Business and Capital Market Analysis !!!

By: Money Morning Tuesday, November 04, 2008 6:24 PM

The U.S. Treasury Department has rejected General Motors Corp.’s (GM) request of $10 billion in assistance for its potential merger with Chrysler LLC after the Bush Administration decided it didn’t want to broaden its $700 billion financial rescue program to include industrial companies - or to play a role in a GM-Chrysler merger that could cost the U.S. economy tens of thousands of jobs, The New York Times reported yesterday (Monday).

Instead of direct financing assistance, it looks like the Bush Administration will speed up a $25 billion loan program that was approved by Congress in September and that’s aimed at helping automakers develop more-fuel-efficient vehicles. The program is administered by the U.S. Department of Energy.

The so-called "Big Three" automakers - GM, Chrysler, and Ford Motor Co. (F) - are in need of government assistance after being pushed to the brink of bankruptcy: Foreign competition and a slumping economy have combined to push vehicle sales down to their lowest level in 15 years.

GM has been in talks with Cerberus Capital Management LP about buying Chrysler since
September. But potential investors in the deal have been hesitant to back the merger without the safety net of federal assistance, or a government guarantee of some sort. GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left the No. 1 U.S. automaker with few options other than appealing to the government.

In fact, General Motors Chairman G. Richard "Rick" Wagoner Jr. reportedly went right to Treasury Secretary Henry M. "Hank" Paulson Jr. and lobbied for the government to provide emergency financial aid to the Big Three via the $700 billion bailout plan.

Badly in Need of a Bailout

GM desperately needs some sort of outside funding, as the company lost $18.8 billion in the first six months of the year, and is hemorrhaging about $1 billion in cash each month. That has raised the prospect of bankruptcy for the company.

GM had $21 billion as of June, but a merger with Chrysler would give the company access to another $12 billion in cash.

Cerberus bought Chrysler from former parent Daimler AG (DAI) last year for an estimated $7.4 billion. But the new owner hasn’t proven anymore adept at arresting Chrysler’s financial and market-share declines. Chrysler, perennially the smallest of the Big Three, has seen its sales fall by 25% — almost double the 12.8% overall decline in U.S. auto sales. Chrysler has been hurt because its fleet of pickup trucks, minivans, sport utility vehicles and high-performance cars include a number of gas guzzlers - popular for their performance when fuel prices are low, but an albatross to market when oil prices were at record highs.

Cerberus had buyout discussions with the Japanese automaker Nissan Motor Co. Ltd. (ADR: NSANY) - and Nissan’s French partner, Renault SA - about recruiting Chrysler into its international auto alliance. But Chrysler has apparently decided to focus exclusively on the potential for a deal with General Motors.

Just how deep the Big Three’s problems actually are will become very clear this week: Sales figures for October will be released this week as part of the third-quarter earnings reports that Ford and GM are scheduled to release.

Industry sales fell 26.6%, but many analysts believe that October could be even worse. Edmunds.com, a well-known auto-industry researcher, is predicting a sales decline of roughly 30%, The Times reported.

Should any of Detroit’s Big Three go bankrupt the consequences for the U.S. economy would be both deep and long lasting. Together, the companies employ more than 200,000 Americans, and support millions more U.S. workers indirectly through suppliers and dealerships.

The unemployment rate hit 6.1% in September and continues to rise. Some analysts anticipate the jobless rate could climb as high as 8.5% to 10% next year. With a jobless rate that reached 8.7% in September, the state of Michigan has the highest unemployment rate in the country.

Alternative Energy is No Longer an Alternative

If bailout money isn’t an option, the first step for automakers is to get the Energy Department to expedite the release of the $25 billion in low-interest loans for GM, Chrysler and the Ford Motor Co.

The loan program is viewed as key to the U.S.

"The auto companies are clearly running out of cash, and badly in need of more liquidity," David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told The Times. "Releasing the $25 billion in loans is a necessary first step."

"While all sectors of the economy are experiencing difficult times, the automotive industry is particularly challenged," the letter said. "As a result, the financial well-being of other major industries and millions of American citizens are at risk."


Source:
IStockAnalyst : Government Won’t Extend $700 Billion Bailout Plan To U.S. "Big Three"