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U.S. Automakers May Want To Think About Banking On Survival

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By DAVID PAULY

Bloomberg News

Published: November 15, 2008

A federal welfare package for the U.S. auto industry's Little Three is inevitable.

General Motors Corp., Ford Motor Co. and Chrysler LLC could speed up the process by becoming commercial banks.

Cash-hemorrhaging auto companies have asked the government for loans to boost their operating capital. Barney Frank, chairman of the House Financial Services Committee, wants Congress to lend them $25 billion by amending its $700 billion bailout package for the banking system. No need for that if the three companies become banks.

This might not be so far-fetched. General Motors owns 49 percent of GMAC LLC, an auto- and mortgage-finance company that is trying to become a commercial bank. Ford and Chrysler are in the finance business too.

If American Express Co., a credit-card company, can become a bank, entitling it to government largess, why not GM, Ford and Chrysler?

Heading For Zero?

However the bailout is achieved, the government should treat it like a bankruptcy - specifically a so-called prepackaged bankruptcy, with terms agreed on ahead of time, avoiding years of wrangling among creditors.

In this case, Uncle Sam dictates the terms. The pain of the years of failure at GM, Ford and Chrysler will have to be shared by all. Managements might be fired. Workers may have their pay frozen, their benefits temporarily reduced. Suppliers would be happy to make contract concessions with the vehicle manufacturers rather than see them go out of business.
Public shareholders of General Motors and Ford might be wiped out. That's usually what happens in bankruptcies. The stockholders have little left in any case: Ford's total market value is $4.5 billion, GM's $1.8 billion. Chrysler is owned by Cerberus Capital Management LP, a closely held company that does leveraged buyouts.

Bondholders would take hits too. Bond terms can be renegotiated. Some securities might be exchanged for new common shares in the automakers - another usual occurrence in bankruptcies.

Investors in auto-company bonds already have taken a beating. General Motors 8.375 percent bonds due in 2033 now trade at about 22 cents on the dollar.

Though a rescue is coming, there's no doubt the three auto companies deserve to die. Over the years, they have trailed foreign carmakers in plant efficiency and product reliability. Rivals from abroad stole the market for small cars, then the market for green cars. General Motors plans an electric car for 2010. Why not last year? The government is now lending the three companies $25 billion to make more fuel-efficient vehicles.

Slim Margins

Even when the trio seemed to be thriving on the sales of trucks and sport-utility vehicles, their profits were peanuts. In 2005, for instance, Ford earned just $1.4 billion on sales of $177 billion, a net profit margin of less than 1 percent. Daimler AG couldn't wait to dump Chrysler on Cerberus last year.

Merit has nothing to do with it, of course. Citigroup Inc. and Merrill Lynch & Co. deserved to go broke, too, after their misadventures in mortgage securities.

The demise of General Motors, Ford and Chrysler would further devastate the Detroit area where they're based and bring pain elsewhere. GM and Ford between them employ almost half a million people worldwide. Failure of the three would bring down steel companies and auto-parts companies with them.

You wonder if government loans will be enough. General Motors worked down its cash in the third quarter by $3.6 billion to $16 billion. People aren't buying vehicles, and auto-finance companies aren't lending.

Another question: With legions of executives running to Washington for aid, where does the government draw the line? Department stores and other merchants are reeling from lack of consumer spending, too. If the money pool looks inexhaustible, even oil companies might line up.

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