Auto shows are intended to be recipes for excess. Take one excessively large convention hall, fill it to capacity with excessive quantities of costly chrome and metal, mix in a few brigades of excessively attractive women, and cap it off with a cadre of excessively awkward journalists (present company excepted, er, we hope) to glorify the results with excessively vapid superlatives. But that was before Carmeggedon and the Great Credit Crunch of ’08 came to town, raining on the parade with an excessively nasty vengeance. Cars are a serious business, and 2008 is looking to be about as serious as it gets.

This year’s extravaganza is most noteworthy for what isn’t happening. For starters, General Motors is a non-starter. GM has canceled both of its planned new vehicle debuts. Neither the new Buick Lacrosse nor the Cadillac CTS Coupe made the trip. Car Czar Bob Lutz, who was previously scheduled to make an appearance, is also staying home. Maximum Bob isn’t having lunch at the RenCen by himself; every other spokesperson within the GM public relations squadron, i.e. anyone who might have been required to field skeptical questions from a editorially-liberated pack of hacks, is likewise giving this show a wide berth.

Not to be outdone by its erstwhile merger partner, the Cerberus-Chrysler team was apparently too preoccupied by the Mervyns bankruptcy liquidation to dispatch anyone here, either. Aside from a few electric concepts, Chrysler has no product launches and provided no PR staff to manage and dazzle the press corps. It gets worse – according to the Los Angeles Times, the Three Headed Dog is offloading much of the cost of this year’s fete onto its Southern California dealers. The Auburn Hill Boyz have been establishing a now-familiar pattern of cramming down their problems onto their retail network, and the LA show is proving to be no exception.

Renault-NIssan head Carlos Ghosn established the weary-although-optimistic tone in his keynote speech, which opened the event. Ghosn is probably the closest thing to a rock star that you’ll find in the auto industry, and his talents for salesmanship and managing a room are top notch. Le Cost Killer fired on all cylinders, masterfully packaging the greenbacks-for-green-tech message that has been offered far less convincingly by Detroit’s troika of CEO’s.

Few seemed to notice the irony of Ghosn touting his vision of an emissions-free future on the very same day that Nissan was launching its 370Z sports coupe and Infiniti revealed its convertible, abundantly-pistoned G37.

Other subtle signs of the industry implosion are evident throughout the floor. A deathly quiet hovers across GM’s vast acreage, which occupies what should be a high-traffic area in the middle of the Convention Center’s South Hall. Much of the obligatory well-dressed eye candy seems to have been given the day off. Most painful for a hungry, coffee-powered observer such as yours truly, the customary sponsored sit-down luncheon was quietly nixed, replaced by a haphazard buffet of small stale sandwiches that made Quizno’s seem like Spago in comparison.

In keeping with the theme of tough times, many an automaker press conference made at least a passing mention of the stumbling economy, even as they proudly touted their new models. Despite the pall, everyone claims to be confident that the current tumble in auto sales is a manageable bump in the road.

The Dearborn side of the hall was considerably more cheerful. Undaunted by bailouts, the brink of bankruptcy and Congressional hearings, FoMoCo debuted the new Fusion and its badge engineered Mercury Milan sedan twin, as well as the Mustang pony car and Lincoln MKZ sedan. During their upbeat presentation of the new Fusion, Ford EVP Mark Fields and Marketing VP Jim Farley seemed not to notice the faltering car market. Crisis? What crisis?

This year’s show includes new world debuts from Bentley (Azure T Convertible), Infiniti (a convertible version of the G37), Lexus (RX 350 and RX 450h Hybrid), a brace of Porsches (Boxster and Cayman) and Nissans (370Z and Cube), as well as the new Mazda 3, an electric Mini and a VW (the TDi version of the Touareg.). Four concept cars make their premiere show appearances here: a Honda FC Sport fuel cell sport concept, Hyundai Sonata Hybrid, a Kia Borrego fuel cell vehicle, and a Toyota CNG Camry Hybrid. Tomorrow’s events will include the presentation of the Green Car of the Year award, which promises to be less controversial than last year’s Tahoe Hybrid.

Not that this will matter much.  Anyone who is paying attention knows that the country’s most important auto show is not being held in Los Angeles or Detroit or Chicago or New York, but in Washington, under the DC big top, where big bailout bucks are the order of the day. It can’t help but make one wonder whether next year’s show will be considerably smaller than this one.

The table of Motown’s CEOs facing Senator Christopher Dodd at today’s Senate Banking, Housing and Urban Affairs Committee Hearing looked more than a little like The Last Supper. If only. When Senator Bob Corker (R, TN) pressed Ford, Chrysler and GM’s top suits for a pledge that they won’t be back for more money– should they be granted $25b in taxpayer-backed loans– only GM CEO Rick Wagoner answered. And then Red Ink Rick waffled, pegging his promise to an economic upturn that no one believes imminent. It was the moment when Motown’s begging bowl brigade went seriously south, in that oh-so-public C-Span sort of way.

Which means, of course, that here in the realpolitik world, that the $25b “bridging loan” lives. To die another day? Given the weak support doled-out by Senator’s Dodd’s ostensibly rubber-stamp-equipped committee, yes. I mean, most of the Senators peering over their granny glasses at the captains of the automotive industry were Democrats. If the blue staters are questioning their union supporters’ right to suck on the federal teat, clearly there are political potholes the size of Manhattan ready to swallow-up Detroit’s last, best hope for survival. However temporary.

At some point in this televised debacle, Senator Corker asked United Auto Workers boss Ron Gettelfinger to rate the three domestic automakers in terms of likelihood of survival. With omerta-dismissing insouciance, displaying none of the political skills for which politicians are famous, Big Ron put the The Big 2.8 in their place. Surprise! Ford, Chrysler and then GM. Which was the exact opposite order in terms of who wants what from this $25b honeypot. Chrysler’s Bob Nardelli put his hand up (our hands up?) for $7b, Ford’s Alan Mulally saw Boot ’em Bob’s seven and raised it a bil (ish) and GM went all-in at $10b – $12b.

Oh, did the overpayment of CEOs man-up. as suggested by TTAC Ken Elias? When offered the chance by Senator Jon Tester (D-Mont) to pull a Lee Iaccoca (i.e. work for a $1 until the public “investment” in The D2.8 is paid back), only ChyCo’s Nardelli agreed. Woo-hoo! The failed exec who pocketed $210m for NOT working at Home Depot knows the value of PR. [Note to Tester: get it in writing.]

Yes, well, this is the same automotive CEO who’s finally been forced to reveal his employer’s financial health, and flat-lining just about describes it. Nardelli admitted that the ailing American automaker is on track to burn through $5b to $7b in cash in 2009. Or not. Deduct the $5b in readies that ChryCo’s consumed in the first three quarters of 2008, including $3b in the third quarter, and the company’s already below “keep the lights on” minimum liquidity.

More precisely, Nardelli said that Chrysler ended the third quarter with about $6.1b in cash. In other words, Cerberus’ automotive venture looks set to join GM in the “DOA by New Year’s” club. Nardelli almost winced when Corker suggested ChryCo didn’t have a pulse. But not quite.

Also in the doghouse: the D2.8’s new BFF Ron Gettelfinger. In his opening remarks, Big Ron made a big mistake: raising the issue of the “money for nothing and your checks for free” UAW jobs bank. The union boss said his brothers and sisters had sacrificed hundreds of goats 50 percent of their pay (not strictly true, it’s now a two-tier pay deal) and “virtually eliminated” (ipso facto not strictly true) institutionalized feather-bedding.

When Senator Corker asked Ronny G how much his members would be paid for not working at a closed factory, the union guy feigned ignorance (95 percent of full pay, BTW). “That’s incredible,” Corker said, providing a pregnant pause in which his outraged incredulity could mature.

After the committee called it a day, Senator Dodd met the not-so-adoring throngs called the Washington Press Corps. His words must’ve sent a chill up Detroit’s collective spine. “My sense is that between inaction and writing a (blank) check, there is a ground I think you can build a majority for. We’re not there yet. Trying to jam something through, I think, would be a mistake.” Or, as Chrysler and GM call it, “a life-saver.”

The bottom line: despite (because of?) its desperation, the Detroit “bridge” is still under construction. Republicans have enough votes to torpedo the legislation, and their constituents are plenty pissed-off at the rush to judgement on the $700b Wall Street bailout. So where’s Barack Obama stand on the bailout? After all, the president-elect is still a– no, wait. He resigned. So although he’s officially pro-bailout, Obama’s not stupid enough committed enough to waste waste his political capital rescuing Detroit from itself. What about the union votes that sealed the election? As another blogger put it, if you want a friend, buy a dog. Not, apparently, a president.

[Click here to read a copy of the Senate “Direct Bridge Loan” bill]

This weekend’s G20 meeting was pretty much a non-event. A Bretton Wood it was not.  While German Chancellor Angela Merkel and her Finance Minister Peer Steinbrueck were still in DC, an urgent e-mail was sent to Carl-Peter Foster, chief of GM Europe. Also on the To: line: Hans Demant, head of GM’s German Opel subsidiary. They were ordered to get their glutei maximi to Berlin. They were furthermore told to bring Opel’s workers council chief Klaus Franz along. Bloomberg reports that the sit down’s set for the Kanzleramt, right after mammy comes home and emerges from her Airbus 310 (named “Konrad Adenauer,” after Germany’s first chancellor, who’s busy rotating in his grave).

Anywhere between €1b and €2b in governmental loan guarantees will be on the table. Before any money is doled out, Foster and Demant will be in for a serious upbraiding. Economy Minister Glos already dropped the ominous remark. “When tax money is on the line to save international auto makers, there will be demands and conditions.” After Angela is through with Carl-Peter, Hans, and Klaus, and class is dismissed for some serious homework, Merkel’s Finance Minister Steinbrueck and Economy Minister Glos will hammer-out details with the federal states the next day. Berlin will underwrite €1b, the states underwrite another €1b. Or somesuch. And then …

And then, there is the A-word. Not “A ” as in Arschloch (although that word may have come up in discussions). That’s “A” as in assets. Only fools with think the Germans will give without taking.

Germany’s mass publication Bild am Sonntag says that GM will have to fork over €1b worth of assets, which Opel could use as guarantees for €1b of loans. Again, bet your sweet assets that when the loan guarantees go to €2b, concomitant GM-owned assets will have to be put in hock. Far from saying “we told you so.” But didn’t we tell you so?

Also assume that Opel’s books will receive an intensive colonoscopy. Anything GM may remotely owe Opel will come up. Assuming GM’s unwillingness (or inability) to pay, the debts will go to the appropriate collection agencies.

At first glance, GM owing Opel €2b and Germany getting ready to pony-up €2b in guarantees is way above coincidental. Then there is the always sticky matter of “unzulässige Gewinnentnahme,” or siphoning-off profits by a parent before they are properly-declared as profits and taxed to the gills. A lowly tax auditor can create havoc at the stroke of his red pen. Rest assured, with the books open to scrutiny, something along these lines may come up. Unless given to a good cause, such as supporting Germany’s farmers, or dotting the landscape with windmills, Germany rarely gives out free lunches. Especially not to Ausländer (foreigners.)

Like BS has a tendency towards walking, money has an inkling towards talking. Things will be different once Opel hangs on the financial drip, shoved up its vein by the German government, and their states that have Opel plants and therefore a political interest (as in “jobs, jobs, jobs”, also as in “taxes, taxes, taxes”) in keeping Opel operative.

As Opel’s dependency on the Government-administered money-methadone grows, GM’s adopted daughter may slowly be brought back to her German parents. Or rather be given to a dark knight who may already be lurking in the hedges.

As the B&B rightly opined, the German government(s) have no interest in running Opel. They have a big interest in keeping Opel alive and its profits back in Germany. The usually well informed German newspaper Welt says today, loan guarantees may not be the only topic discussed with Frau Merkel: “Government support, or a disentanglement of GM’s European activities from the parent will be on the table.” Wowie: “Disentanglement.” And not just Opel. “GM’s European activities.”

In related news,  Opel’s captive financing arm GMAC now finally received the memo from back home, outlining the sortof-bank’s dire straits. GMAC Germany finally expressed interest in Germany’s government money as well, Autohaus reports. That money, earmarked for banks, is there for the taking.

In a departure from reality, all too common at GM, GMAC Germany had said last Monday that there’s no need, we have a rich aunt in America. TTAC receives hundreds of hits per day from a network called “General Motors Corporation,” and at least one of them must have picked up the phone and yelled in the direction of Rüsselsheim:”WTF are you doing? It’s free money! Get as much as you can!” It will be most welcome.

As per November 1, GMAC Europe already stopped loaning money for cars to customers in the Czech Republic,Finland, Greece, Norway, Portugal, Slovakia, and Spain. “We won’t stop lending in Germany,” said a speakstress in Rüsselheim. Of course not, no money to customers, no money from Berlin. And then they are Weissbrot. Or make that toast.

PS: Just in case you are wondering where Angela Merkel’s automotive heart lies, on the job, she’s being chauffeured in either a Mercedes S Class, a 7-Series Beemer or an Audi A8 (all Germans are equal under the law).  At home, she drives a Golf.

In December of last year, a certain Peter Hart wrote an opinion column for Fairness And Accuracy In Reporting (FAIR). Hart decried the prevalence of polling in political coverage. Not only did he cast aspersions on the accuracy and reliability of polls, he identified them as a sinister threat to no less than “American Democracy.” “The more fundamental problem for the press — and for American democracy —” wrote Hart, “is that the media’s overreliance on polls encourages a kind of political conversation that prioritizes strategic consideration and tactics over substance.” He didn’t know how right he was. Today, Peter Hart Associates released the results of a poll of their own, gauging support for an auto industry bailout. Read the results in the Detroit News and you might be surprised. Read the poll itself and the Hart Associates client list, and that surprise should evaporate faster than Mr Hart’s ideals regarding polls and their cynical abusers.

Let’s start with the substance of the poll, which would probably send Karl Rove into an ecstasy of nostalgia. After the usual demographic and exclusionary (no media, no auto workers) questions, the first substantive query shows where things are headed.

How important do you feel the American automobile industry is to the American economy–extremely important, very important, somewhat important, not important, or not at all important?

Needless to say there’s no satisfactory way to answer this question, let alone any metric provided to measure “importance.” Anyone who knows nothing about cars or the car business knows there’s only one answer here: somewhere between “extremely important” and “very important.”

As the questions go on, they make it clear that this poll isn’t about ascertaining public opinion. It’s about communicating and legitimizing pro-bailout arguments. In Hart’s words, “the prioritization of strategic consideration and tactics over substance.”

You know the pro-bailout arguments; we’ve sliced them and diced them all over this blog. Presented in their most misleading forms as questions, is it any surprise that they poll… decently? Actually, the poll result’s relative ambivalence is surprising, considering how questions’ inherent bias.

“The federal government has recently provided financial aid to the insurance and banking industries to make sure that these industries do not fail. Do you feel that providing financial aid to ensure that the U.S. auto industry does not fail is more important, just as important, or less important?” Only 14 percent answered “more.” Just 55 percent picked the obvious “correct” answer: “just as important.”

The scaremongering picks-up as the poll goes on, with subsequent questions asking respondents to rate the “importance” of a host of possible dire consequences of industry failure. Not that there are any guarantees that a bailout would prevent or solve any of these sinister symptoms. Just “which ones scare you the most?” Of course, when these questions meet with even the tiniest amount of context, the Hart poll’s results begin to look like the PR stunt they are.

Alternatively, a Rasmussen poll which asks the respondent to examine the entire economy and base priorities from there finds that 45 percent of Americans oppose a GM bailout, with 20 percent undecided. The same poll shows that the automotive industry has actually fallen eleven points as a priority since March 2007. Oh yeah, and 80 percent were “concerned the government is getting too involved in the private economy.”

Again, this is in the context of the larger economic picture. Only by looking at the auto industry through the wrong end of a telescope could Hart achieve the results his clients paid for.

Bias is evident enough in the substance of the post (have a look for yourself). But a quick peek at Hart Associates’ online client list is the final piece of the puzzle. Politically, it’s all Democrats, many from automaker states (with their party affiliation left unstated). On the corporate front, Hart’s benefactors include “DaimlerChrysler,” as well as notorious federal teat-sucklers Boeing and Fannie Mae. Then there’s the United Auto Workers, the AFL-CIO, Teamsters, SEIU and other unions, large and small.

In short, Hart works for this country’s biggest bailout backers, from the worlds of industry, politics and labor. Including of course, the big Kahuna: GM. As the Detroit News puts it, “General Motors Corp. paid for the poll but had no input or review of the design, methodology, content or interpretation.” Then again, why would they handsomely reward Hart if he wasn’t pro enough to give them exactly what they wanted, without them asking?

In any case, opinion polling, as Hart himself lamented, is a dark art. He correctly identified its significant shortcomings a long year ago– only to appropriate the very tactics he denounced in aid of a multi-billion dollar giveaway to failing companies.

And they say the master’s tools will never tear down his house.

The question presumes that A) Detroit’s ailing automakers ARE America’s automobile industry and B) using our tax money to protect Ford, GM and Chrysler from their own incompetence would benefit the U.S. car industry. Not true, on both counts. And by ignoring the flawed assumptions underpinning the argument for raiding the average American’s wallet, bailout proponents are misleading what they condescendingly call “Main Street.” To which I say no, no, and Hell no.

Clearly, unequivocally, the American auto industry does not consist of Ford, GM and Chrysler. In fact, these three Detroit-based companies COMBINED no longer control the lion’s share of the American automotive market. Foreign-owned manufacturers– the so-called transplants– account for over 50 percent of all new vehicle sales within the U.S. For better or worse, they constitute the core of the American automobile industry.

Feel free to debate amongst yourselves whether or not the fact that the transplants’ profits return to their home country is a crucial difference— just as long as you understand that Ford and GM’s North American divisions have been living off of their foreign ops’ profits for at least the last two years. And that this financial flow inwards is decades old.

And don’t forget another, equally salient detail: Detroit-based car companies are, right now, importing hundreds of thousands of cars and millions of parts from outside U.S. borders. For more than a decade, Ford, GM and Chrysler have been Hell bent on “saving” the American automobile industry by destroying it, sending U.S. manufacturing jobs to Canada, Mexico, South Korea, China and elsewhere.

Anyway, if we accept the idea that BMW, Mercedes, Toyota, Honda, Hyundai and Nissan’s American production facilities are a vital and yes, equal part of the American automotive scene, it raises an interesting and completely ignored question: is the federal bailout for Detroit good for the REST of the American automobile industry? Does it “save” them?

The surprising answer is yes. By supporting Detroit’s inefficiencies, a bailout would help maintain a suitably high “floor” for new car prices. So your tax subsidy to Detroit would protect the transplants’ profits, and by extension, their American workers.

On the downside, a federal bailout screws the consumer. It would help prop-up new car prices, stifling the kind of competition that leads to innovation, and increased value-for-money. As far as the non-Detroit-related taxpayer’s personal pocketbook is concerned, letting American-owned automakers fail is the best possible course of action. The American consumer would get a better product at a lower price, for no extra charge.

Sorry. I know: it’s about jobs, jobs, jobs. Inherent in the idea of “saving” the [strictly defined] American automobile industry is “saving” American automotive jobs, upon which the entire U.S. economy supposedly rests.

Again, you can discuss the “ripple effect” of a combined Ford, GM and Chrysler C11 on the wider U.S. economy without my interference. But however great the impact, it doesn’t alter the truth: the word “save” here means “subsidize,” to no appreciable end. I mean, is there any one amongst you who truly believes that injecting $25b of federal capital into Ford, GM and Chrysler will put them back on their feet, so that their workers and products can compete with non-Detroit automakers? If so, you simply haven’t been paying attention.

And once we’re doing a reality check, if saving the American automobile industry is a euphemism for “giving The Big 2.8 a bridging loan so they can get healthy and competitive at some point in the not to distant future,” we need to face facts: Ford, GM and Chrysler will have to shed jobs anyway. Bailout or no bailout, they’re too damn big for the U.S. car market, now that the new car “bubble” (which they created) has burst.

Enough of this misdirection. Let’s get down to brass tacks. The real question is this: is Detroit worth saving?

No, it’s not. Not in its current form. In this I refer you to General Motors Death Watch 1, wherein I proposed that GM should be parted out. I asserted that its current management should take a hike and its constituent brands reconstituted as independent car companies. (Or not.) In the last three years, I’ve seen nothing to dissuade me from this opinion. As for Ford, it too needs to shed brands and reinvent itself. Chrysler, well, Chrysler’s a basket case. Only Jeep may live on.

So yes, the American automobile industry is worth saving. Only it’s not in any real danger. The only part of the U.S. car biz that’s on the ropes is the Detroit contingent. And the only way to save that bit is to let it fail, so that it may be reborn. But no matter how you slice it, and sliced it will be, “bailing it out” is against the interests of the American taxpayer AND the American consumer who, after all, must foot the bill.

At the end of the proverbial day, a federal bailout for Ford, GM and Chrysler would simply prolong the automakers’– and their workers’– agony. Yes, there will be pain. Lots and lots of pain. But sometimes the more painful the mistake, the more important the lesson. This is one of those times. Detroit can not be saved from the reality that they’ve studiously, callously, stubbornly ignored. Nor should they be.

Do we need an American automobile industry? And by American, I mean those manufacturers, suppliers, and associated vendors owned and operated by US citizens – red blooded, football-loving, meat and potato types. (Ok, that’s a stereotype, but you know who I’m talking about.) I submit that it’s in our national interest to keep it alive and moving forward. Farago disagrees completely (editorial to follow).

For now, we’re going to ignore the mechanics of rescuing Detroit. Or discussions about saving two of the companies and letting the third one go (back) to the dog(s). And we won’t even raise the question of how silly it might be to let Nancy Pelosi-– from San Francisco– to lead the charge to shovel your money to Detroit. So don’t go there; TTAC’s got that discussion covered already. Nope, this is a purely philosophical discussion about the merits of a home grown auto industry. So here goes…

Transportation provides the arterial network of moving people and goods around this country. It’s a darn big country, and most of it has been developed and organized around personal vehicles. Not trains, planes, or buses. The Unites States has more vehicles per capita than any other country in the world: 765 units per 1,000 population (from the United Nations Statistical Yearbook). England, by comparison, has only 426 per 1,000 pops. More new vehicles are sold in the United States than in any other country by millions. (China is the closest at 10 million units – but they’ve got four times the population of the USA.)

By any yardstick, the Unites States is the biggest and most prolific user of automobiles of any country in the world today.

It’s also the richest vehicle market in the world. American’s buy more “vehicles” (in terms of size, content, power, and fuel consumption) than anywhere else, too. While Europeans pay more for cars, they generally get less too: smaller cars, smaller engines, and in many countries, devoid of air conditioning or automatic transmissions. The developing world gets vehicles lacking most safety innovations and creature comforts. We get the best vehicles, with the highest level of safety, amenities, and power. And big, powerful, personal trucks to do our hauling.

So not having a home-grown automotive industry to sell to this market just seems insanely stupid. Everyone else (mostly) seems to make money selling new cars. Toyota and Honda make more profits here than anywhere else. New car sales represent a $400b per year market here. Selling a fraction of this market means big revenues and a Gulfstream jet or three for the executives. Just think of the waterfall of those dollars trickling through the economy with every car sold. Do we really want to ship a big chunk of those dollars overseas to foreign companies, governments and their owners so they can live the high-life?

Sure, we do buy a lot of goods from overseas. But it’s mostly stuff we can’t manufacture here at the same cost as over there. When a seamstresses cost $8/day in China, with few benefits paid and no OSHA regulations, we benefit from the savings as consumers. It makes little sense to produce Walmart’s clothes here.

But guess what? The costs to manufacture a new vehicle in the United States are about as cheap as it gets for the level of car sold as anywhere in the world. The direct labor component of a car represents roughly $1,800 of its total cost. Believe it or not, the direct production cost differences among all US-based assembly facilities from any manufacturer are nominal.

What’s different: the profits of foreign-brand cars assembled or imported in the United States go back to their home countries. That means their countries benefit from reinvestment of those profit dollars into the next generation of vehicles. Better motors, advanced electronics and safety equipment, and even new propulsion systems come from over there– not from US ingenuity and skills. Do we really want to depend on Japan, Korea, and Germany (and soon China) for the future of our cars and related technology or do we want it grown here in the USA?

What’s most promising is that the future of personal vehicles lies not with traditional gasoline ICE, but with variants thereof such as HCCI, diesel, and hybrids and/or all-electric vehicles. Getting there requires a huge investment of dollars. New tech also delivers collateral benefits: software for engine management, ride control, transmissions, heat recovery systems, emissions, and improvements in safety systems. Investments in new technologies come directly from the profits generated from selling vehicles today. And they’re mostly made by suppliers looking for an edge. We simply can’t abandon our future to others.

We need an American auto industry. One that runs the table on the entire production and sales chain. There’s no cost basis reason not to produce vehicles here. We just need better run companies with forward thinking managements. You can argue how we get there, but not where we need to be.

Once upon a time, Honda represented everything that Detroit was not. Efficient, lean, reliable and most of all, innovative. While The Big Three soldiered-on with the same powertrains for decades on end, Honda constantly renewed, redesigned and released cars that genuinely improved their customer’s lives. Profits and widespread admiration followed… until the Honda hybrids came along. Then Honda, long regarded as the technology leader, got its ass kicked by Toyota. What happened?

The 1999 Insight was an absolute masterpiece of technology. Honda coupled a 70 hp. 1.0L engine (with an air fuel ratio of 25.8) to a 13 horsepower electric motor. It was ‘Wow!’ technology back in the Clinton Era. At only 1847 pounds, with a wind whispering 0.25 Cd, the Insight generated exceptionally high fuel economy numbers (70/61) for their customers. What customers? This was an especially difficult question to answer as the Insight was not ready for prime time.

The ‘Integrated Motor Assist’ technology wasn’t the problem. Simply put, the Honda was a niche vehicle. At the turn of the century, with gas at a buck a gallon, the high-tech fuel-miser niche that was so small that the Insight literally offered a zero carbon imprint on dealer’s lots.

Honda optimistically projected 6500 sales for for the model year 2000 Honda Insight. Dealers unloaded a measly 3805 units during the hybrid’s first full year of release. And that was the high water mark. Worse, the sales failure killed the Insight’s evolution. For seven full years, the model’s design and technology became stuck in neutral, with limited modifications. That was where the real tragedy for Honda took shape.

While Honda was initially content with having a long model run and a limited market, Toyota had other plans.

When the first generation compact Prius was released in Japan in 1997, Toyota’s Corolla had officially become the world’s best-selling vehicle. The Prius was designed as a hybrid-only model from Day One. Toyota fully redesigned the Prius in succeeding generations to accommodate the changing nuances of the hybrid buyer.

At first the Prius failed. It racked-up just 5562 U.S. sales in 2000. Even as gas prices rose, both Toyota and Honda were besieged with anti-hybrid issues and innuendos. Both companies had to deal with the financial fears associated with battery packs. Warranties were extended, and some customer assistance was offered.

But Toyota– not Honda– used adversity as a PR tool. Before long Toyota was highlighting battery failures in 56 degree below zero Arctic weather and proudly proclaiming that no other battery had ever needed to be replaced. It wasn’t factually correct (a.k.a. complete bullshit) but the story played well with the general public.

By 2003, Honda was putting the same technology in the Insight (with minor modifications) into the Honda Civic. They gave the conversion more torque, an extra 300cc’s of displacement and a bit more engine heft. Speaking of heft, at 2700 pounds, Honda’s CVT transmissions would now power a vehicle that was nearly 850 pounds heavier than the Insight.

It didn’t take long before Consumer Reports and a rash of owner review sights began to highlight the very expensive and frequent transmission work requireed to keep the Honda Civic hybrid on the road. After a few battles, Honda upped the transmission warranty to 100k and agreed to replace or modify components in the hopes of avoiding the inevitable. Unfortunately, with cases of third and fourth transmissions being replaced within 100k, the Civic Hybrid began to lose serious traction with the public.

While these Civics sat with their Taurus quality transmissions, the Prius was garnering reliability awards from J.D. Power, Consumer Reports, and was quickly becoming the de-facto poster child of a mass ‘hybrid’ market. Honda had abandoned a sheetmetal design projecting their hybrid model’s green, high-tech, Space Age credentials (albeit in a less-than-practical two-seater) for a mass market clone car. The Prius’ shape morphed in the exact opposite direction, from flat-line Echo cardiogram to an Insightful hybrid statement.

With gas prices in the upswing, the Prius’ aspiring hypermilers and the eco-conscious consumers were soon joined by those simply looking at the economic proposition of ownership. By 2005, with a second ground-up redesign, the Prius passed 100k annual sales, heading for over a million hybrids sold worldwide by 2007. In the same year, Honda would sputter-out only 32k Civic Hybridss, 3400 Accord Hybrids), and three of the now defunct Insight. Honda now had a full fledged failure on it’s hands.

Beneath the skin, much of Honda’s failure in the hybrid market can be traced to the same shortsightedness and bad customer support that’s afflicting the Detroit Big 3. The depressed valuations and bad owner reviews for the past Honda Hybrids will undoubtedly make the 2010 Honda Insight a far tougher sell.

Should Honda offer a stronger warranty on their new vehicles? Should they simply recall the defective transmissions and offer a longer warranty for current owners? It’s easy to say yes. But every automaker has to draw their own line is between taking care of the customer, and taking care of the bottom line.

As these pictures demonstrate, Honda is determined to take-on the Priora of the world with a kick-ass hybrid. That isn’t afraid to look like a knock-off of its direct, perhaps only competitor. Priced to go. With (one hopes) brand-faithful reliability. Even so, Honda will need to figure-out how to take on a rival who kept their product exclusively focused on a very unique and evolving customer. As Honda and The Bailout Big 3 are learning, the road to redemeption is long and perilous, with persistence, determination and humility providing the best chances of success.

[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.

[The following analysis was sent to TTAC by a New York City bankruptcy lawyer who wishes to remain anonymous. It’s twice as long as our usual editorial, but I think you’ll find it’s well worth your time. Thanks to you-know-who-you-are.] Cerberus Capital, a highly secretive NYC-based vulture investment fund, wants the U.S. government and taxpayers to bailout its failed investment in Chrysler and its failing investment in GMAC. Its partner in this raid on the US Treasury is General Motors, a woefully insolvent automobile manufacturer whose CEO is paid $40k each day. Here’s why a bailout for GM and/or Chrysler is a bad idea.

Background

Cerberus Capital uses hedge funds as the vehicles in which to invest in various companies. Apparently, the hedge fund known as Cerberus Series 4 is the owner of an 80 percent interest in Chrysler and a related fund owns or controls a 51 percent interest in GMAC. Not surprisingly for a company known for its secrecy, Cerberus has not disclosed which entities actually own the interests in Chrysler and GMAC, has not disclosed what fees Cerberus has taken or accrued from its investments, and has not disclosed what severance payments would have to be made if GM actually acquired Chrysler. For example, would Chrysler CEO Bob Nardelli get another big payday if he’s cut loose in a merger? The interrelationships among GMAC, Chrysler Financial, Cerberus and other entities are also a well-kept secret.

Secrecy, Secrecy, Secrecy

Why is everything so secret? What happened to the idea of open government? A few questions come to mind:

1. Exactly what is the Cerberus/GM proposal to borrow $10b from the US Treasury in order to fund a merger, the terms of which are also secret? Is it in writing? Where is a copy? What were the proposed terms that were rejected by the current US Treasury? Is another proposal in the works? How is the $10b going to be repaid by two insolvent auto manufacturers?

2. Which lobbyists represented GM and Cerberus in getting their loan application before the US Treasury? How much were the lobbyists paid? With whom did GM/Cerberus meet? Where are the notes of any meeting or other communications about the loan proposal?

3. What do we know about the financial condition of the proposed borrowers? Where is Chrysler’s current balance sheet and income statement? Surely Chrysler is insolvent on an equitable basis, and probably insolvent on a balance sheet basis. Why is basic financial information not available for public inspection and comment?

4. Where are the financial statements for the Cerberus Series Four hedge fund? US  taxpayers are being asked to bailout the failed auto related investments by Cerberus Series Four, while the profitable investments in the same fund are not being shared with taxpayers.

GM is woefully insolvent and should file Chapter 11

5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its current liabilities were $70b, dwarfing its current assets of $55b. Moreover, we do not know what deals GM has made to stretch/defer repayment of its account payables.

6. Is Chrysler in any better shape than GM? Probably not, but without a current balance sheet the definitive answer is a secret.

7. Assuming Chrysler is insolvent (liabilities exceed assets), then the equity interest of Cerberus and Daimler (the 20 percent equity owner) are worthless and these entities are not even entitled to a seat at the merger negotiating table. The real economic owners of Chrysler are its creditors and employees, who are also in the dark about the proposed US treasury bailout.

Who really benefits from a GM/Cerberus/Chrysler merger?

8. The US taxpayers can’t benefit since there is no repayment plan. Not surprisingly, Cerberus and its hedge fund are back door beneficiaries, because the 51 percent Cerberus ownership interest in GMAC will increase in value if GM and GMAC survive. Chrysler is a lost cause, but with the value of the Cerberus investment in GMAC also plummeting, Cerberus is trying to prop-up GMAC by helping GM survive. Is Cerberus pledging its equity interest in GMAC to the US Treasury as security for a government loan to GM? Why not? Is GM pledging its 49 percent equity interest in GMAC to secure repayment of any loan by the US Treasury? More secrets kept from the public.

9.  The self-dealing by Cerberus extends to wanting to cherry-pick the Chrysler assets and keep the auto financing arm for itself. What is the value of the Chrysler auto financing business, and why should Cerberus benefit?

10. GMAC had negative net income of $3b for the first 6 months of 2008. GM’s ownership interest in GMAC was impaired by at least $2.7b during the same six month period, meaning that Cerberus Series Four hedge fund had suffered a similar loss in value in its investment in GMAC. Why should taxpayers bailout the millionaire investors in the Cerberus hedge funds?

More secrecy and lack of disclosure

11. Does GM plan to make any payments to GMAC, payments that directly benefit Cerberus? As vehicle residual values decrease, GM is obligated to make payments to GMAC under “residual support and risk sharing” agreements. On August 6, 2008, GM paid GMAC/Cerberus $646m, money which could have been used by GM to fund its ongoing operations and its obligations to employees.

12. Should any taxpayer money be used to fund payments to GMAC/Cerberus, whether that money is used directly or indirectly? How much, if anything is Cerberus investing in new money to prop up its investment in GMAC? If it is not investing in Chrysler or GMAC we can reasonably conclude that its analysis shows that the investment is a bad one. What’s bad for Cerberus is bad for the US Treasury.

Although it appears that the Cerberus Series Four has money available to make follow-on investments, it makes no sense to throw good money after bad if you can lobby the US Treasury to make the bad investment for you. A related question is whether the Cerberus equity interests in GMAC are going to be used as collateral for the loans that will be used (albeit indirectly) to bailout GMAC. Why should equity bear none of the risk but get all of the benefit?

More non-disclosure

13. What is Cerberus ResCap Financing LLC and who has seen its financial statements or the agreements relating to the $3.5b secured loan facility? How is this secured loan impacted by the bailout of Cerberus/GM/Chrysler?

Deepening insolvency is likely

14. GM’s current insolvency and continuing losses will trigger additional liabilities, and make it doubtful that GM will be able to make payments promised to employees and former employees or perform its labor agreements. GM’s worsening financial condition also deepens its losses from its derivative contracts. How would a GM/Cerberus Chrysler merger affect these liabilities? Will any government loans be used to reduce the $30b of GM accounts payable, or, in the event of a merger, to pay down Chrysler accounts payable in some still unknown amount? Sadly, we don’t even know what Cerberus proposed as the use of funds and we have no idea how Cerberus will benefit since we have no financial information on Chrysler or Cerberus.

15. As GM and Chrysler idle plants and facilities, more employees are laid off  the employee related liabilities of GM/Chrysler will increase by hundreds of millions. Since GM and Chrysler are insolvent, who will pay these increased costs? Can any of these costs be avoided in a Chapter 11 case of Chrysler or GM?

16. Should taxpayer money be used, directly or indirectly, to pay GM and Chrysler obligations that are coming due while these entities are unable to pay from their own assets. Surely not, but what is being proposed, and who will benefit if GM debt is redeemed at par by vulture investors that bought the debt at pennies on the dollar? A related question: will any Cerberus entities benefit from government funded redemptions of auto maker debt? Is it possible that Cerberus is trading in credit default swaps and actually benefiting from the difficulties of Chrysler, GM and GMAC? Yet more items of non-disclosure on a long list of secret items.

Conclusion

17. GM, GMAC and Chrysler are not credit worthy and are unable to borrow money on any basis, secured or unsecured.

What’s Good for GM/Chrysler is a Chapter 11 Filing

18. GM needs to be restructured, which means it must change the terms of its legal obligations to suppliers, bondholders and employees. The only vehicle to accomplish the needed changes is Chapter 11, which lets GM reject unfavorable contracts, renegotiate its debt obligations, defer interest and principal payments and gives it time to fix its business. Without a chapter 11 filing a government infusion of $10b cash will be gone in six months when GM uses the money in 2009 to pay bondholders and employees billions of dollars, payments which do nothing to help GM survive.

19. Chrysler, the stepchild of a distressed debt vulture fund, is also a prime candidate for Chapter 11. But Chrysler should be liquidated, not reorganized. A liquidating Chapter 11 case, expressly permitted by the Bankruptcy Code, can be used to keep Chrysler operating while its divisions are sold. With adequate Chapter 11 funding line workers can keep their jobs and benefits, and non-essential executives can be fired at minimal cost to the Chapter 11 debtor, known as the debtor-in-possession. Trade creditors will continue to ship to Chrysler because their post-petition claims will have a priority in payment. Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments. Chapter 11 will also make it clear to Daimler and Cerberus that their investment is worthless and they will not be able to use their position of control to improperly benefit.

20. Cerberus should acknowledge the financial reality and either file a Chapter 11 case for Chrysler or have a federal receiver appointed so that the value of the Chrysler assets can be maximized in an orderly sale procedure. The US government should fund the Chapter 11 case and keep Chrysler operating by giving Chrysler a debtor-in-possession loan having seniority over all other liabilities of Chrysler, thereby assuring taxpayers that the money will be repaid out of the proceeds of asset sales. The US could also give a senior secured loan to GM to help GM acquire assets from Chrysler, but this would require the cooperation of bondholders, cooperation not likely to be forthcoming. On the other hand, if GM is in Chapter 11 then the government could refinance the GM operations without fear that taxpayer money would be diverted to pay existing creditors.

Environmental exploitation is here to stay. Even the threat of industry collapse has failed to take the collagen out of American automaker’s eco-friendly lip service. In this they are hardly alone. The litany of firms running advertisements professing their undying love for our Mother Earth, and building concept cars to show their unconsummated devotion, continues apace. 2008 is the first year that the SEMA has set aside a portion of its annual show for green trendiness. It’s not a concept that sits well with the show’s ethos of excess. But never underestimate the power of hypocrisy. And America’s ability to co-opt controversy to unite our society under the banner of the almighty buck. Amen.

Make the long trek to the very back of the second floor of the Las Vegas Convention Center’s South Hall this week, and you might see a sign advertising SEMA’s “Making Green Cool Zone.” As if the 20-minute walk through spray-on bedliner and rhinestone Aston badge frame peddlers weren’t distraction enough, a pair of GM hybrid SUVs block all sight of the Zone’s inhabitants as you approach. As it turns out, these “green” sentries could not have been better chosen.

Venture past GM’s four-wheeled answer to a question no one asked and you’ll find yet another HUMMER-on-treads. Of course. This one looks ready, will and able to guzzle as much biodiesel as a 6.5-liter engine needs to push several tons of H1 to the South Pole. The thought of this brute chewing through miles of untouched Antarctic landscape and gallons of shipped-in biodiesel suddenly filled my heart with hope for the future of the planet.

After several more minutes of zoning-out, it became clear that the Zero South HUMMER was SEMA’s shade of green. Specifically, biofuel capability is the major qualification for what “makes green cool.” From yet another military-themed biodiesel H1, to the VegiRam (how kiny is that?), to the Vegistroke Harley-Davidson F150, to the E85 ALMS Corvette, the Zone’s offerings were SEMA business-as-usual with a vegetable twist. In fact, A123 Systems’ $10k Prius PHEV conversion kit was the sole non-agricultural contribution to the cause.

Of course, SEMA’s “Green Zone” press conference (RPG-free) shied away from anything as crass as corn ethanol-boosterism. The many limitations of biofuel as a renewable and environmentally-friendly gasoline alternative were glossed over with more casual ease than Adriana Lima’s pout.

Having waded through the acres of status and power-enhancing merchandise, I pondered the long-term future of SEKA’s belated and half-assed courting of “green” credibility. Do the savvy businesspeople who make up the automotive aftermarket really believe that demand for chrome grilles and 28″ wheels has more growth potential than mileage-improving mods? Apparently so. The market has spoken.

I have overheard more than a few comments this week to the effect that this year’s SEMA show is smaller and less vibrant than past years. Listening to exhibitors, the specter of economic malaise seemed to hide behind every cautious assessment of the industry’s future. So if a consensus has been reached that the market for slammed, lifted, flashy and loud has been saturated (based on credit availability), why aren’t more companies offering mileage-improving products?

The problem with SEMA’s approach to “green” appeal is emblematic of the trends which are causing their industry to retract. Putting lambo doors on a Prius may “make green cooler” than converting gas-swilling monstrosities to biofuel-swilling monstrosities, but clearly even this is a myopic approach to an economic opportunity which will only improve over time.

Besides A123 solutions, the only hint of true vibrancy in the environmental aftermarket came from Electrojet, a tiny Michigan-based firm which isn’t even listed as a SEMA exhibitor. Their world-beating idea? A low-cost electronic fuel injection system which can bolt onto the small motorcycle engines which provide most developing-world personal transport. These tiny engines create a disproportionate amount of pollutants, creating a huge potential demand for cheap aftermarket solutions.

But SEMA was too busy “making green cool” to fully embrace the many possibilities for such game-changing aftermarket developments. Yesterday the culture of machismo and excess that permeates the SEMA show seemed like poignant self-parody. Today, I saw the true cost of this addiction to hype, quick profit and shallow glitz. A huge opportunity for a challenged industry, reduced to a few disingenuous tokens hidden away in the back corner of a huge convention hall.

I know there is more to SEMA than the garish beasts which define the automotive aftermarket in the minds of the public. The hard-working, unheralded engineers and fabricators who sell their seemingly mundane components from pedestrian booths are as important to SEMA as the dub-peddling jokers and their flashy displays. If these people take on the “green” challenge with practical, affordable accessories, they won’t just make money. They will change the entire face of the automotive aftermarket. And not a moment too soon.

Back when the “first” Detroit bailout bill was headed for the President’s desk, U.S. automakers scrambled to justify their $25b call on the public purse. Read the goddamn label, they cried. It’s a LOAN. For building FUEL EFFICIENT CARS. Meanwhile, Michigan Senator Stabenow displayed the political instincts for which she is rightly famous. “It’s about jobs, jobs, jobs,” the Debster decried. Well exactly. And thanks to “jobs, jobs, jobs,” the domestics will get a second, third, fourth and fifth turn at the taxpayer trough. But first, there’s a little business to take care of: Cerberus.

Cerberus Capital Management is the private equity group that bought Chrysler from the Germans. Why they did that is anybody’s guess— provided “strip and flip” are the first words out of their mouth. At the time, Cerberus swore up, down and sideways that theirs was a long-term play. They had deep pockets and they weren’t afraid to use them. Just in case anyone believed them, Cerberus installed the disgraced cost-cutting CEO from Home Depot at the automaker’s helm, and terminated virtually all new product development.

OK, so here we are. Chrysler’s dead in the water. The U.S. car market is dead in the water. Cerberus has a better chance of selling a cup of water to a dead person than off-loading their Chrysler investment at profit, either as a going concern (yeah right) or in parts. To exit their Chrysler debacle “gracefully”– i.e. prop-up the biz until they can off-load it on another sucker– Cerberus would like to draw-down some federal bailout bucks. Only that’s an extremely risky strategy.

Unlike GM and Ford, Cerberus is a going concern. Going very well, in fact. The equity firm’s website claims $100b worth of annual income from its other investments, in industries ranging from aerospace to travel and leisure. Automotive accounts for just eight percent of its total holdings. All of which means Cerberus could actually go the distance with Chrysler. You know; if they wanted to.

Which they bloody well don’t. ‘Cause they’re not stupid. In terms of money and time, Cerberus knows they’d be better off starting a new automaker from scratch than trying to revive a liability-laden, union-stifled, bureaucratically-challenged, over-dealered, product-deficient Chrysler Corporation. Or simply torching a 100 dollar bill every five seconds for the rest of eternity. So, again, Uncle Sam’s mams are looking pretty good to Cerberus right about now.

But not for long. Now that Congress has pissed-away $700b on the “are you SURE we needed to do that?” Wall Street bailout, spending several tens of billions more to “rescue” a private equity firm’s folly is an idea with wings of lead. I mean, eventually. Right now, the average American doesn’t know Cerberus from Adam. Right now, it’s all about “jobs, jobs, joibs.” So now’s a good time to ask for bailout bucks. So now they’re asking.

But the clock is ticking for Cerberus’ political fixers, and they know it. It’s only a matter of time before they’re “outed” [see: today’s Wall Street Journal]. So they’ve devised a suitable plan B: blackmail.

Cerberus is blackmailing GM into buying them. It may be a coincidence that GMAC– 51 percent of which is owned by Cerberus– has cut-off vital floorplan lending to GM dealers. It may be a coincidence that GMAC now requires a FICO score of 740 for a GM loan or lease. And it may not. I repeat: Cerberus has deep pockets. They could shore-up GMAC on their own.

So, if GM buys Chrysler, what’s the bet the GMAC “problem” goes away? More importantly, so does the Cerberus PR problem. In fact, a combined GM and Chrysler would make an even MORE compelling case for federal aid. And, let’s face it, that’s all GM has left now. Without a federal bailout, GM’s dead. And everyone knows it.

Well, not everyone. The average car buyer is still blissfully unaware that GM is a zombie. If he devotes any mindspace to the issue, Joe the Car Buyer thinks GM’s in a spot of bother, what with building all those SUVs and all. If we need to protect blue collar jobs, well, better Detroit than those banker boys or those foreign automakers (did I tell you my wife’s brother bought a new Honda?). By the same token, a merged GM and Chrysler makes perfect sense. Two are stronger than one, right?

In short, to avoid– or I should say forestall– Chapter 11, GM and Chrysler will merge.

During CEO Rick Wagoner’s tenure, GM has always tempered major bad news with a major announcement. So this could be the mysterious revelation scheduled for Friday morning. With or without Treasury Department assistance, I reckon American Leyland is on its way. If it does arrive, one thing’s for sure: Cerberus won’t be around to watch it die.

I waited all day for the fear to take hold. Wandering through a parking lot jammed with alien whips, I wondered when the icy fingers would make contact with my sun-baked scapulae. But it never came. As the desert sun faded to dusk and Las Vegas slowly came to life with humming neon, I couldn’t help but take what alcoholics call a searching and fearless moral inventory. What had robbed these ferociously unnecessary monuments to excess of their terrifying power? Were they too much at home in glittering Babylon, little more than tiny microcosms of the glaring titans that loom over the Vegas Strip? Or had some infectious irony (gone pandemic in the face of national malaise) landed in this last bastion of shallow glitz, reducing each glittering status symbol to so much light parody? Or was I (and the creators of these mechanical beasts) simply preoccupied with said malaise, and the seemingly inevitable national transformation which has only now, as I write from my hotel room, been officially realized? Nobody goes to Vegas seriously expecting answers, but was a little existential fear now too much to ask for too?

Nothing had empirically castrated the gleaming hulks which littered the front of the Las Vegas Convention Center. The luxury armored cars, fire-breathing dragsters, and bristling street racers were not short on horsepower, fuck-off attitude, or obtrusive hedonism. Behind me, a twin-turbo Hennessy GT40 roared to life, blasting a window-rattling raspberry at the very notion that hydrocarbons might not be a God-given and limitless right. No, this automotive bloodline was clearly still feeling its oats, evolving in every monstrous direction and bouncing off the limits of sanity.

And yet, gazing on these brutes I felt nothing more than the inevitable maturity that settles on any movement that founds itself on the principles of outrage and excess. Where a low-slung, double-bubble-topped artifact from the era of the great Dream-O-Ramas shone with the promise of a sleeker, lower-slung future, the Hummer on four individual tread-tracks spoke only of a culture sliding into a morass of unimaginative self-parody. Or a deeply unwell individual.

But even the sight of an H2 perched on triangular traction generators (and its cultural implications) couldn’t shake a sensation that I was witnessing something vulnerable. Fragile, even, for aftermarket parts. Maybe I’ve been watching too much cable TV news which can not stop blaring the promise of historical change they swear is happening. Perhaps it’s the steady diet of apocalyptic news I’ve digested steadily since becoming an automotive blogger. Whatever the reason, I feel the earth shifting around the SEMA show.

When the founder of the duPont Registry admitted that he’d received many questions about the status of the luxury auto market, he made no refutation to the fundamental implication: that Americans can no longer afford the irrational exuberance his publication hocks. All he could say was that the industry must focus on the global market, a remark which strangely reinforced my impression that the boom-town bustle, status fixation and epic scale of Las Vegas felt more Chinese than American. He then unveiled the $300k Knight XV luxury armored car.

If not every mechanical saurian born at the SEMA show notices the burning comet which appears to hurtle towards it, is it even fair to blame its pimps and proud owners? Surely no Tyrannosaur ever considered the evolutionary choices of its forbears (damn, baby girl, you got some tiny arms) anything less than a step towards unprecedented greatness. In the same way, since the first cars emerged from the workshops that gave them birth, their creators have sought to make them bigger, faster and more expressive. That this process of evolution, which has captured the minds and imaginations of millions, has culminated in the grotesque monstrosities haunting the Las Vegas Convention Center is no more surprising than the fact that most dinosaurs eventually transformed from primeval monsters to modern birds.

And though the odd archaeopteryx (Yaris Club, anyone?) perched between the brontosauri, subtly pointing to a more rational future, there is little to suggest that nonsensically transforming utilitarian machines into fearsome beasts is going away completely. Old-school muscle machines outshone their new-wave pretenders, smiling like crocodiles who know that their niche isn’t going anywhere. Car tuning may have become a $38b industry thanks to cheap credit and poor taste, but its beating heart is the not the guy who put 28 inch wheels on a Phantom Drophead Coupe. It’s the guy who works eight hours and then goes home to spend his evening on his back under an internal combustion engine. When the 2009 SEMA show convenes a year from now, that guy will be back in Vegas. More than a few of the dinosaurs may not.

So you thought Porsche financed the VW takeover by foisting overpriced floormats and trucks on their well-heeled buyers? Yesterday’s issue of Die Welt, Germany’s conservative newspaper, thinks different. They undug the dirt on Porsche’s takeover-machinations of Volkswagen. It’s a story that makes Cerberus look like a frisky puppy.  It’s an account that makes banks and hedge funds look like morons.

In March 2005, Porsche Chief Wendelin Wiedeking, and his clever CFO Harald Härter traveled to the picturesque Salzburg. They presented to the Porsche/Piech clan their strategy to subjugate the auto giant Volkswagen. The cunning plan: Porsche buys VW for no money. Make that: Porsche bamboozles hedge funds– supposedly the smartest of the smart– into unwittingly forking over the cash.

The Porsche/Piech clan liked the plan, and it was set in motion. Unspoken, but obvious: that meeting included-– virtually at least-– Ferdinand Piech. As every TTAC B&B knows, Ferdinand Piech owns a good chunk of Porsche, and serves as the head of Volkswagen’s Supervisory Board. Did he exercise the powers vested into him, and warned the shareholders of VW of the machinations? We don’t think so.

Using the whole arsenal of arbitrage, swaps, puts, straddles, fraptions, and butterflies, Porsche drove the VW share up, while the hedge funds, fixated on the fundamentals of the flopping auto market, sold short. Porsche used every available loophole of the German law: A swap for instance doesn’t need to be registered. Porsche owned more and more of VW without anyone noticing. Porsche/Piech controlled the news. They could buy low, sell high, and with leverage that would have put the awe in Archimedes. The proceeds were used to buy more stock (to move it) and more options (to make more money.)

Over the years, Porsche kept people guessing why they would invest into VW at all. Three years ago, Porsche announced to an astounded world that they bought 20 percent of VW’s stock. They positioned themselves as the benign white knight that kept VW’s vestigial virginity from being gang-raped by rabid Auslandskonzerne (foreign corporations.) If anybody asked where this would lead, no answers followed.

Did Porsche want just a small chunk of VW? Or a blocking minority of 25 percent? Or, gasp, would they go for 51 percent? When questioned, Wiedekind assuaged the markets: “We are not going for a blocking minority.” A few months later, Porsche had more than 25 percent. Reminded of what he had said before, Wiedekind smiled.  He had not lied. A blocking minority was not what they had in mind. They wanted the whole kit and caboodle.

In the meantime, Porsche conducted the orchestra of financial instruments like a Kapital-Karajan. Their financial fiddling did not remain completely unnoticed.  Says the Economist, a bit belatedly: “The risks of short selling should have been apparent to the brightest hedge-fund managers in Mayfair and Greenwich because of widespread suspicion that Porsche, a dab hand in currency-derivatives markets, was also mucking about with options on VW stock.”

Indeed, Morgan Stanley warned clients on October 8th to refrain from playing “billionaire’s poker” by betting against Porsche. Max Warburton of Alliance Bernstein correctly predicted Porsche could make billions by squeezing short-sellers of VW’s shares. Porsche’s answer? “A fairy-tale.”

Likewise, Porsche’s balance sheet got curiouser and curiouser: In fiscal 2005/2006, Porsche showed a profit of  €2.1b before tax, and of that, a whopping €900m were “non recurring items” – an euphemism for gains from speculation. “Currently, Porsche makes only a quarter of its profits from building its luxury cars,” says Die Welt, “and it won’t be long before their profits exceed their annual sales.” Which stood at €7.4b as of the last fiscal year.

The stock yo-yo of last week may have brought Porsche close, if not beyond that elusive target. In an all-out final attack, Porsche drove the hedgies into panic-buying, psyched funds managers into loading up on VW at all cost. Then, Porsche sold their options and made an even bigger killing. With an utter deficiency of shame, they spun even that as “providing a greater free-float to a constrained market.”

The funny thing: Porsche may get away with the murder of the hedgies.  Actually, in Germany, Porsche’s backs are being slapped with Schadenfreude.  One CEO of another company that is part of the DAX, wisely said off the record: ”How Porsche engineered the financing of the VW takeover is exemplary. Ingenious!”  Ulrich Hocker of the Deutsche Schutzgemeinschaft für Wertpapierbesitz  (German Protective Association of Shareholders) grins: “The losers are no small stockholders. This time, it was professionals who should have known the risks.”

The losers see it different: “Stock manipulation”  grumbles DWS, the fonds of  Germany’s banking giant Deutsche Bank. Unless totally dead, losers have a tendency to get even.  Sneers the Economist: “Porsche may struggle to sell 911s to hedge-fund managers for years and years to come.” That may be the most benign revenge of the many that are being hatched in the hedges.

After the initial media support for a potential GM – Chrysler hookup (e.g. Jalopnik.com’s Ray Wert), the bandwagon began to roll like a snowball down the proverbial mixed metaphor hill, and everybody soured on the deal. We even charted how individual commentators changed their positions and eventually “threw Chrysler to the Wolves.” In Monday’s New York Times, Andrew Ross Sorkin said that GM CEO Rick Wagoner’s continued employment is a “minor miracle.” But the commentatorati are still behind the curve re: the government’s rumored $10b “intervention” in the GM – Chrysler merger. In the main, they have’t even acknowledged that the bailout is happening. That, and the critical fact that it’s structurally designed to fail.

Let’s start with the likely government strings. This is after all, common sense. If the merged GM/Chrysler is going to enjoy the benefits of our largess, they should be held accountable for what happens next. He who owns the gold makes the rules. At least in theory. In theory, you and I might demand that the entire executive floor of the Renaissance Center be fired. But the U.S. government doesn’t see it that way. All indications are that the men who’ve gutted GM will keep their jobs and eviscerate what’s left of the American automaker(s).

But it gets worse. One of the politically-fueled requirements of this politically-fueled bailout: Chrysler-GM must keep as many jobs intact for as long as possible. That’s 97k union jobs that someone’s duly elected officials want to protect. But any analyst with a high school diploma or better knows that both GM and Chrysler are currently too big to survive; too many managers, brands, factories, dealers and workers. Unless the new entity makes job cuts, merging the two automakers makes no sense whatsoever. How do you achieve any benefits if you can’t replace two jobs with one?

At this point, the bailout request from GM and Chrysler is a $10b package (in addition to the $25b previously allocated for plant retooling for more fuel-efficient cars). The combined debt of GM and Chrysler is $52b. GM alone is burning through $1b per month, just to keep the lights on. Even if their collective debt vanished or could be put on hold (a process we once referred to as bankruptcy), bailout number two only provides enough cash to keep GM-Chrysler (a.k.a. American Leyland) rolling for another two years– at best.

The automotive business runs on a five-year cycle. From a product perspective (remember products?), General Motors and Chrysler can’t do anything significant during those two federally-subsidized years. We know exactly what will be on the showroom floor in two years’ time. GM’s “great hopes” were the Chevy Cruze and Volt. While the Volt’s feasibility is debatable, the Cruze (a much easier to build conventional car) is slated to go on sale as a 2011 model some time in 2010. That’s it. Time’s up for GM. Giving them money without restructuring is like heading into the bottom of the ninth, losing, and insisting the other team takes its turn at bat.

So why will the government attempt the bailout anyway? Because “something must be done.” GM and Cerberus (Chrysler’s owner) have powerful friends in Washington. The United Auto Workers may be a shadow of its former self, but it still knows how to deliver votes. And American government officials have always loved dumping cash into the economy right before an election (see Edward Tufte’s 1978 book Political Control of the Economy). Second, class warfare. This bailout makes up for the first “thief in the the night” raid on the public purse for Wall Street fat cats. This one’s about protecting “real jobs” for “middle class working stiffs” who “build stuff,” thus protecting our “industrial base.”

If GM filed for bankruptcy and the government sat back and watched, people would be angry at the “failure to respond.” So they will take a futile action instead, with $10b or more, lots more, to make the problem a little less grave (or at least look that way). It’s a cover-your-ass play on an epic, tragic scale.

As a result, it’s unlikely anyone in Congress or the lame-duck White House will oppose a bailout. Nobody wants to be the first to oppose the bailout when their election opponents are in favor of it. Nor does anyone have a strong desire to go toe-to-toe with the UAW weeks before a local, state and presidential election.

From any rational perspective, it makes far more sense for the government to do something else with the money headed for Detroit. The feds could simple hand every blue collar at GM and Chrysler worker a $100k tax-free check. They put it into schools; provide health care for a pile of people. Or give the American people a tax break. Or simply not spend money they don’t have.

GMAC will go bankrupt. The U.S lending giant is cut off from all lending sources. Smart depositors will flee its small bank (relative to GMAC itself). And its majority owner, Cerberus, won’t save it. It’s a pure liquidation play now– with the bank going into FDIC receivership, maybe as soon as this Friday. Whether or not all Hell will break loose is an open question, with many answers…

Let’s start with this: GM’s dealers have been hoodwinked by GM execs. The corporate mothership failed to provide their franchisees with fair warning that GMAC was going to pull the plug on all retail lending– never mind removing itself from the leasing business. Yes, GMAC says it will fund prime customers– with a 700+ FICO. And rates now 75 basis points higher (unless subsidized by GM).

Uh, wait a second – GMAC’s regular lending rates were already non-competitive. Now they’re just stratospheric. And again. that’s for good customers. Non-prime customers– those who buy Aveos, Cobalts, HHRs, G5, G6, entry-level Malibus, Saturns and, well ,mostly everything else GM offers other than Cadillacs, Saabs, and high end big SUVs and Hummers– are now mostly shut out of financing altogether, from any source. If you wonder why car sales are tanking, look no further than the lack of credit availability for this group of buyers.

So GMAC’s out of the market. We know that. GM has even announced an incentive program to spiff dealers who get customers financed with anyone else besides GMAC. Meanwhile, GM still owns 49 percent of a soon-to-be bankrupt GMAC. The only saving grace here: GM’s managers won’t have to blame themselves. If you didn’t know that unloading GMAC was a desperate play for cash/time, and most people don’t, they look smart for unloading half of GMAC to the wizards of Wall Street.

Here’s the crux of the matter. GMAC– formerly known as GM’s captive finance arm– used to gush cash. GM founded the subsidiary in 1919 as a means to finance both dealers and customers, so GM wouldn’t have to rely on finicky banks at the time. GMAC became a model copied by every other automaker of size. The early business model was simple: aggregation of loans written at rates higher than the cost of funding. A basic interest rate spread business. When you start writing billions of dollars of loans, the interest rate spread produces big dollars.

Later, captives found an even cheaper source of funds through securitization of receivables (i.e. bypass the banks and go direct to institutional securities buyers). And if that works for auto loans, it also works for mortgages. Soon enough, GMAC became a huge entity that provided a steady stream of profits and dividends for its owner.

There’s one problem with the model. When the music stops, the gig is over. If GMAC can’t borrow from lenders or sell its securities, it can’t make new loans. In a nutshell, that’s where it’s at today. No one in a sane mindset– given the current credit crisis-– would loan money to this finance company.

Bottom line: GMAC now has $173b of debt against $140b of income producing assets (loans and leases), and some of those assets aren’t worth the paper they’re written on. If GMAC liquidated the loans and leases, it couldn’t pay back all of its debt. If you add GMAC Bank’s $17b in deposits (a liability), the situation only gets worse. No point looking at the rating agencies to tell you there’s a problem here. Good thing the FDIC required higher capital ratios for GMAC Bank; it might survive on its own with its higher quality assets. But everyone else is on their own.

By its own admission in an internal memo to employees this week, GMAC says that it has no access to funding. That means more layoffs. No Christmas bonuses. And probably telegraphing the message that the company could go under. Only the government can rescue GMAC now, adding to that to the pile of bigger rescues going on elsewhere. And any rescue can’t be seen benefiting private equity. So Cerberus will get wiped out. GM will have to write down its investment in GMAC, thus taking another enormous hit to its shaky balance sheet. And there will be further downgrades to its credit rating.

GMAC’s collapse may not be the final death blow for GM, but it’s sure gonna leave a mark. GMAC says they’ll still support wholesale floorplan. But one has to wonder for how long that will last? Given that 80 percent of GM’s dealers use GMAC for floorplan, what happens when that song stops playing? How many dealers will go under? Worse, what will happen to GM itself if even a fraction of its dealers cannot replace GMAC with suitable alternatives? To be continued…