back to blog homepage

GM Bailout

The House passed the bailout plan yesterday, but the Senate is not likely to be as accommodating. Look for the Senate to potentially reject the bailout, then later pass it with some significant compromises that make the package more like a bankruptcy plan.

I know it sounds harsh, but for any plan to be effective, all parties will have to feel the pain. The equity holders should be wiped out and the bond holders should be converted into the new equity holders. The union contracts and the management compensation packages should be voided and reinstated with equivalent packages that Honda and Toyota have for their US plants.

Here is the statistic that speaks louder than anything being said in Congress, proving that the current business model for GM, Ford and Chrysler needs to be broken apart and rebuilt:

In 2007, Toyota (TM) and General Motors (GM) each sold 9.37 million vehicles.
In 2007, Toyota made $17 billion, while General Motors lost $38 billion!

GM can sell cars just like Toyota. Clearly, if they are selling the same number, its not as if buyers are shunning the models produced in Detroit due to esthetics. The problem is their cost structure – too much debt and too much salary. Until those are fixed any bailouts will be money flushed down the drain since it just postpones the inevitable day of reckoning.

Mark