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Pressure For GM Bankruptcy Mounts After 2008 Results

GM Bankruptcy

U.S. Government Apparently Is At Least Thinking The Unthinkable.
Decision On Bailout Expected At The End Of March.

Only a couple of years ago, the kind of red ink generated by General Motors would have been unimaginable. But with politicians talking about U.S. budget deficits in trillions of dollars, GM’s mere $9.6 billion loss in 2008’s 4th quarter doesn’t seem so bad. Even its loss of $30.9 billion for all of 2008 perhaps doesn’t impress.

But GM’s latest numbers will add power to those who say that it and Chrysler’s insatiable lust for taxpayer’s money must come to an end, now. GM says it needs $30 billion in federal loans to survive, double the amount it sought two months ago.

Enough is enough, says the Wall Street Journal and the Financial Times’ Lex column. The time has come to allow GM, and by implication, Chrysler as well, to go bankrupt. GM Chairman and CEO Rick Wagoner has adamantly opposed bankruptcy, saying this would tarnish the brands so much that potential buyers would be repelled.

The Wall Street Journal isn’t impressed.

“Its (GM’s) latest plan foresees a total of $30 billion in government loans before it reaches its projected break-even point – this for a company that, by its own reckoning, has a “net present value” in the range of $5 billion to $14 billion and market capitalisation of only $1.25 billion. That $30 billion request doesn’t include the possibility of pension-fund contributions over the next few years. It also assumes that additional aid will forthcoming from European governments where the company has plants – a possibility those governments view with dread,” the Wall Street Journal editorial said.

Itchy fingers
“Chapter 11 (bankruptcy) remains the one stick to beat back the itchy fingers,” says the FT’s Lex, as it describes GM’s lust for government money.

The Obama administration has said it will decide whether to bail out GM and Chrysler at the end of March. It had seemed likely that the bailout would go ahead, as Democrats who control Congress were opposed to bankruptcy. But budget pressures have forced Obama into a corner, as other political priorities demand money and stark choices have to be made. Towards the end of February, the Washington rumour mill reckoned that advice about the implications of bankruptcy was being taken by the administration.

The Wall Street Journal believes GM, Chrysler and the United Auto Workers union need to be pushed into action.

Cruel to be kind
“GM, Chrysler and the UAW will continue to postpone the hard choices. Only bankruptcy, painful as it may be, offers the tools and legal authority needed to force all stakeholders to change the habits that brought the companies to this ebb. Bankruptcy looks like the least painful choice,” said the Journal.

The FT’s Lex is a bit more brutal, maybe figuring you have to be cruel to be kind.

“The best way to turn GM into a company able to see out the next century is to blow it up and put it back together again,” it said.

Perhaps feeling a little guilty at the starkness of its advice, Lex drew back a little after GM announced its results for 2008.

“Unless lenders and unions accept a transformative restructuring, the (government led) taskforce considering the relative merits of more aid versus Chapter 11 should firmly recommend the latter,” Lex said.

That adds up to the same, but doesn’t sound quite so cruel.

Neil Winton – March 2, 2009

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