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Old 04-03-2019, 09:10 PM   #11
DealerEx
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Join Date: May 2009
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Quote:
Originally Posted by XDCX View Post
I think to fully understand what happened to the 789 it's necessary to revisit the "perfect storm" that brought Chrysler and GM to bankruptcy.

In my assessment there were essentially three storms that collided and brought the auto industry to a sales level that wasn't sustainable and resulted in a massive hemorrhage of cash.

The first storm was the collapse of the U.S. Housing Market. After being fueled by years of easy lending "No-Doc" mortgages the market turned quickly as foreclosures started to drive down home values. In some markets the value of a recently sold home dropped by 50% or more and even people who could afford their mortgage were walking away from their negative equity. The impact to the auto industry was a massive decrease in personal wealth and an increased pool of customers who damaged their credit to the point they were no longer able to buy a new vehicle.

The second storm was a rapid spike in fuel prices - gasoline at $4.00+ was common. The impact to the auto industry was less disposable income for their pool of customers and a drastic decrease in demand for trucks and SUVs.

The third storm was a rapid decrease in available liquidity for banks and auto finance companies to write new auto loans. The debt markets were in crisis because it had become clear that bond ratings were worthless because many of those "No-Doc" mortgages were actually bundled with other mortgages and sold as AAA debt. The impact to the auto industry was a shortage of funds to write new loans and higher interest rates.
Your analysis is accurate but the third storm you bring up brought about a 4th storm for the auto makers that resulted in the bailout. In January of 2009 three of the four largest investment banks in the world went under. The largest mortage lender in the country failed. Several large banks in California failed when they had runs on them when the extent of their exposure to the real estate market was revealed. All the large banks were terrified that they could face a run also. They pulled in their horns and went into survival mode and canceled all their revolving lines of credit for the automakers. In September 2008, GM and Chrysler were sitting on the largest cash reserves they had ever had, and weren't worried about the downturn initially. They calculated they had enough cash to ride out a cyclical downturn for 2 to 3 years based on past recessions. They never dreamed that their operating credit lines would be pulled. Instead of burning cash at a rate of 1-1.5 billion a month, they suddenly had to come up cash to pay their normal operating expenses on top of R & D and capital projects. That had never happened before. ALL the operating expenses they normally just paid interest on, now had to be paid out of cash reserves and Chrysler was burning thru an extra 3-5 billion in cash per month on top of the normal expenses and GM was swallowing 6-7 billion a month. By the end of November they realized they could run out of money in 6 months. They were in uncharted waters at that point.
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