Obama Rejects Automakers’ Plan

After pushing out General Motors’ (GM) CEO Rick Wagoner because of disappointment in his turnaround of GM, today President Obama outlined his latest deal with the automakers based on findings from the Auto Task Force that neither company has a viable plan forward. In an announcement to the press today, the President said he will give GM 60 days worth of working capital to continue to allow the company breathing room from bankruptcy, but he is expecting a much more rigorous reorganization plan than the one submitted last month. Furthermore, in regards to Chrysler, Obama was more harsh saying that he is giving the company 30 days of working capital in order to allow for a merging of operations with Fiat or another suitor. We wrote about this deal with Fiat back in January (How Much is Chrysler Worth? That Little?), but as of today nothing formal has materialized. Interestingly, Obama said that if this deal is not reached within 30 days there will be no more money coming for Chrysler, but if a deal is reached they could get another life line of up to $6 billion.

On this blog we have been vocal against the auto bailouts because the business models are unsustainable with massive legacy costs. In our mind, clearly there was no perfect solution, but the best way forward would have been reorganization through chapter 11 bankruptcy. However, those days prior to the initial bailouts are long gone and the companies continue to burn through cash like there is no tomorrow. However, this new attitude from the administration should at the very least get GM and Chrysler’s attention. The President said that he was not ruling out bankruptcy for GM either, but he wants to reevaluate the company after the next 60 days of working with the Auto Task Force. The President tried to assuage customer’s fears saying that as of today, car buyers should feel safer today than ever because the U.S. government will stand behind your warranty on any U.S. made car, should the maker go under. As the President stated:

“So it’s my hope that the steps I’m announcing today will have an effect. Will go a long way forward towards answering many of the people who have questions about the future of GM and Chrysler. But just in case they’re still nagging doubts, let me say it as plainly as I can, if you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, your warranty will be safe. In fact, there will be safer than it’s ever been because starting today, the United States government will back up those warranties.”

This is probably the deepest intrusion of government into private industry yet in the Obama administration, but at this point there are few other options. He has restructured management at GM and is even forcing a merger at Chrysler, but nothing he has tried prior to this has yielded results. Many billions have already been sunk into the failing businesses, and to allow the companies to fail now would be a major blow to the economy that is just now starting to show signs of improvement. Chrysler CEO Bob Nardelli is now on the hot seat, as it is up to him to merge with someone or collapse. He has seen what happens when a CEO falls out of favor with the Administration and its Task Force. In the face of this new mandates, how happy is Ford (F) that they have stayed out from under the government’s clutches by not accepting government funds. There are still “nagging doubts” about Ford as well, but at least they are able to make their own business decisions unlike competitors Chrysler and GM.

Obama Gives Ultimatums with Teeth

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.