General Motors Hurtles Toward Bankruptcy

The big headline yesterday was that GM CEO Rick Wagoner is being dismissed in favor of Fritz Henderson. This isn’t remarkable in itself, because no one expected him to last, despite having the oft-expressed (in public, anyway) full confidence of GM’s board .

Today, the President of the United States is expected to make significant announcements about GM’s warranty policy. No, that’s not a typo, and yes, it’s remarkable. I didn’t say the President of General Motors, I said of the United States.

Since when does an urban agitator and small-time legislator with a law degree think he can run an enterprise with 100,000 employees, thousands of vendors, millions of customers, and operations in every part of the world? Well, that’s one of those questions you’ll just have to ask the people who voted for him last November. I can shed some light on the rest of this.

And there’s another really remarkable aspect here, which speaks either to tremendous political skill or luck among the Democrats: they kept the whole thing out of the news for the last three months.

All signs are now pointing to a significant bankruptcy event at GM, and the departure of Wagoner is the first sign of that. Why? Because for months now, he’s been the one guy saying consistently that GM can not file any kind of a bankruptcy.

There are two reasons why not. First, the public ones. Wagoner has always insisted that GM’s customers would abandon a bankrupt automaker for fear of not getting their warranties honored.

How interesting and convenient it is then, that the new CEO of General Motors, a certain Barack Obama acting ex officio, will announce today in public the formation of a government-sponsored entity, independent of GM and non-defeasible in a bankruptcy, to guarantee performance on GM’s warranties! That’s your other sign that a bankruptcy filing is imminent.

But there is another really important reason why GM has resisted bankruptcy tooth and nail. No one will lend them the money to operate in bankruptcy.

Last summer, the first warnings on GM were sounding as they started running low on cash. They haven’t turned a profit in several years, and the burn rate as of last summer was about a billion dollars a month. That would have had them out of cash by sometime in late 2009.

But then, the bottom fell out of the auto market, beginning in October. Since then, every automaker in the world has felt the pinch of sharply-reduced demand for new cars and trucks. In some months, GM’s sales dropped by no less than half. This is the top line, mind you, not the bottom line! It’s quite incredible, and would be an enormous challenge to even a healthy business.

But GM wasn’t healthy. The out-of-cash event that was originally projected for next fall, instead came at the end of last December. You can go back and read the long series of posts I wrote at RedState for the blow-by-blow.

If a company can possibly operate in a Chapter 11 bankruptcy, they’ll arrange bank financing and work out their issues under court protection from their creditors. But there are two problems: first, you may have noticed we’re in a credit crunch. You couldn’t get a banker to lend you money even to buy Treasury bonds these days. And second, everyone knows GM can’t survive, and has known that for years, so even under normal credit conditions, no one would lend to GM.

So a bankruptcy filing would quickly degenerate from Chapter 11 (restructuring) to Chapter 7 (total liquidation, and the immediate loss of hundreds of thousands of jobs, and a cascade of bankruptcies among GM’s dealers and suppliers).

That might indeed have been the picture last January, had the Treasury not stepped in with a wad of cash from the TARP, which was then supplemented several weeks later.

We all knew the moment of reckoning would come right about now. It matches the amount of bailout cash that GM has received, at their current burn rate of about $5 billion a month.

The wonder is that it’s been kept out of the news so effectively. The rolling flaps over the banking crisis and AIG have provided useful cover for the Democrats, as they’ve beavered away at a plan for nationalizing GM.

But the TARP and all the banking assistance programs (except for AIG) have been about providing support for the capital positions of banks. The public dollars committed in support of those entities have been going onto bank balance sheets. The public has been buying stock in those banks, and you expect to get your money back out when you buy stock.

But the public money given to GM and Chrysler LLC has simply been poured down a rat hole. These companies are bleeding cash, and in a just world they would have failed months ago. Instead, public money is getting fed into them, just like pint after pint of precious blood dumped into a guy who’s hemorrhaging from a dozen bullet holes.

That’s the situation that GM’s new CEO, Barack Obama, is going to perpetuate, as I told you many times last December.

GM are facing bankruptcy because they’re insolvent. They’re built for a high cash-flow world, not a world in which sales contract by anywhere between a third and a half (year-on-year) month after month. GM, like Obama himself, have been pinning their hopes on the kind of economic recovery that will see total annual sales volume in North America shoot back up toward its high-water mark of around 17 million units.

Reality is a lot closer to 9 or 10 million. That’s enough to sustain the number of world-class automakers we have, but GM simply can’t be one of them with its current capital and cost structure.

GM needs a total restructuring of its operations. By rights, every stakeholder in the room should take a lot of pain, and then the company should figure out how to move forward in a world in which the competition is a lot hungrier, the markets are a lot smaller, and access to capital is far more constrained. But that’s a great challenge for American business people, who are still by far the best in the world.

But that’s not going to happen, because some stakeholders are more equal than others.

The common shareholders of GM are going to get wiped out. That’s good, they should. The bondholders are going to get converted to equity at 30 cents on the dollar. That’s good, they should.

Many of GM’s dealers will receive lavish buyouts as an inducement to close their doors, for a total cost in the billions of dollars. That’s disgusting, but it’s required both by GM’s contracts with them and by the welter of state laws that protect the dealers. (If you want to know who the political power brokers are in any given city or town, look for the car dealers.)

This is going to be kept scrupulously out of the news, because car dealers contribute huge sums to every last man and woman in Congress and the Senate. The public was ready to torch the private residences of AIG executives, but they won’t make a peep about paying billions of their own hard-earned dollars to provide a cushy retirement for thousands of already-rich auto dealers.

And then there’s the UAW. They are in fact the beginning and the end of the government’s interest in General Motors. They will come out of this as the big winners. Never mind that the average automaker earns half again as much in wages and benefits as the average American. UAW boss Ron Gettelfinger, with CEO Obama at his side, will announce “deep, painful concessions” to be suffered by the union membership.

But don’t believe a word of it. The union will come out of this nearly untouched, with their exorbitant compensation packages basically intact, and minor changes in work and seniority rules. And you the taxpayers will be paying for every penny of this, because they won’t be earning all that pay in the market. GM in bankruptcy will force every one of its stakeholders to take major pain except the UAW membership.

And their ex officio CEO, Barack Obama, will start forcing them to focus on non-economic electric cars. You see how conveniently that worked out? A more circumspect President would have recognized that it’s not good for government to be in the auto business. We’re going to replay a lot of bad history lessons that other countries learned long ago.

Oh yes, I almost forgot about Chrysler LLC. I can summarize their situation in two words: shark bait.