CIT's Last Hope May Be Government Rescue

In yet another twist to the story that will not end, Senator Chriss Dodd (D-CT) stated with regards to CIT Group Inc.(CIT) :

"I wouldn't rule out the possibility of a government intervention financially",

and

"Maybe there are some alternative ideas that would allow the company to survive in an altered state, but still allow it to provide the assistance and support they have to smaller business"

This statement comes on the heels of what appears to be an effort by the advisers to CIT's bondholders to push the company into Chapter 11 bankruptcy in August. This news was initially broken by Bloomberg(here), who purpotedly learned of the adviser's intentions through "people familiar with the matter".

We must remember that although Chris Dodd is the Chairman of the omniscient and omnipotent Senate Banking Committee, his voice does not necessarily represent that of the Administration's, or for that matter, the voice of fellow Democrats in Congress. If your recall, earlier this week Chris Dodd managed to get in the crossfire of the impotent Capitol Hill debate that centered around whether or not to buy more F-22 fighter jets this year. This was by the way, one of the more irrelevant and useless debates we have ever seen, as the entire escapade was about Obama trying to prove that he could save the country slightly more than a Billion dollars by curtailing a weapons program. For whatever reason, Dodd and a handful of others bucked up to Obama and positioned themselves as staunch defenders of the program. The most likely explanation being that the F-22's are scheduled to be manufactured in Dodd's district. This is beyond the point though, which is that the king's soldiers do not always fall in line with each other. Throw a little high-from-victory Republican opposition into CIT's bailout equation, and the outcome appears far from a given.

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Why GM's Financial Projections Are Invalid

GM Financial Projections

When General Motors submitted its proposed Restructuring Plan to the federal government in late February, one could hypothesize that, absent some sort of miraculous revelation being contained within the proposal, the resultant outcome would be a bankruptcy petition. In our opinion, the Restructuring Plan did in fact provoke a miraculous revelation on the Government's part: Even when the future viability of the Company depends on it, General Motors is unable to produce a valid set of financial projections showing that it could ever turn things around.

General Motor's restructuring plan is a full 117 pages long. The majority of the document is comprised of claims that the company will fulfill the following goals: manufacture more fuel efficient cars, reduce labor costs, kick unsecured bond-holders to the curb, and solicit additional aid from foreign governments. These are great ideas, however, we took 30 seconds or so and came up with the following problems:

1. GM doesn't know how to profitably design/manufacture/market/sell fuel efficient cars.
2. The UAW will not want to give management concessions.
3. A large portion of GM's bond holders are individual retail investors-they will pen op-ed's in the WSJ and inspire an outpouring of empathy.
4. Foreign governments are not happy with the US right now. There will be no free foreign lunch for the GM boys.

Having confirmed that the prose section of GM's proposed plan is basically worthless, let's assess the quantitative portion of the document. To begin with, we were a bit insulted to see cash flow projections as far as five years into the future. To illustrate our reasoning, please select any five year window of time during this decade, and consider the significant changes to the world and the economy that occurred during that time. 

Our primary grievance with GM's financial projections has to do with the methodology used to calculate the Enterprise Value of the Company, and the inherent deficiencies in the GM brand that render those calculations invalid. Specifically, we refer to the fact that in a calculation of Enterprise Value, a Peer Group is a necessity that allows the analyst to apply a set of standardized EBITDA multiples to the Company in question. The following companies were used as GM's Peer Group:

• Daimler AG
• Toyota
• Honda
• Nissan
• Hyundai
• Renault

The problem, as we see it, is that these companies do not belong in any "Peer Group" of which General Motors is also a member. None of the companies listed above have a horrible reputation for producing shoddy vehicles. In fact, surveys have shown that the more educated an individual is, the more likely he is to avoid the purchase of an American car. We don't understand why Evercore selected these companies for inclusion into GM's peer group, however, it may be because every member of GM's real Peer Group is either in Chapter 11, or teetering on the precipice of such.

Ultimately, the most painful insult that can be given to a Company is the determination by the Federal Government that you are bloated and unprofitable, and need to shed some of your outsized liabilities. Sounds similar to a cliche we heard once concerning a pot and a kettle.

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GM Bankruptcy Petition

The included document became available shortly after 8 A.M this morning, following the General Motors filing for Chapter 11 creditor protection.
GM Bankruptcy Filing

Publish at Scribd or explore others: Law & Government Business & Law bankruptcy gm

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Chrysler and Uncle Sam

Today we are informed that the Government has added "Creditor Negotiator" to its rapidly expanding area of expertise. Accounts of the events surrounding the impending Chrysler bankruptcy would have been rejected by us as farcical, as recently as eighteen months ago. However, as discouraging as it is to admit, we were not surprised to learn that the Government had attempted to restructure Chrysler's debt via a broad brushed offer to all lenders, whether secured or not, of 29 cents on the dollar. With the Auto Maker's two biggest lenders, JP Morgan and Citi, currently on the Government till, it is likely that Uncle Sam thought he could compel the acceptance of these draconian terms in BOA/Merrill like fashion. Unfortunately for the "Auto Task Force", a sizable chunk of Chrysler debt is also held by a consortium of hedge funds that decided, possibly on principle alone, to reject USA's offer. Aside from the bit of satisfaction that can be derived from such an openly defiant measure against the US Government, nothing positive whatsoever can come from Government intervention taken to this extreme.

As we have attempted, to the best of our ability, to espouse on these pages, the deepest and most permanent damage that has been inflicted upon the United States during the current Recession is not financial loss itself, but rather the invalidation of previously sacred Rules of the Game. In order to effectuate the proper functioning of a free market society, the Government must set and enforce specific and unmalleable parameters, specifically with regards to the capital structure. With Chrysler, the Government has entered the fray as an unsecured creditor, and proceeded to dictate to other, Secured Debt holders, the terms by which they might avoid a bankruptcy.

Apart from these theory-based objections to the Government's actions, we would propose that they have single handily managed to ensure that Chrysler's stay in Chapter 11 will be longer than previously necessary, and wrought with competing legal actions and claims-the only beneficiary of which will be the hordes of attorneys that will descend upon the proceedings. We see this as the most likely outcome.

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