September 22, 2008
A $25 Billion Loan Will Not Be Enough For The Detroit Three
Analysis of:
US Lawmakers Say Auto Loan Package Likely To Become Law (online.wsj.com)
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Implications: With all of the past weeks bailouts, buyouts, federal government purchases and bankruptcies', it was not surprising to hear that Congress is expected to approve a $25 billion loan package for the Detroit Three. However, there are a lot of "ifs" that will have to happen before Detroit is out of the woods.
Analysis: The Wall Street financial-industry crisis could push back any recovery in U.S. auto sales beyond 2010, unless a number of "ifs" come to pass.
Analysts now feel that auto sales could improve as soon as 2010, but not sooner:
If: The credit crisis that drove Lehman Brothers into bankruptcy doesn't get much worse.
If: Auto loans for consumers continue to be widely available, despite reports of tighter approval standards and an increase in turndowns.
If: Auto lenders can borrow enough money to make retail loans and leases--for those who still offer leases.
If: Automakers can continue to raise enough cash to keep from going bankrupt.
Considering the financial crisis that drove Lehman Brothers into bankruptcy, none of these "ifs" is a given. The problem is that nobody knows where all the risks are.
Analysts now feel that light-vehicle sales this year should be about 14.2 million. That would be the lowest in 15 years. For 2009 it looks like an essentially flat forecast of 14.3 million. The first substantial improvement would be an estimated 14.9 million sales in 2010.
How bad is the outlook for the auto business? Its so bad that the dismal first half of 2008 is beginning to look good by comparison.
We're at the point right now that Detroit is wondering if they can get results something like the first half of this year, in the second half of 2009.
Even at 14 million there's more downside risk that upside if what we're seeing recently continues.
A fundamental trouble with the financial crisis is the widespread feeling that all of the bad news hasn't come out yet.
I am reminded of something a banker once told me: "Don't lend money to people who need it.
Analysis: The Wall Street financial-industry crisis could push back any recovery in U.S. auto sales beyond 2010, unless a number of "ifs" come to pass.
Analysts now feel that auto sales could improve as soon as 2010, but not sooner:
If: The credit crisis that drove Lehman Brothers into bankruptcy doesn't get much worse.
If: Auto loans for consumers continue to be widely available, despite reports of tighter approval standards and an increase in turndowns.
If: Auto lenders can borrow enough money to make retail loans and leases--for those who still offer leases.
If: Automakers can continue to raise enough cash to keep from going bankrupt.
Considering the financial crisis that drove Lehman Brothers into bankruptcy, none of these "ifs" is a given. The problem is that nobody knows where all the risks are.
Analysts now feel that light-vehicle sales this year should be about 14.2 million. That would be the lowest in 15 years. For 2009 it looks like an essentially flat forecast of 14.3 million. The first substantial improvement would be an estimated 14.9 million sales in 2010.
How bad is the outlook for the auto business? Its so bad that the dismal first half of 2008 is beginning to look good by comparison.
We're at the point right now that Detroit is wondering if they can get results something like the first half of this year, in the second half of 2009.
Even at 14 million there's more downside risk that upside if what we're seeing recently continues.
A fundamental trouble with the financial crisis is the widespread feeling that all of the bad news hasn't come out yet.
I am reminded of something a banker once told me: "Don't lend money to people who need it.
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