.

“On Friday I was in Washington for a meeting with administration officials,” Wagoner said in a statement. “In the course of that meeting, they requested that I ‘step aside’ as CEO of GM, and so I have.” I guess that the message to Wagoner was no money for GM unless you fall on your sword. Wagoner was probably sick at being at the end of the administration’s string anyhow. Taking early retirement funded by multi millions stashed away from happier days at GM should help to reduce the embarrassment of a public sacking.

The Obama administration’s efforts to bailout GM is yet another example of how trying to sustain the unsustainable is a suckers game. And it is the American taxpayer who is being suckered. Almost certainly GM will end up in bankruptcy. That will be after additional billions have been wasted trying to avoid the unavoidable.

Obama and his government can not overcome the destructive forces of capitalism that have been unleashed. That is how capitalism is supposed to work. When you make bad decisions and bad investments your business is supposed to fail. The government may be able to slow the process down but that only extends the pain.

2009 will be the year of reckoning for the Obama administration. Bailouts will be out and bankruptcies will be in.

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