The Car Makers' Excuses

The Big Three automakers' chief executives testified before Congress today, blaming the credit crisis for their downfall. 

But Richard Wagoner, CEO of General Motors (GM) did not use the credit crisis as an excuse for the company's poor profits when he wrote an editorial for the Wall Street Journal in December 2005. 

In his opinion piece, which came amidst record sales, he blamed not the credit crisis, but a kaleidoscope of other reasons, including "intense" foreign competition, soaring gas prices in the aftermath of Hurricane Katrina, and high benefit costs for the automakers' downfall.

And in his 2005 editorial Wagoner makes this stunning admission.

Wagoner confesses in his opinion piece that GM has "a weaker sales mix--essentially, we've sold fewer high-profit SUVs and more lower-profit cars." You can click on this link to read it here.  

There you have it. The automakers can't blame the credit crisis for their problems, their problems didn't just arise this year, despite what the CEOs will tell you.

Detroit pumped out way too many gas-hog pickup trucks and SUVs -- meaning, Escalades, Excursions, Suburbans -- and did little to retool their plants toward what consumers wanted. That's because Detroit earns much, much more money off of these cars versus smaller cars such as hybrids and fuel-efficient vehicles.

It's been estimated that US car makers can earn profit margins of $10,000 for SUVs, depending on the model, while they just break even on smaller cars unless the consumer buys options, due to the automakers' huge cost overhang.

Oil prices rocketing to $147 a barrel this summer took its toll, causing sales to plunge. Nearly 90 cents out of every dollar in gas consumers put in cars, particularly SUVS, goes towards moving the car, not the passengers, according to a recent analysis. When consumers started turning up their noses at the gas guzzlers, the automakers dumped them on rental fleets, slamming their resale values.

Notably, resale values on SUVs, too, plummeted and Chrysler, overly dependent on SUVS (as GM is on pickups), saw its leasing operations dry up, causing it to pull the plug on this business.

The carmakers' problems have been decades in the making, they've had problems even during strong economic times and when consumers were buying cars at record rates.

Just like Wall Street, there was zero risk management at the car companies, given their powerful friends in Congress. It's not news that only about 8% to 10% of the entire US fleet now on the country's roads turn over every year, as consumers tend to hold onto their cars for long periods of time. Never mind that inconvenient fact, the automakers pounded out gas guzzlers because they can make more money off of them.

But what the heck, sotto voce, the US taxpayer is a compliant capital cushion for any shoddily run business these days. Keep this in mind as Congress moves to give the automakers a blank check with no strings attached.

Wagoner does point out in his piece that foreign auto makers don't carry the abalone around their necks of health costs, because foreign governments "fund a much greater portion of employee and retiree health-care costs." Duly noted.

So where do we go from here.

For the quarter ended September, GM had a negative net worth (assets minus liabilities) of $59.9 bn. It had assets of $110 bn, but those assets backstop a whopping $169.4 bn in debt owed to suppliers, for payroll, to banks, bondholders, to retirees, you name it.

That's a huge $59 bn swing just to right size GM's damaged balance sheet. GM spilled $9.7 bn in negative operating cash flow for the first nine months. It only has $15.9 bn in cash and equivalents right now. It is bleeding at least $1 bn in cash per month.

GM is effectively insolvent. It needs more than its slug of the potential $50 bn bailout.

Can taxpayers trust the car makers to make a profit on any bailout money the government gives them, which could amount to a total of $50 bn? Should taxpayers be asked to bail out a privately owned automaker, Chysler, run by the private equity fund Cerberus, headed by former Bush Treasury secretary John Snow?

Should Congress put at least this contingency on any bailout money--that in exchange for getting tax funds, the top executives who drove these companies into a ditch should step down?