Automakers and financial institutions begging for loans and cash infusions seem to be getting a free ride, much to the chagrin of struggling small businesses that have no hope of a government handout. (After a few weeks of public humiliation, does anyone truly believe the Big Three aren't going to get some federal help?)
As a business executive and former CFO of major multinational businesses, one of the first lessons I learned was that top management, stakeholders and the markets do not like surprises. Allow me to repeat that, they do NOT like surprises!
The reason that corporations have so many internal reporting mechanisms such as planning, forecasting and a daily or weekly cash flow statements is so they can avoid surprises. They conduct periodic risk reviews in order to mitigate any potential surprises and if necessary, take appropriate actions. GM clearly knew that revenues were down, market share was down, cash was burning at the speed of light and debt was spiraling out of control.
With that in mind, it?s should have come as no surprise to anyone, that GM execs, (who arrived in Washington in a private corporate jet) requested a federal bailout?they need $4 billion just to pay their bills this month, or risk running out of money. They are seeking an additional $18 billion?$12 billion in loans and a $6 billion line of credit.
Now that they?re on the hotseat, the company is finally making plans to shrink its work force by 34%, close nine plants, shut down 1,750 dealerships, focus on four of their eight current U.S. models, cut its debt in half and win new concessions from the UAW. They may have been considering these actions for awhile, but why would they put off outlining a plan until they were running out of cash? Why now? This is not the way to run a corporation. . . or has this become the new standard?
The current board and top management have failed spectacularly, and in my opinion, the government should forget the bailout and allow the company to file for Chapter 11. However, my main concern is that the $18 billion is not nearly enough for GM to survive at current production levels anyway. Furthermore, using rough estimations, the restructuring process alone could cost GM $20 billion.
Another fallout of the global credit crunch is that auto finance companies do not have enough money to lend to consumers. But GMAC Financial Services, GM's finance arm, has applied to become a bank holding company, making it eligible for a slice of the bank bailout pie, as well as giving them access to the Federal Reserve's discount window for emergency loans.
The bottom line is that even if the government bails GM out, who will want to invest in them? I don?t mean to sound contrarian, but I am realistic enough to think that GM filing for Chapter 11 would be the best option for the taxpayer and the American consumer.
We stated in our book, ?The Big Gamble: Are You Investing or Speculating?? that maybe we should not give up just yet on GM. After all GM was once considered a rock solid investment, even though in hindsight, it turned out to be mere speculation. But we were still betting that GM could bounce back and steal the spotlight from Toyota. However, looking at the reality of their current situation, perhaps it is too late now.
GM missed an opportunity to learn from the Chrysler bailout in 1979 and 1980. In that landmark case, Chrysler spent months building support for a $1.5 billion loan guarantee. Executives received zero bonuses, took deep salary cuts and negotiated for concessions across the board. Their efforts eventually helped save the company and tens of thousands of jobs. GM did indeed miss an opportunity to learn from this, but unfortunately, that seems to be true of many of today's corporations
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