Procerity

Chrysler LLC, General Motors Corp, and to a lesser extent Ford Motor Co, appear to be on the verge of bankruptcy. Goldman Sachs has suspended its rating and price target for GM. If the large automakers seek Chapter 11 protection, many of their suppliers will also fail. Unemployment will not climb suddenly and sharply to the extent that a Chapter 11 bankruptcy is a managed reorganization process, but climb it will. Only those smaller components of each company that can continue as going concerns will be left, and they will belong to the creditors, not the shareholders. So, should GM and Chrysler be “rescued” with billions from the Troubled Asset Relief Program (TARP) or some other emergency government funding? Treasury Secretary Henry Paulson argues that TARP is only for financial institutions. And Europe has signaled that any subsidizing of U.S.-headquartered automakers would be challenged at the World Trade Organization (WTO), even though General Motors’ Opel unit is asking German taxpayers for a billion dollars.

The largest automaker in the world, Toyota Motor Corp, reduced its operating profit forecast by over 60%, but note it is still profitable. It would seem that the business models of the U.S.-headquartered automakers may be broken. During boom times, almost anyone can succeed. But, it is during times of upheaval that the weakest are culled from the herd.

Procerity’s Prognosis: Any aid dispensed to the automakers will only delay the inevitable.