Does GM really need to be bailed out before February?

Although it had seemed rather obvious last week that a GM bailout as part of a next phase of fiscal stimulus was a "slam dunk" for this week, it quickly became clear that recrimination and acrimony were much more likely and that any serious new round of fiscal stimulus for the economy would have to wait for Barack Obama to take office. The big question is whether GM in fact needs that cash before February. Some say yes, but I strongly suspect that there is enough room wiggle room for GM to squeak by until February or March or even April before they are in fact at the edge of the cliff.

I think the real, original point from the GM comments on November 7, 2008 was that they would run out of cash by June at their current burn rate. Somehow that got twisted around in the media to suggest that GM would go under before January 2009. What GM actually said was:

Cash, marketable securities, and readily-available assets of the Voluntary Employees' Beneficiary Association (VEBA) trust totaled $16.2 billion on September 30, 2008, down from $21.0 billion on June 30, 2008.

The change in liquidity reflects negative adjusted operating cash flow of $6.9 billion in the third quarter 2008, driven by the industry-wide slowdown in vehicle demand and compounding credit crisis, especially in North America and Europe. During the quarter, GM drew the remaining $3.5 billion of its secured revolving credit facility and made $1.2 billion in payments to Delphi as required by agreements between the companies as part of Delphi's bankruptcy proceedings.

GM expects adjusted operating cash flow in the fourth quarter to be much improved versus the third quarter, and more consistent with the first half of the year. Improvements in fourth quarter cash flow are largely driven by anticipated improvements in working capital in North America relating to sales allowances, and lower fourth quarter finished vehicle inventory in Europe.

Improving its liquidity position remains a top priority for the company. In response to deteriorating market conditions, GM announced today that in addition to the $15 billion in liquidity initiatives it outlined in July 2008, it has identified $5 billion of incremental liquidity actions. Cumulatively, GM has announced actions aimed at improving liquidity by $20 billion through 2009. To date, $10 billion in internal operating actions have either already been completed or are on track for full execution by the end of 2009.

Even if GM implements the planned operating actions that are substantially within its control, GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business. Looking into the first two quarters of 2009, even with its planned actions, the company's estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing. The success of GM's plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the United States and Western Europe.

There were some extenuating circumstances in September and even October that no longer exist, including Hurricane Ike and the freezing of the commercial paper market, so that GM may in fact actually do okay over the next few months. Granted, they may have to sacrifice on longer-term priorities in favor of short-term liquidity, but the eventual bailout will re-focus the company on longer-term issues anyway.

In summary, although GM and its supporters and its critics are all on the same page crying that GM is about to go under, but they all have vested interests, so the reality is that GM can probably shuffle its priorities a bit and easily make it through the next 3-5 months. What happens then and what they may or may not need in terms of a bailout of course depends on the fate of the rest of the economy and any new round of general fiscal stimulus, not to mention the results from ongoing actions of the Federal Reserve.

So, at this point, I say that a GM bailout can and should wait.

-- Jack Krupansky