- A late-February forecast of debt blowout in the American
auto sector, clearly announced by Lyndon LaRouche when all "accredited"
economists were proclaiming an accelerating U.S. economic recovery, was
confirmed in the first week of May. It became evident then that General
Motors, if not also Ford Motor Co., and scores of their supplier companies,
are mudsliding faster and faster towards bankruptcy and dismemberment of
the most important machine-tool and related industrial capabilities remaining
in the American economy.
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- LaRouche, on Feb. 27, had pointed to large volumes of
short-term debt payments piling up on GM and Ford's doorsteps this year,
while they made the problem rapidly worse by large money-losing "incentives,"
attempting to keep autos moving to buyers whose falling real incomes meant
that they could no longer afford them. On March 3, LaRouche asked publicly:
"When will GM and GMAC go? Who will refinance this bubble, this debt
swindle?"
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- A series of shocks on May 2-5-GM's and Ford's fourth
straight month of plunging sales; GM's loss of access to unsecured credit;
corporate vulture Kirk Kerkorian's circling of the company; and then the
unprecedented dumping of Ford and GM's debt (combined, $453 billion) into
junk-bond status on May 5-called LaRouche's question. He had warned that
the auto giants' desperately incentivized credit and price practices had
created a bubble of unsecured and unpayable debt, sitting alongside the
U.S. housing debt bubble, ready to burst.
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- LaRouche had meanwhile spelled out, in an April 2 memo
to Congress and in a mass-circulation pamphlet, "Recreate Our Economy,"
the potential to save these capabilities, by government intervention to
retool for production of vital new economic infrastructure such as high-speed
rail corridors (see "LaRouche: To Save Auto, Build Rail," EIR,
May 6). He had insisted in these policy papers that it is simply not possible,
nor desirable, to attempt to force the sales of more cars and trucks, while
the other major means of transportation have shrivelled away or, like the
airlines, are collapsing financially.
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- Now the rapidly onrushing problem of saving the auto
sector from physical collapse is on the desks of Congressmen, although
few have yet acknowledged that publicly. In response to the escalating
events of May 4-5, LaRouche urged that Congress has to "move fast,"
learn the importance of national economic infrastructure, and intervene
to give the auto sector a new mission. His proposal is the only effective
policy on the table.
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- Nowhere To Borrow
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- The May 5 downgrade of GM and Ford debt by Standard and
Poor's rating agency jolted the entire corporate bond market, and will
destabilize Third World nations' debt interest rates in particular. The
companies' combined nearly half-trillion dollars of "junk" immediately
constituted about 10% of the global junk-bond market. As soon as one of
the other rating agencies follows suit, many pension and other funds, banks,
and so on, will be required by law or regulation to get rid of GM and Ford
bonds.
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- Adding to the shock was that S&P put GM's down two
more notches on May 5 (Ford, one notch), deep into junk status, after a
downgrade only one month ago. The agency expects GM to burn up cash this
year to the tune of at least $5 billion of its $18-19 billion reserve.
Said chief analyst Scott Sprinzen: "We don't expect funding problems
[running out of operating funds] in coming weeks and months, but no one
knows-they're in uncharted waters." And S&P said it is considering
still a further downgrade of the unsecured debt of General Motors Acceptance
Corp. (GMAC, its huge financial arm), which constitutes nearly $150 billion
of the total.
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- After assessing that GM and Ford will not be able to
reverse the steep loss of sales of gas-guzzling SUVs and pick-up trucks-on
which they have solely based their profits for nearly a decade-S&P
blamed the lunatic incentivizing LaRouche had warned of: "Even with
extensive efforts to renew its products, GM continues to lose market share
in North America, despite an aggressive pricing strategy-and we believe
the company's reliance on discounts has itself been detrimental."
The agency pointed to losses in Europe as well, and even in China-GM management's
foolish idea of a "Global Motors" strategy which abandons most
production in the United States, is unworkable as well as extremely damaging
to the U.S. economy.
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- And notably, S&P echoed the judgment of LaRouche
in March, and of competent auto analysts based in the U.S. Midwest and
published in the Detroit News in late April, that the Wall Street strategy
of drastic shrinkage of GM is also unworkable. Those analysts warned that
GM management's austerity strategy-it has already closed or idled five
plants and laid off 15,500 production workers since January-will shrink
the productive company and its sales, but will not shrink its debt, bringing
it into bankruptcy faster. GM's "net debt" position-short-term
debt due, vs. cash on hand-has deteriorated by $19 billion since the end
of 2003. S&P's release added, "It is questionable whether GM's
relative competitive standing has improved as a result of extensive cost-cutting
in its North American operations. The company has downsized operations
through curtailing excess production capacity, but the boost to its efficiency
has been undermined by market-share losses. The company has significantly
reduced the size of its workforce, but total personnel costs have risen."
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- General Motors was already frozen out of the unsecured
corporate credit market, when its sales fell 7.7% in April, the fourth
straight month of steep losses relative to one year earlier. Ford's sales
were down 5.1% from a year ago (8% in their pick-ups and SUVs). On May
3, Bloomberg News reported that GM/GMAC hasn't sold bonds to institutional
investors in the United States since November 2004. The "spread"
on its 10-year bonds-what it would have to pay if it did issue bonds now-was
nearly 7% above the rate on U.S. Treasury bonds, before the May 5 downgrade
to junk; that was already worse than many junk-rated companies have to
pay. However, GMAC has $50-$60 billion in debt maturing this year. How
can it pay or roll that debt over, when shut out from the credit market?
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- According to GM spokesman Jerry Dubrowski, on April 30,
GMAC will use its $18.5 billion in cash to pay maturing debt-it also claims
to be able to loot a $6.5 billion "reserve" out of its employees'
pension funds to pay down debt-and sell more secured bonds, pledging GMAC's
streams of auto-lease and auto-loan payments to the lenders. Otherwise,
junk-bond status will mean paying a prohibitive 14-15% total interest rate
on a 10-year bond. To make things worse, GM and Ford's combined underfunding
of their pension plans, by more than $100 billion, is nearly one-quarter
of the entire deficit of all corporate pension plans in the entire U.S.
economy. The Federal Pension Benefit Guaranty Corporation, fearing that
it may have to absorb GM's large pension obligations, may decide that it
has to move preemptively, in order to have a claim on the same auto-loan
and auto-lease income streams being pledged by GMAC to banks and bond-market
lenders.
- In all, a prospect for bankruptcy and dismemberment of
the company.
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- Wall Street Vultures Circle
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- U.S. stock markets were sent "booming" on May
4 by a strike on GM, by corporate vulture Kirk Kerkorian, who made a sudden
move to raise his holdings to 9% of all GM stock. Showing the ghoulish
character of this Wall Street move, the big auto supplier Arvin Meritor's
stock also boomed that day, as it announced that it was closing 11 plants
and laying off 1,830 workers. After the severe auto sales slump of the
Bush "41" term, corporate raider Kerkorian had tried to seize
control of Chrysler Corporation in 1994-95. What he wants now is to bite
off and get control of the residential mortgage unit of GMAC, the source
of half of GMAC's profit, although it represents less than 20% of its business.
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- The Wall Street Journal, in several articles on May 5,
made clear that Kerkorian's strike was aimed at enforcing Wall Street's
strategy upon GM. More broadly, the fact that a financial vulture firm
like Kerkorian's is circling General Motors, shows that GM is being taken
down faster than anyone had thought.
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- Wall Street's demands have been clearly proclaimed at
least since March. On March 17, Stephen Girsky, chief auto analyst at Morgan
Stanley investment bank, stated: "The company's market share doesn't
support its size. They have too many plants, too many workers, too many
models, too many dealers, and their employee benefits are too high."
Merrill Lynch, and Citigroup's investment bank, Bear Stearns, have published
repeated "analyses" insisting that GM must get rid of 25,000-30,000
of its remaining 117,000 production workers (down from 530,000 a generation
ago!) and close up to 20 plants. GM management has already closed or idled
five plants, and five others are down to only one shift.
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- Second, the Wall Street strategy demands drastic cuts
in the auto companies' healthcare and retirement insurance-making employees
pay 25-30% of the costs, excluding many drugs from coverage, and cutting
higher-cost HMOs. And third, "the Street" insists that GM must
sell off the residential mortgage unit of GMAC, its biggest source of profit,
and Kerkorian's apparent prey. That would leave the remainder of the company
certain to go bankrupt that much quicker.
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- LaRouche's "Super-TVA policy" for rebuilding
the economy's crucial infrastructure, taking the auto sector's capabilities
into that mission, needs fast action by Congress, against this fascist
"solving" of financial crisis by of ripping out production and
gouging labor. The U.S. does not need more SUVs, but the technology-intensive
machine-tooling capacity and skilled labor of the auto sector would be
critical in building such technologies as a magnetically levitated train
system.
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