Sunday, December 14, 2008

Breakup GM

While I write this Gm and ford and Chrysler are struggling to find a way to get a quickie loan to carry them over their cash flow crisis from your favorite lender of last resort, the taxpayer. Right now, the momentum is to send them to the wall to learn the joys of chapter 11.

The current proposal floating around calls for giving the GM bondholders a huge haircut and trimming the labour contracts. Of course the shareholders will be asked to walk the plank. What happened to that old adage ‘Where GM goes, America goes’. Hmmm.

GM has begun discussions with chapter 11 lawyers and are reviewing their options. Is anyone getting happier?

GM exists for one reason and one reason only and that was to have efficient access to fresh capital as needed. That was how they became the huge multi model company that they are.

I will give you a clue. That game is now over. The shylock business has just been forcibly downsized. It is now not a good idea to be just big because the shylocks are bailing like crazy to just keep themselves afloat and betting the bank on a one stop borrower does not seem such a good bet these days.

There are at least six to seven healthy future high multiple car companies wrapped up in GM. Spin them out one at a time with a fresh financing package and everyone will walk away whole. It can be done and it will be an excellent way to reposition the auto industry in North America.

The foreign competitors have already shown us that the public can handle product coming from many manufacturers. So add several more. GE is set up to do this in a heart beat. Surely GM is up to it.

Financial gigantism has been shown to be the road to financial ruin for the same old reason. If you are big enough, it is possible to game the financial system for way too long until it wrecks the global financial system.

What the Auto industry and every stakeholder in the American economy needs today is a firm kick in the pants.

So why not invite the Chinese government to invest some of their vast horde of US funds in the industry while we are at it? The humiliation should focus a lot of minds.

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