pay attention to the auto industry, because as GM goes --so go the country, eh? eh? eh? ..
October 11, 2008
GM, Ford too big to fail?
Experts wonder if another rescue next for automakers
BY SUSAN TOMPOR
FREE PRESS COLUMNIST
After this week's mind-numbing market meltdown, the big question for Michigan is: Are General Motors Corp. and Ford Motor Co. the next in line to need a government bailout? Or will a merger partner be needed?
Who would imagine that we'd speculate on such an odd question -- especially after the federal government's guarantee of $25 billion in loans for the auto industry?
But clearly, these are not normal times. The Dow Jones Industrial Average had its worst week ever.
The Dow tumbled 700 points early Friday. But the Dow ended the day down 128 points, or 1.5%, to close at 8451.19 points.
Since Sept. 30, the Dow is down nearly 2,400 points -- or 22%.
"People are just incredibly shell-shocked here," said Dana Johnson, Comerica Bank's chief economist.
But Johnson, who maintains that a recession is inevitable, said he's growing increasingly confident that the Federal Reserve and the U.S. Treasury will be successful through extraordinary efforts and not allow lending to collapse.
Johnson is one of the few who said he's seeing a way out of this credit crunch. He is not putting a timetable on that recovery, though, because the situation is so complex.
"I have an overriding faith that the amount of lending that the Fed can do is literally unlimited," Johnson said.
Disaster is feared
Market watchers, though, are debating whether extraordinary efforts that the government is making for banks and financial firms could need to extend maybe even to automakers.
Could automakers be viewed as too big to fail, especially if the credit markets do not rebound soon enough?
The overwhelming fear is that automakers could be headed for disaster unless the credit markets are revived.
Reports late Friday said that GM and Chrysler LLC were exploring a merger. But it's unknown how long that could take or whether it could work.
GM closed at $4.89 on Friday -- up 13 cents or 2.73%.
Ford closed at $1.99 on Friday -- down 9 cents or 4.33%.
Both companies continue to stress that they have enough cash to last through the slump and into better economic times.
This past week, stocks for GM and Ford got crushed on forecasts that sales will slump further in the United States and abroad. The credit squeeze, if it continues, could only make things far, far worse.
"The bad news is a lot of people are losing their jobs -- and it's hard to get loans to buy cars," said David Wyss, chief economist for Standard & Poor's in New York.
The silver lining, of course, is that gas prices have pulled back considerably during the market meltdown.
"It's not all bleak," said David Healy, a veteran auto analyst with Burnham Securities. He noted that news out of the auto industry does not justify the sizable sell-off.
Betting against automakers
Yet the bond market is betting big-time that GM and Ford would have to file for bankruptcy.
What triggers a default, experts say, is running out of cash and not being able to refinance. If a company is able to refinance short-term liabilities, it would not go bankrupt.
As the credit crunch lingers, the worries build that automakers would have a hard time refinancing their short-term liabilities. And experts say those worries about GM and Ford are playing out in the bond market.
"The bonds represent almost a 100% chance of bankruptcy," Jim Cramer, host of "Mad Money" on CNBC said in an e-mail.
Edward Altman, a finance professor at New York University's Stern School of Business, said bond markets are looking at an extremely high probability of bankruptcy for GM and Ford -- but not as high as 100%.
Altman, the creator of the Z-score mathematical formula that measures bankruptcy risk, said it is hard to say whether the real troubles would pop up in six months, one year or 18 months.
He said Ford is on slightly stronger footing, but he said both companies are increasingly on the verge of bankruptcy.
"They're the only ones who say they are not," Altman said Friday.
Mike Krushena, senior portfolio manager for Munder Capital Management in Birmingham, said the bond market is forecasting a very dire outlook for automakers right now.
Krushena said he thinks the odds are very low that GM and Ford would file for bankruptcy.
"I don't think bankruptcy is an option for either company right now," Krushena said.
Contact SUSAN TOMPOR at stompor@freepress.com.
