Hard Cold Reality

As a result of the high unemployment and speculation of what is to come, there is tangible fear on the pedestrian streets.

November job losses were in excess of 500,000. well above the forecasted estimates. Since September, the cumulative figure is approximately 1.2 million jobs lost. Frightening numbers.

On Dec 4th, individual retailers released their comparative store sales (CSS) for the month of November. It was dire. . Later this week, the industry as a whole will be releasing their figure. As it is well known in industry that retail is notorious for its layoffs during January, expect more volatility in the markets. With Christmas around the corner, and the consumer not buying small ticket items, it is difficult to imagine them buying cars.

This was a contributing factor and set the tone for the speeches in Congress on Friday. At the onset, one knew that regardless of what they said or presented in their reports, the gentlemen from Detroit will be returning home with committments for financing.

To many consumers, the likelihood that General Motors will cease to exist as a going concern is a high probability. This was indicated by November sales. GM was down 41%, from November 2007. The drop in sales at the other car manufacturers was approx. 32% for November.

This is really about General Motors. Short term Ford is holding its own.

Chrysler, is 80% owned by Cerberus, which is a private equity fund. Due to the nature of the ownership there is little information available. Prior to any funding from the government, it is imperative that a due diligence be performed to ascertain if there has been any movement of Chrysler assets.

Regardless of what it is called or how it is restructured, this endeavour to return General Motors to solvency must also work to restore consumer confidence in the company or it will be to no avail.

This must be the number one priority. The consumer has to feel confident enough in the ability of the company to survive. Without that confidence, they will continue to purchase their cars elsewhere.

The question is, how will this bailout “package” be structured? In what terms will it be referred to? Unfortunately, this past month, the labels, bankruptcy, re-structuring, insolvency, Chapter 11, Chapter 7, among others gives the public very negative connotations of what bankruptcy might lead to.

The UAW, automobile executives and media are alluding that if there is a bankruptcy, the industry will not survive, resulting in the loss of millions of direct and indirect jobs.

If not handled with the proper expertise, there is concern that the automobile industry in the US could implode.

In line with that perspective, perhaps what is necessary is to structure the “bailout” to shadow the Chapter 11 process but refer to it a bridge loan. It is all in ones perception.

Treat it exactly as a bankruptcy but refer to it as something else. In essence it would be like a pre-packaged Chapter 11, with the government guaranteeing the DIP financing and mandating the Czar as the bankruptcy judge.

The difference between concessions under a government bailout or re-organization under a Chapter 11 bankruptcy filing is the degree of structure and elasticity that would be demanded of General Motors, the most needy . Keep the stringent rules as if an actual filing under Chapter 11 had occurred.

Detailed below are some thoughts on the restructuring:

· Each company must be evaluated on its own merits.

· Completely replace the board of directors. The Chairperson of the board would be appointed by the government. The balance of the board must include representation from each major class of creditors, along with representatives from management.

· The CEOs and upper management of the companies be evaluated and if dismissed, agree to leave without severance.

· Restructure all categories of debt. Each class of creditors would have to accept a certain percentage of forgiveness of their debt in turn for a debenture or an equity position in the newly reorganized company. The main categories of creditors would include: UAW, employees, bond holders, trade creditors, service creditors, dealerships, landlords, financial institutions, and retires.

· All existing contracts are open to re-negotiation including the UAW, retires, vendor agreements and leases.

· An independent auditor be commissioned to crunch the numbers and present a more realistic report than that, that was submitted on December 2nd.

A predetermined amount of the loan would be allocated to honouring of warranties, along with an ongoing percentage of sales.


There has to be a high level of transparency. Learn from the mistakes of the rescues of the financial institutions. If the public knew that their money was being used by banks to purchase other banks……

A sense of urgency has to be established. Waiting for the next administration or until after the holidays is not an option. A temporary loan of $10 or $15 billion to tide the companies over until March is not a solution, or even a band-aide.

Proceedings must take place immediately. Otherwise, it is hard to imagine car buyers going to GM during December and January.