GM's Saab files for bankruptcy protection in Sweden; is GM next?
Feb 20th 2009 9:00AM
Updated Dec 4th 2009 10:49AM
Sweden has been in the news lately. And so has General Motors (GM). But you may not have known that the two intersect. That's because Swedish car-maker Saab is a GM subsidiary -- one that just filed for bankruptcy.
GM's viability is also seriously in question, thanks to its unrealistic financial projections. Perhaps the best solution is some kind of prepackaged bankruptcy that would let GM continue operating while it renegotiates contracts with workers, suppliers, dealers, and bondholders.
Sweden is also in the news because some are citing its 1990s temporary nationalization of the banking industry as a model for what should happen in the U.S. But those folks are barking up the wrong tree. How so? We have a dual problem here: We need to get lending going fast and we need to wind down failed financial institutions in an orderly way.
For the first, we should create new banks and for the second, we should use my colleague's plan to let the FDIC buy up the 15% of bad mortgages buried inside of mortgage-backed securities that are weighing down our zombie banks. Nationalizing banks will just wipe out common shareholders and give control to the government that knows less about banking than the bankers who run them -- even though many of those CEOs should be replaced.
Back to Sweden's (and GM's) bankrupt Saab, which lost $340.1 million in 2008 -- a performance it expects to repeat in 2009. Its problems include falling demand, aging products, excess capacity and high costs. With its proposed reorganization it plans to concentrate on production and seek funding from public and private sources to keep operating.
This sounds like what GM should do as well. As I posted, its projections for market demand are 17% too high and it forecasts growth in future years. Why does GM think its market will grow while its bankrupt subsidiary Saab forecasts shrinking demand? Simple, if GM forecasts what it really thought would happen, then it would not get our $30 billion.
In the case of GM, as goes Sweden's Saab, so should go the rest of the company. As for the U.S. banking system, we need to go our own way. Would you buy a Saab now that its maker is bankrupt?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.