Here’s a copy of the draft Detroit bailout bill. While we digest it, here’s what we know so far… Automotive News [sub] says that yes indeed, there will be a car czar. Appointed by President Bush. The Freep is more specific. “Under the bill, automakers would have to submit a restructuring plan by March 31 to what’s being called a ‘financial viability advisor,’ who would have the power to set negotiations among the company, unions and creditors. If the advisor deems the company isn’t making progress, the loans could be called back.” In other words, he or she could throw The Big 2.8 into bankruptcy, without passing go, without collecting $34b (just some of it). Well, fair enough. But from there, things get seriously gnarly…
“The industry superintendent [euphemism three] would create his or her own plan for a government-mandated overhaul if the Detroit 3 failed to create acceptable proposal before April.”
WTF? So if Ford, Chrysler and GM can’t get their shit together, the feds take over? Can they do that? Not yet. But soon…
“As with the first rescue plan, automakers would have to pledge stock to the government equal to 20% of the loan value in return for the money, and the loans would be senior to all of the company’s other debts.”
So for a 20 percent stake in a company with negative net worth, Uncle Sam gets to call ALL the shots as and when they want? And how does that square with the Ford family’s special class of voting stock? Dunno.
That last bit– re: creditor cram-down– represents a HUGE departure from existing financial regulations. For the first time, the U.S. government will be able to come into a [theoretically] solvent company (invited or not) and force legal creditors to the back in the queue. Call it nationalization via the front door. Faustian doesn’t even begin to cover it.
And if you need proof that this bill will create D2.8 reform in name only, The Wall Street Journal [sub] says “Despite calls for the ouster of auto executives, the heads of the three U.S. auto companies would not lose their jobs as part the package under discussion, a senior congressional aide said Monday.”
Still, GM CEO Rick Wagoner and his teams’ golden parachutes are headed for dumpster. Allegedly. “Additionally, no bonuses could be paid to the top 25 senior employees, and no golden parachutes would be extended to departing senior employees.” Fine print please…
It gets worse…
One of the key strings: Detroit has to drop its lawsuit against California’s emissions regulations. How does it help Chrysler, Ford and GM make enough money to repay your pay money? Obviously, it doesn’t. Obviously, it COSTS them money; otherwise they wouldn’t have been fighting the regs (duh).
Even before the checks cashed, the politicians are molding the D2.8’s corporate policies in accordance with political correctness, not profit. As we’ve pointed out, this is just the beginning of some extremely bad decision-making.
He who owns the gold makes the rules.
In the interests of fairness, I do wholeheartedly agree that it is extremely unfair that the banks get a $700 billion bailout with no strings attached and the (not so) big 2.801 have to jump through hoops to get less than 5% of that.
At least, Detroit’s jobs are meaningful (i.e manufacturing) and not paper jobs (i.e service-based). Detroit’s jobs are worth saving.
Hmmm. Bankruptcy not an option. So, the government will create out of whole cloth a new process that is kind of like bankruptcy, but without rules that the participants will know in advance and with criteria that will include the political as well as the financial. And we will do it right now, so nobody really has a chance to design it properly. All the risk, none of the protection. This bailout gets worse the more I hear about it.
in the alternative, let ‘er go and let ’em eat them there Credit Default Swaps. no one seems to know how many hundreds of Billions of these things there are. think AIG has been a headache so far? imagine also how many skeletons are in Red Ink Rick’s off balance sheet closet?
I just read the article…
Of course they won’t say no to the conditions. Anything at this point. But their agreement to drop lawsuits against CA for their own greenhouse gas (translation, fuel economy) standard is a clear bone to the environmentalists who were whining and moaning about their fighting this measure. Why? If the automakers (all of them) have legit points, and the law is on their side, why can’t they fight it?
Fine. They’ll get their wish. Now, what they’ll see (since they have had their blinders on for years) is that 1) this lawsuit was supported by pretty much every automaker, not just Detroit. However, Detroit was the easier target, lest they go after dear-old Toyota on this one. 2) They’ll finally get to see Toyota isn’t all sunshine and flowers. Guess who is going to have to step up? That’s right. All the wonderful, earth saving companies the environmentalists love. 3) Explain to me how we can have each state setting its own standards? Do they have any idea the expense of this? (I’m sure I can answer my own question…they don’t care about anything except saving the earth at any cost…) 4) The lack of a cohesive USA policy is part of this mess. 1 fuel economy standard. 1 emission standard. 1 fuel blend. Be done with it. 5) You don’t think they could somehow get around this measure? Maybe you don’t see the company names in the lawsuit….doesn’t mean they can’t have others take care of things. Gov throws up a roadblock, what do smart companies and individuals (we all try to pay as little tax as possible….) do? They find ways to get around it. But the gov would rather create the huge mess and try to police it than come up with simple, straightforward policies that make more sense, are simpler to navigate, and cost far less.
Like I said, they’ll agree to it, and the dirty work that used to be Detroit’s job now goes to those companies who previously were happy to let Detroit be the bad guy and they be the good-guys. Lets see what happens.
You’d think Californians would buy a lot fewer cars if they hated the automobile so much. I wish CA didn’t have such pull on these matters. If Idaho were the one with these ridiculous demands, you’d see all the automakers probably just walk away…not enough money to bother with it. Its the same as China….everyone puts up with the blatent patent infringement because they’re all making too much money to care.
When this results in super expensive cars only the rich can afford, or shortage of cars consumers in California demand, watch how quickly these environmentalists start complaining. Things will probably change real quick. Unfortunately their damage will have been done. But hey, killing Detroit will save the world, right??
If enacted, it will set a dangerous precedent. For the first time, the U.S. government will be able to come into a [theoretically] solvent company– invited or not doesn’t matter– and force other legal creditors to the back in the queue. Call it nationalization via the front door. Faustian doesn’t even begin to cover it.
Under the TARP, didnt the US Treasury distribute $150 Billion or so to a dozen or so banks for preferred stock without invitation?
This ‘solution’ pleases no one. Way to go Congress, once again you have shown nearly zero ability to understand an issue or act in a responsible way.
Oh, and let me get this straight. To get $15B in LOANS (not a money give-away) they have to submit to a Congressional dog-and-pony-show, agree to all these strings, have oversight by a government car-czar (who I’m sure really knows a lot about the auto industry and how to restructure a company…and for sure can do it for 3 better than the companies themselves), and give up fighting extremist environmentalism, while banks get orders of magnitude larger amount of money GIVEN to them, with almost zero goverment oversight, no congressional circus, no “bank-czar”, and no requirement that they stop suing anybody, stop massive pay, etc??
No bailouts for anyone. Period. But if this is how its going to be done, why not one standard?
KatiePuckRik:
In fairness, the financial system bailout was never about saving jobs of those in the financial sector. Where the one of these financial services companies was not viewed as contributing to the risk of a total credit lockup, it was allowed to fail (Lehman Brothers). The bailout was about preventing a complete and total credit seizure which would be disastrous for the entire economy. Whether the bailout is doing what it advertised (or was necessary to start with) are discussions for another time. But it has never been about jobs in the financial sector (non union jobs, I may add) – only the crucial service that they provide.
In contrast, the auto bailout is not about its product. Carmaker G, F or C could go out of business tonight, and there would still be plenty of new cars and trucks available for purchase tomorrow and next month and next year. This is about jobs, jobs, jobs. Union jobs. I understand that unions raised about $500k in the recent elections. These people are not going to suffer silently.
If it were Toyota, Honda, Subaru, BMW and Mercedes that were failing in their US operations and looking at possible closure, do you think we would be hearing the wailing and gnashing of teeth at anywhere near the level that we are hearing now?
Don’t the feds have the power to stop a GM-Chrysler merger under the bill? At least, that’s what I read.
Of course it’s half-arsed, but Detroit didn’t offer anything concrete in their “plans”, so now you have the worlds biggest committee trying to solve a very complex problem over a weekend.
These guys show up with an ultimatum – give us money or we go broke and dump millions onto the dole, etc. Congress says no and it’s some sort of economic chaos, they roll over and give ’em the money – and they set a REALLY “dangerous precedent” to hand out money to anybody.
This actually pleases everyone – the anti-bailouters get tons of strings attached, the pro-bailouters get a BUSH (!!!) appointed puppet-master pulling the strings, which will amount to no supervision whatsoever.
April will come, the money will be gone, no progress will be made, Detroit will threaten to dump millions of workers onto the dole, repeat process…..
If the outline of the bill’s terms is accurate, then it is a terrible bill, and bodes ill for what we are going to have to put up with for the next two-four years. A child could have done a better job than the Congress. Any where are the Republicans? They may not be able to stop it, but they should be raising hell, and proposing a sensible alternative.
So now the government will own the means of production.
Somewhere, Marx must be enjoying this turn of events.
Here’s the full text via the NY Times: http://graphics8.nytimes.com/packages/pdf/business/autobilldraft.pdf.
And here’s my commentary:
sec 3a establishes the so-called “auto czar”.
sec 5b2 calls for reviews of restructuring planning progress at 45 days (conveniently after the bush-obama switchover since the clock starts ticking jan 1, i believe).
sec 6(3)b calls for a long term restructuring plan to be submitted by march 31, 2009 (with 30 days of wiggle room at the auto czar’s discretion). this explicitly mentions debt restructuring and debt-to-equity swaps.
sec 9a1 names the funds to be used as the DOE funds that were supposed to go to produce greener cars save for $500 million that will be used for the original purpose. not cool. however, continued applications (such as from Tesla) are still accepted per sec 9a3.
sec 10 covers loan duration and rates: 7 years. 5% for the first 5 years, 9% thereafter. one of the “openness” conditions is the requirement that all transactions over $25 million be reported to the govt overseer. the auto czar has the ability to veto “any asset sale, investment, contract, commitment, or other transaction [described elsewhere]”.
sec 10 continues with the penalties for failing to abide by the restructuring plan or failure to submit such a plan by march 31, 2009: the auto czar may take the money and run, essentially, or call for early repayment as he sees fit.
the last paragraph of sec 10 mandates that automakers withdraw their lawsuits against states that are attempting to enact stricter greenhouse gas standards. this means california and all the states that follow CARB’s lead! this is a good thing.
sec 11 covers the collateral: warrants or their equivalents for 20% of the amount lent, at the 15-day average price going backwards from dec 2, 2008.
also in sec 11 are the limits on executive pay: a vaguely worded ban on “golden parachutes” (yes, they actually say exactly that); no bonuses or incentive pay for the top 25 paid execs in each company until loans are repaid; a ban on owning or leasing any corporate aircraft (hah).
sec 11 goes on to prohibit dividends for extant stock and establishes bailout loans to have first priority for repayment.
sec 13 is kind of interesting: calls for manufacturers to assess whether their now-idled excess production capacity could be utilized for production of bus and rail cars.
sec 14 covers reporting: the auto czar will report to congress 30 days after initial disbursement and then every 90 days with updates.
sec 15b4c says that congress may take matters into its own hands and renegotiate contracts on behalf of the automaker per the plan laid out by the auto czar if the manufacturer is unable to negotiate a tenable plan on its own. this is the money section, so to speak.
I heard an idea this weekend that made so much sense there is no way in Hell it would ever happen.
Instead of giving this money directly to the Big 2.8, put it into an interest earning fund that is used to reimburse people who buy cars from Ford/GM/Chrysler. Should you choose to buy American, you pay for the car, then submit your receipt or what have you, and in return the government gives you back some percentage of your tax dollars toward the price of the car, say (and arbitrary) 25% in either a tax credit at the end of the year or check in the mail. That or it could be figured into the financing. That way, instead of putting good money after bad, the Big 2.8 moves some metal while the taxpayer who is footing the bill gets something out of the deal as well.
Think about it.
Funny, I thought WE (the taxpayers) owned the gold.
Silly me.
If GM had any pride left, they’d tell the Feds to shove it and file Chapter 11. Call the bluff.
However, the powers that be won’t allow that to happen. That is, the unions and the dealers will push tooth and nail for the loans to prevent GM, Ford and Chrysler from abrogating their contracts.
Bankruptcy has established legal and financial standards that everyone understands. The playing field is level and known to all. Under this arrangement, no one knows the rules, no one knows the boundaries, and no one knows if they’ll be paid. No self-respecting lender will extend credit on those terms to the Big 2.8.
Bankruptcy is the ONLY option that preserves any semblance of equitable treatment for all.
I have to say, this is quite similar to a Chapter 11, except that it won’t be handled through the bankruptcy courts and the government is providing the first installment of what would be called DIP financing had it been handled through the court system.
Since Detroit is so insistent on getting free money, these are strings that are attached. If they don’t like it, let them go to a banker and try to borrow it.
To get $15B in LOANS
Since we can pretty much expect them to stiff us, these are not LOANS, but GRANTS.
From Toshi’s post:
“the auto czar has the ability to veto “any asset sale, investment, contract, commitment, or other transaction [described elsewhere]“.”
Great. That way, if they want to make any investment overseas, or use any overseas suppliers, or invest in anything overseas, the goverment can say no. What a fantastic idea. Way to set them up to be competitive in the future. While all the competition uses the economics to make their business run more efficiently and for less cost, these guys are saddled with more higher-cost obligations. Sounds like UAW-agreements Part II.
“the last paragraph of sec 10 mandates that automakers withdraw their lawsuits against states that are attempting to enact stricter greenhouse gas standards. this means california and all the states that follow CARB’s lead! this is a good thing.”
Please explain why this is a good thing.
“sec 13 is kind of interesting: calls for manufacturers to assess whether their now-idled excess production capacity could be utilized for production of bus and rail cars.”
Great. So instead of focusing on making cars and fixing their companies, they might be required to start building busses and rail cars? Way to focus on fixing the core business.
God, with all these limitations, I’d be half tempted to say no thanks. This is full of boneheaded restrictions that end the end just make it harder for them to restructure and come out of this.
But that last bit represents a HUGE departure from existing financial regulations. If enacted, it will set a dangerous precedent. For the first time, the U.S. government will be able to come into a [theoretically] solvent company (invited or not) and force legal creditors to the back in the queue.
Theoretically solvent company? Who are you talking about? I’m not even sure Ford meets this definition, you know GM doesn’t. Chrysler? who knows? we haven’t seen their books.
If any of the other creditors don’t like it, they can throw the debtor into involuntary bankruptcy before the fed loan goes through. They won’t, because the new fed money is the only new money out there.
I’m worried about what AB GWB would appoint as auto czar. Michael Brown?
Bankruptcy’s gotta be better than this.
The only benefit of the “oversight board” is that it gives everyone involved political cover for some pretty ugly decisions. “Sorry to axe these plants, jobs, brands and dealerships, but the car czar said so.”
I can’t believe that any ‘Auto Czar’ that is a political appointee is going to actually, pull back any funds loaned to these companies – commencing a full scale bankruptcy.
I can just see the headlines now “US Gov’t order Big 3 into Chap 11/7”. I think that they have us over the barrel now……
In fairness, the financial system bailout was never about saving jobs of those in the financial sector. Where the one of these financial services companies was not viewed as contributing to the risk of a total credit lockup, it was allowed to fail (Lehman Brothers). The bailout was about preventing a complete and total credit seizure which would be disastrous for the entire economy. Whether the bailout is doing what it advertised (or was necessary to start with) are discussions for another time. But it has never been about jobs in the financial sector (non union jobs, I may add) – only the crucial service that they provide.
The collapse of an industry which threatens to swell unemployment numbers would be equally disastrous, straining state resources in unemployment compensation, and if left to linger it would double back on banks when homeowners with otherwise safe mortgages began defaulting on those loans because they can’t make payments and they can’t sell to get out of their mortgage. Even now, you have economists arguing that the Fed’s decision to let Lehman Bros fail was a bad mistake which made a bad situation worse. Letting this industry crumble in such an ungraceful manner would be just as bad and would make recovery even more difficult.
In contrast, the auto bailout is not about its product. Carmaker G, F or C could go out of business tonight, and there would still be plenty of new cars and trucks available for purchase tomorrow and next month and next year. This is about jobs, jobs, jobs. Union jobs. I understand that unions raised about $500k in the recent elections. These people are not going to suffer silently.
I wonder if people understand that in this consumer based economy, one of the key foundations of that support this economy is ensuring people stay employed so they can pay their bills, etc. It makes no sense dumping billions into a credit market to ensure banks keep lending money to people who may soon find themselves on the unemployment line. But then again, I’m not the economist, so what do I know?
If it were Toyota, Honda, Subaru, BMW and Mercedes that were failing in their US operations and looking at possible closure, do you think we would be hearing the wailing and gnashing of teeth at anywhere near the level that we are hearing now?
Depends on how loudly they cry and who’s ear they’re able to bend. To be honest, I did hear this level of wailing and teeth gnashing from Mitsubishi when they were on the verge of shutting down U.S. operations before they went to their corporate parents for their bailout. If only Detroit had this kind of support from their corporate family…
This is as it should be. When the Indebted 3 went to the government asking for money simply to keep the doors open, they surrendered any claim to the privileges of capitalism. This plan deliberately sets them up for failure and a gradual, government-guided removal from the marketplace. This, versus a sudden crash out of the market, which would happen at a bad time and generate a lot of social and political nastiness.
Great. That way, if they want to make any investment overseas, or use any overseas suppliers, or invest in anything overseas, the goverment can say no. What a fantastic idea.
It would’ve stopped that deal with FIAT way back when =]. And Saab, and Suzuki, and Isuzu…
Hey man did you see the second to last paragraph where they snuck in a raise for federal judges. LOL WTF Bush got his boyz a raise LOL
All we need now are the customary wooden arrow tax abatements and were good to go.
Jerome, here’s a clue: one reason the Big 2.8 are in this mess is because they (mostly successfully) fought higher gas taxes and then CAFE (got loopholes and favored emissions status for SUVs). At this point, they should not be allowed to fight attempts to regulate externalities — or they get zero dollars of public money.
Remember when your parents paid your bills and they got most of the say about what the hell you did with your life? Well, daddy’s money doesn’t come free to the car companies either.
Bankruptcy is better than this s**t sandwich. Roll the dice GM.
Seems Cerberus has secured itself a teat through messers Quayle and Snow. That is criminal.
Also, it surprises me that anyone who reads this site supports CAFE. CAFE is so stupid that it almost discredits itself.
Teenage Daughter: Dad, seems to me the best way to make people drive more fuel efficient vehicles is to make sure gas is expensive. Why don’t they tax gas and keep it a constant price?
Me: Because putting on a show is easier, and makes politicians lives easier.
3) Explain to me how we can have each state setting its own standards? Do they have any idea the expense of this?
Jerome, only California has an EPA waiver to establish an alternative standard. Other states may only choose between EPA or CARB.
funny picture
the wikipedia article on british leyland has interesting similarities
Buickman – 60 Minutes estimated there were 30 – 40 TRILLION in credit default swaps out there. But it’s totally unregulated, so nobody really knows…
“WTF Bush got his boyz a raise LOL”
What makes you think all Federal judges are Bush appointees? Most are not. They can just as well be Clinton or Carter appointees. It doesn’t matter. They all get a raise.
Toshi: “sec 10 … one of the “openness” conditions is the requirement that all transactions over $25 million be reported to the govt overseer. the auto czar has the ability to veto “any asset sale, investment, contract, commitment, or other transaction [described elsewhere].”
This sounds like overturning the concept of sanctity of contracts, but on closer reading it appears the veto power is for proposed transactions; that is, deals not yet consummated. In the auto industry there are a LOT of transactions of $25 million or more. The czar will need a rubber stamp, lest purchases, etc., get piled up pending oh-so-thorough bureaucratic review.
Gee, I’d need to check the Federalist Papers to be sure, but somehow I doubt James Madison, John Jay and Alexander Hamilton envisioned the proposed federal government would exercise this kind of power.
Teenage Daughter: Dad, seems to me the best way to make people drive more fuel efficient vehicles is to make sure gas is expensive. Why don’t they tax gas and keep it a constant price?
Me: Because putting on a show is easier, and makes politicians lives easier.
A tax gas that effectively raises gas prices to a constant $4-$5/gal floor will end a lot of political careers (with the distant possibly of sparking some form of civil unrest). It’ll make the CAFE question moot, but some congressman (or men) will have to fall on his/their swords and take one for the team.
Remember these loans will not “save” these jobs, only delay the inevitable.
Here is the chain of events:
First, the Government pours money into a private company, and jobs are saved… for a while. Remember, the “Government” is not an individual, is a bunch of people with diametrically different aspirations and objectives (that’s why it’s called a “democracy”, everyone has a say)
Second, since they invested that money, they feel entitled to influence business decisions.
Third, since everybody in the Government has different aims, they do what politicians do: compromise. Which is good for a debate, but in a company that means not having a clear direction or vision of the future.
Fourth, when things get worse (probably because of the market conditions), somebody should be blamed for it. More debate on where the company should be headed, and less direction as a result.
Fifth, the company is even worse because of lack of a clear direction. More money needed to run it, and more Government intervention.
Sixth, the company is finally nationalized. Lots of money, lots of debate, no direction… and terrible products. Nobody wants to buy from them, they turn to private companies. Therefore, the Government enacts protectionist rules to help the company out. Result: product quality goes to hell.
Seventh, after gazillions of $$$ poured into the company, products are awful, productivity is terrible (all jobs are guaranteed, so who cares about working harder?), losses increase and the Government runs out of money. Result: they try (maybe succeed) to sell the company to somebody (i.e. Privatize). As pre-condition for the sell, the buyer demands millions of job cuts, lower salaries and Government incentives (i.e. money).
Final results: even more jobs are lost in the long term, salaries at the bottom, Government bankrupt, awful products, no competitiveness and one very happy investor buying the spoils for nothing.
This has happen in the past in many places, will happen now to the US if this goes forward.