The human cost of GM's failure

There was an interesting discussion/argument about whether or not to bail out GM on CNBC this morning. There were a number of different elements to the discussion: Cerberus Capital, the company that owns Chrysler and Chrysler Finance, as well as a majority interest in GMAC, is trying to position itself to get financial bailout money from the U.S. Treasury. GM is trying to get additional loans from the U.S. Government in order to close its acquisition of Chrysler. But hovering over both these issues was the bigger question: Should GM be allowed to fail? After all, it's been mismanaged for decades. We live in a capitalistic, free market society where companies have no right to survival, and no company should be "too big to fail."

The only panelist who seemed to have any interest in the impact of such a decision on the lives of people was Phil LeBeau, CNBC's beat reporter covering the auto and airline industries. LeBeau repeatedly stated that GM going under would be tantamount to exploding a nuclear bomb in the U.S. Midwest. He pointed out that not only would all of GM's workers lose their jobs, but the entire infrastructure of Tier 3, 4 and 5 parts suppliers that are largely or completely dependent on GM or its bigger suppliers would also go under, and with them would go their employees' jobs. Many of the retailers who supply these workers with goods and services would soon follow, along with their jobs. The cities and towns that depend on property, sales and income taxes would be stressed to the limit as their tax bases dry up while demand for their services increases. (If anyone would like to get a foretaste of what would happen, I invite them to visit the steel towns of Western Pennsylvania, where I grew up. The model of progressive economic collapse started in the early 1980s as steel mill after steel mill closed. Today, over 20 years after the steel industry failed, very little has improved.)

I was shocked that none of the other panelists even seemed to understand LeBeau's argument--it's not just GM, it's the entire economy of large portions of the Midwest, and peoples' lives, that are at stake. Perhaps it's time for CNBC to have fewer reporters in New York, and more reporters in the field, where the real economy lives.

Cerberus: Using GMAC to get GM to buy Chrysler?

The negotiations between GM and Cerberus Capital for GM to trade its remaining share of GMAC to Cerberus for Chrysler have apparently picked up steam. One big reason is that GMAC is all but shutting off credit to GM's dealers and customers, leading GM to launch a promotion encouraging dealers to finance cars through companies other than GMAC. Some observers believe that Cerberus is trying to "cut off GM's air supply" by withholding credit, and that without that credit, GM could burn through its remaining cash by the end of this year.

GM's Board of Directors was decidedly cool to the Chrysler deal when it was first proposed, so Cerberus may see this as the only way to get the deal done. If Cerberus is so desperate to get rid of Chrysler that it's willing to hold a gun to the head of GM, things at Chrysler must be even worse than the company has revealed so far. However, it's unlikely to work out well for anyone, even for Cerberus. A merger of GM and Chrysler simply makes no sense, especially in this economy, and the $10 billion operating savings that are being quoted haven't been explained by anyone, and have to be seen as vapor. If GM is forced to take Chrysler, it will have a strong incentive to steer future financing to other banks, thus leaving GMAC without an outlet for future business.

I for one hope that cooler heads prevail. One rumor is that Renault could buy Jeep back from Chrysler (Renault sold Jeep to Chrysler years ago as part of its sale of American Motors), so those jobs wouldn't be lost. Some of Chrysler's more modern plants could be sold to other manufacturers. But, a shotgun wedding between GM and Chrysler could result in far more long-term carnage than would result from a straightforward liquidation of Chrysler.

How not to succeed

The freeze-up in the credit market has hit GMAC, GM and Cerberus Capital Management's financial arm, hard. According to Jalopnik, GMAC will only finance car loans at dealer invoice or below for buyers with a FICO score of 700 or above. That means excellent credit; no subprime borrowers, please. Also, restrictions are being placed on loans for longer than 60 months, so buyers won't be able to get lower payments by opting for a longer term. Earlier, Chrysler Finance (also controlled by Cerberus) pulled the plug on lease financing for anyone, including highly-qualified customers.

With all the problems that GM has right now, pulling the plug on financing to all but the most qualified customers won't make things any better.

GM wants to buy Chrysler???

As reported in the New York Times yesterday, GM and Cerberus Capital Management (the private equity company that controls Chrysler and holds a majority share of GMAC) have been negotiating a deal in which GM would acquire Chrysler in return for the share of GMAC that it continues to hold. For GM, it would get GMAC's toxic subprime mortgages and car loans off of its books, and for Cerberus, it would get out of the car business. However, if this deal happens, it's likely to become the poster child for the adage "When two weak companies merge, you get a bigger weak company."

Other than limiting its downside exposure to the financial market, what would GM get out of this? Chrysler's product line is weak, especially passenger cars, and its product pipeline is almost nonexistent. Its strength is in trucks and SUVs, especially Jeep, but both those product areas have been especially hard-hit by gas prices. Chrysler's international position is far weaker than that of either GM or Ford. GM doesn't need Chrysler's dealers--it already has a bloated dealer structure that needs to be pruned. GM would pick up more plants, with more United Auto Workers contracts.

Even two months ago, this deal wouldn't have made sense, and it makes even less now. GM is having so much trouble turning itself around, why would it even consider taking on Chrysler? If there's any long-term logic to this deal, I don't see it.