Five Key Questions On GM Bankruptcy
1) How will GM survive all this negative publicity in terms of getting future customers to buy their cars?
GM's ability to win back consumers scared off by bankruptcy depends on the speed of the bankruptcy case. The Obama Administration would like to see a debt-free and smaller GM spin out of the courts by September.
The trick in the car business is to get rational people to spend money for an irrational thing. Remember -- all a car or truck really does is provide transportation. The auto industry makes money by convincing consumers that they require leather interiors, sunroofs, sculpted lines and a killer sound system to feel good about making those trips.
People are unwilling to lay out the $25,000 required to buy such amenities if they are dubious about the sustainability of a car company. People typically own cars for 5 years or more. That's a commitment that must be supported by confidence in the brand. GM will have no chance at convincing people to buy its brand unless it quickly gets back to the business of building profitable cars and trucks in North America.
2) What does this bankruptcy mean for the rest of the auto industry?
The American auto industry as we knew essentially ended today. The auto making behemoth that was General Motors is dead. It is now a government-owned ward of the bankruptcy courts. Chrysler is part of an international car company (FIAT).
Only Ford remains as a fully independent American automaker. How Ford takes advantage of its strong position is unclear. They could play-up the fact that they are the last survivor on the island. But they could risk alienating many consumers. Of course, the economy could get worse and Ford may find itself in the same boat as its Detroit cousins.
Ultimately we are looking at an industry that is not American, Japanese, Korean or German. The new reality is that cars are made in bits and pieces all around the world by companies that are capitalized by investors all around the world. The modern auto industry is now truly a global affair with a far more nebulous national character.
3) What will it mean for the rest of the economy?
GM's bankruptcy will be a catastrophe for many communities across the Upper Midwest. At least 21,000 more people will lose their jobs.
Then there's all the ancillary businesses connected to plants slated to be closed. Those restaurants, laundry mats, stores and suppliers all take huge hits. The only thing worse for the economy than a GM bankruptcy would have been a complete liquidation of the company.
Make no mistake, that would have been cataclysmic. It's also the reason why the U.S. government will sink more than $70 billion into keeping GM alive.
4) What is the government's exit strategy and will the U.S. ever get the money back from GM?
It appears the government's exit strategy is built around the idea that GM stock will be worth something someday. When that day comes is anybody's guess.
The hope is that the price of the stock will be worth at least what the U.S. government invested into GM. That's when the Treasury Department will begin to slowly sell the government's equity holdings in GM -- now about 60 percent of the company.
5) Will the government's intervention here have an effect on other big companies, such as banks?
Actually it's the other way around. The government's intervention in the banking sector is what laid the groundwork for the remarkable involvement we are seeing now in General Motors.
Over the course of just six months, Congress and Wall Street have acquiesced to the economic reality that the economy could have gone over the edge had the Treasury Department and the Federal Reserve Bank not jumped into the fray.
Nobody knows where this is all going. Alarmists might say we're headed toward some quasi-socialist state. A more rational view is that extraordinary times require extraordinary measures. Things will get "normal" again.
Of course, the context of normal for American capitalism may have changed for years to come.