The U.S. Senate failed to pass legislation necessary for Ford, General Motors and Chrysler to survive without filing bankruptcy. On the news, Asian and European markets tumbled, with the DOW expected to open lower.
Where the DOW will go during the day is anyone's guess, but barring a dramatic announcment of inclusion in TARP funds, it is unlikely that the market will recover during the day. This may be the fuse to set off a considerable drop in the markets we've been expecting for several months.
Unless an alternative proposal is put forth and accepted today or Monday, it is likely GM and Chrysler will likely be forced to file bankruptcy by Friday next week.
Meanwhile, Nissan, Toyota and Honda stocks dropped by double-digit percentages and all foreign automakers suffered serious losses on the markets.
Though it is very true that the management of all three companies have been spectacularly poor over the past decade and a half, it is important to note that these three companies provide the bulk of the U.S. industrial/manufacturing base. Without them, our trade deficits will increase exponentially. We believe their survival is a critical component to the American economy.
We remain critical of management in all three companies, and strongly urge the senior management teams to tender their resignations today, allowing the company boards to select new leadership.
Further, we strongly - in fact - very strongly - recommend that the Federal Reserve Board step in and provide a government guarantee to private lenders who may come forth for the three companies, with the FRB organizing and managing the loans. Whether the money comes in from stakeholders or banks, is unimportant, but getting the loans together soon.
GM has recently hired bankruptcy counsel to prepare the company for that possibility, now looking more like a probability.
All three companies have the option to appeal to the FRB for an emergency loan on the basis that failure will have serious ramifications on the economy as a whole.
The risk of this country losing more than 2.4 Million jobs is too high and would hit this economy in such a way that would prolong economic recovery by at least one, possibly two decades. For each position terminated, you can expect an additional 2.2 that will be lost in secondary markets. In plain terms, if Joe the Welder loses his job, most likely so will Sally the Waitress at the Diner and Fred, the mechanic at the gas station.
Michigan and Ohio will be devastated, but so too will be those southern states where other automakers are based. Many foreign manufacturers may close their plants out of fear that moving forward, the American public will not be able to afford to purchase cars. To put a finite picture on it, we may become like Cuba, driving cars that are fifty years old, routinely. Oddly, all those old cars in Cuba - made by Ford, GM and Chrysler - cars that have stood the test of time.
The economic impact of failure of these companies will be felt in every segment of the economy, and every part of the nation. The number of business bankrupties that will result from their closure will be in the tens of thousands, with millions of personal bankruptcies and additional foreclosures.
This is not a pretty picture.
