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  • what will be the effects of a gm bankruptcy?

    someone emailed me, saying that he thought a gm bankruptcy might be a real catastrophe. i wrote a reply, below, and then thought to post it here for discussion. i'm interested in others' thoughts about how serious the consequences of a gm bankruptcy might be. is the scenario i picture realistic or just doomer porn?

    -------------------------

    why do you think a gm bankruptcy, especially if it's mostly prepackaged, will cause catastrophic fallout? or rather than "why," let me ask "how?"

    i share your sentiments about how misdirected all the rescue/bailout efforts have been, but i think we are playing out the "it has to get worse before anything serious can be done" scenario. ej predicted 20% unemployment. that's pretty damn bad. so far i think itulip's specific predictions have been overly optimistic, just as they say. they're called doomers, but their predictions are on the bright side when the events come to pass.

    i think that the bad news is just hitting main street. so maybe that's the lehman-gm parallel. in bill fleckenstein's terms, this is a triple header- financial disaster, economic disaster, funding crisis. the financial problems perhaps peaked with lehman's failure. it feels like the gov't has made clear now that, after lehman, nobody significant IN THE FINANCIAL SYSTEM will be allowed to collapse.

    the heart of the crisis then moves from the financial system into the real economy. perhaps the peak will be gm's bankruptcy, with its attendant job losses at both gm and its suppliers, dealers, and assorted camp followers. i think even a prepackaged bankruptcy will have to include shutting many factories and laying off many workers, and cutting wages and/or benefits for remaining employees. pontiac, gmac and perhaps buick divisions will disappear. i say perhaps for buick because it's big in china. maybe it will only remain as an asian brand.

    but this is mere digression from the wider effect of a gm bankruptcy. will e.g. parts suppliers stop trusting their customers for payment? not just in the auto industry, but more broadly. will all deliveries be for cash, not 30 day invoicing? imagine every factory having to be run on cash instead of accrual. will supermarkets have to pay their food suppliers in cash on delivery? that would really screw things up a lot, wouldn't it? that would be analogous to the effect that lehman had in the financial system.

    i've got to stop for now. i'm scaring myself.

  • #2
    Re: what will be the effects of a gm bankruptcy?

    Good question. My only comment is that a GM bankruptcy won't be as surprising as Lehman's was. Presumably people who would be affected have done more planning for it, so the shock to the system may be less. Then again, government threw trillions at the financial system shock, and (so far) seem to be thinking orders of magnitude less for these real-economy problems. That will have to change, and maybe GM's effects will be the catalyst for that political attitude change.

    It's very hard to separate out all the individual forces at work these days. For me the only hope is to look at the Great Depression as the model, and adjust it with factors such as U.S. net debtor status (suggesting high inflation as the eventual outcome). Then read iTulip to get the truth.

    Comment


    • #3
      Re: what will be the effects of a gm bankruptcy?

      JK,

      The good news is, there is a canary in the coal mine of PC economy going cold turkey on credit: Russia.

      Russia had probably some of the most egregious supply chain credit: 60 day and 90 day credit was very common.

      In December, that all stopped. Completely.

      So far as I can tell, it has still not restarted.

      The stores are still stocked, but the supplies are running low. The only reason they haven't fallen further is that the difficult nature of Russian importing meant a larger than typical amount of inventory in the pipeline - plus consumption basically stopped for about 1 month.

      But consumption is starting up again. It will be interesting to see what happens next - I have customers ordering products for which price increases are 40%+ increased. Fortunately I've always maintained a policy of COD which is (mostly) intact, but I've seen a number of im/ex companies fail due to the losses accrued from the foreign exchange gyrations at the end of last year plus mostly disappeared credit.

      Comment


      • #4
        Re: what will be the effects of a gm bankruptcy?

        Originally posted by jk View Post
        someone emailed me, saying that he thought a gm bankruptcy might be a real catastrophe. i wrote a reply, below, and then thought to post it here for discussion. i'm interested in others' thoughts about how serious the consequences of a gm bankruptcy might be. is the scenario i picture realistic or just doomer porn?

        -------------------------

        why do you think a gm bankruptcy, especially if it's mostly prepackaged, will cause catastrophic fallout? or rather than "why," let me ask "how?"

        i share your sentiments about how misdirected all the rescue/bailout efforts have been, but i think we are playing out the "it has to get worse before anything serious can be done" scenario. ej predicted 20% unemployment. that's pretty damn bad. so far i think itulip's specific predictions have been overly optimistic, just as they say. they're called doomers, but their predictions are on the bright side when the events come to pass.

        i think that the bad news is just hitting main street. so maybe that's the lehman-gm parallel. in bill fleckenstein's terms, this is a triple header- financial disaster, economic disaster, funding crisis. the financial problems perhaps peaked with lehman's failure. it feels like the gov't has made clear now that, after lehman, nobody significant IN THE FINANCIAL SYSTEM will be allowed to collapse.

        the heart of the crisis then moves from the financial system into the real economy. perhaps the peak will be gm's bankruptcy, with its attendant job losses at both gm and its suppliers, dealers, and assorted camp followers. i think even a prepackaged bankruptcy will have to include shutting many factories and laying off many workers, and cutting wages and/or benefits for remaining employees. pontiac, gmac and perhaps buick divisions will disappear. i say perhaps for buick because it's big in china. maybe it will only remain as an asian brand.

        but this is mere digression from the wider effect of a gm bankruptcy. will e.g. parts suppliers stop trusting their customers for payment? not just in the auto industry, but more broadly. will all deliveries be for cash, not 30 day invoicing? imagine every factory having to be run on cash instead of accrual. will supermarkets have to pay their food suppliers in cash on delivery? that would really screw things up a lot, wouldn't it? that would be analogous to the effect that lehman had in the financial system.

        i've got to stop for now. i'm scaring myself.

        Like the banks this decade, the global car industry, which has been in trouble for many years, also participated in one last cheap credit driven hurrah. Not just SUVs flying out the door, but every imaginable car from every imaginable manufacturer.

        I've been watching the same silly thing develop in the commercial airline manufacturing business...for years Airbus and Boeing just traded places as to which was in the most trouble, and there was an undeniable +'ive correlation between "how well" one of them was doing and the relative [de]value of their competing currencies. Troubles with the product [A380 and B787] were just a media sideshow. The real problem is too much capacity fueled by too much artificial demand [think back to those unbelievably huge orders from Middle East and Asian airlines at every Farnborough, Paris, Dubai and Singapore airshow]. As we all know, when capacity has to be reduced, invariably the largest owner of capacity ends up taking the biggest hit. And that's one important reason why GM is taking the brunt of this.

        If GM goes down it will affect the economies of much of the world. How? Well you answered a good part of that yourself jk. And I agree, it is scary.

        GM is a huge, global company, that not only owns a lot of car assembly capacity around the globe, but is contractually entangled through its various businesses, including finance, with thousands of other companies in pretty well every economic sector. Restructuring the car manufacturing part of GM, including the related parts suppliers, may be the tip-of-the-iceberg easy to see part.

        There is much talk about "prepackaged bankruptcy". This is a nice sounding phrase that just rolls off a press secretary's tongue or a journalist's pen. It makes the whole thing sound clean and sanitary. Reminds me of the Fed repeatedly stating that although it was helpless to prevent it, we should be confident in its ability to stand by ready to mop up the mess of a bursting asset bubble. And "prepackaged bankruptcy" makes it sound as though the Obama Administration has a well constructed plan, and is fully in control of the situation and outcomes. After all, that's what we all want to believe in these troubling times, isn't it? Well pardon me all to hell, but I remain sceptical.

        I think the danger is that the complexities of letting GM fail are badly underestimated, in the same way the Administration underestimated the complexities and consequences of letting Lehman fail. I really believe this has the potential to be for Fleckenstein's "economic disaster" phase, what Lehman was to the "financial disaster" phase. And it may mark the surfacing into full view of the beginning of the "funding crisis" phase as the rest of the world realizes that the US government is sinking their economies because it is now politically impossible for it to rescue its multi-national [non-financial] companies.
        Last edited by GRG55; 04-01-09, 10:58 PM.

        Comment


        • #5
          Re: what will be the effects of a gm bankruptcy?

          A GM bankruptcy, pre-packaged or simulated, or whatever is going to be softened by government intervention and social tinkering.

          I haven't fully formulated the theory yet but it is my belief that GM will be Obama's great experiment in social engineering in changing the face of American business and government.

          Being an industrial company, GM allows Obama to tinker with the future of the common American worker. Note how unions at GM are being warned of future concessions. Rather than being "saved" by Obama, union supporters are now being used as tools. Union pay will be cut but more importantly for Obama, their health care and pensions will be cut off from GM and the responsibility transferred to the government.

          This will be an experiment and then eventually the model for how all health care and pension obligations will be provided for in the US. Of course, greater government responsibility in these areas will require greater taxes to cover the costs.

          GM will agree to the this, so as to get out from underneath those obligations and the unions will agree because they have no choice. Obama and Democrats will gladly take on this added government responsibility because it allows them to use it as a model for how they would like to see the rest of US business to go. Even some pro-business advocates may like it because it removes direct health care costs from business.

          It is interesting to note that there is talk of GM being divided into a good GM (Cadillac, Chevy, GMC, Buick) and a bad GM with Hummer, Saturn, Pontiac being tied to the toxic debt

          Now, of course, many of us would say the experiment will end in tears with even more unsustainable debt from the bad GM being covered by the Feds; but given the trillions being spent on the banks, a few hundred billion to work this grand social experiment is well worth it to Obama. It will likely fail, but in the short to medium term that is the Obama model because it sets in stone social policy for a generation

          Just a big picture theory at this point, still working out the details. Thoughts?
          Last edited by BiscayneSunrise; 04-02-09, 01:18 AM.
          Greg

          Comment


          • #6
            Re: what will be the effects of a gm bankruptcy?

            Originally posted by BiscayneSunrise View Post
            Just a big picture theory at this point, still working out the details. Thoughts?
            Your theory makes good sense.

            Where this is going to get interesting is with the mismatch between Obama's view of how the world works and how it actually works. The picture that's being painted today is that the mean execs and stockholders will be punished, and the noble employees and car owners will be saved. Heck, new car buyers are even likely to benefit. I just don't see it playing out anything like that. It's going to be an unmitigated disaster.

            Combine that with your theory, and I wouldn't be surprised if the result is some form of Draconian legislation that prevents certain people from acting in their own best interests. Maybe something like GM employees being guaranteed certain wages, but then not being allowed to quit for 4 years. Or it might even be simple protectionism, with strict import quotas, etc.

            GM is in some ways like a microcosm of the whole country: the more controls the government imposes on them, the more unstable and unpredictable the system becomes. They might drag it out, but it's hard to imagine how this ends up anywhere other than eventual full nationalization.

            Comment


            • #7
              Re: what will be the effects of a gm bankruptcy?

              Originally posted by grg55
              As we all know, when capacity has to be reduced, invariably the largest owner of capacity ends up taking the biggest hit. And that's one important reason why GM is taking the brunt of this.
              gm has been losing share as global capacity has INCREASED. Now it will likely lose more as global capaicty is decreased. But more generally, when capacity has to be reduced, the largest owner of capacity ends up taking the biggest hit in terms of units of production or percent of overall production. But in another sense, surely the biggest hit is taken by small producers who disappear entirely.


              Originally posted by biscayne sunrise
              Union pay will be cut but more importantly for Obama, their health care and pensions will be cut off from GM and the responsibility transferred to the government.

              This will be an experiment and then eventually the model for how all health care and pension obligations will be provided for in the US. Of course, greater government responsibility in these areas will require greater taxes to cover the costs.
              I think this is a brilliant idea, and if they don’t do it, they should.

              Originally posted by biscayne sunrise
              GM will agree to the this, so as to get out from underneath those obligations and the unions will agree because they have no choice. Obama and Democrats will gladly take on this added government responsibility because it allows them to use it as a model for how they would like to see the rest of US business to go. Even some pro-business advocates may like it because it removes direct health care costs from business.
              the tie between employment and healthcare is an atavism which originated with businesses’ attempts to get around wwii wage and price controls. It ended up being a severe handicap for globally competitive manufacturing firms. Cat, for example, provides healthcare for its employees, komatsu does not.

              Originally posted by sharky
              GM is in some ways like a microcosm of the whole country: the more controls the government imposes on them, the more unstable and unpredictable the system becomes. They might drag it out, but it's hard to imagine how this ends up anywhere other than eventual full nationalization.
              a couple of years ago, bill gross wrote that gm was a microcosm of the country because it had made unaffordable promises about future health and pension benefits. That still stands.

              Comment


              • #8
                Re: what will be the effects of a gm bankruptcy?

                Originally posted by GRG55 View Post
                Like the banks this decade, the global car industry, which has been in trouble for many years, also participated in one last cheap credit driven hurrah. Not just SUVs flying out the door, but every imaginable car from every imaginable manufacturer.

                I've been watching the same silly thing develop in the commercial airline manufacturing business...for years Airbus and Boeing just traded places as to which was in the most trouble, and there was an undeniable +'ive correlation between "how well" one of them was doing and the relative [de]value of their competing currencies. Troubles with the product [A380 and B787] were just a media sideshow. The real problem is too much capacity fueled by too much artificial demand [think back to those unbelievably huge orders from Middle East and Asian airlines at every Farnborough, Paris, Dubai and Singapore airshow]. As we all know, when capacity has to be reduced, invariably the largest owner of capacity ends up taking the biggest hit. And that's one important reason why GM is taking the brunt of this.

                If GM goes down it will affect the economies of much of the world. How? Well you answered a good part of that yourself jk. And I agree, it is scary.

                GM is a huge, global company, that not only owns a lot of car assembly capacity around the globe, but is contractually entangled through its various businesses, including finance, with thousands of other companies in pretty well every economic sector. Restructuring the car manufacturing part of GM, including the related parts suppliers, may be the tip-of-the-iceberg easy to see part.

                There is much talk about "prepackaged bankruptcy". This is a nice sounding phrase that just rolls off a press secretary's tongue or a journalist's pen. It makes the whole thing sound clean and sanitary. Reminds me of the Fed repeatedly stating that although it was helpless to prevent it, we should be confident in its ability to stand by ready to mop up the mess of a bursting asset bubble. And "prepackaged bankruptcy" makes it sound as though the Obama Administration has a well constructed plan, and is fully in control of the situation and outcomes. After all, that's what we all want to believe in these troubling times, isn't it? Well pardon me all to hell, but I remain sceptical.

                I think the danger is that the complexities of letting GM fail are badly underestimated, in the same way the Administration underestimated the complexities and consequences of letting Lehman fail. I really believe this has the potential to be for Fleckenstein's "economic disaster" phase, what Lehman was to the "financial disaster" phase. And it may mark the surfacing into full view of the beginning of the "funding crisis" phase as the rest of the world realizes that the US government is sinking their economies because it is now politically impossible for it to rescue its multi-national [non-financial] companies.
                More from Bloomberg this morning. "Prepackaged Bankruptcy" has morphed into "Surgical Bankruptcy", which sounds cleaner and more sanitary...
                GM Use of Surgical Bankruptcy to Survive Will Encounter Delay

                April 2 (Bloomberg) -- General Motors Corp.’s plan to use a quick “surgical” bankruptcy as the most likely means to become a viable business is fraught with dangers of intransigence from bickering stakeholders and delay, reorganization experts said...

                ...More likely, the Detroit-based automaker will pursue a pre- arranged reorganization with the backing of enough workers, creditors, suppliers and dealers to smooth the way, advisers to the company and the U.S. auto task force said. This plan to control what is often an unpredictable, lengthy process may encounter surprise obstacles, bankruptcy lawyers said.

                “Surgical bankruptcy is a made-up term to give people comfort,” said James Shein, a Northwestern University Kellogg School of Management professor and a turnaround expert. “Unless the court makes some really gutsy moves, we’ve got the odds of it bracketed somewhere between slim and none. Conceptually it’s a good idea, but practically it’s going to be tough.”

                To give the company a “quick rinse” in a negotiated bankruptcy may not work, said Van Conway, managing partner of Conway MacKenzie, a restructuring consulting firm in Birmingham, Michigan, that works with partsmakers. “You’re talking about stuff that’s never been done before in one of the biggest, most complicated bankruptcies ever.”...

                ...Neither GM nor the Obama administration presented a new offer to the committee representing creditors, a person familiar with the panel’s activities said. Creditors have not been invited to a GM bailout meeting tomorrow involving interested parties, the person said...

                ...“The benefit of bankruptcy that also makes it more difficult to manage is that all parties of interest have a right to be heard on every issue,” said David Feldman, partner at Gibson, Dunn & Crutcher LLP and co-chair of the firm’s restructuring practice. “Every creditor or shareholder can stand up and object, and that makes the bankruptcy process that much less predictable” than out-of-court restructurings, he said...
                Real potential to become an unholy mess that drags on in the courts for years...

                Comment


                • #9
                  Re: what will be the effects of a gm bankruptcy?

                  Originally posted by grg55
                  Real potential to become an unholy mess that drags on in the courts for years...
                  i am becoming persuaded that you are right in your lehman analogy.

                  Comment


                  • #10
                    Re: what will be the effects of a gm bankruptcy?

                    Originally posted by jk View Post
                    but this is mere digression from the wider effect of a gm bankruptcy. will e.g. parts suppliers stop trusting their customers for payment? not just in the auto industry, but more broadly. will all deliveries be for cash, not 30 day invoicing? imagine every factory having to be run on cash instead of accrual. will supermarkets have to pay their food suppliers in cash on delivery? that would really screw things up a lot, wouldn't it? that would be analogous to the effect that lehman had in the financial system.

                    i've got to stop for now. i'm scaring myself.
                    This may be a bit too scary for you JK, but I think it fits in pretty well with what you're saying.

                    There’s a hidden credit crunch going, according to UBS economists Paul Donovan and Larry Hatheway — a crunch relatively unreported because it is occurring within the more opaque realms of inter-company credit.
                    As their note explains, companies have access to three forms of credit: Bank credit, vendor financing and credit stemming from normal terms of payment such as invoicing.
                    Bank credit contraction is, of course, well documented thanks to the vast amount of public data available from banks and central banks. Data regarding vendor financing or invoicing, however, is much harder to collect.
                    Nevertheless, anecdotal evidence points to an abrupt tightening in this form of financing, according to UBS. And, as they point out, this is relatively out of historical context:
                    Much more here;
                    http://ftalphaville.ft.com/blog/2009...oicing-crunch/

                    Comment


                    • #11
                      Re: what will be the effects of a gm bankruptcy?

                      Originally posted by GRG55 View Post
                      Like the banks this decade, the global car industry, which has been in trouble for many years, also participated in one last cheap credit driven hurrah. Not just SUVs flying out the door, but every imaginable car from every imaginable manufacturer.

                      I've been watching the same silly thing develop in the commercial airline manufacturing business...for years Airbus and Boeing just traded places as to which was in the most trouble, and there was an undeniable +'ive correlation between "how well" one of them was doing and the relative [de]value of their competing currencies. Troubles with the product [A380 and B787] were just a media sideshow. The real problem is too much capacity fueled by too much artificial demand [think back to those unbelievably huge orders from Middle East and Asian airlines at every Farnborough, Paris, Dubai and Singapore airshow]. As we all know, when capacity has to be reduced, invariably the largest owner of capacity ends up taking the biggest hit...
                      Just as an aside, here's another shoe that will drop in the transport sector. There is far too much commercial aircraft manufacturing capacity...more than the world will need for years to come, if ever again.

                      Airbus is still in denial. A significant depreciation of the Euro against the US $ is the only thing that can help them, and even that may no longer be enough.
                      Airbus Says Deliveries May Fall 15% Next Year, Touching Bottom

                      April 2 (Bloomberg) -- Airbus SAS, the world’s biggest planemaker, anticipates that deliveries may drop as much as 15 percent next year in a worst-case scenario before picking up again in 2011, the company’s chief salesman told analysts.

                      A target of 483 deliveries this year should still be achieved, John Leahy, who is also chief operating officer, said today in a presentation to analysts...

                      ...The assertion that output will bottom out next year is a surprise and seems implausible, said Nick Cunningham, an analyst at Evolution Securities in London who attended the briefing by Airbus parent European Aeronautic, Defence & Space Co...

                      ...Leahy’s remarks were comfirmed by Frank Skodzik, a Frankfurt-based analyst at Commerzbank AG...

                      ...The Toulouse, France-based company handed over 76 jetliners in the first two months, matching the year-earlier period. New orders amounted to just six planes, and with 14 contracts canceled the company had a net intake of minus 8...
                      [On my recent trip into the Arabian Gulf the A330 I boarded in Frankfurt for the inbound leg was on lease [to the Gulf national carrier] from India's Jet Airways, which has ordered far too many airplanes and is now parking those it cannot lease out. Flight crew was European, livery and cabin staff from the Gulf carrier. There's just too many airplanes out there.]

                      Comment


                      • #12
                        Originally posted by GRG55 View Post
                        Real potential to become an unholy mess that drags on in the courts for years...
                        Which is why it won't happen.

                        Obama is in firm control of the situation and he needs to maintain control in order to shift GM responsibilities of health care and retirement to the Feds.

                        This creates his new paradigm in his exact image.

                        Letting things spin out of control in Ch 11 puts things in the hands of others and Obama is not the type to relinquish control.
                        Greg

                        Comment


                        • #13
                          Re: what will be the effects of a gm bankruptcy?

                          Originally posted by BiscayneSunrise View Post
                          Which is why it won't happen.

                          Obama is in firm control of the situation and he needs to maintain control in order to shift GM responsibilities of health care and retirement to the Feds.

                          This creates his new paradigm in his exact image.

                          Letting things spin out of control in Ch 11 puts things in the hands of others and Obama is not the type to relinquish control.
                          You have more confidence than I do that this Administration has some sort of comprehensive long term plan. I say this, in part, because every time I hear the President speak I get the distinct impression that his handlers haven't figured out they won the election, because he always sounds as though he is still campaigning.

                          Further, I have much less confidence than you that even if they have a preferred plan, that under the present circumstances, where events are overtaking them faster than they can cope, they are actually able to work such long term plan.

                          I think they [Fed, Treasury, White House] are continuing to throw everything they have at this crisis, in whatever case-specific, ad hoc manner is feasible in the moment, and so far there's not been any traction.

                          Only time will tell...

                          Comment


                          • #14
                            Re: what will be the effects of a gm bankruptcy?

                            From Ritholtz's Big Picture blog...

                            http://www.ritholtz.com/blog/
                            Top 10 Things the Letters “GM” Stands For
                            10. Got More?
                            9. Goals missed
                            8. Giant Mess
                            7. GO MARX
                            6. Government Mooch
                            5. Grossly Mismanaged
                            4. Got Mechanic?
                            3. Gasguzzlin’ Monsters
                            2. Goodbye Michigan!
                            And the number thing the letters”G” and “M” stands for:
                            1. Gambled & Missed

                            Comment


                            • #15
                              Re: what will be the effects of a gm bankruptcy?

                              Originally posted by GRG55 View Post
                              You have more confidence than I do that this Administration has some sort of comprehensive long term plan. I say this, in part, because every time I hear the President speak I get the distinct impression that his handlers haven't figured out they won the election, because he always sounds as though he is still campaigning.

                              Further, I have much less confidence than you that even if they have a preferred plan, that under the present circumstances, where events are overtaking them faster than they can cope, they are actually able to work such long term plan.

                              I think they [Fed, Treasury, White House] are continuing to throw everything they have at this crisis, in whatever case-specific, ad hoc manner is feasible in the moment, and so far there's not been any traction.

                              Only time will tell...
                              GRG,

                              Obama is bailing out the banks because he has to, however, he is bailing out GM because he wants to. The nuance is that since GM is a broad based industrial company with a large middle class work force it allows him to social engineer.

                              You are right concerning their strategy regarding the banks, it is haphazard and certain to fail.

                              His strategy concerning GM, (I'm trying to understand the politics of the man), is much more well thought out. In his mind, he has a very clear idea of how he wants society here in the US to evolve. GM will be his laboratory.

                              I believe that is his goal. He will work furiously with GM. He will likely have some short term success but, I am, like you, highly skeptical he can pull it off in the long run.
                              Greg

                              Comment

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