Protecting Detroit from bankruptcy protection
Today's Financial News - Posted March 19, 2009
What will the nation’s auto parts suppliers do if General Motors (NYSE:GM) or Chrysler fail? According to today’s reports they will turn to Uncle Sam and his printing press.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The government is at it again. I realize that line has been leading many of my stories, but with Uncle Sam writing billion-dollar checks one after the other, it is impossible not to report on the action.
Today, shares of companies like Tenneco (NYSE:TEN), American Axle (NYSE:AXL) and Lear Corp. (NYSE:LEA) are soaring thanks to the news Washington is earmarking $5 billion in aid for the nation’s auto suppliers.
In a report released this morning, the Treasury announced it will create a program that allows the nation’s automakers to feed up to $5 billion in aid to their suppliers to keep them solvent as the nation’s car industry reels from the pain of a recession.
This is interesting, possibly groundbreaking news, that provides and insight into the government’s plans for Detroit. I believe that because of one facet of the plan. The government intends to guarantee any payments due to suppliers from major manufacturers, no matter what happens to the carmaker.
In other words, if General Motors (NYSE:GM) or Chrysler file for Chapter 11 bankruptcy in two weeks, companies like Tenneco will still get what is owed to them, thanks to Uncle Sam’s generosity.
Protection from bankruptcy protection
The details from this plan are sketchy at best, as it is not likely to go into full effect for at least a few more weeks. But its announcement is intriguing. It means the government is seriously contemplating and preparing for the idea of the Big Three becoming the Big Two (or the Gruesome Twosome).
Of course, it is up to the Big Three to sign on to the deal, which comes with stipulations and a “small” fee to join the program. If they do join, the money will flow through their books before ending up in the accounts of their suppliers.
The nation’s auto suppliers have been asking for aid to the tune of $25 billion. $5 billion may not be enough to keep many of the nation’s 5,000 cash-strapped manufacturers out of bankruptcy court, but it may be enough to open up new collateral and get credit flowing to the industry once again. Only time will tell.
While the markets appear bullish on this news, I recommend taking a cautious approach. The industry is extremely volatile and this may be positioning for news of larger problems down the road.
I have almost no doubts the government will force GM and Chrysler to restructure out of courts. When that happens, the details of today’s report will make much more sense.
If you have the stomach to speculate in the auto industry, tread lightly. It is dangerous, volatile territory.
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