I let this settle for a bit before Tickering it, as this morning the news was coming fast and furious, and I wanted to write one instead of three......
First, the "easier" - apparently Chrysler and Fiat have reached terms. This may take Chrysler off the table in terms of a bankruptcy. Maybe. No details as of yet.
GM on the other hand is in trouble. There are those who back Wagoner, who was forced out. I'm not one of them.
Wagoner came into the firm's top spot well aware that GM needed to make some very difficult choices and screw a lot of people, or it was done. The firm has been functionally bankrupt for twenty years, and avoided the fate back then only by levering up using cheap money in their financing side, managing to roll people into upside-down car loans to pull forward demand and then spreading out into home equity and mortgage lending to gear it up even higher.
None of this was sustainable and it still isn't, and the legacy costs are murderous. Those costs came about through several decades of knuckling under to the UAW and managing to finagle people into buying their debt. The KoolAid was definitely being drunk at all levels; it is simply impossible to build a sustainable auto company when your only seriously profitable lines are big trucks and SUVs, all of which have a sales curve that depends on "forever" cheap fuel.
The collision between reality and this corporate posture was inevitable and well-known more than a decade ago - more than enough time to tell the stakeholders to cut the crap and resolve the problems, or face being wiped out.
But Wagoner didn't do that, with this changes being incremental rather than the necessary revolutionary upset.
Now President Obama has grown a tiny little set of mouseballs and threatened to do what should have been done last year:
“We cannot, we must not, and we will not let our auto industry simply vanish,” the president said at the White House, announcing new and final deadlines for the No. 1 and No. 3 U.S. automakers to remake themselves. “But we cannot continue to excuse poor decisions. And we cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars.”
If plans for automakers fail, the administration is prepared to let them slide into a structured bankruptcy that he said would make it easier GM and Chrysler to clear away old debts and emerge as smaller, leaner operations.
A fair question is why the administration has continued to allow the poor decisions in the banking system, both regulated and shadow, to stand and be profited from on the backs of the taxpayers.
While this is clearly a good move in terms of what needs to happen, it is only a small start.
From a macro economic perspective removing the bad debt on GM's balance sheet through bankruptcy (or renegotiation) is a good thing, but it is only a first baby step along the road to returning our economy to balance.
Should Obama's mouse-balls grow into elephant nuts then there will be something to celebrate. Wake me up when President Obama forces identical haircuts on the bondholders of the banks and other financial institutions, thereby reducing the outstanding debt in the system to a meaningful degree, and cuts the Federal Budget so that he does not spend more than the government can take in. (Holding your breath in anticipation of such an act is suicidal; I do not recommend it.)
Unfortunately what I believe is going on here is yet another diversion - this time away from the ever-growing evidence that the big banks have effectively "captured" the government much like occurs in any good Banana Republic, and we're headed down the same hole as those nations in terms of our economic outlook - that is, destruction, and the government, instead of addressing the problem will continue to look for things they can misdirect with.
This misdirection is very likely to blow up in their face as I suspect the UAW's Gettlefinger is going to give the finger to Obama and GM, forcing a trip through the bankruptcy process, while at the same time the government's backing of warranties will turn into a monstrous inducement for fraud among the dealerships who are rapidly seeing their credit access and cashflow disappear.
And then there's the nearly $1 trillion in CDS that will trigger. There is no accurate way to know what the net exposure is on those, but I'd take the "over" on $100 billion, focused in you-know-where.
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