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Detroit's Bankruptcy Event Horizon

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An "event horizon" is a term scientists use for that point in space where matter is on the verge of falling into a black hole from which it can no longer escape. Cross over that line, and not even light can escape the immense gravitational pull.

That's where General Motors (NYSE: GM  ) and Chrysler sit today, swirling on the event horizon of bankruptcy, once a concept GM's CEO Rick Waggoner wouldn't even deign to talk about. The vortex of Chapter 11 is pulling the automakers deeper within its hold, and it's only a matter of time before they reach the tipping point and succumb.

While GM has framed the argument as akin to Armageddon -- not only for the company, but for the government as well, since it estimates it will eventually need as much as $100 billion in financing if does take that action -- it has become all but inevitable. And necessary.

The outcome of GM's China Syndrome is first predicated on a massive loss of sales following its bankruptcy filing. Sales are already in freefall, with January's numbers off 49% from the year-ago figures, and the industry itself is tumbling: Ford (NYSE: F  ) car sales are down 40%, while Japanese automakers Nissan (Nasdaq: NSANY  ) , Toyota (NYSE: TM  ) , and Honda (NYSE: HMC  ) all saw declines of 30% or more. Still, GM anticipates that as much as 80% of its sales will evaporate. Undoubtedly a bankruptcy filing would steer some customers away to companies not seeking such protection, but considering the rosy numbers GM was estimating were just around the corner in the progress report it filed with Congress the other day, its dire predictions may be just a bit of scaremongering.

The other moving parts in GM's doomsday scenario include propping up parts suppliers and dealers to help them weather the cataclysm as well. Of course, they're also pursuing their own bailout dreams, so the tab might not be as substantial as GM makes out.

The Obama administration is rounding up potential lenders for an event Moody's estimates has a 70% chance of happening. According to The Wall Street Journal, at the top of the list are Citibank (NYSE: C  ) and JPMorgan Chase (NYSE: JPM  ) , as well as some 70 other banks, since even the administration's proposed $40 billion in debtor-in-possession (DIP) financing tab would need many partners. Yet there don't seem to be too many willing lenders.

Banks are already saddled with toxic assets and awaiting the Treasury Department's "stress test" to assess their solvency, and adding billions more in potential losses won't shore up their shaky condition. Even with the government guaranteeing to act as a backstop on losses, potential DIP lenders remain unconvinced, as the government is also trying to cut to the front of the line ahead of private creditors. Also, current GM bondholders may be reluctant to accept the $0.30 on the dollar they've been offered, which could hold the process up further.

And if you aren't a fan of government intervention, perhaps the only thing worse than a bankruptcy filing is the new automotive task force the Obama team put together. It will have a big say in which road GM and Chrysler ultimately take, perhaps even going so far as dictating what models are built and how much auto workers make. Might it also demand the two merge?

Chrysler's hedge-fund owner, Cerberus Capital, certainly wouldn't mind. It wants to get out from under Chrysler in the worst way and is floating the idea again. Since the task force will also be headed by a hedge-fund operator, it may just find a receptive voice. Saddling GM with Chrysler's detritus, however, doesn't exactly thrill the former, which broke off similar talks last November, saying it wanted to go it alone.

In the end, bankruptcy might not be the worst event for General Motors or Chrysler. Considering some of the alternatives on the horizon, we may yet see Detroit jump into the abyss willingly.

Nissan Motor Co. is a Motley Fool Global Gains recommendation. JPMorgan Chase is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2009, at 5:13 PM, norenore wrote:

    bs. u r a paid dumper, someone wants to accumulate shares. That's why they pay you to talk down this stock. Long and will accumulate more, if it drops .....

    Ha ha ha, cheaper than a big mac deal.

  • Report this Comment On February 24, 2009, at 7:26 PM, TMFMarlowe wrote:

    norenore, those are extremely serious (and ridiculous) allegations. But we'll leave that aside for the moment. What's the long case for GM right now, as you see it? Why should anyone buy GM common stock at this moment except as an extremely speculative whim?

    Please note that I'm the guy who has been arguing a long case for F around here. I know all three of these companies pretty well. Your long-GM argument is going to have to be awfully good to convince me.

    John Rosevear

  • Report this Comment On February 24, 2009, at 10:15 PM, whollyfool wrote:

    I think the problem here is the way the information is cast. The way this article is presented encourages the downward spiral in a way that's almost gleeful. No one wants Detroit to fail. It would be catastrophic for a large part of the country. It's not really a topic for levity.

  • Report this Comment On February 25, 2009, at 1:50 AM, Rasbold wrote:

    Today is the day to get rid of GM. They had a nice run, as was expected given the news. Their time has come. The lawyers will succeed in taking them into protection. They will be the only ones who really make out off of GM. I cannot see a long case for stocks, only a short case for the Chapter 11!

    They are over.

    Hold on to your Ford.

    and, "May Your Dow Never Jones!"

  • Report this Comment On February 25, 2009, at 10:55 AM, pondee619 wrote:

    "Please note that I'm the guy who has been arguing a long case for F around here. I know all three of these companies pretty well"

    How , and why,do you feel about the Ford Preferreds F-S? Trading with an a dividend at about 40%. Too good to be true? Is the only downside to the preferreds bankruptcy?


  • Report this Comment On February 26, 2009, at 6:41 AM, TMFMarlowe wrote:

    pondee619, I'm planning to do an article talking about the F preferreds sometime early next week. I've got several thoughts on 'em; I'll collect them there. Short answer: Very, very tempting.

    John Rosevear

  • Report this Comment On February 26, 2009, at 8:13 AM, pondee619 wrote:


    Looking forward to it.

  • Report this Comment On March 06, 2009, at 3:37 PM, pondee619 wrote:

    "On February 26, 2009, at 6:41 AM, TMFMarlowe wrote:

    pondee619, I'm planning to do an article talking about the F preferreds sometime early next week. I've got several thoughts on 'em; I'll collect them there. Short answer: Very, very tempting.

    John Rosevear"


    Did I miss your piece. Please supply the link.


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