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GM: Too Big to Fail?


Auto giant finds itself at crossroads.

Will General Motors (GM) back a truck up to Uncle Sam's discount window and load up on cash?

The answer may depend on the interpretation of "What's good for General Motors is good for the country."

In 1953, Charles E. Wilson, then head of GM and President-elect Eisenhower's nominee for secretary of defense, was misquoted as saying the company had a market value of about $20 billion. The misquote lives on: It underscores what was once an all-powerful company - one viewed by some as lacking an ounce of humility.

The market has chastened GM. The company's value has sunk below $3 billion; it may need a large injection of cold cash to stay alive. Banks and venerable Wall Street investment firms have already vanished, raising a basic question: is GM too big to fail?

There will be no immediate turnaround in the auto industry. US auto sales are down 13% from a year ago. J.D. Power and Associates cut its sales projections: It now expects new car sales in the US to total 13.6 million this year and 13.2 million in 2009. (A total of 16.1 million new vehicles were sold in 2007.)

In July, GM announced plans to cut costs by $10 billion and to raise $5 billion through asset sales and borrowing through 2009. At the end of June, the company had $21 billion in cash and $5 billion available in credit. But GM has been spending about $1 billion a month; analysts say the company needs an estimated $11 to $14 billion to keep the lights on.

The basic question may be: How soon can US automakers get federal money, and will it be enough to save the industry?

GM, Ford (F) and Chrysler are eligible to share $25 billion in low-cost federal loans to retool assembly lines for more fuel-efficient vehicles. The deal was approved in September, but it may take months to draft rules for passing out the money - even as Detroit lobbies Congress to make more money available more quickly.

Barron's says GM could seek a direct loan from the Federal Reserve. Both the Fed and the Treasury Department declined to comment on the report. But it's not difficult to imagine GM -- and the entire auto industry -- wailing in unison: "What about me?"

Tapping Uncle Sam as the "lender of last resort" would allow GM to borrow at 1.75% along with banks that have turned to the Fed's discount window for as much as $420 billion per day during the credit crunch. With the $25 billion package, GM could borrow at market rates of about 4.5%.
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No positions in stocks mentioned.
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