The Money Pit

Even with the government throwing money at it in multi-billion dollar chunks, GM seems to be sinking too fast for even the Treasury department to keep it afloat:

The target date for General Motors Corp. to get its second installment of government loans passed last week, but a top company executive says he expects the money to arrive in the next several days.

Fritz Henderson, GM's president and chief operating officer, said without the second installment of $5.4 billion, the company would run out of cash long before March 31.

In December, the Treasury Department authorized $13.4 billion in loans for GM and another $4 billion for Chrysler to keep both automakers out of bankruptcy. GM received $4 billion late last year and was to get $5.4 billion Jan. 16 and another $4 billion on Feb. 17, the day it is to submit its plan to show the government how it will become viable.

Henderson told the Automotive News World Congress in Detroit that the money is critically needed to pay its bills. He attributed the delay in receiving the second installment to the Treasury Department's workload and the change in administrations.

"If we don't get our second installment of the funding we'll run out of cash, it's that's simple," he said. "We've been finalizing what we need to do. We anticipate receiving it. But it's critical that we receive it."

The AP article above actually softpedals GM's money burn rate by saying GM received the first $4 billion "last year."  While technically correct, the fact is that GM received the money "last month."  So it appears that GM's burn rate may be as high as $4 billion a month, and that is before we necessarily even hit bottom in the recession. This should be absolutely unsurprising, as GM was burning through about $2.5 billion a month of cash pre-recession, when times were good.

It is just incredible that Congress and the Administration (old and new) are spending this much money to help GM management hang on to their jobs and to protect GM bondholders.  GM assets are not going to go away in a bankruptcy, but they may end up in hands that are more capable of using them productively.  Just to get one tiny glimpse of the incompetence at work here, note this:

Henderson also disagreed with United Auto Workers President Ron Gettelfinger who said on Monday that that a mid-February deadline for General Motors and Chrysler to complete their restructuring plans may be "almost unattainable" and that the automakers may have been set up to fail.

So, through the fairly strong economy of the last several years, GM has been burning through cash but did not see the need to have a restructuring plan (for most companies, having an operating cash flow deficit at the top of the business cycle is a pretty big red flag, but apparently not so at GM).  GM managers showed up in Washington to demand taxpayer money, and still didn't have a plan.  Chagrined, they showed up again to beg humbly for money, and they still didn't have a plan  (and frankly lie about their likely cash burn rate).  Three months later, in February, they may still not have a restructuring plan.


  1. dearieme:

    His Holiness the O will put matters right by a laying on of hands.

  2. K:

    GM did have plans. But planning can't prevent disasters. Reality trumps good intentions.

    The collapse began with the severe economic downturn in October. Before that the economy and sales were very poor but it seemed possible to operate indefinitely.

    And given another year or so there was some chance to adjust. But they didn't get that year.

    Having said that, I concede that GM management has failed. For decades they repeatedly opted for short term rewards. In chess that is called the Fools Mate.

    That attitude is hardly unique to GM managers and directors. A sense of duty and responsibility is not what comes to mind when describing today's leaders whether they be in business or government or pulpits.

  3. Doug:

    Since Warren often mentions football here, did anyone notice the extremely heavy advertising that GM sponsored during this weekend's football playoff games? Every other commercial was for a GM truck, it seemed. Tell me that GM did not spend all (okay, "some") of their money on these advertisements. It reminds me of the drunk who wants to borrow money so he can go clean up, and then goes out and buys enough liquor to stock his liquor cabinet for another month instead.

  4. John Dewey:

    K: "The collapse began with the severe economic downturn in October. Before that the economy and sales were very poor but it seemed possible to operate indefinitely."


    Follow the link Warren provided. GM had a negative cash flow of $7.5 billion in 3Q2008 - that's July through September - before the "severe economic downturn in October".

    How would GM have been able to oeprate indefinitely if it was burning $2.5 billion cash each month?

    K: "A sense of duty and responsibility is not what comes to mind when describing today’s leaders"

    How many business leaders do you know, K? What do you know about the sense of duty and responsibility possessed by FedEx's Fred Smith? by Southwest Airlines' Gary Kelly? by Apple's Steve Jobs? by Berkshire Hathway's Warren Buffet? by Starbucks' Howard Schultz? by Proctor & Gamble's A. G. Lafley?

    I could list dozens of large company CEO's who have demonstrated over and over again a clear and unwavering sense of responsibility. You could, too, if you did a little research before you made statements denigrating our corporate leaders.

  5. jared:

    The plot also thickens with the Chrysler/Fiat situation...Chrysler got taxpayer money, Fiat just (sort of, non-bindingly) offered to buy a 35% stake in them a couple days ago, now the government is threatening to yank the money back if a Fiat deal goes through.

    While I'd appreciate getting our money back, I see this as the worst possible combination of moves by the government. If we assume Fiat would be a better steward of Chrysler's assets, or that Chrysler-as-part-of-Fiat has a far better shot at real profitability, it seems to me the government should promote conditions that attract suitors.

    If the feds were outright offering taxpayer funds to profitable (foreign) automakers as "cash back" on the purchase of a debt-ridden (domestic) company, at least that would be rewarding the worthy.

    But if the strategy is "establish a condition that attracts potential suitors, then threaten to retroactively penalize suitors if a deal actually happens"...what exactly is the goal state?

  6. K:

    John. Is your problem with "indefinitely"? It doesn't mean forever. Since GM is still operating today, several months after October, I think they have operated indefinitely.

    Will you cite evidence that before September it did not seem possible to operate indefinitely?

    And you conveniently chose to overlook this part of my comment about GM: "And given another year or so there was some chance to adjust. But they didn’t get that year."

    About the cash flow at GM: Do you contend that sales and economic conditions did not greatly worsen in October? Or do you argue the conditions worsened but that did not greatly shorten the time GM could operate? Two simple questions.

    As to our leaders in general: First I didn't single out business as you imply. IMO the fields of politics and academics have a worse record. And I didn't say every business leader was the same, so your dishonest attempt to put such words in my mouth is clear.

    No matter how many names you cite I stand by my first remarks.

  7. John Dewey:

    K: "GM did have plans"

    Warren was referring to a restructuring plan - a contingency restructuring plan to emerge from or to prevent bankruptcy. The words of GM president Fritz Henderson above confirms that Warren was correct.

    K: "Is your problem with “indefinitely”? It doesn’t mean forever"

    No, bright guy. It doesn't mean forever. The most common usage is:

    "not definite; without fixed or specified limit; unlimited"

    When most people use it as you did ("seemed possible to operate indefinitely") they are meaning "for a a long period".

    K: "Since GM is still operating today, several months after October, I think they have operated indefinitely."

    You are now trying to claim you implied a less common usage of the word. Fine. Please do not in the future expect to be understood if you use less common word usage without providing explanation.

    I think GM is only operating today because their creditors know they will soon receive a government bailout. Even without the severe economic downturn and the bailout, GM was going to either shrink significantly or else fail altogether, IMO.

  8. John Dewey:

    K: "I didn’t say every business leader was the same"

    No, but your sentence implies you believe most lack "a sense of duty and responsibility".

    K:"No matter how many names you cite I stand by my first remarks."

    You can stand by them all day long. Based on what you've written, I don't think you know very much about corporate leaders. My only desire is that other readers will realize your denigration of corporate leaders in general is not based on any facts, and will not take those remarks seriously.

  9. John IV:

    I own a chevy mini van now, but I certainly wouldnt buy another. Its plague ridden with electrical and mechanical problems, not to mention the absolute horror that customer service and maintenance has become, and has been since we bought it. That isnt going to be fixed with a restructuring plan. My DAD used to by chev's too, till he tried a toyota. He never went back either. GM and Chryslers problems are NOT going to be fixed by a bailout, or a restructuring plan or even bankruptcy. They have 3 generations of families that simply refuse to buy their vehicles now because of decades of choosing to expand the bottom line over customer satisfaction.

    That said, I kind of hope that GM blows it SO BADLY with this bailout that congress and the house thinks twice before giving more money away. I mean, is it too much to ask to see GM executives all walk away, splitting the 17 odd billion amoungst themselves and retiring to a nice, non extradition, carribean paradise? Just to rub congress' nose in it? I mean sure, its gonna hurt taxpayers, but maybe that would cause enough of a hemorrage in congress to maybe think about slapping a tournaquette on it?

    no, im not really kidding :(

  10. Scott Wiggins:

    Only bankruptcy will save what can be saved of GM...Not an original thought but something that needs to be said loud and often...Bush backed down on this one and I wish he had stood firm. Legacy costs are not affordable in this environment...Our domestics are building some pretty good vehicles nowadays but who feels comfortable buying right now? Not enough people. The vast majority of people are going to make do with the vehicle they have until they pay for it or pay down other debts. It is going to be a "annus horribilis" for car manufacturers at home and abroad. Only the strong will survive this one I'm afraid.