A run on the bank. That’s what will happen as soon as Congress adjourns without a bailout plan for the Detroit 3. Hard-pressed suppliers and creditors will force GM to do what must be done: Chapter 11. I guarantee it. GM and Chrysler will sink into bankruptcy before they even think about the annual Holiday shutdown. A few Senators and hundreds of thousands of workers within America’s automotive industry don’t want to see that sad day arrive. But arrive it will. And as the Capitol Hill hearings proved beyond a shadow of a doubt, Detroit needs a thorough cleansing.
The hearings didn’t do much of anything to bolster the case for bailing out Chrysler, Ford or GM; or the industry as a whole. In between the grandstanding and the personal stories by our elected officials, a few key questions were asked. And neither GM CEO Rick Wagoner nor Chrysler CEO Bob Nardelli could give a straight and honest answer.
Simple questions like when would you run out of money? (“Uh, it’s hard to say.”) If we give you this money, how do we know you won’t come back looking for more? (“We have a plan in place, we think it will work.”) What changes will you make to restructure your business? (“We have already restructured and we’re doing more.”) The only real answer we got was from the guy whose union has had Detroit’s nuts locked in a vice for years; he accurately ranked the depth of despair among the Three. GM’s in the worst shape of all and everyone knows it.
Bingo! That’s all the supply chain needed to hear. If Congress doesn’t allocate the “bridge to nowhere” loans, they’ll all be looking for immediate payment on their invoices before they ship one more part to GM and Chrysler. (Give credit to Mulally, he was smart enough to say he doesn’t need the money now, or maybe ever. Just wanted to have access to it if needed.) And that’s why Rick and Bob can’t answer the question about running out of cash. No loan, it’s the next day. Loan granted, and we stay afloat for three or four months.
Uh, Rick…Bob…you two geniuses just sealed your fate. Kind of like the mistake the prosecution made with O.J. You didn’t go for the kill and put the burden on the defense to prove otherwise. Just waffling on the answer about the cash end game gave Congress the excuse it needed not to get into a political showdown. You had to put the onus on Congress that this situation can’t wait for Messiah Obama. It’s a clear and present danger – and you didn’t scream loud enough. And you forgot to show everyone a truly credible plan too.
Congress won’t act. Pelosi owes the “Greens” too much (she’s from the land of fruits and nuts) for her job and they won’t let her touch the Department of Energy money. No chance. Pigs will fly before they give that up to save Detroit. Hank Paulson won’t even discuss tapping the TARP billions for the auto industry. He’s an ex-Wall Street guy and that money goes to save his buddies, not union employees. The Republicans won’t let a new bill get passed; they’ve got all the auto industry they need right there in the South.
So it’s a deadlock. Congress will do some posturing, but will punt on coming to an immediate solution. Maybe they’ll come back in December for a more thorough hearing on the situation but that will be too late. Another round of deliberations on the road to nowhere.
Even if Detroit gets the $25 billion to stay afloat, it’s just money that enables management to keep making all the same mistakes as before, rewarded for their own incompetence. But it’s not the end. Based on their current cash burns, all of these companies will use nearly the exact amount of cash as their respective share of the loans by the end of the first quarter of 2009. By then, GM will have more than $53b in debt and no turnaround in sight. Chrysler will be back at the starting line, with no new products and no hope. Ford probably won’t even tap into the line but will need the funding later.
Congress should take the easy road on this one and do nothing. It’s the right thing to do. Inaction is action. That’s the message to the Detroit 3 – fix your own house. You made the mess of things, and didn’t come to us with ANY plan how you were going to change the way you do business. Half of the country doesn’t want to help you and they don’t buy your products. And Congress shouldn’t set a precedent of becoming the lender of last resort for troubled industries.
And when Congress doesn’t act, the chips will start to fall. The market will determine its own solution fast enough, within hours. The cash calls at GM and Chrysler from suppliers will overwhelm these two companies faster than a Corvette ZR-1 or a Dodge Viper SRT-10 ACR. It’s going to be an ugly crash.