The End of the Road for GM

GM Faces Either Bankruptcy of Becoming a Quasi-Nationalized Taxpayer Sinkhole

March 11, 2009

The collapse of the market for vehicle loans has devastated the Big 3 automakers. Even though GMAC qualified for TARP money and lowered its credit rating for potential buyers, it hasn't helped sales at General Motors (GM). The outlook is bleak for GM and time is clearly running out.

While Chrysler is running to Fiat for salvation, General Motors is running to the federal government, and this will be a crucial test for President Obama. Of the eight members named to the to the Presidential Task Force on the Auto Industry and the 10 senior policy aides who are assisting them, only two own American vehicles, which doesn't bode well for Chrysler or GM.

In these volatile times, your best defense is a strong offense of fundamentally superior stocks. Make the wrong choices and your already battered portfolio could suffer even more. Make the right moves though, and you can ensure your portfolio posts profits for the entire year. The actions you take now could make or break your performance this year. Accept your FREE copy of the 2009 Investing Guide and get a look at the opportunities and the dangers that investors will confront in 2009.!

It looks like the Treasury Department is trying to implement a managed bankruptcy for General Motors, but they're not calling it a bankruptcy for public relations purposes. Not matter what you call it, GM's stock is at a 75-year low. Even GM's auditors have expressed "substantial doubt" about the company's ability to continue as a going concern.

GM said its future depends on its ability to execute a viability plan presented to the U.S. Treasury as a condition of its $13.4 billion bail-out loan. In a surprisingly blunt tone, GM said, "If we fail to do so for any reason, we would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the U.S. Bankruptcy Code." Last month, GM told the U.S. Treasury that it needs up to $16.6 billion more of emergency aid to stay alive. In other words, the sinkhole will only grow and grow.

Since the UAW helped Obama win the election, I expect that GM will get some form of aid. Just like Fannie, Freddie and AIG, GM will become another quasi-nationalized company that will suck up billions of dollars every year from taxpayers. There's one more hitch and that's that Obama's 2010 budget plans to earn over $700 billion from "cap and trade" by more strictly regulating carbon dioxide and emissions from utilities.

Cap and Trade Will Cripple GM's Business

Why is cap and trade so important to GM? The reason is that the auto industry is very dependent on cheap hydroelectricity from Canada and coal from the U.S. So as Obama forces coal-fired power plants out of business, the era of cheap electricity in the Midwest will end which will place an even greater burden on GM and other auto manufacturers. The initial response from GM will probably be to seek special exemptions for local utilities or possibly relocate to Canada, where cheap hydroelectric is abundant.

Obama is serious about imposing cap and trade on the utility industry since it will generate huge amounts of revenue–double the revenues of allowing the Bush tax cuts to expire and curtailing charitable deductions. Cap and trade is a massive $700 billion per year cash cow for the Obama administration and is crucial for its argument that it can keep the budget deficits under $2 trillion a year.

The argument that what's good for General Motors is good for the country apparently no longer applies. Cap and trade would impose dramatically higher electricity costs on GM and make their U.S. operations much less competitive, especially relative to Canada. I'm afraid that cap and trade and General Motors won't be able to co-exist–we can have one, but not both. Since cap and trade will fill the government's coffers and GM won't, you can see that GM's open road is really a dead end.