GMAC Could Tank Chrysler Deal

While healthcare liabilities continued to get a lot of attention in General Motors' massive new filing with the Securities Exchange Commission (SEC), the new 10K paperwork also offers a glimpse into the pressures confronting the auto giant even as its business shows hints of turning around.

Reading through the 10K, it becomes apparent that GM's management has little choice but to remain extremely cautious about any bid for the Chrysler Group. Fritz Henderson, GM chief financial officer, declined to comment last week about a bid for Chrysler, though a new story in BusinessWeek suggests GM's management would like to engineer a deal.

The obstacles to a Chrysler deal are formidable and may have increased in recent weeks as the housing market, and the market for housing-backed securities, have wobbled, wiping out mortgage companies and leaving their major backers such as GMAC holding the bag.

In addition, GM admits in the 10K that its current level of automotive indebtedness is an enormous burden. And the final cost of the settlement or sale ofDelphi still has not been fully accounted for, according to the 10K report.

Nor has the spin-off of GMAC resulted in a clean break. GM expects to write a check for $1 billion to GMAC's new owners to cover a shortfall in the value of transferred assets. In addition, GMAC also is obligated to cover other costs if asset values decline.

Henderson said GM believes the company has adequate reserves to cover any additional expenses. But only a few months ago, few observers believed the mortgage-backed securities were risky, even though they were resting on subprime loans to individuals with marginal credit.

GMAC's strategy in real estate now seems little different from the disastrous "nothing-down" policies deployed by Mitsubishi and Ford earlier in the decade to boost faltering car sales. Those strategies backfired at Mitsubishi and Ford, and apparently are on the verge of backfiring again.

Part of the subtext of the 10K filing is that GM's exposure to the real-estate crisis is far larger than any of its competitors, and the threat hasn't been mitigated to any great extent. Indeed, the position of the federal government is they don't really see the point of getting involved.

Rising interest rates, high debt, and financial obligations, however, aren't the only element in what is a very difficult environment for General Motors right now.

GM deliberately played up the threat of work stoppage by the United Auto Workers and the threat got a lot of attention in the press accounts of the filing. However, Harley Shaiken, a labor expert from University of California-Berkley, has said that he doubts the union would strike this year. 

"If there is a strike it will only last a couple of days," Shaiken said during a recent appearance in Detroit.

Far graver could be the potential fallout of higher fuel prices, which the company's 10K noted is a genuine risk. GM acknowledged the auto giant depends on the continuing success of full-size sport-utility vehicles and pickup trucks for revenue. The big SUVs and pickups do well when gasoline is hovering around $2.50 per gallon, as they did during February, when GM set a truck sales record and when the Chevrolet Silverado outsold the Ford F-150 for the first time in decades. Experience from last year indicates that sales of big trucks and SUVs becomes more problematic once gasoline prices move past $3 toward $3.25 per gallon. 

Merging with Chrysler would only amplify that problem. The truck-dependent Chrysler Group would face an even sharper threat from higher fuel prices. 

GM also admitted in the 10K that its huge investment in high-tech projects such as fuel cells and electric vehicles is a high-risk activity that may not yield much in the way of concrete results.

Lastly, GM and other automakers are being outflanked by fuel-economy pressures in Washington . There is a very good chance some sort of tougher fuel-economy standards will be approved by the current Congress. Buying Chrysler could intensify the risk for a combined GM-Chrysler, because there would be less money to meet the rules as the companies attempted to integrate.