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Friday, November 14, 2008


liquidating the automakers

it was more than three years ago that the debt of ford and general motors were downgraded to junk. the process of slow deterioration seems now to be coming to a head.

the two are suffering massively under the weight of economic contraction -- see today's retail sales disaster report -- and further look where things are going -- in historical context -- and are burning through cash at a rate that may make them insolvent before year end. while the bailout-mad treasury dishes cash to seemingly every applicant in any line of business, in fact there are limits to what the feds will do. and republicans in this lame-duck congress are not inclined to take big steps to save the automakers and the bush adminstration will not dip into the TARP for aid.

``I don't know of a single Republican who is willing to support'' the auto bailout, Democrat Christopher Dodd, chairman of the Senate Banking Committee, said yesterday, adding that he would be careful about bringing up any measure that might fail.

It is ``highly uncertain'' Congress will pass a bailout package this year, Goldman Sachs Group Inc. analyst Patrick Archambault wrote in a research note yesterday.

GOP lawmakers are pushing for reform as a condition of the bill, and it's hard to fault them. but there also has to be a realization that the automakers will likely not be able to reorganize.

``If we were in a different overall economic environment, one of them going down wouldn't necessarily kill'' the industry, he said. A weakened economy and frozen debt markets make an automaker bankruptcy impossible, with a Chapter 11 filing for reorganization resulting in liquidation instead, Ross said.

Failures by automakers and related businesses would lead to a drain on government spending for unemployment benefits, health care and pension recoveries, said Ross, whose WL Ross & Co. is based in New York. GM has said bankruptcy isn't an option.

i mentioned to a friend yesterday that financing for chapter 11 reorganization simply isn't available, which as howard davidowitz makes plain on bloomberg has meant the chapter 7 liquidation of several retail chains already.

and today comes word that the automakers' cash needs will intensify as european credit insurers are stepping away from the american majors.

The withdrawal of credit insurance – which covered suppliers against the risk of the automakers failing – has previously hastened the demise of a string of European companies. Euler Hermes, Atradius or Coface, which control more than 80% of the world’s credit insurance market, are refusing to write policies for suppliers trading with GM or Ford on credit. GM and Ford are two of the biggest groups ever to be blacklisted. The cut-off of cover will primarily affect the companies’ large operations in Europe, where the insurers do the bulk of their business. US suppliers largely operate without insurance. The move leaves three possible scenarios: GM and Ford can start paying upfront for goods; they can hope their suppliers will trade uninsured; or they could be unable to buy the parts they need for car production.

as a result of the confluence of economic depression, financing crisis and political obstruction, the big three carmakers look increasingly likely to fold up shop in the next few months -- along with many of their supply chain dependents.

more than 200,000 people work for the big three directly; there are over 3 million employed in the supply chain.

the response to the onset of depression in this country has been a combination of demand stimulation, limitless liquidity provision and (so far) limited capital injections into banks and bank-like financing structures. as many have noted, liquidity provision, while perhaps desirable and even necessary, is not a solution to what is a solvency disaster. capital injection has, thusfar, been a failure -- not least because the beneficiary institutions have not yet delevered or even marked their assets properly, and are therefore inclined to hold capital as a loan-loss reserve.

should the automakers go to liquidation, for all the happy talk in washington one can declare demand management a failure too. the bankruptcy will be difficult enough, particularly if chris whalen is correct about the liquidity sink effect of credit default swaps awaiting delivery, of which there would be trillions outstanding referencing the big three. but the blow to aggregate consumer income as millions in the automotive industry see their paychecks stopped would place severe pressure on already-collapsing consumer demand.

if the carmakers are allowed to BK, congress must at least assure financing for reorganization if it is even to make a show of avoiding the "policy errors" that "caused" the great depression.

UPDATE: mish relays how demand management in chicago is about to get a whole lot more difficult.

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from perrone: did you see this at the curious capitalist --

"GMerdammerung." god, I needed a good laugh. I almost peed myself.

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LMAO! enjoy, perrone!

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