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Who's going to fix my Pontiac?

  The Answer Desk, by John W. Schoen.

With Chrysler now in bankruptcy court fighting for its life and GM slashing operations as it runs low on cash, owners and potential buyers of GM the car makers vehicles are understandable nervous about whether their warranties are still good. For now, at least, they're covered.

Now that GM is dumping Pontiac will anyone take care of the cars still under warranty?
— J. M. Miami, Fla.

With Chrysler now in bankruptcy court and GM running out of cash, owners of those model cars are covered in the short term. On Friday, the judge overseeing Chrysler's bankruptcy filing approved the company's request to continue funding its warranty programs for new and existing cars and trucks. Without those warranties, Chrysler says, it would make buying one of their cars an even tougher sell for dealers.

GM, meanwhile, has decided that after an 83-year run, Pontiac will come to the end of the road by the end of next year. General Motors had hoped to keep Pontiac going as a “niche brand.” But the collapse of car sales and the years of over-reliance on gas-guzzling SUVs and light trucks have forced big cutbacks to keep the company from running out of gas completely.

The brand enjoyed its heyday in the 1960s, when cheap gas prices and advances in engine design spawned an era of high-performance “muscle cars” that included the Grand Prix, Firebird and GTO. In the 1970s, Pontiac kept the brand’s success rolling with the Grand Am and Trans Am models.

But the brand entered a steady decline in the '80s and '90s, and GM was never able to get it back on track. Last year, Pontiac's market share slid to 2.1 percent — down from from 3.1 percent in 2002, according to industry tracking firm

Pontiac isn’t the only brand that will be left by the side of the road. GM says it is going to focus its limited capital on just four core brands: Chevrolet, Cadillac, Buick and GMC. That means Hummer, Saturn and Saab will also be sold off or shut down. (The company has not announced final plans for those operations.)

According to the company’s Web site, Pontiac warranties are still good and the cars will continue to be serviced by GM dealers. Since 85 percent of Pontiacs are currently sold through combined Buick-Pontiac-GMC dealers, most people won’t have to find a new place to get service. GM says there are about 1,600 of these combined dealerships in the United States and that Pontiac parts will continue to be available “for the foreseeable future.”  Even if GM dealers eventually discontinue stocking parts for older Pontiac models, aftermarket parts makers will likely fill the void.

For other questions about the care of your Pontiac, you can give GM a call at 1-800-762-2737. (Try 1-800-263-3777 in Canada or 01 800 466 08 08 in Mexico.)

I am continually puzzled by this notion of certain financial institutions being "too big to fail."  Who or what entity made that arbitrary decision? Is there the possibility these firms will be broken up?  As an example, Fannie Mae and Freddie Mac could easily be broken up along the lines of the Federal Reserve districts. 
— Tim V., Grandview, Wash.

Of course no financial institution is too big to fail. Some of those now on government life-support have already failed. If or when they emerge again as going concerns they will be much smaller and pose much less risk of doing further damage to the global financial system and the economy. The ongoing shrinking of the banking industry may provide the best solution in the short term.

While there are measures in place to cope with the failure of a bank insured by the Federal Deposit Insurance Corp., the same is not true for hedge funds, investment banks, insurance companies and other financial institutions that making a living taking on risk. As regulators sift through the wreckage of the financial meltdown, that’s one big problem they’re hoping to correct.

The real question is whether these institutions became too big to succeed. For over a decade, the financial services industry promoted the idea that American banks and investment firms needed to bulk up to compete on a global stage. Alas, it turns out that size can be as much of a liability as an asset.

As banks gobbled up smaller competitors, the ones that thrived were those that figured out how to combine operations efficiently and manage and control risk across the new banking empire. The ones that continued to operate as a collection of silos found it all but impossible to keep track of how much risk was accumulating in any one corner of the operation.

All it took was too much risk in just one silo — like bad mortgage lending or credit default swaps — to spring a leak threatened to sink the entire ship. When the global credit system began imploding last September, it turned out these financial leviathans were not particularly seaworthy in a bad storm.

So why save them? The failure of any large financial institution comes with collateral damage, from lost jobs to reduced lending and the money hole left when there are too many debts and not enough assets. A lot depends on how they fail. When a bank insured by the FDIC runs aground, depositors are protected, losses minimized and healthy pieces often sold off to new buyers. That’s a much better outcome than a sudden collapse.

Some people argue banks should be allowed to sink — if for no other reason than providing a “moral hazard” that will discourage other bankers from making bad bets and taking on too much risk. But the failure of Lehman Bros. demonstrated that these institutions have become so interconnected — having swapped trillions of dollars worth of loan guarantees — that the wreck of one major player in the modern financial system can quickly swamp otherwise seaworthy vessels.

It’s kind of like the power grid: If one part fails, and that failure spreads, pretty soon the lights go out everywhere. Since you can’t have a healthy economy without a healthy lending industry, the question becomes whether the cost of preventing the failure is less that the cost of the cleaning up damage that would result from that failure.

The bigger question regulators now face is: How do we make sure this doesn’t happen again? Chopping up a big bank with a portfolio of bad loans into a bunch of smaller banks with bad loans doesn’t really solve the problem. The solution is to keep banks from getting into trouble in the first pace.

That means “too big to fail” may not be the right measure of keeping the credit system healthy in the future. It’s more likely the solution will be finding a way to make sure banks don’t become “too big to regulate.”