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GM and Ford may be too big to fail
Given the automakers' pervasive presence in the U.S. economy and their value as symbols of industrial might, many believe they wouldn't be allowed to go under.

By Ken Bensinger, Los Angeles Times Staff Writer
October 10, 2008

With sales of General Motors and Ford vehicles down more than 17% this year and the companies' stock prices at lows not seen in decades, one might expect the bankruptcy vultures to be circling over Detroit.

General Motors Corp. closed Thursday down 31%, to $4.76. That was its lowest finish since March 1950, according to Global Financial Data, prompting jokes among traders that GM was now a mid-cap stock.

Ford Motor Co. closed down 22%, to $2.08 -- for a market capitalization of $4.7 billion, scarcely above that of Magna International Inc., which makes, among other things, the rearview mirror for the Ford Edge.

Amid concerns about access to credit, low consumer confidence and precarious cash positions, the debt ratings of the U.S. carmakers have slid deep into junk range. GM, once AAA rated, is now a B-, and Ford is slightly above it at B. On Thursday, Standard & Poor's said it would consider further downgrading GM. And this week, industry forecasters said U.S. car sales would be down 20% this year compared with 2007.

It's a grim financial picture, but talk of the companies' filing for bankruptcy protection has been surprisingly muted. Financial and industry experts are speculating that the automotive giants may simply be too integral to the economy to go under.

"For GM and Ford to fail, some pretty catastrophic things have to happen," said Brett Hoselton, equity analyst at KeyBanc Capital Markets. "Then again, things are pretty bad now."

Beyond just selling cars, the Michigan automakers have a huge financial reach, representing millions of jobs in the supplier, sales and aftermarket sector; they each have stakes in large financial services companies selling loans, leases, insurance and, in the case of GM, mortgages; and their value as symbols of U.S. industrial might is something few politicians are willing to overlook.

Although 2008 is proving a tough year for all carmakers -- Toyota Motor Corp.'s shares have slid 46% in the last year, and Honda Motor Co. is down 38% -- the picture for Ford and GM appears much worse.

Both are struggling under the weight of automobile lineups long on trucks and SUVs and short on the fuel-efficient cars consumers suddenly want.

Each company has substantially more liabilities than assets, and with declining sales, the picture is dim for profits: GM lost $18.8 billion in the first six months of the year, and Ford lost $8.6 billion. Despite a sizable reserve of cash on hand, GM last month drew down $3.5 billion of a $4.5-billion credit line, citing "uncertain times in the capital market."

Bruce Clark, an analyst at debt rating service Moody's, acknowledged that "their balance sheets are very weak" but said he would be surprised if either company went belly up. "It's not that a voluntary filing can't happen, but the costs associated with the bankruptcy of an automobile manufacturer are generally too high."

For starters, both companies still have a lot of money on hand. At the end of the second quarter, Ford had $26.6 billion in cash and cash equivalents, and GM had $21 billion, which even the most negative analysis suggests should be enough to get through this year and most of 2009.

Both still have access to lines of credit and are expecting significant cost reductions starting in 2010, when many of their healthcare and pension liabilities to retirees and union workers will be reduced under a new labor deal.

In recent months, executives at both companies have revealed plans to cut costs significantly by reducing production and workforce; both have also floated the possibility of asset sales.

"We face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets," Renee Rashid-Merem, a GM spokeswoman, told Bloomberg News on Thursday. "But bankruptcy is not an option GM is considering."

According to Clark, a bankruptcy filing would probably have terrible effects on the residual value of cars and their warranties, making it even harder to sell new cars as consumers gravitate to other, more stable carmakers. That, he said, means that carmakers would choose to stay out of bankruptcy far longer than companies that might normally see it as a way out of untenable financial straits.

GM has a 49% stake in GMAC, a huge lender that not only finances car loans but also holds billions of dollars in residential mortgages. Ford, too, has a large finance arm, and both used their status as lenders to get the companies put on the Securities and Exchange Commission's list of firms temporarily protected from short sales. Executives at both companies have said they expect that under the $700-billion rescue package passed by Congress last week, they will be able to sell impaired securities on their books to the Treasury Department.

But perhaps the most compelling argument against going under comes as a result of the companies' unique position in American industry.

Despite perilously small market capitalizations -- GM is now worth less than $3 billion -- the two continue to bring in massive revenue and spread their money over a huge number of people. With more than 350,000 employees between them, they are true Goliaths, and when one factors in the estimated six indirect jobs created by every Ford and GM worker, nearly 2.5 million jobs are tied to the Big Two (Chrysler is privately held). By comparison, the U.S. has lost about 760,000 jobs this year.

Add to that the deeply symbolic role GM and Ford have in the country's industrial history, and many believe that no politician would ever let such a failure happen.

To that end, just two weeks ago President Bush signed off on a plan to guarantee $25 billion worth of low-cost loans to U.S. automakers and suppliers, a crucial lifeline at a time when borrowing at any price is almost impossible for large companies.

"It's been a struggle here in Washington to secure an acknowledgment that a domestic-based auto industry is vital for America," said Rep. Sander M. Levin (D-Mich.) on the occasion of the bill's passage. "What this does is to embody that idea, and to help it continue to be."

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I am amazed that Ford's extremely devaluated market capitalization value is still higher than GM's and that Ford has more cash in hand that GM. Things over at GM may be worse than I thought.

What a mess.
 

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I am amazed that Ford's extremely devaluated market capitalization value is still higher than GM's and that Ford has more cash in hand that GM. Things over at GM may be worse than I thought.

What a mess.
Tell you what with a difference of 1 billion in market cap, things are equally bad at both companies.
There is no queens here. All we can hope is for the best. I think things may be worse at Toyota, which might be looking at a 40% drop in their profitability.

It really is not good. Depending on how toyota finances its operations, a 40% drop in profits might devastate them. But you know the Japanese would not blink before giving them credit.
 

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I am amazed that Ford's extremely devaluated market capitalization value is still higher than GM's and that Ford has more cash in hand that GM. Things over at GM may be worse than I thought.

What a mess.
GM is in worse shape than Ford, that is not a secret. Ford is healty in Europe and SouthAmerica. GM is not profitable in Europe. GM isnt in the rigth way, like Ford is. GM persist in the multiple and redundant Divisions ( Chevrolet, Pontiac, Buick, et al.....) policy. And GM dont have Mullaly!
 

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Tell you what with a difference of 1 billion in market cap, things are equally bad at both companies.
There is no queens here. All we can hope is for the best. I think things may be worse at Toyota, which might be looking at a 40% drop in their profitability.

It really is not good. Depending on how toyota finances its operations, a 40% drop in profits might devastate them. But you know the Japanese would not blink before giving them credit.

Devastate Toyota??? Toyota have more cash in the banks than all Latin American countrys together!! Maybe the excutives at Toyota will have a little bonus this year....but the plans will continue the same: expansion and to be the number one in the world.
 

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Discussion Starter #8
Tell you what with a difference of 1 billion in market cap, things are equally bad at both companies.
There is no queens here. All we can hope is for the best. I think things may be worse at Toyota, which might be looking at a 40% drop in their profitability.

It really is not good. Depending on how toyota finances its operations, a 40% drop in profits might devastate them. But you know the Japanese would not blink before giving them credit.
I don't hope thing will get worse at Toyota. And with all the crazy record earnings they have had in the last years with 40% less they are in a great position.

I hope that things get better at Ford and GM.

Keep in mind that Ford having a highest market capitalization than GM is an anomaly (ford is less than half the size of GM), even more so under the current circumstances when both companies are enormously undervalued. I think that things at GM may be worse than we know.
 

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GM isn't in the right way, like Ford is. GM persist in the multiple and redundant Divisions ( Chevrolet, Pontiac, Buick, et al.....) policy. And GM don't have Mullally!
I don't understand how you can see Chevrolet and Buick as redundant divisions. They all stand for something and all have a pretty good lineup of cars.

Now in my opinion the real redundant divisions at GM are..

#1 HUMMER... It simply needs to go it (in my opinion) serves no purpose.

#2 SAAB... From what I know it just absolutely loses money for GM and this spot is already and has been for sometime now been is where Buick slots.

#3 PONTIAC... It has a couple of exciting products (G8 and G6 GXP) for now but from what I've heard and read Pontiac's future is currently being evaluated and if GM decides to keep Pontiac it's just going to be re badged Chevrolet's and their already well on their way with that (G3, G5, Torrent and Solstice which is a re badged Saturn).

GMC really doesn't make a big difference whether it stays or not. It kinda fills the same spot as Mercury does for Ford except they just make Trucks and SUV's

Now please don't anyone take this the wrong way and get upset and if it wasn't for the CTS, CTS-V and Escalade. Cadillac would be #4 on that list.

But the way I see it I think GM could do just fine with Chevrolet, Buick, Saturn, and Cadillac.
 

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Discussion Starter #10
I don't understand how you can see Chevrolet and Buick as redundant divisions. They all stand for something and all have a pretty good lineup of cars.

Now in my opinion the real redundant divisions at GM are..

#1 HUMMER... It simply needs to go it (in my opinion) serves no purpose.

#2 SAAB... From what I know it just absolutely loses money for GM and this spot is already and has been for sometime now been is where Buick slots.

#3 PONTIAC... It has a couple of exciting products (G8 and G6 GXP) for now but from what I've heard and read Pontiac's future is currently being evaluated and if GM decides to keep Pontiac it's just going to be re badged Chevrolet's and their already well on their way with that (G3, G5, Torrent and Solstice which is a re badged Saturn).

GMC really doesn't make a big difference whether it stays or not. It kinda fills the same spot as Mercury does for Ford except they just make Trucks and SUV's

Now please don't anyone take this the wrong way and get upset and if it wasn't for the CTS, CTS-V and Escalade. Cadillac would be #4 on that list.

But the way I see it I think GM could do just fine with Chevrolet, Buick, Saturn, and Cadillac.
I tend to agree with this view.
 

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I don't understand how you can see Chevrolet and Buick as redundant divisions. They all stand for something and all have a pretty good lineup of cars.

Now in my opinion the real redundant divisions at GM are..

#1 HUMMER... It simply needs to go it (in my opinion) serves no purpose.

#2 SAAB... From what I know it just absolutely loses money for GM and this spot is already and has been for sometime now been is where Buick slots.

#3 PONTIAC... It has a couple of exciting products (G8 and G6 GXP) for now but from what I've heard and read Pontiac's future is currently being evaluated and if GM decides to keep Pontiac it's just going to be re badged Chevrolet's and their already well on their way with that (G3, G5, Torrent and Solstice which is a re badged Saturn).

GMC really doesn't make a big difference whether it stays or not. It kinda fills the same spot as Mercury does for Ford except they just make Trucks and SUV's

Now please don't anyone take this the wrong way and get upset and if it wasn't for the CTS, CTS-V and Escalade. Cadillac would be #4 on that list.

But the way I see it I think GM could do just fine with Chevrolet, Buick, Saturn, and Cadillac.

I think GM could be fine with 3 divisions: Chevrolet, Pontiac-GMC and Cadillac
Chevrolet: basic transportation
Pontiac-GMC: performance, sport cars and trucks-crossovers-SUVs
Cadillac: luxury division

Buick is redundant with Cadillac; Saturn is redundant with Chevy; Saab is a nightmare GM must sell yesterday ( yes, is not a mistake, yesterday!!), and Hummer is a division completly out of focus in this days ( kill it now)
Just my opinion.......
 

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Discussion Starter #12
I think GM could be fine with 3 divisions: Chevrolet, Pontiac-GMC and Cadillac
Chevrolet: basic transportation
Pontiac-GMC: performance, sport cars and trucks-crossovers-SUVs
Cadillac: luxury division

Buick is redundant with Cadillac; Saturn is redundant with Chevy; Saab is a nightmare GM must sell yesterday ( yes, is not a mistake, yesterday!!), and Hummer is a division completly out of focus in this days ( kill it now)
Just my opinion.......
GMC and Chevy Trucks are completely redundant.
 
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