General Motors

By Hasen Bao

I’ve just participated in ‘Should Obama let GM and Chrysler go bankrupt?’ quick vote poll on CNNMoney.com; not all that surprised at the result, 70% of whom have participated in the poll thinks the automakers have been given too many chances and failed. The minority who voted for ‘No they are too big too fail’ or ‘Give them one more shot and then think about it’ are probably people who work for the automakers or people who own their cars.

Before any American can form judgment on whether they think the Detroit automakers should file for bankruptcy they would first consider two of the most important factors out of a ‘dozen’. The first would be what damage would this do to the history of great American automobile industry; bankruptcy would mean the extinction of some of the iconic American car brands that represented the American dream and the American lifestyle over the past century. The second factor they would consider is the ripple effects the bankruptcy of GM will have upon their lives or the lives of people surrounding them.

For those that do not work for GM or any of its counterparties nor do they own a GM car will probably wish the government would spend their tax money somewhere worthwhile. Maybe get rid of some toxic assets from the bank’s balance sheet so that they can start lending to the company I’m working for, so that my boss don’t have to hinder my wages, so that management won’t look at accrue wages as a reason to lay me off, and blah blah blah.

There are a lot of people like me who do not think GM can be categorized under the ‘too big too fail’; GM employs roughly 250,000 people globally, which is not that much compared with some of those truly ‘too big too fail’ financial firms. But if you count in all the other parties that are likely to be affected by a GM bankruptcy; you would probably consider otherwise.

First of all there’s the employees; I really do feel for the those who will be out of job as a result of bankruptcy, they are truly the ones who suffers from a failed company. Of course; those who suffers along with them are their families, let’s just hope that there will be enough unemployment benefits and union compensations for these people to live on until they finds another safe sanctuary.

Then there’s those who drives the big GM vehicle; they are worried about who is going to look after their big boy’s toy when GM is gone. The Obama’s administration has recently confirmed they will stand behind and continue all warranties on GM vehicles purchased if bankruptcy precedes, but this still leaves a reasonable amount of concerns on many owners of GM vehicles.

It would be disrespectful to have forgotten about the complicated networks of suppliers and dealerships associated with GM. News sources have reported a $22 billion payable to GM suppliers. If GM stays, suppliers might eventually receive the full amount owed to them, but if GM files for bankruptcy, assets will be liquidated to repay only those suppliers who are ‘qualified’. If the situation is bad enough; GM’s bankruptcy will initiate a headwind domino effect on its suppliers, causing possible shut downs.

Many other businesses in Detroit are also subjected to financial affliction from the Big Three’s crisis. Revenues for restaurants and pubs has plummeted due to the large amount of lay-offs in Detroit, sales for retails and department stores entered a downward spiral as people cut back on spending, the aftermath of the crisis is visible in every corner of Detroit and it is depressing.

Bankruptcy can be viewed as an easy road to end all the GM trauma; this will release GM from all ties with the labor unions and its previous obligations to ex GM workers. Contracts with suppliers and dealers can be cut much easier when bankruptcy is involved.

There must be someone who will be benefiting from all the bankruptcy drama. Some say that GM’s bankruptcy might indicate a good buy for competitive auto shares. A clear sign of improvement on stock price on Ford, Toyota, Honda, Nissan was shown immediately after the announcement of GM’s possible bankruptcy. This is a rational market reaction to the possible bankruptcy announcement. Yes, the likes of Ford, Toyota and Honda are likely to fill in the demand gaps for GM if the company goes bankrupt. This matter will also change the perceptions people have on American and Japanese auto brands; people will perceive Japanese brands as safer and relative dependable compare to American auto brands, and for this sake demands for imported vehicles will boost when market begins to recover.

The most recent GM outcry

It does not matter how many chances the government give to GM; it is almost certain the ailing automaker will never be competitive enough to reemerge on the top again. Every chance of restructuring GM receives means yet another change of strategy; GM has drove itself to ruin, with the company the way it is, a feasible long-term strategy to revive the automaker is unlikely. However if indeed GM has come up with a viable corporate strategy; it is probably another obscure and unsustainable one only for putting on a good show for the government so that General Motors can become qualified for more aid again.

GM is required to lay preparation for bankruptcy filing before 1st of June; to stop this from happening, GM must successfully negotiate a $28 billion worth of debt for equity swap with its bondholders and the UAW. GM’s fate for survival depends on whether bondholders and unions are willing to extricate the company from going under by accepting GM’s equity offers.

Clearly the bondholders are struggling to swap their debts into equity; if bondholders hold onto their position, GM would soon be bankrupt and default on interest and principal payments, bondholders will receive nothing. Say if sufficient bondholders agree to convert bonds into common shares; the company might have a chance of surviving, ‘exhilarating’ news like this would push the share prices up.

I don’t think I would put my bids on a prolonged GM recovery though; if I was holding converted GM shares I would probably hold them for the short-term, waiting for it to appreciate till I can recoup some losses. The recent 16% plunge in GM stock on Monday doesn’t seem all that promising to bondholders, secured bondholders will gain the upper hand if the company files for bankruptcy, and GM’s assets will be liquidated to reimburse bondholders. Debt for equity swap will appeal more to unsecured bondholders; as there will be no assets secured behind the bonds they’ve purchased.

With the majority of Americans voting against more taxpayer aid to GM; I think it is and should be time that the American auto industry ditch the obsolete and inefficient GM and move on to something new and fresh. After all; those iconic and healthy GM brands will probably get bought out by some private investors who are skilled enough to operate these brands efficiently, and just let the worn out GM discard itself from the marketplace.