Friday, November 07, 2008

Can GM be saved from bankruptcy?

Flip a coin whether GM can actually avoid bankruptcy. On the one hand, the combination of the credit crunch, a sharp decline in consumer spending, a competitive disadvantage relative to Toyota, et al, and the potential for a deepening recession all point to extreme pressure on GM. But on the other hand, its bloated structure, continued reliance on gas guzzlers such as the Hummer, and continued reliance on GMAC for consumer financing, all strongly suggest plenty of room for restructuring. The open question is the degree of restructuring that GM is willing or able to do pre-bankruptcy vs. post-bankruptcy. Technically, I strongly suspect that they can do enough to avoid bankruptcy. Some of it might be a bit too painful to contemplate right now, but sliding towards bankruptcy will only make it more painful. I also suspect that there is a fair amount of posturing going on right now in an attempt to get some bigger "bailout bucks" from the government.

A few years ago I was convinced that GM would survive, but only if restructured within five years to the extent that it was no longer recognizable. Maybe we are finally approaching the point in time where that restructuring transition finally takes place. The whole situation has deterioated to the point where it looks as if this will transpire by the end of next year, if not sooner. I have no idea what the restructured result would look like. Maybe it would simply be a "Mini-GM" (GM-Mini?) that is only 25% the size of GM today and completely focused on vehicles of the future, such as the Volt, and whatever other brands are significantly profitable.

I suspect that the incoming Obama administration is unlikely to simply let GM "fail", but I sure hope they do not simply throw another $50 billion at them that simply helpes them limp along but not actually transform into a newer and leaner GM. We need a reinvigorated GM, not simply a subsidized GM, regardless of whether the economy is in a recession or not.

The government cannot simply help make GM much more competitive and not provide the same benefits to Ford and Chrysler.

Maybe the trick is to buy up a huge chunk of the assets of the three companies and then lease them back at an attractive rate so that the companies have the $100 billion or so of cash that they need for next year, while the government in fact gets a decent income stream from the leases. The companies would then be expected to buy out of the leases over the next five to ten years.

In short, I do believe that GM, et al can in fact be saved from bankruptcy, but only if the result at the end of the process is something new and completely different and that does not resemble the GM of today.

But, I suspect that what will happen is something in the middle, where GM, et al get a combination bailout, part of which is a simple loan payable over a number of years and part of which is simply a bridge loan for assets sales that would occur once the credit crunch has fully dissipated. My suspicion is that once they get this money, then they will quickly realize that they really do need to go for the dramatic restructuring.

I suspect that the final tab for the GM, et al will be in the $100 billion to $200 billion range.

Sure, the taxpayers will "foot the bill", at least initially, but if managed properly such a deal could be a net gain for Treasury over the next five to ten years.

Two restructuring steps I want to see are: 1) a complete spin-off of GM capital, either selling it to a bank, or creating a full-fledged bank from it, and 2) a complete spin-off of the GM pension fund, forming the core of a new private pension fund entity which would look like a privatized version of the Social Security Administration, and could take on pension fund operations from other companies as well. These two steps would help enormously in letting GM focus on being a lean and mean car company.

-- Jack Krupansky


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