- May 22, 2007
Interesting article I read this morning.
Neither General Motors (GM, news, msgs) nor Chrysler succeeded in convincing the government that it can survive as a viable company.
After a month of analyzing the two automakers, the Obama administration's auto task force said they will have to drastically overhaul their recovery plans in order to receive more government aid.
The task force also said "utilizing the bankruptcy code in a quick and surgical way" could be the best road for the companies.
Rick Wagoner will step down from his position as chairman and chief executive officer of GM and will be replaced by Chief Operating Officer Fritz Henderson.
Shares of GM slumped 90 cents, or 24.9%, to $2.72 on the news.
Stocks were plunging this morning. At 10:50 a.m. ET, the Dow Jones Industrial Average was down 274 points, or 3.5%, to 7,502. The Nasdaq Composite Index had lost 59 points, or 3.8%, to 1,486, and the Standard & Poor's 500 Index had shed 29 points, or 3.6%, to 787.
Crude oil fell $2.14 to $50.24 a barrel this morning.
GM is burning more cash than it earns, the task force wrote in its report, failing a key test of viability. Bankruptcy for GM would wipe out all ordinary shareholders in the company and would leave bondholders to receive pennies on the dollar, in relation to the face value of bonds
The task force concluded that, if Chrysler's deal with Italian automaker Fiat (FIATY, news, msgs) does not go through within 30 days, Chrysler should not receive any more aid.
President Barack Obama will discuss the automakers this morning at 11 a.m. ET.
Ford Motor (F, news, msgs) has said it does not need any government funds.
GM CEO steps down
GM has received $13.4 billion in loans from the federal government to help keep the company afloat. The automaker said last month it needs up to $16.6 billion in additional aid to survive.
Wagoner had been at GM for 32 years, running the company since 2000. He earned $14.9 million in total compensation last year. While at the helm, he cut the company's U.S. work force to about 92,000 from 177,000, closed unproductive plants and got rid of the Oldsmobile brand. But GM lost $82 billion in the past four years.
"If GM is to be allowed to survive, it needs someone with a totally fresh mind, someone untainted by decades of failed management and strategy," Howard Wheeldon, senior strategist at BGC Partners in London, told MarketWatch.
Another expert agreed.
"The bailout loans aren't hugely popular, and that's creating an issue for Obama," Jeremy Anwyl, CEO of Edmunds.com, told Bloomberg News. "One way to make the loans more palatable is to be able to say the person responsible is no longer with GM."
Obama is mildly optimistic
President Barack Obama said that the U.S. economy is showing "glimmers of stabilization."
The president told the Financial Times that the improvements were coming from the housing market.
"Our housing plan has led to the lowest interest rates, mortgage rates in a very long time, and you are starting to see a huge number of refinancings in the banking sector. In certain select markets, like the market for auto loans or the market for student loans, Secretary Tim Geithner's efforts to provide a market for asset-backed securities has helped," Obama told the newspaper.
Obama will be in London for the Group of 20 meeting that begins on Thursday.
Meanwhile, the Obama administration will take a more accommodating posture toward Europe regarding how much global emphasis should be placed on economic stimulus at the meeting, The Washington Post reported Sunday. The administration is no longer insisting on targets for how much each of the G20 countries should spend to revive their economies, the paper wrote.
More economic reports on tap
Investors have more economic reports to digest this week.
The Conference Board will release its report on consumer confidence on Tuesday, and economists expect a slight improvement. The index will likely increase to a reading of 27 in March, after hitting an all-time low of 25 in February.
The S&P/Case-Shiller Home Price Index will also come out Tuesday. Economists expect the 20-city index to decline slightly to a reading of 18.5% in February.
Economists are looking for the National Association of Realtors' Pending Home Sales Index to have fallen 2% in February from a decline of 7.7% in January.
Economy likely shed more jobs in March
While there have been some better-than-expected economic reports over the past few weeks, Friday's jobs report from the Labor Department is not likely to be anything to cheer about.
Economists expect a loss of 688,000 jobs in March, with the unemployment rate ticking up to 8.5% after hitting 8.1% in February. An 8.5% rate would be the highest level since 1983 but still not as high as the 10.8% rate seen in 1982.
In February, the economy shed 651,000 jobs; it was the 14th straight month of job declines. In fact, job losses since December 2007, when the economy officially entered into a recession, total an estimated 4.4 million.
One observer believes the jobs picture might be improving, ever so slightly.
"The general tone of the labor market seems a bit less horrendous than in the December-February period, as layoff announcements have not been quite as plentiful and anecdotal reports also have been suggestive of a possible bottoming," wrote Stephen Stanley, chief economist for RBS Greenwich Capital, in a note to clients.
But Stanley was hardly optimistic.
"It will take a much-sharper slowdown in the pace of contraction of employment to fundamentally alter consumer attitudes and the outlook for the economy," he wrote.