6
The truth Hertz
GM finally acknowledged today in its annual report that its survival is in "substantial doubt." GM said it could be forced to file for bankruptcy under various scenarios. I suppose if unicorns start buying cars, GM won't have to file, but I'm glad to see a more rational expectation from the company. Still, the knock-on effects of a GM bankruptcy are many. Let's start with the rental car companies.
DealBook looks at the situation for Hertz:
About 28 percent of Hertz's rental fleet is G.M. cars, according to regulatory filings. For some of those cars, Hertz has agreements with G.M. that allow it to sell them back to the automaker, as well as "guaranteed depreciation" schedules that put a floor on the resale price.
The problem for Hertz is that if GM goes bankrupt, it could break those agreements. Hertz could be on the hook for major losses, and it'd be standing in line with other creditors hoping to get a piece. Last month, Hertz's CFO admitted the loss from an automaker bankruptcy would be "material," but she said Hertz has enough liquidity to handle it.
Also standing in line would be the dealerships. This week, GM sent out a memo to dealers about the company's buyback policy. One line in particular stands out to me:
Payment will be made by GM as soon as practical following inspection (of the cars GM buys back).
As soon as practical... let's see... 2050 sounds about right to us. It's a raw deal for the dealerships, but bankruptcy could force some kind of payment.
As for suppliers, GM argues bankruptcy would kill them, but Harvard law professor Mark Roe made the case this week that Chapter 11 has clear procedures to remedy that problem:
Courts know that bankrupt companies need to keep getting supplies, inventory and parts for manufacturing to be viable. Hence, the bankruptcy code and the bankruptcy courts put payments for new supplies at the top of the queue, even ahead of most old lenders.
Even so, GM is still trotting out the argument that people won't buy cars from a bankrupt company. On GM's Fastlane blog this week, PR guy Tim Wilkinson says:
I ask: "Would professor Roe and his Harvard colleagues buy a car or truck from a company in bankruptcy, when there are similar products available at another dealership right down the block?" I expect that if they were honest, they would answer "Probably not."
I ask: Would anyone buy cars from a company that's headed for bankruptcy? If anything, car-buying taxpayers might appreciate a company that chooses the more secure path of Chapter 11 over the current "we can make it if we restructure and get enough money from the government" plan. Bankruptcy is a new reality and people understand that. And besides, focus your brand, make cars people want and bankruptcy won't be an issue.
Finally, this interesting note. German car sales were up 21% in February. How in the world? Well, it turns out Germany started a new incentive program -- trade in your old clunker for a new car and the government gives you 2,500 euros. It might just be another gimmick that won't work long term, but there are environmental benefits, and I guess it's something to think about.
The bottom line is that a GM bankruptcy will be tough on a lot of people. But if companies like Hertz say they can handle it and suppliers are given preferential treatment, I don't see why Chapter 11 has to be such a boogeyman.
Buy a car from a bankrupt company? Why not. As soon as GM files, sales will approach zero (if not already there) and complete chaos will breakout among the dealers. Think prices will drop on cars still on the lot? I'm guessing 25%. What will happen to the price of a used car from Hertz with no GM buyback? Might be a good place to go bargain hunting.
I'm no economic genius but I'm waiting for fire sale pricing before I buy another new car. I doubt I am alone. I'm just waiting for the rest of the herd to go over the cliff.
Don
Hi Scott - and just yesterday I was kidding with our financial advisor that she should be putting our assets into General Motors (then at about $2/share) since their stock had to go up and @ $2/share it was a real bargain. Given today's news, I should be careful about what I say.
I've got several questions if I may:
On PBS this morning the commentator indicated that the Government couldn't let GM fail, if only because its failure would be so symbolic of the meltdown, it would exacerbate the crisis. In 'normal' times, I'd say let them sink. But in this climate, I don't know. Wadda ya think?
Another very related question. Several weeks ago I heard on a PBS program on the melt down, that the Government allowing Lehman Brothers to fail started the current crisis. They said that similar to a GM demise, Lehman's failure caused a drop in confidence that sent everyone to the pull in their assets (and everything else) and head for the bomb shelters. Any opinion on this?
Great blog. Thanks for hosting it. I don't know which I have enjoyed more - you on Marketplace in the morning or you on the blog. Either way, sure enjoy your comments.
Thank you, Mike. I appreciate your comments. To answer your questions, I think the language around bankruptcy is a little distorted. Bankruptcy does not mean the end of GM. It means a new GM, albeit a dramatically different, leaner company, as the case should be. The question is - do you trust GM to solve its own problems at the taxpayers' expense or would you rather have the courts sort it out?
If we're gonna fork out billions anyway, I'd rather it go to financing the more efficient process of bankruptcy. Otherwise, there's a good chance GM winds up a never-ending taxpayer money pit like AIG.
But let's say we put GM in the same category as AIG and the banks -- too big to "fail." I still prefer some kind of nationalized bankruptcy to just giving GM the cash and expecting different results.
I addressed the Lehman question in a blog entry yesterday: "Maybe with Lehman, it was the timing. The government has pumped so much money into the financial system since then, it has to be in a better position to withstand failures." I don't know that to a certainty, but neither does anyone else it seems. Ask yourself this: What does the market do every time the government says x company needs more money? The market tanks. How can it be worse to actually solve the damn problem and get some of these companies into a more secure, certain situation? Dead or alive. It's the uncertainty that's killing confidence and has everyone selling.
How do we get rid of the uncertainty? I heard the This American Life "Bad Banks" podcast (which was terrific) and became convinced a lot of nationalization is needed there. I am leaning toward let GM file, as you say, because then we aren't pouring more money after bad. Pension funds are next up; didn't know about GE till today. Hospitals are tanking and health care providers would seem a few notches away from making it up the "we can't let them fail" food chain. It seems, more and more, like get the bad news over with somehow, and then see what's left. Though it scares the bejeezus out of me, for plain old, selfish reasons. Nice to hear you on the radio this morning!
Thanks, Jane. It is scary, there's no question about that. But I'm with you - let's at least peel the band-aid back some. I don't relish the consequences of a GM bankruptcy. But I'm getting very frustrated with the line of thinking that every big company needs a government infusion to stay alive. Ashley Milne-Tyte had a good story on Marketplace tonight about GM. But I don't agree with the people quoted in the story who said a GM bankruptcy would be disastrous right now. I'm sorry, but at some point, we as taxpayers have put our feet down and say, no. I know it's not fair to the auto industry. Our government has forsaken that business in favor of the financial industry. A do over, and the choices might be different. But it's high time to start protecting the taxpayers' interests.
