Disaster on Wall Street Spells Trouble for GM, Ford

September 16, 2008
In what the New York Times called Wall Street's "Worst Loss Since '01," the collapse of firm Lehman Bros. and the sale of Merrill Lynch resulted in the Dow Jones industrial average dropping 4.4 percent yesterday, a total decline of 504.48 points. This is the largest decline since 9/17/01, the day the markets re-opened after the 9/11 attacks and the Dow fell 684.81 points. Detroit News' commentator Daniel Howes said this stomach-turning fall "drew unsettling, if arguably overwrought, comparisons to the onset of the Great Depression."

This spells more gloom and doom for U.S. automakers, who desperately need low-interest federal loans to the tune of $25 billion total to inject capital into their efforts to revamp, retool, and pull a 180-degree turn in the way they've been designing and building automobiles. With their stock recently at untradable numbers, the giants could only borrow at interest rates of around 15 percent, an exorbitant amount of money when the discussion is about so many billions of dollars.

GM and Ford are hoping to play on election-year politics, and you can bet their top men (CEOs Wagoner and Mulally, respectively) will be in Washington later this week arguing vociferously on their companies' behalf, so they can switch their fleets over to fuel-savers like the new 2011 Chevrolet Volt. But paying for the loans will cost the Treasury up to $7.5 billion as insurance against default, and Wagoner and Mulally have some tough convincing to do to get that kind of money in the face of the historic Wall Street crisis.

Credit giant AIG's similar struggle to raise capital compounds the automakers' troubles, as lenders such as AIG are forced to downgrade credit and reduce loans if they can't obtain money to lend. And with loans harder to secure and interest rates creeping higher, an already intimidated consumer won't be visiting any auto lots without the help of even larger incentives, cutting deeper into automakers' pockets.

At least crude oil has dipped below $100/barrel, a small silver lining for all concerned. But some analysts see this as an ominous harbinger of a global recession and just another sign of struggles yet to come.--Colin Mathews

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