Published February 19, 2009

Automakers give Wall St US$18b to think about

Price tag for government bailout of GM and Chrysler now hits US$39b

By ANDREW MARKS
NEW YORK CORRESPONDENT

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A MASSIVE sell-off on Wall Street on Tuesday made it clear that fear is once again back in the driving seat in the stock market.

Running on empty: Struggling carmaker GM faces a rough ride ahead

Investors virtually ignored the signing of a historic US$787 billion stimulus package by President Barack Obama, worrying that it and the other multi-billion dollar efforts being contemplated to heal the financial system will not be enough to keep the already debilitated global economy from imploding.

'It is a little incredible to have to think that after all the money, financial guarantees and other measures made by the government here and governments throughout the world since this crisis erupted, and we're right back at the precipice, as if none of it has or will make a difference,' said Hugh Johnson, chief investment strategist at Johnson Illington Advisors.

Now, the stock market has something else to worry about.

On Tuesday after the stock market closed, two of the Big 3 American car makers, GM and Chrysler, asked for another US$18 billion in federal money in order to survive the next two years.

General Motors vows to cut 47,000 jobs around the world, close several more manufacturing plants and halve the number of brands.

The price tag for bailing out GM and Chrysler has now rocketed to US$39 billion, with the two companies saying that they would need the additional money to remain solvent.

'The Treasury agreed to advance us US$13.4 billion to cover the first-quarter needs, and then asked us to re-look at the whole thing, so, we're doing exactly what we said,' said GM CEO Rick Wagoner in a conference call with reporters. 'We said in December we would need US$18 billion to cover a downside scenario, and we are in such a scenario.' GM alone has vowed to cut 47,000 jobs around the world, close several more manufacturing plants and halve the number of brands.

The car makers's cash crisis will require fast action by the administration's new Cabinet-level Presidential Task Force on Autos, which is overseeing the reorganisation of GM and Chrysler.

The deteriorating finances of the two companies presents the Obama administration with two options, neither of them appealing. It can provide the money in the hopes that the companies will stabilise. But there are no guarantees that the Treasury Department won't be throwing good money after bad, as the car makers's viability plan could easily fail in such a precarious economic environment.

But if the federal government balks at their requests, that would mean that the two companies likely would have no choice but to file for bankruptcy, since they are losing hundreds of millions of dollars each month, Mr Wagoner warned.

In the New York stock market, the early trade yesterday seemed to indicate that investors were willing to creep back, albeit cautiously, after Tuesday's sell-off despite the latest, multi-billion dollar bailout request from the car makers.

Blue chips rose a modest ten points in the first minutes of trading following the opening bell. By 12.30am (Singapore time), the Dow was up 30.75 points at 7,583.35.

Mr Johnson said that he thought it likely that stocks would build on those gains through the morning in the lead-up to Mr Obama's official unveiling of a US$75 billion mortgage relief plan, scheduled for shortly after noon yesterday. 'But after that, who knows whether we can hold onto those gains for the rest of the day?'

The day before, panic-induced trading had sent the Dow spiralling down 297 points, or 3.8 per cent to 7,552.60, taking it within a whisker away from the 5-1/2 year low that it sunk to last Nov 20 as investors raced to traditional safe havens, buying up Treasuries, the dollar and gold.