Wednesday, April 08, 2009

General Motors And Bankruptcy


Doctors will tell you to take all 10 days of your antibiotics to be sure that the infection has been eradicated. Implicit in those instructions is the assumption that your pharmacist will give you the full 10 days of medicine that is required.

In the case of General Motors and Chrysler, they received just enough medicine to begin to address the problem... and then were told that the "pharmacist" wanted to see if they could heal themselves. It looks like GM and Chrysler will be seeking "alternative medicine."

The problem is that this "alternative medicine" may allow the "disease" to be spread to other parts of the economy.

GM preparing for bankruptcy

A source close to GM said company still hopes to meet Obama's June 1 deadline to reach concessions with unions and creditors but that bankruptcy is an option.

By Chris Isidore, senior writer

NEW YORK ( -- Preparations for a possible bankruptcy filing at General Motors have become "intense and earnest", according to a source familiar with the company's plans.

The source, who spoke on the condition of anonymity, said GM still hopes to win concessions from its creditors and unions that will allow it to avoid bankruptcy. But the June 1 deadline given to the company by President Obama and the Treasury Department to reach deals or go into bankruptcy has caused a pick-up in preparations, the source said.

"We're talking about what could be the largest industrial company to ever go bankrupt. The preparations better be intense and earnest," the source said. "The preparations are being made because there's a short time frame here."

GM owes about $28 billion to holders of its unsecured debt. It wants those creditors to agree to take an equity stake in the company in return for reducing that debt by at least two thirds.

An ad hoc committee representing GM bondholders have objected to this proposal due to the uncertain value of GM's stock going forward.

A person involved with that committee said Tuesday that the reports about bankruptcy preparations at GM did not change the creditors' views. This source added that there have been no formal talks between the bondholders and the company since Obama's deadline was set last week, but that the committee is eager to hold negotiations.

"We're very concerned about the state of the company and the possibility of bankruptcy," the source involved with the committee said. "We're still trying to work to try to get something done outside of bankruptcy, which is our hope."

0:00 /1:59GM dealer's optimism

The auto task force overseeing $13.4 billion in federal loans GM has already received declared last month that neither the company nor its competitor Chrysler LLC were viable under turnaround plans the companies submitted Feb. 17.

Chrysler was given only 30 days to reach a new alliance with Italian automaker Fiat. GM (GM, Fortune 500) was given 60 days to get creditors to agree to swap debt for equity, and to win further concessions from the United Auto Workers union. The government also forced GM Chairman and CEO Rick Wagoner to resign last week.

New GM CEO Fritz Henderson said at his first press conference last week that he would not have taken the job as CEO if he wasn't willing to take the company through the bankruptcy process, although he said he still preferred to reorganize the company outside of bankruptcy court.

Henderson also said the company would not wait the full 60 days to file for bankruptcy if it became clear it could not reach deals with the creditors and unions.

"If it's quite clear it can't be done, we'll move faster," said Henderson. "More time isn't going to help the process."

Shares of GM lost about 10% in midday trading Tuesday on the reports of bankruptcy preparations. The already battered shares have lost more than 40% of their value since President Obama raised the threat of bankruptcy on March 30. To top of page


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)