Ongoing Payback of Government Bailouts Will Focus Scrutiny on GM, Chrysler
September 08, 2009
Since early this summer, a handful of the nation's large banks starting paying back their share of emergency bailout loans taken under the controversial, $700-billion Troubled Asset Relief Program fund created by the Bush Administration last year. T
It was reported recently that eight major banks and investment firms that received TARP loans have repaid - and that the U.S. Department of Treasury's profit was about $4 billion and a tidy 15-percent return on the investment.
Although the money repaid represents only a small portion of the TARP funds extended to scores of banks large and small, some banks' prompt repayment is certain to lead the discussion to General Motors Co. and Chrysler Group LLC, two non-banks - along with their closely-aligned financing operations - that were extended a collective $65 billion in TARP funding.
The auto companies have undertaken (not entirely voluntarily) drastic actions to downsize, right-size, and economize. Just like the banks, GM and Chrysler are highly dependent on a gradually improving U.S. economy to bring normalcy to their balance sheets. But the business of banking seemingly is better positioned to benefit from the fragile recovery that many economists and analysts seem to agree is underway.
People Need Banks More Than New Cars
The auto companies, meanwhile, are holding their collective breath in the post-Cash for Clunkers fourth quarter and early 2010. Because unlike the banks, GM and Chrysler (and the rest of the auto sector) are dependent almost exclusively on customers who must make a discretionary choice to purchase.
It is far from conclusive a sustainable number of those customers feel good enough about the economy and their own household finances to purchase enough new vehicles to fuel a swift industry recovery. Neither GM nor Chrysler has the luxury of waiting out a protracted recovery - the companies' presumed breakeven threshold is approximately 10 million annual U.S. sales, with 2009's total likely to be not much in excess of that number, and analysts currently are guarded about whether 2010's auto sales will meaningfully exceed the 10-million-unit magic number.
A recent research note from industry analysts IHS Global Insight, while projecting a strengthening U.S. economy through the rest of the year, nonetheless said, "It remains difficult to make a case for a robust consumer recovery."
Treasury Department officials and GM executives have talked about an initial public offering in the "new" GM next year, but many industry insiders believe that scenario is optimistic. Even if the economy and business conditions improve to the point that GM can put together an IPO, it still seems several large steps to a pay back of some $50 billion in TARP funding.
Chrysler's potential to repay U.S. taxpayers appears even more of a gamble than it was in the 1980s. The company must pull off a complicated merging of product-development and manufacturing strategies with minority owner and managing partner Fiat S.p.A. Time is even more the enemy of Chrysler, which had suspended or heavily cut back most of its product development during its run-up to bankruptcy.
Chrysler currently has several underperforming model lines and has sharply reduced its model range in answer to the need to downsize it operations, while any new, Fiat-based models are believed to be a minimum of 18 months from seeing U.S. showrooms. - Bill Visnic
Posted by Michelle Krebs at 10:59 AM under Chrysler , Commentary , Companies , GM | Comments (0) | digg this | Seed Newsvine
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