Monday, May 17, 2010

It Isn't Always a Liquidity Problem

The AP reports:

The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009. Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.
Remember the good old days (waaaaayyyy back in the summer of '08) when this was just a "liquidity" problem? Lets go back to what GM was saying at the time (via an August 2008 Bloomberg article):
"Our plans, which require significant investments, are at risk because of limited access to capital,'' said Greg Martin, a spokesman for Detroit-based GM. He declined to comment on whether GM is seeking more than the original $25 billion. "This program will open capital that is necessary to make sure our transformational plans continue at full speed and give us the best chance to succeed.''
And what better way to look back at that "liquidity" problem than some recycled charts from EconomPic.

August 2008



The "liquidity" (i.e. "loans") provided as it was not officially called a bail out at the time:



And finally, when it was officially a solvency problem following the May '09 financial release (one month prior to the bankruptcy filing):



To summarize....
  • Leveraged entity
  • Didn't watch expenses (i.e. overpaid employees)
  • Performed very well during economic boom (see leveraged entity)
  • Got into "liquidity" trouble when growth stalled (see leveraged entity)
  • Was given "loans" for "liquidity" problem
  • Turns out it wasn't a liquidity problem, but a solvency problem
Where have I heard this before?