Why Detroit’s Still Waiting for Their Checkby Tim Manni
Every on setting day seems to bring more bad news for the American auto industry. Today, a Deutsche Bank analyst downgraded General Motor’s stock, noting that without government interaction the automaker would be bankrupt by year’s end.
The Center for Automotive Research (CAR) released a study on November 4 that calculated the cumulative effects of the potential contraction of the auto industry. If the Big Three were to fold completely, suffering a 100% contraction, CAR estimates total job losses of 2,951,344, and a U.S. personal income loss of $150.7 billion in 2009 alone.
Under such dire circumstances and a grim outlook, why hasn’t the federal government stepped in to prop up an industry that effects so many American families?
“It’s a politically thorny issue,” said HSH Vice President Keith Gumbinger. Extensive retirement packages have been a thorn in Detroit’s side for a number of years, limiting their earning potential. In essence, the government would be asking taxpayers to pay for another taxpayer’s retirement. The government has yet to identify the core issue behind Detroit’s downfall — is it financing restrictions, lack of credit, poor sales, or some combination?
Also, we have still yet to hear of a decisive plan from the Big Three on how a federal loan will be spent. Officials are trying to get a sense of how federal funds will be employed, and what’s their plan of action for recovery — how do these three automakers plan on recapturing the marketplace?. If The Big Three were to receive a $25 billion loan, that would leave each automaker with only $8.3 billion:
We see General Motors burning about $1.8 billion in the fourth-quarter, and ending 2008 with about $14.4 billion. We look for cash burn of another $4.5 billion in 2009. We’ve included detailed cash flow walks later in this report.
Especially with a political shift of power already in place in Washington, lawmakers are skeptical of writing a blank check for an industry that could burn through $8 billion dollars in a matter of months. With no spending plan in place to assure the government their investment will be worthwhile, The Big Three could see their stock values disappear before new years.