Excluding the
bottomless pit of Wall Street executives now tarred and feathered to satisfy
the constituents of the "blameless" U.S. congress, the Big Three
automaker CEOs rank second as they were publicly chastised for their own
inadequacies. While much blame has been rightfully bestowed on Ford, GM and
Chrysler for declining from market dominators to market losers, it is necessary
to acknowledge that auto manufacturers didn't lead the U.S. Economy into
recession.
It seems ironic that while the U.S. Banking sector
evolved too quickly and endorsed derivative instruments it didn't fully
understand the Big Three U.S. auto manufacturers have lagged in adapting to the
demand shift from "gas guzzlers" to economical driving machines over
the past 10 years. Both industries have been laden with errors in judgment, yet
the banking system is essential to economic growth in all sectors while auto
manufacturers reorganizing under chapter 11 bankruptcy will allow only isolated
damage as automakers emerge leaner and stronger.
Interestingly the administration with the
"right stuff" to endorse such policy decided instead to supersede the
refusal by congress and grant GM and Chrysler loans from the TARP fund. The
loans designed as bridge financing totaled $17.4 billion and were expected to
ensure that the two companies met their debt obligations through March 2009.
The more conservative Bush administration
failed to allow the auto makers to reap what they have sown, even as GM's cash
burn rate clocked in at $4.7 billion in 2008 Q3. President Obama announced Monday
that the government would finance GM working capital for two months ending in
June 2009 and will keep Chrysler afloat for thirty days allowing time for the proposed
Fiat deal to buy a 35% stake in the company to be reached. If the Fiat deal is successful
Obama pledged to offer an additional $6 billion of capital to bring the deal to
fruition. The President is taking a hard stance on the issue and suggested that
if the companies cannot find a solid footing on their own by the deadlines announced,
the companies will be allowed to enter bankruptcy with the “backing” of the
United States government.
GM and Chrysler
both structured their first loan from Uncle Sam with the premise that demand
for automobiles in the U.S. would average 12 million vehicles over the course
of 2009, but statements from GM President Fritz Henderson in January 2009
reassessed projected 2009 auto sales closer to 10.5 million units. Earlier this
month GM and Chrysler pleaded for an extra $22 billion, citing talks with bond to
convert debt into equity shares as evidence of their ability to survive with
the government’s help. However, one must wonder whether the holders of
relatively secure debt will convert their investment into equity shares given
language from Washington on Monday, suggesting stockholders could be wiped out.
Rick Wagoner, CEO of General Motors, announced his resignation Sunday ahead of the U.S. government’s announcement of its stringent requirements for the automakers on Monday. Wagoner had been at GM for a total of 32 years and had served the past nine as the company’s CEO. As captain of the sinking ship he saw GM replaced by Toyota as the U.S. market leader in car sales and is responsible for the lack of forward vision in the new millennium. His removal from the company is not only symbolic of change to come, but a signal to the industry that the Obama administration will not tolerate complacency in the increasingly competitive environment challenging automakers.
