I am going to go out on a limb…sort of…and state the following: GM will go into bankruptcy within the next 60 days, and Chrysler will be liquidated. Dollars to donuts that will be the President’s plan… although in a highly disguised form. The public may see it as a rescue, but it’s really just the beginning of a long and painful readjustment coming for Detroit. So how did I reach this conclusion? Follow the breadcrumbs. Given the time necessary to craft the President’s bailout plan – likely to be presented by this Friday – this tells me that it’s going to be much more than just a loan with a few strings. Methinks it will have three key points:
• Immediate cash assistance to GM and Chrysler with adequate taxpayer protections;
• Requirement to prepare a pre-packaged bankruptcy immediately; and
• Assurance from the Government that it will provide guarantees to commercial lenders for the future DIP financing. And warranty guarantees for new car buyers.
Moody’s released a document this week outlining three possible scenarios for Detroit. Its most favored scenario, to which it ascribed a 70% probability, was “Pre Packaged Bankruptcy with Government Assistance.” Now how the heck could Moody’s possibly know that this was the most likely scenario? Oh wait, Mark Zandi, their on-board economist, did testify at the second automaker Congressional hearings that it would take $75 to $125 billion to restructure these companies without a bankruptcy.
The scary thing is that he’s right, and Secretary Paulson knows it and believes it. Hmmm, maybe the good Secretary did leak his thoughts to Moody’s so they could float this “pre-pack plan” out into the financial ether?
Second, during a live interview on CNBC on Tuesday afternoon, Hank “the Hammer” Paulson supported this conclusions. In his interview, Secretary Paulson outlined four elements in crafting the loan program:
• Temporary bridge loan only;
• Protect the taxpayer money advanced in a loan;
• Make the automakers show a path to viability immediately by demonstrating shared sacrifice by all stakeholders; and
• Avoid a disorderly failure of the companies.
This means that any funds advanced will be of short duration only – for the next 30 to 60 days – to enable GM and Chrysler to come up with a negotiated plan. And there’s no way Obama will reverse this. It’s becoming more obvious every day that only a bankruptcy filing can restructure these two companies. Congress and the new President will have little incentive – never mind the ability – to change the inevitable outcome. But wait, there’s more!
There will be a requirement for each company to fully collateralize any loans with assets that would remain outside a bankruptcy filing. For GM, this would be some blanket collateralization of its unencumbered ownership stakes in its foreign entities. (GM’s Mexican operations have already been pledged for its secured bank line of credit.) Chrysler’s lenders have a blanket encumbrance on the entire company. Either Cerberus will have to offer another asset or cash as collateral or Chrysler goes away into the night.
And we’re going to get a “car czar” empowered by Treasury to manage the loan grants and upcoming bankruptcy proceedings. Look for Mitt Romney to become the “face of the government” upon the stakeholders– and he’s already written in the New York Times that bankruptcy is the only road to salvation.
The upshot of all of this: meltdown in Detroit. Ford has to pray that the liquidation of Chrysler goes smoothly, and that the shrinking of GM takes some time too. This will give their suppliers time to adjust to a new reality.
In the meantime, there will be great deals on GM and Chrysler products. Even with the plant shutdowns for January, there’s still a ton of iron sitting on dealer lots. And when the bankruptcy gets filed, the fire sale begins. Americans love a bargain, and new vehicles, even from a bankrupt automaker, can be sold at a price. But it’s also going to be the end for thousands of dealers.
So on Friday, the government will offer approximately $6b – $8b to GM, and a lesser amount to Chrysler, maybe only $4b – $6b. Collateralized. GM can do it. Chrysler can’t. There’s a gun to the head of the dog – put up something of equal value or don’t – you make the call Mr. Feinberg. In the end, it’s still going to be bankruptcy for both, with GM coming out the other side with Chevrolet and Cadillac, and Chrysler being parted out. Watch this space.
Ken – it is being reported on MarketWatch this morning that the GM/Cerebus talks are on again. Do you think this any effect on the above scenario?
If this plan is released Friday, I see Cerebus looking like the RCA Victor dog x3. How long before it becomes apparent that the pooches aren’t going to pony up? And how long after that ’til they saunter downtown to the Federal Courthouse?
Robert – Like you, I’ve read a great deal on the subject and am still not clear what the “right” solution might be. I just hope when the dust settles we still have a U.S.-owned auto industry.
edgett:
GM’s Chapter 11 will give the company over to it’s predominantly American creditors. New shares will be offered in the company, and they will be bought primarily by Americans. I wouldn’t wish the remnants of Chrysler on my worst enemy, oh, wait, I would – China can have them.
There is a difference between automakers whose shares are predominantly owned by Americans, and a auto industry owned by the US, without real bankruptcies the only possibility is the later.
… there will be great deals on GM and Chrysler products.
Another well done article. Agreed, people will in fact buy cars from bankrupt companies … at a price.
A reality of the car biz is that once a vehicle gets built it IS going to get sold …eventually … at some price.
…unsold merch doesn’t get returned to the factory… they don’t meltdown 4x4s for scrap … or donate SUVs to charities.
…it may sit in a slaes bank for 5 months … then on a dealer’s lot for 4 more but it’s not coming home.
They’ll keep marking it down until a buyer eventually steps up to the plate.
nice photo , if anyone is interested the goat is up an
Argan tree ,which only grows in a small area of morocco !
There is a buyer for everything, just depends how long you want to wait and how much you are willing to lose.
I would suggest that this is a reasonable and likely course of action. As W will tell you, he’s the decider, and I can’t see him just figuring out how to delay this until the new guy starts work. It would seem though that whoever is feeding W info on this will have the last say. I can’t see him having much of a indepth knowledge of the industry.
“The most dangerous of animals, a clever sheep.”
Ken, I like your take on it and really hope you are right. Assuming you are I’d expect the banks that have benefited most so far from federal assistance will be pressured to step up to provide the DIP financing.
The piston-head in me is secretly hoping for a blood-bath in Detroit for the selfish reason that I would love a new Pontiac G8 (V8 version of course) at 1/2 off sticker.
While the normal me is hoping that there are some responsible people somewhere that can keep the job losses to a minimum. Having been laid off in the past, and losing valued co-workers to the lay-off hatchet numerous times, it is a truly awful thing to lose one’s job, especially if you have little mouths to feed at home.
So here is hoping that someone, somewhere, will do the right thing… although I have yet to see anyone, anywhere, show that is a possibility.
Great editorial Ken. I just hope you are right and this whole fiasco doesn’t end up just being a bandaid after bandaid forever for a lost limb gushing blood. Sucks to have so many people loss their jobs at once but the creative distruction is what this country and the industry needs to reinvent itself and start moving in the right direction.
Major surgery or death is the only thing that can stop the suffering of both these patients and the community the supports them.
Ken, this plan saves a lot of heartache. First the new President can tell the union he didn’t do it. Secondly, the rest of America could say that half of the union jobs were salvaged at an hourly rate that still stands at the top of American production wages (say $20.00/hour base). Finally, GM can clean up it’s house and compete head on with the rest of the marketplace. The alternative is far worse. Even if Paulson gives Detroit say 75 Billion and everyone get’s paid off, how do these domestics compete with their benefit structures going foreward? This is the enema Detroit has been dodging for all these years, but the future will finally be brighter for Ford & GM and the suppliers. Botton line, only if Detroit can make money building cars should they continue in business.
Looking at GM’s balance sheet, I don’t see any assets for the government to collateralize.
An installment of $6-8 billion would be equal to all of GM’s revenues for about one month, so they can’t just put up cash flow from sales to secure it, they need that cash just to keep the lights on. Since GM has no other way to raise money, there won’t be sufficient collateral to assure repayment.
The government can take priority, as would a DIP lender, but that doesn’t mean that there will be enough to pay us back. If getting repaid was that easy, there would be a private sector DIP lender to provide it. There is a reason why no one in the private sector is stepping up to do it.
As much FUD people claim about D2.8 Bankruptcies – CH11 for GM / Ford (CH7 for Chrysler) is the only medium that will allow them to do it the fastest, and cheapest way.
I support the fact that the Gov’t guarantee a GM / Ford emergence from CH11 – I think these industries are vital to our economy and we can be competitive but not under the current status quo which has repeatedly flailed / failed for 5 decades.
The FUD – Too Big to Fail is an idiom, nothing more. If you cannot compete and are inefficient – no matter how much money you bail into their coffers it will only stave off the inevitable. Detroit just doesn’t get it – can’t look in the mirror and ascertain that they need to change, and change fast, and for the better. Business as usual can no longer sustain itself.
CH11 will be damning and really open the books of the mess that is Detroit 2.8 (we still cannot see the entire picture). However the quicker and more honestly we bring these to light the better we will be off.
Pch101 – Most of GM’s debt is unsecured. A portion of its NA assets and its Mexican operation are encumbered by the bank loan. Hence, it’s foreign subs offer collateral value to any loan.
I’m with you Jonathan. Hoping for a sweet deal on a G8 GT!
Sigsworth – “IT’s moy considered opinion that it’s nestin\'”.
Overall, if the “Casa Blanco” crowd is aiming this direction I think is about the best shot they have.
The Merrill Lynch survey of a few days ago indicated that something like 90% of buyers would consider a vehicle from a company in a Gov backed BK.
I agree that Cry-Co is probably unsalvagable (hopefully Ford would get the minivans but I would bet on Nissan for that and the Ram).
Even with a managed “pre-pack”, if the GM “leader-sheep” are not changed they will still fail. But it will, hopefully, be slow enough to be absorbed.
Dang. Hope this works.
Bunter
I’ll try out an even slimmer limb and pose that the added time for Bush and Team to forward a solution to this is because of the UAW. I believe everyone else is being arm wrestled to a pre-packaged BK – each interest can weigh the alternatives.
For the UAW there is no alternative, and if it is a matter of accepting a BK through Bush or holding out for salvation from Obama, I think they will hold out for the latter.
If a Bush deal goes through it will only be with UAW’s “committment” to participate and assist with the process, but not to offer up any tangible reductions in pay/benefits. They won’t do it.
” There will be a requirement for each company to fully collateralize any loans with assets that would remain outside a bankruptcy filing. For GM, this would be some blanket collateralization of its unencumbered ownership stakes in its foreign entities. (GM’s Mexican operations have already been pledged for its secured bank line of credit.) ”
Don’t stop there, tell us more, as in, Canada? The Canadians have a package of $ in waiting which, as it amounts to twice per capita what the Americans are paying, needs 1rst charge collateral for the taxpayers. What happens to that?
If the UAW doesn’t go along then go BK now and nuke them.
It’s not just the wages, it’s the work rules and the attitude.
Chevrolet, Cadillac and Jeep could be very successful with new management and without the UAW image.
They actually have much better product then Ford.
Nicely written Ken…and if we are mildly lucky, this will be the case. I’m not loving the car czar idea just yet because 1: who the heck is qualified-Maybe Penske…maybe an odd-numbered board would be better…2: I foresee a lot of time wasted just prepping for dog and pony shows to shell out for said car czar…and 3: Graft? Collusion? Lobbyists anyone? Pullllease…the car czar will be awash in ‘gifts in kind’.
@PCH101: Quote ” Looking at GM’s balance sheet, I don’t see any assets for the government to collateralize. “ -Maybe Real Estate? GM owns thousands of properties with millions of acres and in most cases when they built something, they bought twice as much land as they needed to allow for expansion later so they should own a lot of real estate-unless they leveraged all of that too?!?!
@Hippo: I totally agree with everything you wrote. People are loving on Ford right now, but if you honestly compare the GM offerings versus the Ford offerings, GM rate quite well.
The only thing that worries me about Elias’ speculation is I don’t foresee the White House ordering GM to shed brands…if they get the cash to sail through bankruptcy, I can well imagine GM making a case that they need the brands to maintain the volume-they never ever have made up for the 400,000 sales that Oldsmobile provided. I’m not saying…I’m just sayin’…
GM owns thousands of properties with millions of acres
Factories are like toxic waste dumps. They don’t have much real world value, particularly when the seller is in trouble and needs cash yesterday.
GM’s assets consist largely of factories of questionable value, inventory that obviously isn’t worth that much, and a little bit of cash. Meanwhile, they have substantial amounts of debt, secured and unsecured.
I don’t see us getting repaid in this scenario. We might get a fraction of what we are owed. This government role as a sort-of DIP lender can’t be that great, because nobody else wants it. We’re not the lender of last resort, we’re the lender of only resort.
GMs foreign assets might not be in hock now – but they’re talking to the govt in every country they operate in asking for bail out – why would the non-US govts not put a lein on the assets in their country if they were to help? Aren’t Germany trying to figure out how to stop any aid to Opel leaking back to GM?
So, what securities can GM offer that they don’t need for their requests to foreign govts?
Dave: Exactly. That’s the Catch 22 I was referring to.
A real world explanation of how
” collateralization of its unencumbered ownership stakes in its foreign entities ” has actual value for lending seems to be key to understanding this. For example, assigning all the shares of GM Canada when at the same time Canada takes a first pledge on all assets not already encumbered by banks etc., makes it the same security value (nil) as with Mexico? Or am I missing something?
So far, no one has lent any money to GM. If the US acts first and collateralizes GM Canada, it may not necessarily preclude Canada from also lending to this unit. It just becomes a question of what collateral and how much – and if there’s enough value left to support the total amount loaned against the total value of the collateral.
This brings up the question of value for GM as a whole. We know that GM as a whole is worth maybe $2 billion today, but GMNA has negative value, so the real value of overseas assets is much more.
DougJp: I think you’re right.
GM can’t pledge their US assets – they’re taken. While they’re asking for aid in Germany etc, their foreign assets are effectively either not avaible to secure the US loan, or have no value because if used for the US $s, the assets are not available to Germany etc so Opel etc don’t get a loan as surely every govt learned the lesson of British Leyland, catch 22 indeed.
I sincerely hope that the guys with the money are smarter than me and can figure a way of making the loan (a real loan not a bailout), happen.
Meltdown in Detroit…..Ford has to pray that the liquidation of Chrysler goes smoothly, and that the shrinking of GM takes some time too. This will give their suppliers time to adjust to a new reality.
If the feeble scenario Ken outlined is as much as our government can muster, in 12 to 18 months the bankruptcy-is-the-only-way crowd will be lamenting that a $125B taxpayer restructuring undertaken earlier would have been cheap. Apparently it’s not enough to have to learn these lessons painfully just once.
Phil
What happens to the 6500+ GM dealers if GM is finally bankrupt? Do they own the inventory, or do they have a system similar to Chrsyler where the dealer ‘borrows’ from some fund to have the cars on their lot until sold?
Are the cars then auctioned off? Do the proceeds go to the dealer? GM?
Phil Ressler :
If the feeble scenario Ken outlined is as much as our government can muster, in 12 to 18 months the bankruptcy-is-the-only-way crowd will be lamenting that a $125B taxpayer restructuring undertaken earlier would have been cheap. Apparently it’s not enough to have to learn these lessons painfully just once.
Just so you won’t feel like the lone wolf crying in the wilderness, I am afraid that you are right. And this from someone that has two Toyotas in the garage.
I can only hope that we are both wrong.
jkross22: “What happens to the 6500+ GM dealers if GM is finally bankrupt? Do they own the inventory…”?
The dealers own the floor-planned inventory; if they didn’t have title then GM wouldn’t have been able to book the sales.
But GMAC has a lien on vehicles it financed, and a bankrupt GMAC will be under pressure to accelerate collection of what dealers owe it. Wherever there’s any contractual basis for demanding immediate payment, GMAC will want to use that. Dealers will be even more anxious to get rid of inventory.
Meanwhile, assume GM also files bankruptcy. The “holdback” payments to dealers (which often are the only way they can make a profit on new car sales) will be stopped. The dealers will just be among the hordes of unsecured creditors–and at the end of the line. More dominoes fall.
And this will hurt other manufacturers and dealers as well. Malibus will steal buyers from Altima when the Chevys are 40% cheaper.
Although I’m all for Ken’s scenario, it seems this Bloomberg story (via Drudge Report) puts a bit of a buzzkill on anything quite that dramatic happening so quickly:
http://bloomberg.com/apps/news?pid=20601087&sid=aAMqMlPsJbDc&refer=home
It’s so reassuring knowing that Bush doesn’t want to leave a mess for Obama. The climate about to boil, oceans rising, desert creeping up from the South (very dry in KY this year), two wars, worldwide economic freefall courtesy US deregulation, $350B pissed away via TARP with no accountability, and Bush is worried about leaving a mess for Obama and having a viable auto industry.
This has to be the sleaziest bastard ever to occupy the WH, Nixon included. No such thing as orderly BR in this economy. This is a very dangerous attempt to bust the UAW pure and simple. Even with intentions and ability far exceeding those possessed by the Bush crew, this would be a very iffy process to get through without wiping out the domestics AND the suppliers AND the dealers AND tons of small town local newspapers. The best hope is for one or more of the parties to tell him to stuff it and see if he has the guts to blow it up. His preferred approach will certainly do that. Either way he’ll fly home with the customary smirk.
Are you saying Mitt Romney would be the “car czar”? He would be a great choice. In my mind, he’s a very skilled businessman but a poor politician.