[GM] said that the troubled mortgage industry and frozen credit markets have raised doubts that the mortgage business of its GMAC LLC financial arm can survive.
The filing says that the value of Residential Capital's mortgage loans have deteriorated due to weak housing prices, delinquencies and defaults. It is also having trouble raising capital.
GM owns 49 percent of GMAC LLC, with the rest owned by Cerberus Capital Management LP. . . .
GM also said in the filing that Delphi Corp., its former parts-making operation that was spun off in 1999, is unlikely to emerge from bankruptcy protection in the short term and may not be able to emerge at all.
Dale Oesterle, at Ohio State University, discusses the much discussed prospect of an automobile industry bailout (paragraph breaks adeed):
The big three American automobile companies are showing substantial operating loses. GM is losing $1 billion or more a month. How does a capital injection help? The companies will just burn through the cash (using it to pay labor or pay off debts, old and new, until it is gone).
The banks, on the other hand, that are receiving bailout funds have operating profits (they can borrow low and lend high) but suffer from capital requirement issues (which limits what they can lend). A capital infusion helps meet capital requirements, frees up lending and the banks can make a profit. Auto companies are not similar. Unless the auto companies can build and sell a car or truck at a gross profit (a profit neutral of debt service or taxes) it makes no sense to bail them out. They should be liquidated.
Professor Oesterle is right that the automobile industry dilemma is very different from that of the financial sector problems. He is also right in his argument that it takes bankruptcy, not just a bailout, to allow these companies to survive. But, his conclusion, that the businesses should be liquidated, is probably wrong.
First, existing contractual obligations are an important source of the Big Three Automakers lack of operating profitability.
All three of the Big Three Automakers have large legacy costs to laid off employees. General Motors owes more for retiree benefits other than pensions (its pensions aren't horribly funded, but other benefits are unfunded) than it does to bond holdes. Payments for retiree benefits are treated as operating costs.
General Motors has large contingent liabilities owed to its spun off Delphi division.
One of the reason that the Big Three have been slow to lay off employees or reduce production is that existing union contracts make it very expensive to lay off workers. Only a fraction of the cost of employing a worker is removed from operating costs by laying off a worker, who receives generous benefits compared to unemployment insurance, if laid off.
Likewise, the Big Three have been slow to thin their bloated dealership network or discontinue excess brands, because dealers have to be bought out under existing contracts at a high cost. These companies have a dealership network designed for a much larger market share. More dealerships mean fewer sales per dealer. Fewer sales per dealer means that dealerships need a larger middle man cut than they could survive on with more sales. The larger middle man cut compared to the competition limits the ability of the manufacturers to increase their dealer invoice price, which decreases operating revenues.
Finally, existing contract provide for greater compensation per hour to factory workers than the labor market requires, and greater compensation per hour to factory workers than the competition pays.
These contractual obligations could be reduced (in addition to reducing current financing costs), to bring these companies closer to operating profits in bankruptcy.
Second, his analysis is insufficiently dynamic. A proposed merger of General Motors and Chrysler, for example, would almost certainly slash the number of automobile brands offered by the Big Three and would also almost certainly reduce the number of vehicles produced that are chasing the same shrinking market segments. This reduction in the supply of vehicles would boost prices.
A proposed merger would also remove financing operations from General Motors and Chrysler, allowing those businesses to focus more on their core businesses.
And, allowing these businesses to survive a little longer would also allow an eventual modest increase in the demand for big, less fuel efficient vehicles, as oil prices stablize at more modest levels, and would buy them time to shift their production capacity to more fuel efficient models.
Third, liquidation is a bad option. Automobile manufacturers have assets that are worth far more when they are a going concern than they do at liquidation value. Automobile factories aren't worth much for any other purpose. Neither are car dealerships, which are often in "automobile row" strip developments with most other competitors already represented. Who would buy Delphi in a liquidation other than the manufacturers that spun off the company in the first place?
Foreign automakers who have built plants in the United States have established that it is possible to build and sell cars at a profit in North America. All three automakers have major restructurings in place. But, if there is going to be a bailout, it might be better structured as mother of all debtor-in-possession financing deals than as a pre-collapse bailout.
This has the virtue of preventing private investors who simply made bad investing decisions from benefiting unduly from the bailout, which might look something like the Amtrak nationalization of the private sector passenger rail system.