The largest of the U.S. Big Three automakers yesterday (Wednesday) announced that it failed to persuade the required 90% of its bondholders to swap $27 billion in debt for stock, pushing the venerable GM several steps closer to a bankruptcy filing.

The rejection by bondholders is the latest chapter in the ongoing saga of GM’s desperate attempts to reorganize as it faces a government-imposed Monday (June 1) deadline to restructure or file for bankruptcy.

In recent days, the company struck a deal with its United Auto Workers (UAW) union on payment terms for $20 billion of debt in a retiree healthcare trust, and it successfully convinced the union to take a reduced stake of common stock in the new company.

GM also is still in negotiations to sell its European Opel and Vauxhall units to a consortium of bidders. Those talks were scheduled to continue in Berlin last night, as German and U.S. government officials met with representatives from three prospective new owners.

Still, the odds now favor what would be one of the biggest Chapter 11 cases in history, as the global auto giant that has been an icon of American culture since the early 1900s will likely follow Chrysler LLC into bankruptcy court.

Last Hope Bond Offer Fails

In what was seen as GM’s last best hope to cut debt outside of a government-financed bankruptcy, bondholders rejected the company’s offer of 225 shares in a restructured GM for each $1,000 of principal – the equivalent of 10% of the new company for their $27 billion in debt.

The principal amount of notes tendered was “substantially less than the amount required by GM” and, as a result, “the exchange offers will not be consummated,” the company said in a statement.

The news was no surprise to many analysts.

Bankruptcy is “imminent,” Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tenn., told Bloomberg News.

“It’s no surprise at all that a deal that was as unattractive as this one would be soundly rejected,” said Hastings, who had recommended that his clients refuse the exchange offer.

Some analysts blamed the offer’s failure on the unyielding stance of U.S. President Barack Obama’s auto task force, which had a hand in deciding the terms of any deal made with the debt holders.

“I think the task force made that hurdle so high, they wanted them to go into bankruptcy, they see that as the solution,” independent auto industry analyst Erich Merkle told Reuters.

Others saw GM’s long history of mismanagement and failure to respond to market conditions as the primary culprits.

“I think the exchange offer was really a transparent attempt to blame bondholders for the bankruptcy rather than to accept responsibility for years of mismanagement and failure to anticipate things that should have been understood,” Richard N. Tilton, a restructuring analyst at Covenant Review LLC, told Reuters.

The New “Good” and “Bad” GM

A GM bankruptcy is likely to involve so-called “debtor-in-possession” financing so it can continue daily operations as it is divided into a “good” and “bad” company by the bankruptcy court.

The “good” GM would include the company’s most successful operations, including the Chevrolet and Cadillac brands, and within months would exit bankruptcy in sound financial health. The “bad” GM would be left with such laggard brands as Pontiac, Hummer and Saturn, and other liabilities that would be divested in a lengthier court-supervised reorganization.

The U.S. government is expected to increase its ownership stake in GM from its current 50% to as much as 70% in order to slash debt and will lend the new company almost $30 billion, The Washington Post reported last week, citing sources familiar with the matter. That’s in addition to the $19.4 billion the United States has already invested. Canada is expected to lend GM an additional $9 billion for a smaller ownership stake in the company, sources familiar with the talks told The Post.

When all these financial packages are included, the GM bailout will have a sticker price of about $60 billion, making it one of the largest – and most costly – rescue and reorganizations in corporate history. When it’s finalized, the United States and Canada would own almost three-fourths of GM, the newspaper said.
Despite the vote, bondholders would be left with a 10% equity stake in the reorganized company and current shareholders would own about 1%. As much as 20% could go to the health-care trust fund for union retirees.

Chrysler Bankruptcy Paves the Way

Ironically, Chrysler’s swift journey through the bankruptcy process may be a major factor in inducing GM to steer its way into Chapter 11.

Chrysler appears to have made great strides towards a successful restructuring and may be ready to emerge from bankruptcy as early as next week, Bloomberg reported, citing an anonymous source.  That would be well in advance of the 60-day upper limit announced at the time of the filing on April 30.

Chrysler has asked a bankruptcy judge to let it sell most of its assets to Italy’s Fiat SpA (ADR OTC: FIATY) in order to avoid liquidation.  Up until now, the judge in the Chrysler case has signed off on all elements of the company’s simplified bankruptcy process that calls for Fiat to take a major equity stake. The deal is still opposed, however, by some of the automaker’s dealers, bondholders, and former employees.

But consumers apparently are buying into President Obama’s pledge to keep Chrysler alive, as the automaker’s sales in May were about even with those from April. That could mean shoppers remain optimistic about the viability of factory warranties and dealer services if GM enters the same process.

“The government has showed that it’s going to put its muscle behind this,” George Magliano, director of automotive research for IHS Global Insight Inc. (NYSE: IHS) in New York, said in a Bloomberg Television interview. “They don’t want a long bankruptcy. They want to get it in, get it out to minimize the impact of a long bankruptcy.”

Jeremy Anwyl, chief executive of automotive research firm Edmunds.com, told Reuters that “a few months ago, the idea of putting a major automaker into bankruptcy raised fears of things spiraling out of control, but the Chrysler bankruptcy seems to be going well, so right now the idea of bankruptcy seems a lot less frightening.”

GM Bankruptcy More Complex and Risky Than Chrysler’s

A GM filing would be far bigger and more complex than what Chrysler is attempting.

For one thing, GM’s bankruptcy would take longer than Chrysler’s, simply because it is a larger company. GM employees 244,500 people, compared with 54,000 at Chrysler. It also boasts a network of dealers that outnumbers Chrysler by almost two-to-one, with about twice as many brands.

And even though the automaker put 1,100 of its 6,000 dealers on notice that they will have their contracts terminated next year, they are shielded by a labyrinth of state franchise laws.

GM also has publicly traded equity and debt, complimented by international operations in Europe, Asia and Latin America.

Those factors contribute to a large web of complications that could hinder the bankruptcy process and present other, more serious risks, David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told MSNBC.

“If you look at the complexity of the company infrastructure and the number of players involved here – the union, the creditors, the dealers, the suppliers and the government – it’s an unholy cast of characters,” said Cole. “Any one of them could cause a problem, and bankruptcy laws are not well designed to deal with institutions of this complexity.”

Cole also said if a “quick-rinse” GM bankruptcy predicted by the administration fails, it could present more far-reaching and serious implications for the overall U.S. economy.

If the planned bankruptcy process “blows up,” he says, it could lead to a “cascading failure,” shoving auto suppliers into insolvency and forcing other automakers into bankruptcy, according to MSNBC.

“We are talking about the potential for a rapid collapse – it could trigger a national depression,” he said. “The automotive supply structure is in pretty serious trouble now… so if we were to see a cascading failure it could quickly spread to the rest of the economy. That’s the scale of this industry.”

Source: Collapse of Bond Deal Steers GM Toward ‘Imminent’ Bankruptcy Filing and Majority Government Ownership

• The Conference Board’s index of consumer confidence jumped to 54.9 in May, up from a revised 40.8 in April. The leap marks the biggest one-month gain since April 2003, and was set in motion by tighter credit and oversupply of homes pushing down prices, Reuters reported.

• Hong Kong’s government will inject another HK$16.8 billion ($2.2 billion) into the economy via tax cuts, fee waivers and spending, Bloomberg reported. Added to previous stimulus measures, Hong Kong’s government has pumped HK$87.6 billion, or 5.2% of the country’s gross domestic product, into the economy.

• Virgin Atlantic said its annual profits nearly doubled, but gave a grim assessment the current fiscal year. “We have not seen conditions as tough as this, and we do not see any signs of recovery … for airlines to make a profit this year is almost impossible,” Chief Executive Steve Ridgeway told Reuters. “The key now is to slow down capital expenditure and preserve cash.”

• South Africa has slipped into its first recession in 17 years, as its gross domestic product fell an annualized 6.4% in the first quarter. Manufactures and miners have been scaling back output and letting workers go, as a result of tightening global demand, Bloomberg reported.

• Sonia Sotomayor, President Barack Obama’s nominee for the U.S. Supreme Court, does not appear to be either particularly liberal or conservative on business issues, but four of her rulings have been overturned by the high court, according to legal experts interviewed by Reuters. Sotomayor has a lengthy record of rulings in business cases as a federal judge in New York, but her rulings appear to present a patchwork of decisions based more on the merits and facts of the cases than an ideological approach to the law, the experts said.

• Hedge funds are making big bets that commodity prices will rise as the global economy rebounds from its steepest slump since World War II, according to Bloomberg. An index of the net long positions in U.S. commodity futures held by hedge funds and other large speculators rose to a nine-month high. The index consists of 20 raw materials and is monitored by the U.S. Commodity Futures Trading Commission.

• General Motors Corp. (NYSE: GM) received approval from its Canadian Auto Workers union to freeze pension payments until 2015 and cut new hires’ pay to protect jobs, as it works on labor agreements to help speed its exit from a probable bankruptcy, Bloomberg reported. The union, representing about 9,000 hourly employees, ratified the accord yesterday (Tuesday) with 86% of the vote. The United Auto Workers (UAW) presented a tentative U.S. contract to plant-level leaders in Detroit yesterday as well.

• A Russian Internet investment firm has invested $200 million in Facebook, as the social networking site builds a cash buffer.  The investment by Digital Sky Technologies, which has invested in leading Russian web properties like Mail.ru and Vkontakte.ru, values the social networking site at $10 billion.  The Russian company took a 1.96% stake in Facebook in preferred stock in exchange for its investment, Reuters reported.

Source: Investment News Briefs Wednesday May 27, 2009

• Agricultural Bank of China raised 50 billion yuan ($7.3 billion) in the nation’s biggest corporate bond sale. The goal of the bond sale was to raise capital and help set up an initial public offering, Bloomberg reported.

• A handful of banks have applied to repay the billions they borrowed from the U.S. government’s Troubled Asset Relief Program (TARP). Sources told Reuters that Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) are two of the banks eager to begin repaying the government.

• Fiat SpA (OTC ADR: FIATY) Chief Executive Sergio Marchionne said in a Bloomberg interview that an offer he plans to make for General Motors Corp.’s (NYSE: GM) Opel unit will include assets that are “better than cash.” Today (Wednesda) is the deadline the German government set for Opel bids.

• World Bank President Robert Zoellick said that a global economic recovery could begin at the end of this year, Reuters reported. “I’m neither an optimist nor a pessimist, I am uncertain, a realist. Clearly the fall has been interrupted. I think there’s a good chance that while we face declines, they will be smaller in size. The majority expect a recovery at the end of this year, at the beginning of next year,” Zoellick said on Spanish television.

• The Bank for International Settlements said the derivatives market declined for the first time in the second half of 2008 as the global financial crisis curbed trading, Bloomberg reported. The Switzerland-based bank said yesterday (Tuesday) the amount of outstanding contracts linked to bonds, currencies, commodities, stocks and interest rates dropped 13.4% to $592 trillion, the first decline in 10 years of compiling the data. The amount of credit-default swaps insuring investors against losses on bonds and loans fell 27% to cover $41.9 trillion of debt.

• General Electric Co (NYSE: GE) Chief Executive Officer Jeff Immelt said yesterday (Tuesday) has already borrowed all the money it planned to raise on debt markets for 2009 and may reach funding goals for 2010 before the year is out.  “From a funding standpoint, 2009 is already done,” the head of the largest U.S. conglomerate told an investor conference in Florida, Reuters reported. “We’re going to pre-fund a lot of 2010 in 2009, maybe the whole thing.”

• The United Auto Workers and General Motors Corp (NYSE: GM) still have a “long way to go” to reach an agreement that local labor leaders could vote on, UAW President Ron Gettelfinger said after a union-sponsored forum at the U.S. Capitol, according to Bloomberg. GM’s decision to shut 16 U.S. plants and boost the number of cars it imports to 7% of North American sales has emerged as a sticking point in talks on a new UAW contract.  GM has a June 1 deadline to complete a restructuring plan or enter bankruptcy.

• Home Depot Inc. (NYSE: HD), the world’s largest home improvement chain reported higher-than-expected quarterly earnings as massive cost cuts offset weak sales. But investors found the results disappointing in comparison with those of smaller rival Lowe’s Cos Inc. (NYSE: LOW) and shares fell.  On Monday, Lowe’s reported better-than-expected quarterly earnings.  Home Depot affirmed its fiscal-year outlook, Reuters reported.

Investment News Briefs Wednesday, May 20, 2009

Marchionne said he’s aiming for Chrysler’s U.S. and Canada labor costs to match those of plants in Japan and Germany. Otherwise, he is prepared to scrap the deal, a move that would likely send Chrysler into bankruptcy court.

“Absolutely we are prepared to walk. There is no doubt in my mind,” he in an interview. “We cannot commit to this organization unless we see light at the end of the tunnel.”

Marchionne gave 50-50 odds that a merger will be formed, and spoke strongly about the reality Chrysler faces if its unions – the Canadian Auto Workers (CAW) and United Auto Workers (UAW) – don’t “change the framework of the discussion.”

“We are not anti-organized labor. No one wants to remove the UAW or the CAW from the table. But it will happen if a bankruptcy process drags on,” he said, adding that the negotiations with the CAW are especially lacking progress.

Privately owned Chrysler has been survived only by taking on $4 billion in emergency government loans, and the Obama administration has given the car company until the end of April to produce a viable business model. If Chrysler succeeds, the administration will provide another $6 billion loan.

“What we’re asking for is difficult,” President Obama said. “It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It’ll require creditors to recognize that they can’t hold out for the prospect of endless government bailouts.”

The first stipulation for Chrysler is that the company alters its partnership with Fiat, which agreed in January to take a 35% stake in Chrysler.

Under new terms, Fiat would take a 20% stake in Chrysler with the White House’s backing. And as Chrysler reaches certain milestones, Fiat would gradually increase its ownership to 49% in 5% increments. The Fiat stake would only rise above 49% after Chrysler repaid all money owed to the U.S. Treasury.

Chrysler is currently 80% owned by Cerberus Capital Management LP and 20% owned by Daimler AG of Germany, owner of Mercedes-Benz.

Chrysler creditors are also planning to make a counteroffer to the U.S. Treasury this week – possibly asking for equity in a firm combining Chrysler and Fiat S.p.A. (ADR: FIATY), The Wall Street Journal reported.

The lenders, which include JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), were in talks with the government to reduce Chrysler’s debt by swapping some of it out for equity, new debt or a lesser amount in cash.

Source: Fiat CEO Gives 50% Chance of Chrysler Merger, Demands More Labor Cost Cuts

The taxpayer-funded check has barely cleared the bank and GM’s chief is hinting that Congress’ recent gift of $9.4 billion may not be enough. Not only is Wagoner saying the company may need more money, he is telling us that bankruptcy is still an option.

Just last month, however, he vowed it is absolutely not an option. Which is it?

It is the same old story in Detroit. General Motors is running around touting cars that nobody wants and the UAW is squeezing every drop of remaining blood from the company’s cancer-ridden body.

If you have turned on the evening news over the past few days, you have certainly seen the shots from the Detroit Auto Show. Wagoner has been grabbing any media attention he can to show off his company’s shaky billion-dollar investment, the Chevy Volt. The CEO needs to do everything he can to create demand for a $40,000 electric car when crude prices are plummeting.

But even worse than the Volt’s chances of becoming a bestseller are GM’s chances of solidifying a life-saving deal with the UAW. The negotiations between the employer and its employee representative will not start until Monday, but already trouble is brewing.

Here we go again

Ron Gettelfinger, the UAW’s fearless leader (I mean that in a bad way), told reporters that he wants Obama to remove some of the concessionary terms placed in Congress’ recent bailout legislation. In other words, the UAW does not want to negotiate.

We should not expect the UAW to be cooperative over the next few weeks. But it may not matter. Already, there is at least one bill making its way through Capitol Hill that will lower the requirements and terms of the loan furnished through the Treasury’s TARP.

Talk about changing the rules in the middle of the game. This is one big political fiasco.

When we boil away all the fat, this subject really is not about cars, the Big Three, or American workers. It is about politicians shoring up their next election. The contingency that can deliver the most votes will emerge the winner.

As investors, there are two ways to look at this situation. We can take a short-term stance and be ready to trade the news. Or we can look at the long-term stance and short the heck out of GM.

Either way, investing in GM is less about fundamental value and is increasingly becoming more of a political bet. That is something no investor should be comfortable with. Remember, dollar and cents add up. Politicians do not.

If you thought the GM story ended when it received its bailout, you had better think again. That was merely the end of the first chapter. There is much more on the way.

Source: Why won’t they just go away

It turns out, according to some analysts, shareholder equity could be wiped out if Washington gets its way. Shares of General Motors (NYSE:GM) are down by nearly 20% today thanks to a report from Credit Suisse that says shareholders may suffer as the company restructures.

The analyst that researched the report cut his outlook for the company’s shares to just $1 each, down from $2 per share. That is not the kind of news shareholders were looking to start the week with.

Toyota’s (NYSE:TM) bad news this morning is not helping the situation in Detroit. It slashed its earnings outlook for the second  time in less than two months. Now, the company expects its first ever annual loss. Its share price is down by 5% on the news the company will likely lose about $1.7 billion during its fiscal year ending in March.

Pay attention this time

As I said last week, this is not the time to be buying shares of automakers, but it is the perfect time to be buying shares of their suppliers. Companies like BorgWarner (NYSE:BWA), American Axle (NYSE:AXL) and Tenneco (NYSE:TEN) are all seeing cuts to their valuations on the recent negative news. It is creating a prime buying opportunity.

Just because Ford (NYSE:F), General Motors and Chrysler are forced to make concessions does not mean their suppliers will. In fact, the supply chain will be the chief benefactor of the bailout. UAW will lose power. Detroit bondholders will certainly suffer. And equity owners will lose even more money. But suppliers will be the first (maybe second after Uncle Sam) to get their money.

Do not try to speculate on the future of the Big Three. Once the government gets involved, logic and reasoning get tossed out the window. Forget about trying to pet the sharks and invest in the remoras that feed off their supply chain.

One of my favorites is Tenneco. With its solid Walker brand and the company’s focus on emissions technology, it will be a long-term winner as the industry cycles back to a stronger state. It is taking healthy steps to deal with its debt load and will emerge as a winner in 2009.

Start doing your research and take advantage of today’s low prices. Little Johnny’s toys are not the only things selling for a deep discount.

Source: For General Motors (GM) the News Keeps Getting Worse

Well… Another day of doldrums in the currencies, with the bias, what little there is, to buy dollars. The stock jockeys received some manna from heaven yesterday when it was announced that the U.S. Treasury Department is considering a plan to halt the slide in home prices that would lower mortgage rates using Fannie Mae and Freddie Mac. The plan could reduce rates for newly issued loans to as low as 4.5%.

Here’s a snippet of the story that ran in the Wall Street Journal yesterday…”Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.

Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.”

OK… So they came up with a plan… I have to think about this a bit, as I see the “good” it could do, but there’s always a “bad” to these things too, and once again, I’m sure it circles around the fact that Gov’t is going to be in the mortgage business… We inch closer and closer, all the time to socialism folks… It all began when they mandated that in a free country we HAVE to wear seat belts… Now don’t get me wrong, I wear them because I believe it’s the safe / right thing to do, but shouldn’t that be MY choice and not the mandate of the Gov’t? Any way, please don’t flood my email box with notes telling me how wrong I am on this… It won’t help, this is what I believe, period!

Whew! I really went off on a tangent there, eh? OK, before you begin to think I’m a nut case… Let’s get back to currencies and economies!

The Reserve Bank of New Zealand (RBNZ) did cut rates, as I suspected, by 150 BPS yesterday… This brings the total of rate cuts by the RBNZ since September to 325 BPS! I think the RBNZ truly believes that global inflation is taking a major step backwards… And it probably is to a degree, but the RBNZ had better be ready to go the “other way” once this slide in inflation tips back… Of course I don’t believe we’ll see that for some time (6-months at least), so go ahead and frolic in the sun with rate cuts while you can RBNZ… Just be ready, that’s all I’m saying…

Bond holders of New Zealand issues have to be frolicking in the sun for sure, and their “locked in yield to maturity” is now, at least 150 BPS, if not 325 BPS higher than new issues, which makes their bonds “more valuable”…

U.K. Prime Minister Gordon Brown unveiled a scheme to allow borrowers experiencing a temporary loss of income due to the downturn to defer mortgage interest payments for up to two years. The U.K. Gov’t will guarantee the lenders against the risk of loss from the deferred payments… That’s going to be quite interesting to see how that plays out… But shoot Rudy, if the Gov’t is going to let you go Ollie, Ollie, oxen free on your mortgage payment for two years, with NO bad stuff happening to you and your credit, I can see the mortgage holders lining up on the right for this!

The U.S. Fed Reserve’s Beige Book that usually gives us an indication of what to expect in the next FOMC meeting, which will take place December 16th, printed yesterday… And it could be probably listed on Amazon under “horror” books! Put away the sharp objects folks, for it’s not just me ranting about these problems any longer, the Fed Reserve, your Central Bank, you know, the people that are supposed to be protecting the value of our currency, by providing price stability, and full employment (and are failing miserably at both!), now are ADMITTING that the problems are real… Here’s a short review from the Beige Book…

Based on data collected prior to November 24th, the Beige Book painted a grim picture of the outlook for growth in the fourth quarter. Lenders tightened standards for loans and lending contracted over the period. Several districts noted increases in delinquencies and defaults.

Consumer spending, which played a lead role in the growth downturn in the third quarter, was reported to have weakened.

Hey, this little tidbit came across my screen yesterday… The number of days that the S&P 500 has moved up or down by more than 5% during the Trading Day… 1950 – 2006 34 days… 2008 44 days! With 22 of them coming since October 1st!

Talk about volatile! WOW!

OK… One of my fave economic writers, Caroline Baum, wrote a piece on Bloomberg that caught my eye… Hey! That makes sense now, since I really can only see good out of one eye! Anyway… Here’s a snippet of the story by Caroline Baum, titled, “Bernanke should buy Buicks instead of bonds”…

“It tells you just how far we’ve come when the headline, “Fed May Buy Treasuries,” gets a reaction.

Buying Treasuries is the age-old way of adding reserves to the banking system, setting in motion the money-creation process.

Historically, these so-called permanent open market operations were designed to have no impact on the shape of the yield curve. The goal was simply to satisfy the banking system’s demand for reserves.

Treasury securities used to make up the lion’s share of the Federal Reserve’s balance sheet. No longer. As of Nov. 28, the Fed held $476 billion of securities carrying the full faith and credit of the U.S. government, less than a quarter of its balance sheet. One year ago, the comparable figures for the Fed’s Treasury holdings were $780 billion and 90 percent.

When the banking system starts functioning again, and the Fed has to mop up all the excess reserves banks are holding instead of lending, the reality is “it doesn’t have enough Treasuries,” said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

Banks were holding $605 billion of reserves in excess of the amount required as of Nov. 19. “Maybe the Fed will have to raise reserve requirements,” Kasriel says. “It’ll be 1937 all over again.”

Many Great Depression scholars, including the late Milton Friedman and Anna Schwartz, point to the Fed’s doubling of reserve requirements in 1936-1937 as triggering the second leg down in the economy, which was recovering in the mid-1930s.”

OK, back to me… All this talk today is causing me to search for something “fun” to talk about, because it’s all been gloom and doom, eh?

Sweden’s Riksbank announced a 175 BPS rate cut this morning. WOW! Another Huge cut, makes you think that the Bank of England and European Central Bank might have something up their sleeves too! And in Canada, their Central Bank doesn’t meet until next week, but Canada has other problems going on, as there are rumblings about a suspension of Parliament…

The Governorator, Arnold Schwarzenegger, has called a Fiscal Emergency for the state of California… I feel like he won’t be the only governor to do so… You see, the Federal Gov’t is giving all it’s McLovin’ to Financial Institutions right now, and the States are hurtin’ for certain… The states that have for decades told the Fed Gov’t to “get out of their business”, will now be knocking on the Gov’t’s door, and be the next in line to ask for bailouts…

And then, one final thought before going to the Big Finish… I saw this yesterday, and almost fell out of my chair! (now that would not be a good thing!) Let’s see what your take is on this….

I know that sure seemed as though the Fed and Treasury had found every last way of pushing off debt from one generation to the next, BlackRock’s Peter Fisher has thought of a clever new one: a 100-year treasury bond. That way, the government can keep borrowing money to finance today’s bailouts, and won’t really have to start bleeding cash until after most of us are dead and gone…

Let’s hope that thought by Peter Fisher doesn’t even cross the minds of Paulson and Bernanke!

Currencies today 12/4/08: A$ .6470, kiwi .5365, C$ .7945, euro 1.2640, sterling 1.46, Swiss .8245, ISK 261, rand 10.2585, krone 7.17, SEK 8.3430, forint 207, zloty 3.0650, koruna 20.3425, yen 92.55, baht 35.70, sing 1.5275, HKD 7.7510, INR 49.85, China 6.8820, pesos 13.62, BRL 2.4790, dollar index 87.22, Oil $47.16, Silver $9.57, and Gold… $769.35

Source: Buying Buicks Instead Of Bonds

So what does the future of the American automobile industry look like? Will all three survive, or will GM absorb Chrysler? No one knows for sure. But one thing is evident: drastic changes must be made. Continuing as is, and keeping the status quo, will surely result in each of the automakers being on the brink again in a few years. And if that occurs, there is no way the government can save them again. Chrysler lining up for a handout twice in 30 years is bad, but GM and Ford holding out their hands twice in a few years is unacceptable (at their current monthly burn rate, even the bailout money won’t last long).

So what changes can be made, and made quickly to save the companies? Here are a few that would make significant impacts.

1. Trim the fat. There is no need for GM to have eight divisions and 76 different models. By comparison, Toyota (TM) has three divisions and 32 different models.
2. Close plants and eliminate jobs through consolidation. This would take serious concessions from the UAW since it violates agreements, but paying the costs to get it done now will save the rest of the jobs. After all, if GM goes out of business, all plants would close and all those jobs would be gone.
3. Eliminate the job bank. Talks are underway to get rid of this dinosaur. It basically guarantees laid off workers full compensation and benefits for not working.
4. Eliminate dealerships. Again, there are costs involved with this, but it is necessary. There are over 15,000 domestic car dealers, outnumbering import dealers 3 to 1. Some of this may be handled through attrition this year, but buyouts are needed.

Will this cure what ails the Detroit 3? Not entirely. There are many other battles to be fought, such as with the UAW. But to continue to operate as they are now only guarantees failure again.

There’s no reason that the companies can’t rebound after the bailout and become leaders once again.  When Chrysler was bailed out by the government in 1979, they made great initial strides. The K car saved the company, and they also created the minivan segment.

Innovation brought Chrysler back from the brink, and the Detroit 3 need to innovate to survive this. Electric cars or alternative fuel vehicles could lead them into the future, and establish them as real players again. GM has their “Flex Fuel” vehicles which can run on E85 (still a debatable solution), the Volt is an electric hybrid, and Dodge (Chrysler) has shown electric vehicle concepts (Dodge EV). More innovation is needed, but at least they are moving in that direction. I would hope that with their backs against the wall, they break archaic processes and really stretch their creative minds. Bland econo-boxes just aren’t going to bring buyers back.

I also find it interesting that Chrysler created the minivan, which saved the company after the bailout. The minivan morphed into the SUV, which the Detroit 3 relied on so heavily for profits, and has proven to be what may kill them. So what once saved them has almost become what kills them.

Source: After the Bailout, The Detroit 3 Still Have Work To Do