GM's Crippling Burn Rate

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GM's 49% stake in GMAC Financial Services (BusinessWeek.com, 11/5/08) (Cerberus owns the rest) added an additional pretax loss of $1.25 billion for the quarter.

The grim financial results—which were matched by a $3.3 billion loss from rival (F)—show just why Wagoner, Ford CEO Alan Mulally, and Chrysler CEO Robert Nardelli were in Washington on Nov. 6 talking to Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi (BusinessWeek.com, 11/7/08) and looking for government aid.

Massive Job Loss

Sources briefed on the meeting said that Detroit's three CEOs made the case that depressed auto sales and the credit crunch were pushing each company to the brink. They asked for $25 billion in bridge loans beyond the $25 billion credit line already approved by the Energy Dept. that is earmarked to retool factories that make more fuel-efficient cars. Since that money has specific uses—and since it isn't yet available—the U.S. carmakers want another assistance package that will see them through the tough times. And they asked that the help be delivered fast. The CEOs made the case that there would be massive job loss if one of them goes into bankruptcy and that the current loan package from the Energy Dept. simply won't be enough.

At the same meeting, United Auto Workers President Ron Gettelfinger asked for financing to make sure that a health-care trust set up for union retirees has enough cash to get started. Last year the UAW and Big Three automakers agreed to a deal that sets up a $75 billion Voluntary Employee Benefits Assn. (VEBA) trust that the union would take over to pay medical benefits to retirees and workers. The companies have to put in cash, but in their current condition they may not be fully able to seed the fund when it is scheduled to go into effect in 2010.

Reid and Pelosi were open to helping, but they didn't offer a specific aid package. Detroit lobbyists have been pushing for President-elect Barack Obama—who on Friday met with his economic advisers—to provide a loan package or some kind of assistance plan like the one the Bush Administration has for the nation's financial institutions. They even want Obama to urge the Bush Administration to do it before the new President takes office in January. If the Administration doesn't agree to it, Detroit will have to wait for Congress to take action in the lame duck session that starts on Nov. 17. "What would be helpful," says one Detroit lobbyist, "is having that signal sent before Obama comes into office."

Cheap Used Cars

So far, Treasury Secretary Hank Paulsen has rebuffed Detroit's requests. Executives at GM and Ford, who requested anonymity, say the Administration doesn't want to get on the slippery slope of helping one industry only to see many more companies line up for help.

Looking ahead, there are only more problems looming for Detroit. Mannheim Consulting, the analytical arm of used-car auction house Mannheim Auctions, said used-car prices took their steepest decline in 14 years last month. J.P. Morgan analyst Himanshu Patel said in a research note that lower used-car values could force more writedowns for the carmakers. If used-car values drop, auto makers can lose money when they take cars off lease.

GM's Henderson also has a dire forecast for auto sales. He said on a call with media and analysts that GM forecasts sales of 11.7 million vehicles next year and just 12.7 million in 2010. That's down from a pace of 13.8 million so far this year and 16.2 million last year. Said Henderson: "We don't understand the timing of the recovery."

That means GM, Chrysler, and Ford will almost certainly need government help to stay out of bankruptcy. And President-elect Obama will have to move to help them.

Welch is BusinessWeek's Detroit bureau chief.