Think GM has it bad? Or that they’re too big to fall? Think again. Lehman Brothers has just announced it’s filing for Chapter 11 bankruptcy protection. The 158 year-old bank decided to exercise the nuclear option after attempts at bailouts and takeovers failed. Lehman Brothers owes $128b in debt, which will probably be paid out at 60 cents on the dollar. (For reference, General Motors has $43b in long term debt). Thousands of Lehman workers were fired immediately after the Chapter 11 filling. The rest were told that they will be paid through Friday, at the most. John McCain – who probably realizes getting New York’s delegates is beyond the limits of reality – told the International Herald Tribune that he was “glad to see that the Federal Reserve and the Treasury Department have said no to using taxpayer money to bail out Lehman Brothers.” Floyd Norris from The New York Times reminds us that Lehman claimed it had ample capital and liquidity as late as last week. Sound familiar? It should. General Motors is in a similar predicament– only worse. Along with Bear Stearns and Merril Lynch, incidents like Lehman are using-up the market’s feelings of shock and surprise at major business failure. If General Motors is hoping for a bailout, they had better get on it soon, or no one will throw money in their direction, even post-C11.
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A $50-billion dollar bail-out cannot save the Detroit-3. GM has burned through $57-billion in 18-months and its Hail Mary pass, the Volt, will fall short.
The “bailout line” has been drawn, at least for financial institutions; any loans that the Big “3” can score are likely to have strict conditions, if the money is even offered at all.
Well looks like they are lining up… AIG & WaMu might be next in the financial firing line. According to what I saw on CNBC last night, several banks & PE’s balked at buying Lehman after the Fed refused credit guarantees.
It’s getting harder & harder for the Detroit cowboys to get string-free government money.
Those still calling for Detroit to file Chapter 11 take note at how the media is treating this entire episode.
Yes, Chapter 11 is fundamentally different than Chapter 7, but as far as the media (and by extension the general public) is concerned, there is no difference. Lehman Bros. is as good as dead.
Take a good look look at how this is all going down and tell me that you still think a Chapter 11 filing is Detroit’s best option.
The issue with bailing out (or not) the financial companies is rather different than with the D3. With the financials the Treasury Dept. and the Fed really had to draw a line in the sand and allow someone to fail in order to set an example and put an appropriate amount of fear back into the banking industry. Bankers should never be aggressive risk-takers.
The D3 are different in this regard and the principle of “moral hazard” just doesn’t work the same way with them. The D3’s problem has been that they’ve been too inward looking and have refused to acknowledge that their business models which were once so successful no longer work. Their biggest problem, and the reason that the bailout will fail, is that the D3 simply don’t want to change.
(Ford seems to be at least trying to change the company from the top down but there’s no guarantee that the entrenched corporate culture won’t strangle that baby in it’s crib.)
Gardiner Westbound: You make a bold statement with your prediction on the Volt.Its going to fall short you say?You know this how?Please share with all of us,what you base your insightfull predictions on.
mikey:
Concept car promised sports car looks, now it just looks like a Prius, only it’s from GM and costs 40k instead of 25k for the Prius. Which will also sell as a Plugin model in 2011 when (and IF) the Volt will hit the market in relevant numbers…
I agree with you. Success is inevitable!
mikey,
The Volt won’t fail but only because GM has set the bar so low that it can’t help but succeed.
The biggest hurdle the Volt faces is in pricing. At $40K – even if some tax credits apply – it will be unattractive to 99.997% of the market.
However, since a production run of merely 10K is planned for 2011, GM is very likely to sell them all and declare victory.
Now, 2012 will be a different story… GM either must reduce the manufacturing cost dramatically or the planned 60K volume won’t move.
Look no further than GM’s two-mode program for a preview of the Volt’s future. How many Yukahoe hybrids has GM sold this year? Close to zilch. Last month, with a $5K price cut and $5K on the hood, GM managed to sell about 500. That got ONE off the local dealer lot after 4 months in residence, leaving another behind.
The Volt looks a lot like a $15K car. It doesn’t even have a clearly unique form, like a Prius does, going for it. For $40K, you don’t get a radically different or unique form for your money? Might as well buy a Prius or Yaris and pocket the difference.
By Justin Berkowitz
If General Motors is hoping for a bailout, they had better get on it soon, or no one will throw money in their direction, even post-C11.
I wouldn’t even give them money for one of their cars!
Bailout is not likely.
Not now. How deep does the Gubment want to go printing cash?
And since when does the Prius have a truly unique shape?
Looks like a Honda Insight. Which looked alot like the EV1. So who’s copying who here?
monkeyboy:
Unless you’re being deliberately obtuse, the three vehicles you mentioned are each pretty distinct from each other. No one will mistake a Prius for a Corolla (though they may mistake the new Honda hybrid for a Prius…).
The Volt on the other hand is getting closer and closer to just looking like the Cruze (with pretty much just the huge black stickers to make the beltline look lower as the differentiating factor).
I have to agree with Monkeyboy – a bailout of the Detroit 2.801 is NOT likely and getting less likely by the hour.
Simply because – Lehman Brothers. AIG. WaMu.
The Fed has a stark choice – let the economy unravel and hope it doesn’t do a 1929-1942, – or -bail all the wealthy elite out and print money like it’s going out of style, with the probable end story looking like Zimbabwe (or the Weimar Republic of the early 1920’s – i.e. HYPERINFLATION).
In a set of moves tantamount to the quickest change of mind ever seen in their circles, the powers-that-be went ahead last week and opted for “disaster door #2” by bailing out Freddie Mac and Fannie Mae (using “someone else’s” money – i.e. taxpayer money, borrowed money, printed money which robs everyone by reducing the value of the dollars already in circulation).
Then yesterday, it looked like the Fed changed their mind and went for “disaster door #1” instead.
It should prove to be a very interesting decade ahead of us… especially as virtually everyone only thinks that the “disaster show” only has 2 doors to choose from.
There’s a third which is not likely to be opened until the disaster has already passed through the economy, wrecking it (and probably taking out the entire Detroit 2.801 with it). It’s called sound money based upon tangible items such as gold, silver, platinum, or fully backed by something such as oil.
Gardiner Westbound: You make a bold statement with your prediction on the Volt. Its going to fall short you say? You know this how? Please share with all of us,what you base your insightful predictions on. – Mikey
The Volt is too little product, too much money and too late to matter. GM will run out of money first.
“General Motors is in a similar predicament– only worse.”
Based on what are you getting this from exactly? GM and Lehman are quite different. Lehman has a problem because the value of its assets has depreciated to a point where they are no longer solvent. They have not necessarily failed from a cash perspective, but in that industry it really doesn’t matter. GM doesn’t have to worry about that because its success is not based on the fluctuating value of its assets, but rather the long term impacts of its cash flows. If GM is able to tighten up their operations and return to a small profit on a cash basis, GM will survive. Lehman’s asset values are debatable and the market has killed their stock price to a point where they will no longer be able to get the liquidity to finance their operations. GM’s stock price won’t put them into bankruptcy on its own, though it does limit their options in the long run.
A blurb on Bloomberg has it that the ex-ceos of Fannie and Freddie will NOT be getting their golden parachute payouts.
The first $25 Billion is already signed into law, but hopefully this change in the bailout tide will stop the second $25 Billion.
Unfortunately Michigan is a swing sate.
I get some smug satisfaction knowing that some poor people who were screwed over on their mortgages have put the rich people who sold them to them out of a job. If GM, Ford and Chrysler are allowed to fail, then how many more Lehman brother’s type banks will fall like a line of dominoes when many tens of thousands of blue collar workers are unable to make their mortgage payments.
The first $25 Billion is already signed into law, but hopefully this change in the bailout tide will stop the second $25 Billion.
It’s my understanding that it’s been authorized but no appropriation has been made. Unless that happens, there’ll be no money available for it.
bancho: “monkeyboy: Unless you’re being deliberately obtuse, the three vehicles you mentioned are each pretty distinct from each other.”
monkeyboy Has some sort of vision problem. Last week there were another half-dozen fairly distinctive cars that he claimed all looked alike.
If I can figure out where he lives, I’m going to drive by his house in a Ford Aspire and sell it to him as a McLaren F1.
Remember, Lehman was supposed to make their living predicting the financial markets and advising other companies how to invest. I guess they weren’t very good at it. Sad thing is, their creditors will get in the neck two years after the heads of this organization payed themselves king’s ransoms and the loweliest traders stuff their pockets with professional athlete salaries. Their creditors should be able to take that money back, even if it comes in the form of used Gallardo’s and Fountain speedboats. I think I’ve discovered the secret to success…believe your own hype, be greedy, and be unprincipled. Worked for these guys.
Lehman Brothers were arrogant bastards and I LOVE seeting them go down.
Those guys all got enough money to last themselves a good long time. Maybe instead of raising taxes on the rest of the honest earners, the courts and regulators can figure a way to get back money from the dishonest and/or negligent people who let this sham go on.
Gardiner Westbound: You make a bold statement with your prediction on the Volt. Its going to fall short you say? You know this how? Please share with all of us,what you base your insightful predictions on. – Mikey
I agree with Gardiner. How is an expensive, unproven, limited production, late to market, yet to be finalized vehicle going to save GM. GM needs several 250,000 sales a year vehicles to save it, not some yet to be seen niche vehicle.
pnnyj and compy386, thanks for your well informed and cogent comments
Seems like every ten or twenty years folks need to be rudely reminded to follow prudent business practices. Bundling crappy mortgage loans into collaterized securities didn’t make those home buyers into good credit risks.
I’ve been a bit redundant, but that never stopped me before so I may as well say it again — GM isn’t going to get what it’s asking for. It can ask all it likes, but it won’t be getting direct loans from the feds. The government can’t afford it, but they won’t be admitting to that prior to November.
That being said, GM is more similar to Bear Stearns than to Lehman. Lehman’s failure is, in the scheme of things, not that big a deal. The markets have been watching Lehman for quite awhile, and were able to prepare for its failure. It wasn’t the first to get hit, so the market also priced the risk into the stock and into its psychology. We had a hard landing, but the parachute was on pretty tight.
Bear Stearns was a different story. It was (sorta) bailed out largely because of timing. It was the first to fall, and its complete collapse without a net at that point would have sent an absolute shockwave through the markets, which were not prepared for it at that time.
If GM fails, you have to wonder what that would do for investor confidence to the US markets in general (not just in General Motors.) It could send the entire market into a dive, as uncertainty and fear grips investors wondering what else could possibly go wrong, as they see that the problem is no longer limited to the financial institutions. This swan dive could provoke the proverbial stampede that tramples on a lot of innocents.
If GM can fail in a vacuum and only hurt GM, I can personally live with that. But the odds are pretty good that GM would take down more than just GM. That’s why a GM bailout could make sense, but not with the current leadership in charge. In order for it to make sense, you need a team leading it who could actually fix it.
A blurb on Bloomberg has it that the ex-ceos of Fannie and Freddie will NOT be getting their golden parachute payouts.
Did the blurb say anything about jail time?