Detroit in Trouble: GM Begs for a Bailout

One intense political campaign may be over, but another one has already begun. "It is time for action," the candidate said forcefully to a nationwide television audience. "And the time is now." But that was not Obama or McCain, or Palin, or even Biden. That was General Motors chairman Rick Wagoner on CNBC on Friday exhorting Congress to give his company, and the rest of Detroit, billions—or have the nation's economy face "significant risks." The auto exec was ostensibly on the financial cable channel to discuss GM's abysmal $2.5 billion loss in the third quarter. But like a savvy political pro, he used the free air time to make his case to the American people and rebut the naysayers who contend that GM, like Lehman Brothers, deserves to collapse from its own ineptitude. "I read the pundits and I suspect these are the guys who said let Lehman Brothers go and you see the impact that had," Wagoner said. "This is a pivotal issue for the U.S."

These are the worst of times in Detroit. But on Friday, as GM and Ford combined to pile up $7.2 billion in operating losses, they tried to turn their misfortune to their advantage. All those bad numbers—thousands more job losses, possible plant closings, looming insolvency—add up to a strong argument for federal intervention as far as the executives are concerned. Consider it bloodletting as a bargaining chip. By putting its worst foot forward, Detroit hopes to maximize the money it gets from the new Democratic regime in Washington. "By telling people how bad it is," says veteran auto analyst David Healy, "they hope it will bring the needed loans to keep their companies going."

Sadly, though, they're not making this stuff up. Detroit really is in the worst shape in the post-war era thanks to its own bad bets on SUVs and the economic meltdown. The hottest new model in Detroit these days might as well be called the Cash Burn (no relation to the Pontiac Firebird or the Chevy Blazer). Ford burned through an astonishing $7.7 billion over the last three months—or $2.5 billion up in smoke per month. GM set fire to $6.9 billion. With profits nowhere in sight, that means both companies will run out of money by the middle of next year, if not sooner. That fact was underscored when GM CFO Ray Young tried to explain in a conference call with analysts Friday how GM will pay its bills come January. "Our payables are spread out over the month," he said, sounding like over-extended consumer buying time to cover his obligations.

Revealing the depths of Detroit's cash crisis had the desired effect. Suddenly, Wall Street became an advocate for a taxpayer bailout—something the free marketeers might have once seen as socialism. "Without government intervention, GM is headed for bankruptcy," bond analyst Shelly Lombard of Gimme Credit bond service wrote after the automaker issued its financial results.

But the most important reaction of the day came from the top. "The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil," President-elect Barack Obama said in his first news conference Friday, after meeting with his team of economic advisers that included Michigan Gov. Jennifer Granholm. "I would like to see the [Bush] administration do everything it can to accelerate the retooling that Congress has already enacted."

That's fine, but as the Detroit Three CEOs made clear in their meeting with House Speaker Nancy Pelosi Thursday, they want more than the $25 billion Congress just approved to retool factories to make fuel-efficient cars. That money will come only after the automakers have spent billions transforming their SUV factories into plants producing green cars. And that, they contend, will take too long. Detroit needs cold-hard cash now to make it through the winter. Estimates of how much it will take to keep the automakers alive range from $10 billion to $50 billion. They promise to pay back those loans, just as Chrysler did nearly three decades ago. And they're willing to give taxpayers some ownership in their companies and to put the brakes on executive bonuses. "We need to find a way to get through this," Wagoner told analysts Friday. "That is our focus."

That singular focus on quick cash has dashed GM's talks with Chrysler, which Wagoner says are now on hold. Analysts had lambasted the proposed Motown marriage as two wrongs that didn't make a right. Studies predicted the job losses resulting from such a union could have reached 35,000—a politically untenable number that could have scuttled GM's hopes for a bailout. Backing away from the Chrysler deal, shows GM understands the politics of persuasion. "The domestic automakers have to basically conduct a political campaign," says Peter De Lorenzo, a former Motown marketing exec who now blogs on the industry. "They had been getting outflanked, but now they're making their case much better. I just hope it's not too late."

The clock is ticking. GM and Ford execs took pains to point out that they're running out of ways to cut costs and jobs after already giving the boot to a quarter-million people this decade. "We are cutting to the bone," GM president Fritz Henderson told analysts. Without a quick-cash infusion, they argue, the end is just around the corner.

But in a clever turn that would make a politician proud, Wagoner contends this bailout is not about Detroit, it's about the rest of us. After all, a new study by the Center for Automotive Research in Ann Arbor found that nearly 3 million Americans would lose their jobs within a year of Detroit's collapse. "The impact would be devastating for the U.S. economy," Wagoner said as he stumped on CNBC. "The problems in the auto sector are a direct consequence of the credit crisis, which has now moved to Main Street. We certainly hope we can count on a similar kind of support from the government as we saw them give the financial sector." A presidential candidate couldn't have said it better himself.