U.S. Automakers: Their Moment Of Reckoning

The Big Three auto makers are meeting with the House leadership today, and they are going to be presenting scary numbers. GM in particular is likely burning through their cash horde of $25 b at a much faster rate than the $1 billion a month projecting a short while ago.

This is the moment of reckoning for these companies. I know no one on the Street who thinks GM and Chrysler, or their suppliers, will survive in the form and structure that they currently exist in.

In addition to having GMAC become a bank holding company (hence getting a direct infusion into the TARP), GMis also likely to be seeking the ability to sell auto loan assets directly into the TARP, which would help support the financing mechanism that has essentially collapsed.

Beyond this assistance, there are some very hard questions that need to be addressed. The big one is: does government "bailouts" of any of the Big Three auto makers really solve the problem?

What the Big Three have is:

1) cost structures that do not make sense, and

2) a collapse in volume: vehicle sales are at 25-year lows.

Most traders and analysts believe there is little if any equity value in GM.

What is likely to emerge here, with or without government assistance, is a much smaller GM. Instead of 25 percent of the market, perhaps 15 percent. That would still cost jobs (they have been shedding jobs for 8 years, by the way) but it might be their best shot at survival.

What about Chrysler? Remember 1979? Lee Iacocca? This would be the second bailout.

While a merger between Chrysler and GM may sound like a good idea politically, what would it accomplish:

1) there would still be enormous liquidity problems;

2) they would still need to cut product lines and cut jobs;

3) the government would likely throw huge amounts of money into the restructuring costs.

How many jobs would be saved by an additional $30 billion or larger investment by the government into a "bailout merger"? How many jobs would the government save to force a merger? Chrysler has probably 90 percent of its sales in North America; the vast majority of that is trucks that no one is buying in the quantities they are manufacturing.

There is no alternative to working down excess capacity.

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