DOW May Drop GM Soon

[jafo]

The market, as it sits currently and for the next year or so, could very easily absorb the disappearance of GM. There is sufficient capacity to replace GM--in this market.

 

 

And you want to government to subsidize a company that the market could do without. Maybe the government could buy all the cars that GM makes and turn around and crush them. If there is that much excess capacity, we might as well crush the excess.

 

At some point with or without a bailout, the excess capacity will have to be dealt with.

[Extreme4x4]

I think the idea, at this point, is to keep this from happening at this time. The economy cannot absorb GM's failure at this time. It truly would be an economic calamity.

 

Prop them up for a year or so, and let them slowy wind down of their own accord. This is how many of the automakers of the past slowly faded away.

 

This way, the entire industry would be able to adjust to the gradual adjustment. As RJ said, if they just went Chapter 7 right now, most of the suppliers would follow (remember that your payment always trails your delivery. Thus, they have not been paid for parts that they already have expenditures on. This is why the constant flow of payments is the only way they survive).

 

You do not want the suppliers going BK. This would have the potential to destroy the entire auto industry in the US, and hurt it throughout the world.

[RichardJensen]

And you want to government to subsidize a company that the market could do without. Maybe the government could buy all the cars that GM makes and turn around and crush them. If there is that much excess capacity, we might as well crush the excess.

 

At some point with or without a bailout, the excess capacity will have to be dealt with.

At this time, with this selling rate, there is no need for GM. That's why they're in trouble.

 

However, at a 16M selling rate, there is a need for GM's capacity. If GM went bellyup and nothing happened to the rest of the auto industry, in a few years capacity would need to be added to cope with a growing market.

 

---

 

The point of a bailout is to ensure an -orderly- market adjustment. That -may- mean the gradual winding down of GM under current management (about all I'd say they're fit to do), or it -may- mean using this downtime to restructure their product engineering and branding structure in order to meet the market upswing (coming in a couple years) rejuvenated and with better product.

 

Either outcome is possible and both outcomes are infinitely preferable to the devastating impact on the middle class, the industrial midwest as a whole, and social support services.

[jafo]

I think the idea, at this point, is to keep this from happening at this time. The economy cannot absorb GM's failure at this time. It truly would be an economic calamity.

 

Prop them up for a year or so, and let them slowy wind down of their own accord. This is how many of the automakers of the past slowly faded away.

 

This way, the entire industry would be able to adjust to the gradual adjustment. As RJ said, if they just went Chapter 7 right now, most of the suppliers would follow (remember that your payment always trails your delivery. Thus, they have not been paid for parts that they already have expenditures on. This is why the constant flow of payments is the only way they survive).

 

You do not want the suppliers going BK. This would have the potential to destroy the entire auto industry in the US, and hurt it throughout the world.

 

 

Like I said, we are going to have to deal with the problem now or later. Let them file bankruptcy, let the good parts be kept and the bad parts be sold. GM going bankrupt will be painful, now or later. If GM goes bankrupt, they get to reorganize their debt, and they will still sell lots of cars at that point. It will hurt suppliers, but it is not going to be to the tune of 3M losing their jobs. GM and all their supplier would just have to disappear for that to happen, and that is just not going to happen.

[Extreme4x4]

Sometimes I get the feeling that I am talking in circles.

 

Who is going to buy parts of GM???................ nobody can buy anybody right now. Do you honestly think any sane lender would borrow someone money to buy any of it??

 

Where is GM going to get the financing to survive, and come out of BK???

 

Who is going to buy a car from a BK company???

 

These are the holes that are never answered, every time someone gives the simplistic answer of "just let them go BK, and everything will be alright," like they are talking about their neighbor down the street.

[jpd80]

I think the government has to be prepared to lose its money on GM. If loans are only meant to

avoid imminent collapse, the government should accept that and call it population relief.

Downsizing and increased loan repayments don't add up to a rosey future for GM

especially if its products and vehicle volume could be replaced by competitors.

 

You guys (and gals) are up late tonight, It's 5 pm in Australia...

Edited November 15, 2008 by jpd80

[jafo]

Sometimes I get the feeling that I am talking in circles.

 

Who is going to buy parts of GM???................ nobody can buy anybody right now. Do you honestly think any sane lender would borrow someone money to buy any of it??

 

Where is GM going to get the financing to survive, and come out of BK???

 

Who is going to buy a car from a BK company???

 

These are the holes that are never answered, every time someone gives the simplistic answer of "just let them go BK, and everything will be alright," like they are talking about their neighbor down the street.

 

It is called a fire sale. GM and its assets are quite valuable. Too valuable to go idle. I have little doubt that at some price point GM's assets could be made very profitable

 

As far as someone buying a car from GM in bankruptcy. All they have to do for those that are concerned is do have hand off the warranty to a 3rd party in the case of complete default. I dont think it is that big of an issue. I am sure GM has many loyal buyer would would rather buy from a bankrupt GM, than ford.

[Extreme4x4]

Baloney. It is a big issue already.

 

There are many loyal GM fans who are not buying new GM vehicles, due to the possibility that they will not be around long.

 

If there are people avoiding them when they are not in BK yet.................. there will be a mass exodus if they do file.

 

People don't care about symantics, or little pieces of paper that say "we'll stand behind the product no matter what." They want to know for sure that their high dollar, multi year investment, will not turn into a high dollar, multi year nightmare.

 

Do not give people credit for looking into things too far. BK means stay away................ plain and simple.

 

This does not come from me, btw, it comes from GM fan sites that I frequent. Reading elsewhere is your friend.

 

BTW, you have still failed to answer my questions about where anyone is going to get financing to buy GM or pieces thereof. There is someone on this forum that works for JPM, and he has said point blank, that they will not touch anything to do with GM right now. They do hold some of the paper on Ford, and have no problem with them, as they believe in their business plan.

Edited November 15, 2008 by Extreme4x4

[jafo]

BTW, you have still failed to answer my questions about where anyone is going to get financing to buy GM or pieces thereof. There is someone on this forum that works for JPM, and he has said point blank, that they will not touch anything to do with GM right now. They do hold some of the paper on Ford, and have no problem with them, as they believe in their business plan.

 

I answered your question. GM has valuable assets and if they can be purchased at the right price, financing will not be a problem. My guess is, if GM were sold for 50 cents on the dollar, you would have investors lining up for part of that action.

[RichardJensen]

It is called a fire sale. GM and its assets are quite valuable. Too valuable to go idle.

Valuable to whom? You and LSfan are all about how GM is valuable, but you have both been very vague about who would find them valuable (and sustainable).

 

I will give you concrete numbers:

 

Bankruptcy of GM -> 100,000 direct job losses (66% of GM's total US workforce--assumes, optimistically--that 33% are reabsorbed in the local economy by other mfrs.)

 

Bankruptcy of GM -> 480,000 indirect job losses (uses a job multiplier of 4.8, as seen in the Journal of Labor Research)

 

Bankruptcy of GM -> 580,000 total job losses

 

Bankruptcy of GM -> NOTE REVISION: c. 2 people supported per job (154,294,000 people in the workforce, 300M people in the US), thus 1.2M people uprooted by a collapse of GM.

 

That is the basis for the numbers I use here.

 

Now, what is -=your=- basis for what you say? Who wants GM's assets?

[RichardJensen]

if GM were sold for 50 cents on the dollar, you would have investors lining up for part of that action.

Really. Who?

 

Say you got GM's truck factories for 50% of book value: say $500M a piece. Who wants to buy pickup factories even at that price?

 

And think about this:

 

Cerberus has made it clear, for the whole world to see, that a bunch of investors cannot make a go of a strictly US car maker that was in financial distress when it was purchased.

[jafo]

Really. Who?

 

Say you got GM's truck factories for 50% of book value: say $500M a piece. Who wants to buy pickup factories even at that price?

 

And think about this:

 

Cerberus has made it clear, for the whole world to see, that a bunch of investors cannot make a go of a strictly US car maker that was in financial distress when it was purchased.

 

 

Maybe they did not buy cheap enough....

[RichardJensen]

Maybe they did not buy cheap enough....

Do you know how much they paid for Chrysler?

 

Nominally, $7.4B.

 

However, Daimler booked a $625M loss related to the sale.

 

http://www.businessweek.com/autos/content/...0514_849359.htm

 

DaimlerChrysler announced Cerberus will pay $7.4 billion for 80.1% of Chrysler, but as part of the deal, the German auto maker is injecting slightly more than that sum to cover Chrysler's outstanding debt and restructuring charges and recapitalize the weakened U.S. automaker. "Daimler actually paid a dowry to unload Chrysler—it took a hit on its balance sheet. That speaks volumes about the future they saw for Chrysler under their stewardship," says Garel Rhys, professor of motor industry economics at Cardiff University in Wales (see BusinessWeek.com, 4/18/07, "DaimlerChrysler: End of an Unhappy Pair?").

 

In essence, Cerberus got Chrysler for about fifty cents on the dollar. They kicked in $7.4B and Daimler kicked in a little over $8B.

[mettech]

Do you know how much they paid for Chrysler?

 

Nominally, $7.4B.However, Daimler booked a $625M loss related to the sale.

 

http://www.businessweek.com/autos/content/...0514_849359.htm

 

 

 

In essence, Cerberus got Chrysler for about fifty cents on the dollar. They kicked in $7.4B and Daimler kicked in a little over $8B.

 

 

Give the money to the suppliers and keep them going. This would help everyone in North America.

 

Then see what happens to GM. :reading:

Edited November 17, 2008 by mettech

[lfeg]

This in not just about GM, it is about the entire domestic auto industry. This industry is like a house of cards, with 3 on the bottom supporting about a thousand on top. Go sit on a three legged barstool, and have someone kick out one leg. That is what will happen with a sudden failure of GM. I doubt that more than 2 or 3 of you has experience of what happens when a customer goes bankrupt. One of the fiirst things that happens is that you get a letter (often from the bankruptcy trustee, sometimes the court) telling you to transfer the funds that the bankrupt company has paid you for the last 90 days back to the trustee. They keep what you sold them, and the funds too. You are told that your claim for payment is just about at the end of the line. You often get nothing. This will decimate the supplier base, who are in many cases just on the edge themselves. Now then, how many F150s can Ford build if the companies that make the frames, seats, etc. are out of business?

[Extreme4x4]

Thank you for telling what actually happens to suppliers, when a manufacturer goes BK.

 

However, I suspect that it will fall on deaf ears.

 

Those who advocate a GM BK as a good thing, will just gloss over reality, and go back to their "happy, happy, joy, joy" outlook of such an action.

[RichardJensen]

I'd call it the 'point theory of economics'

 

We all know what a point is, it's an object that has no length, depth or height. It's a 0-dimensional object.

 

Points are useful, but they have no real world analogue.

 

Anyway, the point theory of economics treats businesses like points--0 dimensional objects.

 

So, when a business is run poorly, this point like business should be allowed to fail, as supporting it would reward poor management.

 

Works great in theory. Works about as well in theory as communism does.

 

However, in the real world, businesses aren't point like. They have multiple relationships with nearby businesses. They have 'dimension'.

 

Therefore, applying the 'point theory' to the real world is messy.

 

Most advocates of the point theory would much rather postulate potential solutions that allow them to retain a faith in the point theory. However, when pressed, few are able to come up with plausible scenarios that support the point theory--that is, scenarios where the impact of the failure is limited to the business that was poorly run.

 

Also, please note that few advocates of the point theory work in economics. Often they can be heard deriding the field of economics from the sidelines.

[Edstock]

Well said, Rich.

[jpd80]

I'm so glad the spotlight is now off Ford.

 

The journalistic buzzards are now happily feasting on GM and Rick Waggoner's record.

[tatsuke]

Also, please note that few advocates of the point theory work in economics.

 

I don't think there's an economist on the planet that doesn't understand that the "auto industry" involves more than just the actual manufacturers.

 

The problem is, you have to establish the "event horizon"; at what point are you willing to pull the plug on these businesses, regardless of the repercussions to the economy? That's the question on many people's minds, and it results in a ton of political posturing. Of course a $25BB, or $50BB or even $100BB loan is a ridiculously low cost to save the auto industry (at this point in history). But what if it can't? THEN do you let them fail?

[RichardJensen]

I think it was Truman who said he wanted a one-armed economist on his staff--one that couldn't say, "on the other hand..."

 

As to whether or not $X can 'save' the auto industry, I would point to Michael Vick as an example that money doesn't solve problems.

 

The guy made tons of bad decisions with money, and now he has no money at all.

 

If you gave him =more= money, he would've only found ways to squander more of it. And if you give him money =now=, unless there's some assurance he'll be smarter with it (e.g. a new staff of honest advisors), he'll just end up broke again.

 

That's why GM needs to change its management.

 

---

 

See, the loan Ford got was contingent on them changing the way they do business. So it should also be with GM.

[jafo]

I don't think there's an economist on the planet that doesn't understand that the "auto industry" involves more than just the actual manufacturers.

 

The problem is, you have to establish the "event horizon"; at what point are you willing to pull the plug on these businesses, regardless of the repercussions to the economy? That's the question on many people's minds, and it results in a ton of political posturing. Of course a $25BB, or $50BB or even $100BB loan is a ridiculously low cost to save the auto industry (at this point in history). But what if it can't? THEN do you let them fail?

 

 

That is exactly right. GM going bankrupt is not going to result in 3M jobs lost, nor is bailing out GM going to result in 0 jobs lost. The truth is somewhere in the middle and probably lies alot closer to 0 than 3M because if GM stopped making cars completley, there would be likely be severe new car shortage.

[RichardJensen]

if GM stopped making cars completley, there would be likely be severe new car shortage.

In this market? No. The reason GM's in trouble is because this market is as soft as a wet Kleenex

[jafo]

In this market? No. The reason GM's in trouble is because this market is as soft as a wet Kleenex

 

 

GM is trouble because of past bad decisions, not a soft market.

[suv_guy_19]

GM is trouble because of past bad decisions, not a soft market.

 

 

I would say its a combination of the two.