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.