Quote:
Originally Posted by DealerEx
In the early summer of 2007, both GM and Chrysler were sitting on large cash reserves and expressed confidence they had plenty of money to ride out any downturn. Two HUGE differences occurred rapidly that changed the situation drastically.
In past market downturns, if they needed to shore up cash reserves, they could simply sell bonds to raise cash. Also, in the past all they had to worry about in a downturn was to keep funding R & D, and manufacturing costs and just covering operating losses out of cash reserves. By September 2007, when the mortgage industry was starting to implode, they were losing money, but at a "normal " level for the slowdown. Within 45 days, 3 of the top 4 mortgage lenders had collapsed and the panic began to set in throughout the financial industry. All the big banks stopped making mortgage loans after Countrywide, the largest mortgage lender, went under. Then, several large banks failed in California when they had runs on them, and ALL he big banks started hoarding cash and not making loans, which further impacted the car market severely. The operating losses began to double and triple overnight. The final nail in the coffin came in January of 2008 when 3 of the largest investment banks in the world went under or had to be merged with others funded by the government. There was no possibility of selling a bond issue at that point. I saw GM bonds selling on the secondary market at discounts offering a 68% yield on the money prior to the governments "managed bankruptcy" and no buyers for them. At that point the financial market was dead in the water and NOBODY would loan big money. All the automakers had their revolving lines of credit shut off that are normally used to fund the day to day operations...covering payrolls, utilities etc...they just paid interest on a monthly basis when they needed to access it. At that point they were having to fund all of the payroll etc...out of cash reserves at the same time they were already losing a billion a month on sales. As I recall, GM burned through 7.3 billion between October -January...almost 2 Billion a month...an amount they had thought would last 18-24 months under an "ordinary" downturn.
What worries me now, is that just 5 years later, we are heading right back into the same situation except we have almost no weapons left in the Fed's financial arsenal to fight it off again. The Fed dropped "money bombs" into every area of the economy to shore up the market, save the financial and auto industry by slashing rates and printing money. The European and Asian markets are already at negative interest on their 90 day bonds now and the US is hanging on at .6% on 90 day T-bills and a 5 year rate of 1.3% currently. That doesn't leave a lot of room to try and jump in and kickstart the market the next time it crashes and yet here we are, only 5 years removed from the end of the last crash, and the mortgage industry has been offering the lowest rates ever seen and the stock market has regained all of its losses from 08-09 and is poised for another bubble to burst.
The people and industry most responsible for all of it, (finance, insurance and politicians) went right on doing their thing...reaping huge rewards...and laughing all the way to the bank.  |
I'm getting caught up and just had a chance to read your post - thanks for the great information/perspective.
I remember that time period vividly and often wonder if we'll repeat the same mistakes all over again.
I remember Chrysler and GM dealers who stepped up to take inventory when they really didn't need it or want it just to support their OEM or relent to the never ending pressure. Some of those dealers then lost their store when the vehicles couldn't be sold (for the reasons you cited above) and then faced curtailments from GMAC and Chrysler Financial.
In my mind the "root cause" of the Great Recession was decision by the bond rating agencies to allow banks and other lending institutions to bundle questionable real estate loans with high quality real estate loans - the theory was the bonds could still be AAA rated because the mix of questionable loans was carefully monitored and there was insurance in place in the event the questionable loans failed at a higher rate than projected.
When the real estate market started to implode the failure rate of the questionable loans spiked and exceeded the limitations of the insurance policies that were in place. Suddenly a AAA rating meant nothing since there was no easy way to determine how "toxic" the portfolio of loans was.
All of this happened while Alan Greenspan looked on and Congress seemed more interested in the drama associated with steroids in professional baseball.