[Another one from our anonymous bankruptcy lawyer.] I’ve had a look at the rules for the $25b Department of Energy (DOE) direct loans for development of advanced technology and manufacturing facilities. To qualify, an automaker must prove that it is solvent. Either that or it must meet one or more of the stated tests that relate to financial liquidity– tests that can be met even if the automaker is insolvent on a balance sheet basis. In announcing its huge third quarter loss, GM has made a statement that suggests that it may not meet the liquidity tests and may not qualify for the DOE direct loans.
GM is balance sheet insolvent to the tune of $59b. So perhaps GM could persuade the DOE to consider their projected cash flows for the next few years as an indication of ability to repay. But the automaker hasn’t released its pro forma projected cash flow statements or given any indication how they will meet the loan eligibility tests enumerated in the DOE interim rulemaking.
Based on what we know about GM, its recent losses, and its obligations in 2009 and 2010 to repay billions in unsecured debt (the $1.3 billion unsecured Series D convertible debt due on June 1, 2009) and fund the retirees’ health plan trust administered by the UAW, GM will need to have the liquidity standards relaxed to qualify for DOE loans. If the DOE does so, it should do it in a way that protects taxpayers.
The starting point: find a way to meet the DOE’s solvency/liquidity requirements. This might be done using a (get ready for this fans of The Jerk) capitalized special purpose entity (a.k.a.“SPE”). An SPE is a separate legal entity, often organized under the laws of Delaware. GM and other companies already use SPEs to finance specialized assets. To qualify for the DOE loans, the SPE would have to be solvent or adequately liquid. Solvency/liquidity could be created in a few ways.
Automakers already have budgets/projected expenditures for alternative technology vehicles. As a starting point, GM, Chrysler and Ford would each make a capital contribution of $500m to the SPE, and then would make quarterly payments to the SPE as additional capital contributions. This would give the SPE significant liquid/current assets and help assure taxpayers that the automakers’ ability to divert the DOE loan for other purposes is limited.
The DOE proposes it get a first lien/security interest in all property acquired with loan funds. However, this approach does not adequately protect taxpayers; the security interest does not extend to existing assets/technology that may be an integral part of the technology being developed.
Therefore, any automaker seeking DOE loans should be required to transfer all existing intellectual property, patents, trademarks and technical know-how in any way relating to alternative technology vehicles to the SPE. These transfers would give the SPE more assets, helping it meet the ongoing test for solvency and liquidity. Any new technical advances and the related intellectual property for alternative technology vehicles would be owned by the SPE.
The SPE would grant any participating automaker a non-exclusive, nontransferable license to use all the intellectual property owned by the SPE. Any loans by the DOE would be the primary obligation of the SPE as the borrower, guaranteed by the automakers and secured by the stock of and the assets of the SPE. The SPE would control how the DOE loan is disbursed and monitor the use of the money.
Having demonstrated their incompetence, automakers should not be allowed to run the SPE. The SPE should have an independent board of directors with its own scientific advisors, charged with the obligation of eliminating duplicate alternative technology development efforts. The SPE would have a detailed budget open to public inspection and comment, with a website which it posts detailed quarterly financial statements showing the use/disbursement of taxpayer funds.
The purpose of the orginal legislation was clear: funding new, fuel-saving automotive techology and products. Money from the DOE should not be used, directly or indirectly, to prop-up automakers that are failing, or to fund automaker obligations to creditors and bondholders. By using an adequately capitalized SPE, GM– and Ford and Chrysler– can qualify for DOE direct loans without endangering federal funds. In the event of a Chapter 11 filing by one of the automakers, having the DOE-funded assets in the SPE assures taxpayers that their investment in advanced technology will have priority. The money will be protected.
I propose a less complicated plan for the Federal bailout. As is, GM, Chrysler, and possibly Ford are financially insolvent companies and bailing them out will not save them in the long run unless major (currently, legally impossible) restructuring changes are undertaken. The Big 2.5 need to renegotiate their obligations to UAW, loan repayments, slash redundant brands, and close a large number of dealerships. The only way the Big 2.5 can pull this off is through Chapter 11 bankruptcy protection. Only after this restructuring takes place, I as a taxpayer will feel comfortable giving these companies the money they’re asking.
I really liked the first article that, by raising many questions, clarified part of the problem, ie; not enough information before paying out big taxpayer’s bucks.
However, this one….to be nice I’ll just say “oops”! Where’s the pea? A new entity and like magic, “poof”, everything is OK? Use of taxpayers money for intended purposes in future as assured? Use by whom exactly?
Sorry, can’t fool all the people all the time, not for a second. A new entity does nothing for the safety of use of funds. All it does is attempt to create on paper an artificial way of qualifying for DOE. Can’t make a pig fly. Sorry!
Take for instance Mitsubishi. They are most likely to be the first on the market with an electric vehicle(MiEV). How soon? Not soon enough. Recent word is Japan in late 2009. Notice I only said Japan. Everyone else is SOL until later.
Low fuel prices sure do take a lot of wind out of the sails when it comes to buying some vehicle specifically to save money on fuel.
Who else has electric vehicles lined up to be released right after Mitsubishi? Nissan and Subaru. A short list I’d say with all the larger players being absent.
If these three already have vehicles lined up and ready; but not yet released. Just think how far off into the next decade it will take for the others to release something.
I still don’t think the big three domestics are deserving of government handouts. It doesn’t take a genius to build an electric vehicle. Consider all three of them have done it at least once before! Take the EV1 tech with modern batteries for example.
Building a car is not hard. Building an EV is even easier. Why? Because a third party provides the completed motor, inverter, and battery pack. Look at Tesla’s situation. They didn’t and don’t build anything! They just put it together! And only a small part of it at that.
The big three have all built EV’s before, it’s nothing new.
The situation is more likely though a case of the government attempting to prop up the economy.
Read up on this just for example:
http://en.wikipedia.org/wiki/Working_Group_on_Financial_Markets
I could essentially see GM and the other two becoming modern day versions of the WPA:
http://en.wikipedia.org/wiki/Works_Progress_Administration
Government subsidized automobiles to keep a large group of people employed.
Toyota is scared of lithium batteries, scared to release an EV, scared to take any sort of risk, and definitely scared to step it up and run all their competitors out of business. Paint Honda with the same brush.
The auto market is definitely stale and conservative. Just expect more of the same year after year.
Heads up on the photo caption, RF. It’s spelled Pompeii.
But forget all this GM stuff for a minute. If Mt. Vesuvius blew tomorrow, I’d be happy seeing that model encased in ash in that pose – very elegant.
Of course, if SHE blew tomorrow…well, I’m sure everyone sees where that’s going…
In regard to the DOE loans: is the solvency clause law or regulation? Automakers could get the new president to change the regulations pretty easily; laws would be harder (but not impossible) to change.
Anyway, keep the articles coming, they are better than almost anything out there— free or paid media.
Let’s see…..
The current credit mess was created by giving homeowners loans they couldn’t afford to pay back.
Now the automakers are asking for bailout loans they can’t afford to pay back.
The U.S. auotomakers got themselves in trouble by making cars that nobody wanted.
The automakers might have liens placed against their property to ensure that the loans are payed back……property that no other automakers would want.
That sounds like a good plan. So when the automakers default on their loans and the companies finally die, does that mean the government will take posession of all their old factories and offices for use as soup kitchens and housing for the unemployed ?.
Not really, Usta– this sounds to me like the unnamed source is suggesting that our government sell technology created under this program– if there’s a default scenario.
Sounds like a winner to me! Bundle up the remnants of America’s industrial might as leverage for loans, and sell it to the Chinese once the domestic faithful die-off.
That’ll help our nation a lot.
dougjp :
November 8th, 2008 at 12:44 pm
I really liked the first article that, by raising many questions, clarified part of the problem, ie; not enough information before paying out big taxpayer’s bucks.
However, this one….to be nice I’ll just say “oops”! Where’s the pea? A new entity and like magic, “poof”, everything is OK? Use of taxpayers money for intended purposes in future as assured? Use by whom exactly?
Sorry, can’t fool all the people all the time, not for a second. A new entity does nothing for the safety of use of funds. All it does is attempt to create on paper an artificial way of qualifying for DOE. Can’t make a pig fly. Sorry!
This is done all the time. A failing company is split into two companies, with all the good assets going to company A and all the debts and shit going to company B. Company B then goes bankrupt, but the “good” company A survives. That is, GM transfers all, or at least a lot, of it’s good assets (patents, brand names, plants) to the SPE. But it’s debts, like union contracts and ties to dealers that can’t be canceled without penalties, remain under the main company. If/when the main company goes poof, the SPE pays back the government by selling it’s assets (patents and stuff) to Toyota or whoever and using that money to pay the government.
Beats just plain giving the loans to the company itself and then the taxpayer losing said money if/when GM goes splat. Makes sense to me.
This is done all the time. A failing company is split into two companies, with all the good assets going to company A and all the debts and shit going to company B. Company A then goes bankrupt, but the “good” company B survives.
Sounds like the Delphi spin off. Free Delphi to compete and get business outside of GM. “Unlock pent up talent and resources!” Guess it didn’t work out so well.
Political considerations outweigh all others. The U.S.A. without Chevrolet is unthinkable. While GWB ponders the impact of a GM failure on his watch, Barack Obama knows he has one opportunity to make a good first impression. A bailout is in the bag!
The GM brand is irrevocably damaged. A bailout will only delay the inevitable at great taxpayer expense, but who cares about the little people?
That is a shocker of a proposal.
(A) it would take 2 years to set up.
(B) it would be completelty ineffectual. It would end up as a useless quango with jobs for the boys.
(C)How could it oversee all research efforts to eliminate duplication?
Morea-Yeah, like Delphi. Except Delphi was the “bad” company in this situation, with GM being the “good” company. This would be more dramatic, of course-the patents and shit that GM gives the “good” company would have to be worth, on the open market, at least as much as the loan value. It would also be more hidden; the “good” and “bad” companies would mostly function as one entity, provided the “bad” company is still around, and the new “good” company would have some mind numbing name like “GM SPE LLC” or something.
I believe he’s borrowing a bit from government support of airplane makers through the 20s and 30s. The government provided the airmail service (which was an indirect subsidy), in return, the airplane makers had to place patents related to airplane tech in the public domain (the most notable was the constant speed propeller).
@Gardiner Westbound:
Of course, it will. Think about the states most affected by the Detroit 3 going bust. Michigan, Ohio, Indiana. So-called “battlegrounds” where Obama essentially locked up the election. So unless your chosen party feels like giving up 48 electoral votes for the next 5 Presidential election cycles. The GOP can’t win with just the South and the Mountain States. The Midwest is going to be big again.
The ‘Toronto Star’ Business Section sums it up pretty succinctly in an article today:
http://www.thestar.com/Business/article/533168
I would suggest huge bonus payments for Wagoner and Lutz at taxpayer expense as a way to save GM.
Johnny, is it you? I agree as usual.
Would it really take 2 years to get a SPE going? I’m not that familiar with this sort of business stuff. Regardless, this editorial should get submitted to the DOE when the interim rule’s file opens up for comments (after the rule is published in the Federal Register). Should be some good stuff for those regulators to chew on for awhile.
We are talking about a bailout, and a shell company to funnel our money to the welfare queen car companies.
This is not a one-time thing. There is no one first impression. This is a perpetual thing. We will be paying the automakers to not sell cars forever, one bailout at a time, quarter after quarter. Taxpayers will be subsidizing- not excellence, not mediocrity, but suckocrity.
No private profit-making company will loan to GM; no one will buy their stock, for very good reasons- guaranteed losses. Therefore, private American citizens will be forced to do so- what else do we exist for? Our own daily labor is punished by being the source of funding for their suckocrity, which is thereby rewarded. It’s the Amero-Soviet way.
Booting management, and getting stock warrants should be mandatory for the bailout. So should more union concessions, which they would get back if GM can return to solvency – which means the taxpayers warrants would pay off.
If GM is the company which is broke, it may be a good idea to fire the management and sell GM to Ford.
The SPE would grant any participating automaker a non-exclusive, nontransferable license to use all the intellectual property owned by the SPE. Any loans by the DOE would be the primary obligation of the SPE as the borrower, guaranteed by the automakers and secured by the stock of and the assets of the SPE.
I have no problem with that, but the IP isn’t likely going to be worth much and owning it wouldn’t really protect the taxpayer.
I don’t see how a proposal centered around direct government loans doesn’t expose the taxpayer to severe losses. Bailing out Chrysler with loan guarantees that generated a profit to the taxpayer was one thing; loans made directly from Uncle Sam are quite another.
If Uncle loans the cash, we had all better be prepared to suck it up when we lose it, because we will.
Toyota won’t build EVs anytime soon for several reasons. One would be that the last time they built an EV – the RAV4-EV they got sued by Chevron to the tune of $30M because GM sold the NiMH battery tech (Cobrasys) to Chevron after Toyota was already building vehicles using it. Big investment only to be told that the battery tech is now off limits.
Gov’t wants to put people back to work? How about exercising eminent domain and seizing the NiMH battery patents and making them public domain?
They’d certainly take your house or mine for a highway…
The Lithium batteries might carry more electrical capacity but they are fragile and they age whether they are being used or not.
The NiMH batteries just go and go and go. Over 150K miles on the original batteries in the RAV4-EV and still going strong.
They are good enough that a reasonable sized battery pack can push a normal CUV over 100 miles per charge and it comes with the usual bells and whistles like a/c. No special chassis and bodywork required (see EV-1). That means car makers could more easily base their EV off of existing vehicle designs, not some special high priced two passenger rollerskate. Lower cost vehicle… That also mean you could buy a gasoline powered Astra AND an electric Astra – your choice.
Note that Cobrasys was by then I think owned by Chevron.
There is another story that Toyota was allowed into a formerly domestic only trade association as a consolation prize. I’m sure that groups like that have their own lobbyists and agendas that they promote together. I have to wonder if groups like that don’t stifle innovation more than they encourage it. The association’s members go forward in locked steps – no one ever getting too far ahead of anyone else. This I can’t prove but I’d love to hear from someone who could.
I am concerned that the recent drop in fuel prices are intentional – to stomp out the EV competition that was rising with the high price of gasoline. Short of a wire-tap how could anyone ever prove it?
We need innovation. I don’t think the Detroit three can provide it. Oh they’ll release something different every once in a while but they won’t put their support behind it – nothing that alters America too much. The engineers might really put their sweat and tears into it but I expect the leadership will let anything too far out whither on the vine. Too weird. Too hard to service. Too hard to make money on. Makes the customer too independent of their dealership network. Customer needs to feel compelled to replace their vehicle every 5 years or so because either it wears out, gets too expensive to repair, or goes out of fashion.
No thanks. I’ll stick to my 166K mile 9 year old Honda or my 155K mile 11 year old VW. Guess whose products I’ll buy next time?
We need innovation and Detroit’s leadership don’t even seem to react to their impending corporate failures. More reasons to think their slide to bankruptcy is intentional to shed old weight like debt, unions, excess dealers, etc.
Giv emoney to Detroit? Absolutely NOT. Let them go broke, reorganize and rise from the ashes a leaner more agile entity.
Do I want to deal with the massive unemployment that will result? No. We’ve already got 1.5M people out of work now (as of last weeks headlines). Maybe though this will be a lifechanging event that straightens out our politics, our businesses, and our society.
I don’t think anything but a catastrophic event will straighten out our political or business leadership. More federal debt certainly won’t do it unless you want to give everybody $50K to spend on their debt or to buy new cars. Imagine the inflation that would trigger though. The greedy people would lineup on Main Street with their hands out and with inflated prices on everything. It would be just like the parasitic businesses around military bases. We know how much money you have and we’ll adjust our prices so we get all of it while you in your ignorance will think you are getting a cool product at a good price.