Friday, November 21, 2008
What Should Happen & What Is Likely To Happen
What Should Happen - Allow the company to go into Chapter 11 or what we call bankruptcy. Then the company will have real negotiation leverage and the unions will really have to listen and make concessions. The government can then step in with some funding but call the shots. Force the merger of General Motors and Chrysler. All outstanding car warranties will be guaranteed by the government via a separate vehicle. Following huge concessions made by the union, the selling down and dismantling of parts, the reworking of cost savings with the 2 companies... maybe, just maybe they can survive.
What Is Likely To Happen - Democrats will probably approve a US$25bn bailout when they return on December 8, but a viable plan is expected from the automakers. Expect Chrysler to quicken talks with GM to hash a merger to get the US$25bn bailout plan approved. Short term feel good, but without bankruptcy, the unions and their demand swill stay the same. Its the liabilities and claims by employees on the company's balance sheet which will always bring the company down. The lifeline will give then a few months grace but the end result is bankruptcy. The trouble is that with the US$25bn bailout, the unions will not lower their rights and demands... you need to put the company into bankruptcy to leverage your negotiations. Sink or swim.
What Should Happen - JP Morgan or Morgan Stanley should step up to buy Citigroup, with the Treasury guaranteeing maybe US$30-50bn in losses. That will calm markets. Its not likely Citi will be able to remain independent for long on its own. The amount of toxic assets is US$80bn, and we haven't even looked at the fallout on funds being tied to Lehman Brothers. Citigroup has another shoe to drop, credit card debts, which will implode as well. A merger would see a bid of at least US$20 per share. It will further reduce counterparty risks in dealing with Citigroup.
What Is Likely To Happen - The company will be taken over by FDIC to prevent a bank run, especially from global depositers. Their liquidity ratios are seriously questionable at this point. The result would be a total break-up of the group. JP Morgan may still end up with the commercial banking side in a break up sale. As Citigroup is trading at barely 1/4 book value, a break up sale should see at least a US$10 value to its shares.
Other Potential "Bad Developments" In Coming Weeks & Days
a) GMAC running into deep trouble.
b) GE Capital running into deep trouble.
c) The merger between Bank of America and Merrill Lynch running into problems owing to ML's excessive exposure to toxic assets.
d) Nobody steps in to help Citigroup, and this time global effects will be felt as Citi's exposure is more pervasive globally.
e) Markets switch to look at credit cards implosion, dragging Citigroup and Amex into deeper trouble.
Still, we are seeing possibly the "peak in selling" here, expect 7,000-7,300 to be attract strong buyers for the longer term and should hold up well there. Asian markets should find good buying support now as there is almost zilch holdings by foreign funds - nothing left to sell now literally. Its not hunky-dory, but those with at least a 6 montn view may nibble.
p/s photos: Li Bing Bing
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