This morning we already knew that General Motors Corporation (NYSE: GM) has 60 days and Chrysler has 60 days until D-Day.  The Obama administration pledged that GM brands will be on the road and continue with some help, but the president called the situation at Chrysler more challenging.  While the viability plans and continuity plans do not assure that bankruptcy will not be used, the US Government is going to guarantee auto warranties and is now going to offer some tax incentives for buying new cars.  There are some companies which may win, but the question is what happens to the equity holders of any of these companies in or around any aspect of these beneficiary companies.

At Chrysler, Predident Obama has said that the government will lend up to $6 billion if Fiat and Chrysler can work out an amicable deal to save Chrysler.  If no suitable deal can be reached then the likely outcome is a swift bankruptcy which will take out the old debt.  President Obama said that if taxpayer money gets used that it will have to be repaid before Fiat can take money out of the company.  As a reminder, a bankruptcy at any of the Big Three could trigger waves of bankruptcies throughout the auto sector.  Even if companies are fine on an operational basis, many companies will lose their funding if and when their key clients are deemed financially insolvent.

But here is where this gets more interesting.  President Obama said that servicing and warranties will be safe, and actually safer than now, because as of today the US government will stand behind auto warranties.

As far as an another incentive, you may be able to deduct sales and excise taxes from income for all new car purchases between now and the end of 2009.

Following a program which has been used in Europe, another incentive would come via turning in old cars that are less fuel efficient for more fuel efficient models of new cars would be made.  This will be worked out with the IRS and would also retroact to today.

Ford Motor Co. (NYSE: F) was down as low as $2.40, or down almost 15%, at one point today.  Shares are now only down 2% at $2.77 today.  General Motors stock is still down 21% at $2.85 today.

BorgWarner Inc. (NYSE: BWA) has too many auto part and systems to easily count for automakers.  But it does have reduced emissions operations for fuel economy and its stock is still down about 7% at $20.26.

Tenneco Inc. (NYSE: TEN) is very far from being safe.  But the company is a supplier of automotive emission control and ride control products.  Its shares are down 16% at $1.55 today, and that is down from over $30.00 last year.

As a reminder, being an equity investor here has no assured protection regardless of what the administration notes about brands and incentives and guarantees.  That is true even on the “clean emissions parts” side of the business.  And by now you know what happens in just about every bankruptcy scenario… everyone takes a hit.  And common shareholders get to fall on their swords.

JON C. OGG
March 30, 2009

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