The President’s non-plan for saving the American auto industry actually works. Believe it or not, it’s a stroke of genius for what it doesn’t do. And that’s not forcing any change on the automakers other than to come up with yet another restructuring plan subject to certain government imposed guidelines. Readers of TTAC know that it’s almost a sure bet that this next round of restructuring will fail. And that’s why it’s such a smart plan. Bravo to Bush!
The set up is simple. Without funding, GM and Chrysler would have gone bankrupt. Under a sudden bankruptcy, billions of dollars in unpaid trade payables would have become pre-petition claims, unpaid, with little hope of recovery. OK; a bankruptcy judge would have put critical suppliers to the head of the queue. But the main point: the fragility of Detroit’s supply chain would have been… tested.
Thousands of dealers would go dark too. The automakers owe them a billion bucks or so for holdback, incentives, warranty, etc., which they would never see again. While still protected by a contract, labor would have a job on paper only. So doing nothing would have created a huge mess, and likely dragged Ford down the drain as well.
The President had to do something to keep these companies from really stinking up the place. Money was the only answer. Time was short. Thankfully, Congress failed to pass its own plan. Any such bailout bill would have become an endless quagmire: a triumph of political maneuvering over common sense, economic reality, and green-party mandated product decisions. Decision time for the chief executive. Well, Treasury Secretary Hank Paulson and company.
The plan’s brilliance: it doesn’t do enough. By design. It’s just enough money to keep the lights on for a few weeks. Sixty days, tops. During that time, both GM and Chrysler must come up with a restructuring program subject to the guidelines in the loan agreements. in a nutshell, these terms force labor wages and work rules parity with transplants, debt exchanges of two-thirds, rationalization of work force, dealers, and suppliers and achievement of a positive net present value (NPV) as a result. Don’t ask what that the NPV is calculated on; I’m not sure anyone knows. Loosely translated, it means “get your shit together.”
Of course, none of this restructuring will actually happen. The tide is heading out. We’re about to see what’s hidden beneath the water’s surface. Cue the scramble among all the parties to protect their own interests-– screw the other guy. Within two hours of the announcement, the United Auto Workers (UAW) asked President elect Barack Obama to remove the “onerous terms” imposed. Just wait until the debtholders-– bolstered by armies of lawyers– get into the act. And dealership rationalization? Look it up at ain’tgonna happen.com.
The bottom line: there can be no real restructuring without bankruptcy.
When all this comes out. Obama, the Congress and the rest of America will see the problem for what it is: a black hole. There’s not now, nor will there ever be, enough public money to placate the hungry wolves. All taxpayers can do is offer GM and Chrysler another section on the bridge to bankruptcy.
GM gets more money than Chrysler, $9.4 billion more for a total of $13.4 billion. Why? ‘Cause GM has to make it. It will be one of two remaining domestic automakers remaining at the end of this process. Can’t let this behemoth run out of money sooner, only because we know that more money will come later in bankruptcy.
And for Chrysler, it only gets $4 billion, no more. And that won’t get it too far down the road. In fact, there’s no road either– this is just the beginning of the parceling of its valuable parts to others. Bankruptcy means death for the Pentastar. And to prevent Cerberus from running off with the government money by finding its way to Chrysler Finance, Paulson required the finance company to guarantee $2b of the bail out funds given to the Motor Company. Take that Mr. Feinberg!
Again, this bailout provides just enough money to keep the ships afloat for now. The false promises of management-led restructurings will never be realized. It’s a scramble for the table scraps. The President did the minimum necessary purposely. His team figured it was better to watch these companies self-implode– on someone else’s watch– than dictate the terms of the collapse. We’ll be watching.
Obama hasn’t even started the job yet and he is already making excuses.
Jimmy Carter reborn!
We need a Reagan and we get a Carter.
@ KE
No chance we are mistaking stupidity for strategy?
In the excitement of 5 or 6 shots yesterday, I completely missed that there wasn’t a “Car Czar”!
It certainly reinforces the argument you make.
Well, I suppose this is better than a wholesale bailout. And if the funds come from TARP, then I guess it’s better than printing up even more digital dollars.
Nevertheless, I see two (maybe three) USA automakers that need to evaporate. And I’ve heard the rumblings about Honda being none too happy about the strength of the yen and the JDM. If Honda wants a new home, I’ve got a Detroit-shaped crater I’d love to sell them.
In a free market GM and Chrysler would crumble and 500,000 Americans would be out of a job. Honda would find Japanese labor to be too expensive and would see a labor pool of 500,000 experienced Americans waiting to be tapped. Honda moves, America is saved. What about the Japanese Honda workers? Japan might not have to import Chinese workers for agriculture anymore.
And here’s what’s worse: a bailout *may* save Detroit jobs. It WILL cause loss of other jobs. If you take a few hundred billion dollars and give it to an unproductive sector of the economy (i.e. Detroit), that money will NOT be available to other sectors. Those sectors will not get loans, new businesses will not get started, existing businesses will not be able to get loans to expand. You may save 500,000 Detroit jobs, but you will lose another 500,000 everywhere else jobs. Actually, at the pay rate of Detroit, you’d probably lose 1,000,000 other jobs.
No way Honda will fill a Detroit hole. Honda will go to a right to work state.
Just like Caterpillar just announced a new engine plant in Seguin, Texas.
The President did the minimum necessary purposely…
You are giving Bush waaaaay too much credit. This “Bridgeloan to nowhere” simply pushes the inevitable collapse of the Big 3 out of his term and onto Obama time. This way, there is one less footnote of disasters that occurred during his watch. Of course, all of us here know the seeds were planted decades ago, but facts never interfered with a Bush decision. I guess controlled implosion is better than a chaotic one.
Regarding having the government require certain “green” car decisions being bad, just for being “green”, I pose this question: Just what helped thrust the automakers into their plight. No, before the credit crunch, you know before this summer when a certain political candidate stated that the economy was sound? Yup, the rise of fuel prices. That is what send the Detroit cash cow to the slaugherhouse, well before the credit crunch sent countless numbers of “marginal” customers home empty handed. Requiring some effort toward better efficiency is more important now than ever, with the dramatic drop in fuel costs. With per barrel prices so low, domestic production stops (old wells too expensive to operate), new wells still can’t compete, alternative sources again are priced out, and once again, America is at the OPEC trough. When the world economy begins to regain strength, oil costs will mushroom. And, as before, America will be caught with no alternative. So, if my tax dollars are being used, I expect some effort to have vehicles that are ready for $170 per bbl oil. Detroit doesn’t need any help with product designed for $35 per bbl prices. That they do just fine.
I still dont get why Cerebus gets any BOB (bail out billions) for Cryco. It is a privately held company. They took a flier and it tanked.
If you think a japanese car company is going to just fire all its Japanese workers and move here I have some WMD I’d like to sell you. In iraq.
Back in the reality-based-world, there is a tremendous overcapacity problem worldwide. I have no idea how that is going to get solved, but Japan and Germany are going to have to stop making so many cars. Financial currency pressures are going to push that. Yen is already causing Honda and Toyota to bleed. Germany is protected because it part of the Euro, but that is going to crack open as well.
In the US, we could be looking at a car market of between 6 to 10 million cars a year. GM can shut down everything except pickups. With currency pressures, it makes sense for the Japanese to continue to produce here. German production here will be limited by the time to takes to spool up a factory.
But if we are looking at a Chrysler going away, GM firing 3/4 of US workers, and a 8 million/year car sales, we are looking a major sustained recession. If so, we need to massively devalue the dollar — by a factor of 4x or so. Can’t wait to see the $120,000 Audi A4….
No way Honda will fill a Detroit hole. Honda will go to a right to work state.
I disagree. If they ever “moved” operations I guarantee that they would end up having a significant presence in Detroit. Maybe not the grunt work/manufacturing but RD and design plus most of their NA suppliers have major offices in SE Michigan. It would be too expensive for them to construct new facilities and they would most likely buy something that fits their needs. I’m not saying that they would take over the Chrysler HQ but the place is already there and is one of the finest technical/corporate HQ in the industry. Maybe the finest.
PLUS, if Honda ever did any massive manufacturing expansion in NA you can bet your ass that Ontario will be No. 1 on their list due to its proximity to Detroit, without actually having to be in Detroit. Plus the healthcare issue. Look at the reasons why Toyota built a plant in Ontario and you will see. I can see Honda wanting to be near Toronto due to its large Asian population.
I know how the over-capacity problem is going to be solved. Some automobile manufacturing will close. The survivors will be the best financed and more efficient. The domestic-managed companies have a great disadvantage – they’ve primarily mortgaged everything.
Bush wants to make sure his legacy is not that of Hoover. Of course for Hoover the fecal matter hit the fan 1.5 years into his term. For Bush it was 1.5 months before the elections that signaled the end of his term. He just is making sure that when the inevitable collapse arrives it will be on the next guy’s watch. Period.
–chuck
I see this as mainly a way to save Christmas retail sales. GM and Chrysler don’t do any more than they already have to kill consumer confidence in the biggest retail buying week of the year-the week before Christmas. In exchange for that they get the promise of a few months reprieve.
GM and Chrysler don’t actually get any of the money until December 29th if I recall correctly, and then only part of the initial $13 billion-odd. Apparently the $13.4 billion is all that is left of the $350 billion that TARP is currently authorized to spend. (Amazing, huh?)If some other more pressing emergency should require those funds between say December 27 and December 29th…well then those funds wouldn’t be available, would they? It’s even possible that if the UAW and the auto companies don’t show some progress quickly and especially if it looks like they’re gaming the situation an appropriate emergency could be more likely to show up or be considered more urgent. In other words Bush does have some leverage for the next week or so if he chooses to use it.
I agree that the non-plan is a plan, albeit a short-term plan. It kicks the can down the road, buying time for everyone (Detroit, UAW, other stakeholders, Congress, the public) to give more thought to a very difficult issue.
My hunch is that by spelling out what’s expected of the recipients, it will provide a benchmark for a more unemotional assessment of whether GM and Chrysler can survive. If little progress has been three months from now, bankruptcy (i.e., drastic shrinkage to match market share) will be more politically, economically and socially tolerable.
The biggest problem, I think, is whether management and the union can openly admit that the old way of doing things (market share; Wagnerism) is irrevocably gone. I doubt that the UAW will ever concede that, because to do so is to admit impotence as the monopoly supplier of D3 labor.
Nor am I sure that the population of Michigan, etc., is ready to admit that. Based on many of the comments I’ve seen on TTAC and elsewhere, the folks closest to our domestic auto industry cannot yet accept that it bears most of the blame for its decline.
This plan was constructed with only one objective in mind: to maximize the problems for Obama.
One aspect of the auto crisis: GM has been propping up at least some of its suppliers. Apparently GM subsidized Cobasys (supplier of NIMH batteries for GM’s mild hybrids) for at least part of 2008 after Chevron decided not to continue subsidizing Cobasys to the tune of $90 million/year. I don’t know how much of the gap GM made up, but in all likelihood they are no longer doing that.
Apparently GM was also lending money to bankrupt (in Chapter 11 since 2005) supplier Delphi to keep them in operation. As I recall it, they’ve loaned Delphi over $900 million, including $300 million in the last half of 2008. Up until the crunch hit they were also talking about paying $1.5 billion to help Delphi meet their pension/health care obligations. GM may be on the hook for up to $6.5 billion in Delphi pension costs if Delphi liquidates.
The point is: GM is not in a position to subsidize these companies. Without a GM subsidy they probably won’t survive. If they don’t survive, which cars will GM no longer be able to make until they find and certify new suppliers?
Another aspect of the supplier situation: Even without bankruptcies by the big 3, already shaky suppliers are probably going to lose at least a couple weeks of revenue because the Big 3 are shutting down, and those suppliers are almost certainly going to see sharply reduced orders for quite some time. Suppliers are already shedding jobs like crazy at least locally. Even if the government keeps GM and Chrysler afloat (a) Are they still going to be able to build cars six to eight months from now? and (b)Aren’t most of the job losses the Big 3 keep trying to scare us with still going to happen?
I think that you have to remember that the party who executed the front end of this plan is not the same one who will be in charge when the deadline arrives. The plan was likely designed in part to give Obama some flexibility to address things his way.
Fortune did a nice job of blowing the supposed “net present value” provision out of the water: http://money.cnn.com/2008/12/19/news/gm.viability.npv.fortune/index.htm?postversion=2008121916
The magazine’s analysis of this NPV issue is solid. NPV is an absolutely meaningless requirement, prone to manipulation, that can be easily supported with a forecast based upon unrealistic bogus assumptions. GM’s cheerleading management is skilled at making worthless, overly optimistic projections, and that toothless caveat plays to their strengths.
Both Bush and Obama have to manage the economic and political fallout. Both know that whatever plan happens is going to cost a lot more than this.
Frankly, I suspect that they are just trying to stall for time as they figure out what to do. Since everyone knows that both extremes (comprehensive restructure and complete failure) are costly, they will need to time to figure out a middle path.
As for Hoover-Bush, Bush is destined to inherit that label, anyway. If these companies fail on Obama’s watch, Bush is still going to get all of the blame. If they succeed, then Obama will get the credit. Either way, Obama wins.
This plan was constructed with only one objective in mind: to maximize the problems for Obama.
I’m sure Obama would be the first to say that the way to maximize his problems once he takes office is to do absolutely nothing now to help GM and Chrysler. That doesn’t mean it’s the right thing to do, but billion dollar bills are the new pennies in this current climate, so for the moment it’s a no-brainer. But I can’t help but think that staying on the brink of Chapter 11 for years and years while taking advantage of government “loans” is just as bad, if not worse, than bankruptcy itself – consumer surveys be damned.
They might as well have just flushed the money straight down the toilet. That way they would avoid the whole indigestion that will accompany this. What a waste of money.
I think we are all in agreement that Bush just kicked it down the road. Whether you define “it” as a can or a Bouncing-Betty is up to you.
The important meta-issue is this: snabster tossed it out in this thread, and it seems to me that it really hasn’t had much traction among our other discussions – how do the D3 survive what is potentially one of the worst sales years in recent memory?
Yes, they sold cars during the Great Depression, built the Empire State Building too. But, just looking at the numbers, the trends, and talking to people, it’s gonna be a slow year.
Really slow. Snabster posited 6-10 MM. A wide spread, and neither one of those numbers is going to make anyone truly happy. My gut, and putting together numbers of available used cars, numbers of personal BKs, repos, and such tells me that 6MM number is probably closer than the 10MM.
Sure, some cars will have to be replaced, some folks still are doing quite well and will buy. But anybody thinking that after the last several years of record sales, we’re going to jump back on the sales wagon after slowing down for 6 months is delusional. At best.
Toyo and Honda may (and will) lose money. But they’ve been making it up till now. As long as they continue to rightsize agressively, they’ll have minimal (relative terms) losses. They ain’t going anywhere.
But if Ford (ignore GM and Chry for a moment) doesn’t look at the real possibilty of moving a total of *maybe* 1MM units in 2009, they’re going to be at the trough in 4 or 5 months too.
I tend to agree that, intentional or not, this maneuver sets up huge problems for the incoming administration.
No matter what course of action he pursues, Obama is going to have a political millstone hung around his neck by some significant portion of the electorate. Not saying it’s right or wrong, that’s just the way things are at this point in time.
“This plan was constructed with only one objective in mind: to maximize the problems for Obama.”
This is what the Democrats in Congress wanted and pleaded for Bush to provide.
Now Preident B.O will have his chance to show how to rescue the Little 3.
We can all watch the Keynsian economics fail as they always do.
Nothing fosters more hate then undeserved status.
The UAW is underestimating this by a large margin.
This basically takes money out of the pockets of other Americans and will solve nothing. They may get paid to sit on the couch for a month or two, but they will lose further market share unless they sell at a large loss. No long term solution.
I would wager that a good % of the money is going to be invested in foreign non union plants that are viable.
There will only be so much of a market.
The D3 problem is only a fat parcel in the whole, much bigger picture.
I spare you the boring technical financial details coming right to the point understandable even for a laymen:
Bush approach to the self made crisis is evidently a copying of Mugabes currently faltering communistic system. Running the dollar print machine day & night on crack- resulting inescapable in hyperinflation. Soon you will see $ 10.000 notes backed not with values like gold or any other assets but with nothing but a lame promise. Ending after the $ 100.000 million note was printed and soup kitchens all over the country. Massive devaluation of the $ and return to the gold standard will be sold to the impoverished US public as the only solution in 2011.
Every gram private gold in private hand confiscated – not for the first time. Americans history repeated.
Wikipedia Gold Standard
I take bets.
PS: By that irresponsible action Bush cements his place as the worst US president in 200 years.
Good night & good luck
The car companies (all of them) are in survival mode; hoping the other guy folds first so they can pick up a few sales from the abandoned market niche. They will promise anything just so they can get the cash to keep going a little longer.
It’s kind of ironic that the taxpayer is forking out billions to support the very thing whose thirst for $4/gal gas triggered the financial collapse in the first place, but personally I see little alternative.
The social impact of a sudden collapse a la Lehman Brothers would be huge. It’s better to put companies on a starvation diet and let the weakest go to the wall gradually, thus allowing people who depend on them to make alternative arrangements if they can.
I remember back in the early ’80s when times were really bad, someone said what we need is a brand-new household appliance that will sell in the millions. The trouble was, everything seemed to have been invented already.
Then they came out with the VCR.
Any ideas as to what the VCR for the aughties will be?
Since Chrysler was sold to cerebus history is repeating itself. Daimler gave the company to cerebus in lieu of putting in more billions. Now cerebus will give it to anyone else including uncle sam or GM in liew of adding more of their private capital. What do the present and former owners both know about chrysler? That it is finished and any more money put in will simply be lost. Uncle Sam is buying time and jobs until Chrysler can be orderly buried. It’s odd that Jeep the only survival of American Motors, will probably be the only major piece of chrysler still existing next year. We don’t need the excess production in America, and the weakest product line will take the hit first. No amount of lipstick will let this pig stay in the marketplace much longer. (This comes from someone who owns a 300C.)
Martin B: “The social impact of a sudden collapse a la Lehman Brothers would be huge.”
Reportedly, it was the surprisingly severe and widespread effect of Lehman Brothers’ collapse that persuaded the administration that other big banks must be kept from failing.
Suggested caption for the photo:
What, Me worry?
We can all watch the Keynsian economics fail as they always do.…
Right. All we need is a good ol dose of supply side economic policy to fix things right up. After all, that worked so well in the past. (Mt Everest size sarcasm here)
Keynes was actually right. The problem in the 1930’s was when FDR stopped being Keynesian, at which the point the economy turned southward again.
WWII forced the government into an extended period of involuntary Keynesian economics, spending and borrowing money like crazy, thus lowering unemployment and ending the Depression.
As for the gold standard, it has absolutely nothing to do with this subject. I’d leave treatises on its alleged virtues to the crackpots and hucksters who are trying to get the dumb money to “invest” in overpriced gold coins that will never deliver a return. (Ironically, the latter are eager and willing to take your fiat money in exchange for their precious gold. If they liked their gold that much, it’s surprising that they’d ever want to part with it.)
sprinting to the finish?