It’s been a while since we’ve run a Ford Death Watch. Which doesn’t mean Ford isn’t dying. It is. It’s just dying more slowly and less spectacularly than GM and Chrysler. In fact, Ford’s head-faked the press. They’ve convinced the pundocrats that The Blue Oval Boys don’t need federal bailout bucks to survive. Oh what the Hell, FoMoCo CEO Alan Mulally just about told Congress, as you’re offering… we might as well accept. In truth, the Detroit’s last man standing is about to hit the pavement just as hard as its cross-town co-conspirators.

Tomorrow, the injury will be audible– and not just in the halls of Congress. Ford’s November sales stats will go splat. Ford analyst George Pipas will seek shelter in metal-moving relativism. Just as Ford proudly trumpets the fact that their cars are nearasdammit as reliable as Toyota’s, Pipas will claim that Ford’s sales drop is nearasdammit as bad (i.e. good) as Toyota’s. Which will be both true and irrelevant.

All things being negative, ToMoCo is still on track to bank $5b in profit this year. Meanwhile, Ford shed $2.6b in Q3, burning through $7.7b of its cash pile. So forget Toyota. General Motors is the more appropriate comparison. And there are only two significant differences between Ford’s plight and that of GM: scope and scale.

GM has eight U.S. brands, six of which need to die. Mazda excepted, Ford sells four brands in the U.S., two of which need to die. GM has around 6550 dealers, 5k of which need to die. Ford has around 4k dealers, 3k of which need to die. Meanwhile, Ford and GM are struggling under the weight of identical labor contracts, desperately trying to shed plants and jobs. In short, as goes GM, so goes Ford.

Commentators— and Ford— like to point out that The Blue Oval Boys are in less danger of running out of cash than GM. Truth be told, the danger’s the same; only the time line varies. Ford’s decision to stock-up on money before the current fiscal meltdown– mortgaging everything up to and including their logo– was either the smartest move the company ever made or the luckiest. Or both. But it doesn’t alter the end result. Unless Ford starts taking in more money than it spends, it’s going to go bankrupt.

As Ford CEO Alan Mullaly bellies-up to the Congressional bailout bar, he’ll parrot GM’s claim that numbers alone don’t tell the story. Right-sizing, on track, bridge loan, bright future, new products, fuel efficiency, world platform, economic downturn, yada yada yada. As the only American automaker with a plausible turnaround tale to tell (which isn’t saying much), Ford will get the money. After all, Congress wants to save SOMEONE in the American auto industry.

Whether or not the feds re-stoke Ford’s coffers and/or help it reduce its overheads, FoMoCo’s comeback is destined for failure, for one reason: branding. Ford doesn’t have any.

Quick: what’s Ford’s slogan? Drive Quality, Drive Green, Drive Safe, Drive Smart or Drive One? Yes. The latter is Ford’s ur-slogan, which says, well, nothing. Given the ailing American automaker’s product overlap, the company’s call to arms might as well be “pick one.” Edge, Flex, Taurus X or Escape?

Make no mistake: this is no small matter. If Ford is to survive, it must come-up with a compelling reason to buy a Ford instead of anything else.

Reliability? Toyota. Resale value? Honda. Price? Hyundai. Stress-free shopping? Saturn. Buy American? Only if you’re thinking continentally. In today’s mixed media world, a car company without tightly-focused branding is like a twenty dollar bill that’s been bleached white in the wash.

Ford’s anodyne anonymity doesn’t end there. Lincoln’s “Reach Higher” slogan– a not-so-subliminal slam at working class buyers– reflects the luxury brand’s lack of a coherent product or marketing plan. And if that’s not enough to convince you that Ford doesn’t “get it,” Lincoln’s farrago of MK monikers illustrates the point nicely. As do the vehicles themselves: a range of tarted-up Fords whose excellence is there for no one to see.
As for Mercury, other than ogling their comely spokesmodel, what’s the point?

Legislators are not likely to concern themselves with such things. If products are the subject, mpgs are the answer legislators want to hear. If pushed, Mulally will argue that Ford’s 2010 Euro-style products will save both planet and company. Politicians will score some points for the folks back home, cross their fingers and sign the check.

But if the pols really wanted to protect the taxpayer’s money (as if), they’d remember that nobody ever submitted a business plan that ends in bankruptcy. The pols would focus on the fact that Ford’s future depends on its products, and products depend on their branding. Someone would look Mr. Mulally in the eyes and ask a simple question: what, sir, is a Ford?

Speculation is rife that GM plans on shutting down or selling Saab, Pontiac and/or another brand as a prelude to a federal bailout. Common sense and recent history suggest that any such move will create a raft of breach of contract claims by jilted dealers and suppliers. As Oldsmobile’s demise proves, there’s only one possible resolution to the resulting feeding frenzy: cash termination payments. If, however, GM filed for Chapter 11 bankruptcy, these breach of contract claims would become nothing more than unsecured claims– which are resolved within the debtor’s C11 reorganization. The claimants would be legally barred from costly state court litigation. In a stroke, GM would be transformed. How great is that? But wait, there’s more!

Suppose Saab’s potential new owners want to make the moribund brand profitable by using different suppliers. Outside of C11, fuhgeddaboutit. The resulting lawsuits would daunt even the most dauntless would-be rescuer. Inside Chapter 11, GM can terminate Saab’s supplier agreements without legal blowback. Creditors asserting liens and security interests on GM’s assets are prevented from delaying their sale; litigation over the validity of disputed claims is prohibited. Since the suppliers’ termination claims become unsecured claims, the affected manufacturers would receive no cash payments. None. In fact, GM can use the money “saved” to aid the profitable operations it intends to keep. And the savior gets to do it their way.

As regular readers know, GM’s renaissance is hamstrung by its bloated dealer network– which is protected by 50 state franchise laws. If GM is to match tri-branded Toyota’s slim-line 1200 dealer network, The General’s existing dealer agreements need to be terminated or modified. Outside C11, Oldsmobile. Under the terms of federal loans (or loan guarantees) for GM, the resulting legislation could amend the Federal Bankruptcy Code to create a “GM exemption.” A U.S. District Court could receive exclusive jurisdiction over any and all auto dealer termination claim. No fuss, no muss, no “ongoing situation” a la Oldsmobile.

A disadvantage (apparently) to GM in Chapter 11: the rules of reorganization require full and complete disclosure of the automaker’s financial status and future profit (you remember profit?) projections. Truth be told, “limited disclosure” to taxpayers is nothing more than contrived non-disclosure– which is insulting, misleading and dangerous. By “encouraging” GM to file, the feds would be forcing GM to open its books to full public scrutiny.

This would help end GM’s stifling corporate culture. It would encourage a new broom, and the introduction of a key concept long missing from Renaissance Center: accountability. In fact, prior to December 8, 2008, GM should be required to make a written SEC filing disclosing the identity of:

a. its 100 largest bondholders;
b. its 50 largest trade creditors/suppliers; and
c. its 20 largest common shareholders.

Knowing how much debt is concentrated with which bondholders helps us gauge the prospects for conversion of debt into equity. Knowing the amounts owed to the largest trade creditors helps us understand how quickly creditors/suppliers can be organized and the terms of a Chapter 11 prepack negotiated. [Much of this information is readily available from paid providers of financial data– but not to the public.] This information will also disclose who benefits most from a taxpayer-funded automaker bailout/rescue.

Sorry for the digression. But in corporate restructurings, whether in or out of bankruptcy, there are obvious concerns about management’s competency. It’s rare for creditors or potential lenders to blindly swallow/follow management’s restructuring recommendations. Captains of sinking ships should not get the chance to prove that they were right and the iceberg was wrong. Congress needs its own independent restructuring experts to decide if sinking automakers can be salvaged. Again, Chapter 11 helps bring the automaker out of the shadows and into the light, where it belongs, for its own good.

By the same token, a Chapter 11 filing would eliminate the uncertainty now surrounding GM and its brands. While there’s no doubt that GM’s sales would crater, an “everything must go” sale would create a new buzz for the company’s vehciles. With a compelling public spokesperson at the helm (shades of Lee Iaccoca), GM could ask for– and receive– public sympathy and support for a fresh start. With the right brands, PR guidance and corporate policies (e.g. U.S.-built products or a new committment to green machines ), GM would have a genuinely compelling– and credible– story to tell.

In short, GM’s fear of chapter 11 is entirely misplaced. After the hearings next week, I will propose a 100-day plan for a GM restructuring in a prepackaged Chapter 11. Meanwhile, there are question that need asking. And ask them I will.

Rick Wagoner lost control of General Motors this week. Forget about his title; game over for the embattled former Duke basketball wannabe. There’s a new sheriff at GM – and it’s a bunch of Wall Street guys that few on Main Street can name. It’s the hedge funds that have been acquiring GM’s bonds. So here’s how these guys will play The General to make a killing on the pending government bailout:

First, they’ve been reading TTAC. The money men know GM can’t possibly turn the business around without a major restructuring. That means fewer brands, dealers, a busted UAW and a balance sheet that looks healthy, rather than one destined for the emergency room. They know that one of two things has to happen. Option one: bankruptcy. It’s the most obvious choice, but one to be avoided at all costs (as per GM management).

Option two: a non-C11 cram-down on all the creditors, the unions and anyone else to whom the GM monster owes money. Either way, every one of these creditors will end-up with a bunch of paper (new equity or new debt), but no cash for the credit already extended.

The bond market sees this coming. GM’s non-bank debt– mostly unsecured obligations– trades between 10 and 20 cents on the dollar. Translation: anyone holding GM paper has very little prospect of getting paid in full when the debts come due. Right now, GM’s attempting the cram-down on those bondholders (and the United Auto Workers). GM CEO Rick Wagoner hopes to trade debt for equity– or perhaps arrange a debt exchange– with GM’s bondholders. That’ll show Congress that he’s “making progress.”

But Red Ink Rick seems to have forgotten that Wall Street “hedgies” control GM’s debt. And they want to make money soon rather than never later. And the plain truth is that the hedge fund playas are going to win this game with or without a GM bankruptcy. Either GM gives them the terms they want, now, or GM will have to file. The hedge fund boys don’t care which way GM goes. In either scenario, they’ll end up controlling the company.

Their terms are simple: give the hedge funds enough new shares now so they can control the General’s Board of Directors. All indications are that GM’s bending to their demands. At the same time, the bondholders are demanding that Wagoner show them the rest of the plan he’s going to present to Congress that proves GM can avoid C11. That means better terms from the UAW labor agreements and the VEBA health care program, killing some brands and dealers, and making even more cost cuts.

And if GM files? No big deal. The government won’t let GM be liquidated. Nor will it nationalize the automaker. The reorganization will happen fast. Again, the bondholders will get to call the shots– right behind the $5b or so of secured bank debt. It’s a pittance in the scope of GM’s total liabilities; the automaker’s bond debt totals nearly $36b or so.

Assuming the hedge funds have been acquiring GM’s bond debt for pennies on the dollar, their total outlay might be around $4 to $8b. That’s not a lot of money, considering that the Feds are likely to put in another $12b or so of your hard-earned taxes. And that’s AFTER the group haircut.

The hedge funds will end-up calling the shots at a company that does $150b in sales with a global franchise and a new balance sheet financed by the taxpayers. Better yet, it’s a company that must be structured in a way to make money. The government wants to get paid back; the Feds will be sure that everyone gives enough so the company can be profitable. And that works for the hedge funds too– they got in on the cheap for a company guaranteed not to fail. (Ish.)

But don’t expect the hedge fund guys to show-up at the Capitol this week. In fact, they’ll stay well out of the limelight while Congress worries about Rick’s mode of transport to D.C. All the hedge funds want is a plan that works, and money from Congress. And then they can steer the wheels at a new GM, one that’s got a new balance sheet, a new management and a slimmed down North American business that makes money. It’s a good bet to take.

How much would a newly profitable GM be worth?

I live in Michigan. Not on the Detroit side of things, around here it’s mostly suppliers. I’m an engineer. As I write this, I’m off on unpaid furlough. I don’t work in the auto business; my company is in an industry about 10 bailout levels down. But around here, it all looks the same. Two years ago the Delphi fuel injector plant was shut down; two months ago the big GM stamping plant was stamped for extinction. Winter even came a bit earlier this year. It’s cold, damp, gray, and we got some snow before Thanksgiving. Not unheard of, but not exactly welcome. I think it was P.J. O’Rourke who remarked while flying over the “liberated” but still depressed Eastern Europe, “Communism is the only form of government you can see from 30,000 feet.” This economy is like that. You can see it of course, but it’s also cold and gray and it hangs in the Michigan air.

I sit on the couch and watch the TV news shows. I choose a network based on who I want to be mad at. It’s pretty easy to know what they’re going to say. They easily find experts who can easily toss out solutions based on villains that are easy to find. I can blame the UAW for greedily grabbing as much as they could with no thought to the future. Or I can change the channel, and blame the management for the same thing. It’s easy for me to pick my side and find a commentator or a website to validate my choice.

Feeling validated always makes me feel better, but I want things to be like they were. I’m mad at these people for screwing up my plans, screwing up the status quo, screwing up my life. But way deep down, there’s a quiet voice in my head that says, “this is life… this is how it goes.” Newton may have said, “an object in motion tends to stay in motion”, but he wasn’t accounting for friction. In life, there’s friction.

The voice tells me that maybe I’ve been ignoring the friction. I work hard… I “put in the hours”. But I do the work to pay for silly conversations on cell phones. I watch silly shows on cable TV. I pay credit card bills for too much silly shit. Maybe I wasn’t ignoring the friction; maybe I just focused on the wrong friction. When life is in motion at its usual pace, when there’s no obvious crisis, no worthy antagonist, I lose focus. I get caught up in the silly stuff.

I’d like to believe that the leaders of GM, the UAW, or the government don’t get caught up in the silly stuff. They’ve been vetted and validated. They’ve risen to the top through a series of tests that predicted these problems and revealed their solutions. But again, I hear the voice and it reminds me that just isn’t true. All these organizations are simply made up of people like my colleagues, like my neighbors… like me. And since the fate of the country rests with the likes of me, I look back out the window at the depressed economy and become, well… depressed.

But then, deep down, I’m forced to acknowledge that voice. Maybe it’s Newton again, “For every action there is an equal and opposite reaction.” But maybe it’s more along the lines of “we finally have a worthy antagonist…we have something to do.”

I easily conjure up more pundits, prognosticators, and keyboard jockeys that shout down the voice with an overwhelming onslaught of facts and scenarios describing insurmountable dooms. But I can’t quite drown it out. “Sure these guys may be a bunch of ass-clowns, unfit to lead during a real crisis…but it’s the crisis that will produce the real leaders. The vetting and validation can take place now. There can be focus.” I’d like to dismiss the voice as jingoistic pabulum. But still, it’s hard to ignore it.

It’s in my culture. Sure, people like to say “work is for suckers”…but most of them hear a voice too. They don’t respect any side that tries getting something for nothing. They don’t shy away from “putting in the hours”.

It’s in my DNA. My parents were immigrants. You can’t leave your whole life behind and not be willing to take a risk. If you were afraid of the worthy antagonist, you’d still be back in the Old Country.

So I just can’t ignore the voice. I have something to do. I have focus. Despite shouts of what may be the worst economic disaster we’ve ever faced… I can still hear the voice saying in it’s best Ed Harris / Gene Krantz imitation, “With all due respect, I believe this is gonna be our finest hour.”

In recent congressional testimony, GM admitted that its experts are “exploring” Chapter 11 reorganization. At the same time, GM continues to argue that a bankruptcy filing is the nuclear option– it would vaporize jobs and inflict cataclysmic damage on the overall U.S. economy. While acknowledging the danger, many argue that reorganization is both necessary and unavoidable. They suggest that GM’s recreation should somehow take place outside of the time-tested legal process known as Chapter 11. Sentiment is growing that a taxpayer-finnaced “prepackaged” Chapter 11 is the best way to solve both GM’s business and financial problems, and perhaps of other automakers. Maybe so. Let’s have a look…

Why is a non-bankruptcy loan to GM a poor use of taxpayer money?

A lender to an insolvent company on the verge of bankruptcy wants its loan to be repaid. It would not allow loan proceeds be used to pay off existing liabilities. GM owes unsecured bondholders about $40b. There is no indication that bondholders have agreed to standstill, waive interest payments, or restructure the debt. GM’s Series D debt of $800m comes due in June 2009, when GM must pay the debt, default or get bondholders to extend the maturity date. GM owes trade creditors about $28b and owes another $34b in accrued expenses.

GM’s legal obligations to bondholders and trade creditors cannot be changed or modified without a bankruptcy case, or the written consent of each individual creditor, That’s a near impossible task. Attempting to reorganize GM outside of a legal proceeding would encourage creditors to holdouts for special treatment, delaying any chance at restructuring

A commercial lender supporting GM– which is insolvent on the basis of its balance sheet– would ask how paying the existing claims of bondholders and suppliers will help GM with its current cash flow problems. They would not allow loan proceeds to be diverted to unsecured creditors. Without a Chapter 11 case, taxpayer loans to GM could be used to pay interest on $40b of GM unsecured debt, and to pay the $800m Series D debt coming due in June 2009.

GM must also pay $7.5b to the retiree trust in January 2010,– another liability for which it does not have funds. Taxpayer money should not be used to bailout existing debt or to pay non-essential existing liabilities. The restructuring of GM’s payment obligations can be most quickly and effectively accomplished in a pre-packaged chapter 11 case.

What is a prepackaged chapter 11?

In a true “pre-packaged” reorganization, the debtor proposes its reorganization plan and solicits votes before they file for Chapter 11 protections. For companies with publicly traded debt and other securities, Chapter 11 gives them the chance to restructure its debts without the “normal” delay and expense of extended negotiations.

A partial “prepack” involves a pre-petition solicitation of certain classes of creditors (e.g. bondholders) and a post-filing solicitation of other classes of creditors (e.g. unsecured suppliers). If the parties have agreed in writing on how their claims will be treated under the plan, sometimes called a “pre-negotiated” prepack, pre-filing voting on the reorganization plan is not essential. [Under a GM reorganization plan, the common shareholders receive nothing and therefore do not get to vote.]

Bottom line: a prepack doesn’t have to address every issue of every creditor group. Smaller claims are usually resolved after a Chapter 11 plan is approved.

A prepackaged reorganization is not ideal for companies that want to terminate large numbers of unprofitable or burdensome contracts. However, GM qualifies. They’ve been restructuring/downsizing for a few years, implementing plant closings, laying-off employee and making other changes to address market realities.

A big advantage of Chapter 11 pre-pack: the debtor can quickly and easily sell assets and operating divisions (e.g. Hummer, AC Delco) to create cash for ongoing operations. The claims of persons affected by the sales are funneled into the bankruptcy court for expedited resolution. Disputes with creditors need not delay the sales.

What is involved in preparing a business plan and application for a chapter 11 “debtor-in-possession” loan?

In a prepackaged chapter 11 reorganization, the financing for the chapter 11 debtor is in place before the Chapter 11 case is filed. The financing often includes a commitment to provide the “exit” financing used to fund the debtor’s obligations– after creditors and the bankruptcy court approves its Chapter 11 reorganization plan.

Given the current state of commercial credit markets, the U.S. Treasury will have to commit to the reorganization plan exit financing. The reorganization plan will set forth the repayment terms for the existing secured debt, the new U.S. Treasury loan and the Department of Energy (DOE) loan.

As with any loan application, the starting point for GM will be its current assets and liabilities, its cash flow and its realistic projections. All of which go into a measured calculation as to the borrower’s credit worthiness and ability to repay the loan, with interest.

In Chapter 11 cases, the debtor prepares detailed projections and budgets, taking into account the reduction in its current liabilities that result when the case is filed. For example, after GM files for Chapter 11, it will no longer pay interest or principal on its unsecured debt. Chapter 11 lets GM stop paying liabilities incurred before bankruptcy. This will increase the cash available for operations. The debtor’s cash flow projections reflect all these deferrals and changes to current liabilities.

How will retiree claims be treated in a pre-packaged chapter 11 case?

GM retiree claims are– primarily– unsecured claims, As such, they have the same priority as bondholders and other unsecured creditors.

In January 2010, the UAW and its related retiree trust will assume most of GM’s retiree liabilities for current retirees. In January 2010, GM has to pay the retiree trust $7.5bin cash and other transfers of assets. The trust also receives a $4.4b GM convertible debt issue– which is an unsecured claim against GM.

Over ensuing years GM must pay the trust additional amounts estimated to be between $10b to $17b. A basic rule of bankruptcy: claims having the same priority in payment get the same treatment under a Chapter 11 reorganization plan. Thus, all unsecured claims, including claims of the retiree trust, should get the same treatment.

In a pre-packaged Chapter 11 case, creditors can agree on different treatment of claims having the same priority. But this invariably leads to more delay and expense. In a GM chapter 11 case, these future payments to retirees are frozen. They’re treated as unsecured claims; they’ll get a distribution under the GM reorganization plan.

What happens at the beginning of a pre-packaged chapter 11 case?

Despite assertions that reorganization in Chapter 11 is not a realistic option, a company with pre-arranged financing is quite able to operate in Chapter 11. In nearly every mega case where a restructuring of an operating business is contemplated, the bankruptcy court enters “first day orders.” Basically, these are all the court approvals that the business needs to continue to operate its business in the ordinary course. First day orders deal with everything from financing, to advance payments, approval of bank accounts, authority to honor customer warranty claims, and reimburse dealers— all the details needed to prevent disruption of the operating business.

While it is definitely a lot of paperwork, legal and turnaround professionals do this type of work every day. The courts routinely approve first day orders designed to save operating businesses.

GM’s assertion that millions of jobs will be “lost” ignores the simple fact that companies continue to operate their businesses while in chapter 11, albeit under a great deal of scrutiny. GM already finances its largest suppliers (Delphi and American Axle) and has a receivable financing program for other suppliers so that the suppliers have access to cash.

These programs can continue in Chapter 11, or even be improved. For example, GM could ask the reorganization court to approve cash pre-payments to essential suppliers. The past due claims of suppliers are unsecured claims. In bankruptcy, these claims have the same priority in payment as GM’s unsecured debt. In planning a prepack, it’s not unusual for the debtor, with the consent of its major creditors, to prepay critical suppliers before the prepack is filed.

What will creditors get in a pre-packaged GM reorganization plan?

A GM reorganization plan must be based on a realistic projection of future profitability. Future cash flows will determine the enterprise value of the reorganized company, and hence the value of new common shares which will be distributed under the plan. Fortunately for taxpayers, in a Chapter 11 case the debtors’ financial projects are open to public scrutiny and to the comments and objections of creditors affected by the Chapter 11 plan.

GM will not have resources to make a cash distribution to creditors. So the reorganization plan will involve a distribution of newly-issued debt and new common stock, with the old debt and old common shares being extinguished. The new common stock will be listed on a national exchange, It wil,l have an immediately ascertainable value based on the financial projections that GM will have to produce to get creditor approval of its Chapter 11 plan.

Under the reorganization plan, the trust for retirees should not receive payment on the $4b short term note, the $4.4b long term note, or its other claims against GM. But will the trust will get its pro rata share of the newly issued debt and common stock of reorganized GM.

Since the new common stock will be publicly traded, it can be sold to fund retiree obligations assumed by the retiree trust. In a Chapter 11 case, creditors can also agree that retirees will get better treatment than is customary. But this requires a vote of creditors and special treatment that’s likely to be contentious, and delay the Chapter 11 case.

Government financing for a GM pre-packaged reorganization

A U.S. Treasury non-bankruptcy equity investment in GM (i.e., purchase of GM preferred stock) is a bad investment for a company already balance sheet insolvent by more than $60b. A primary beneficiary of an equity type investment: the existing unsecured bondholders and unsecured creditors, who would have a claim on the proceeds.

Some suggest that taxpayers should make an unsecured loan. Any such a loan would have the same priority as the other $105b of existing GM liabilities, making loan repayment unlikely. Taxpayers should demand that any loan made to GM be made only in connection with GM’s Chapter 11 filing, that it be fully secured, and only disbursed pursuant to detailed written budgets.

Naturally, lenders to Chapter 11 debtors should insist on competent management. They should also hire their own accountants and reorganization professionals so that the lender has an independent analysis and opinion of the debtor’s viability, business plans and the “viability” of the debtor’s goals and financial projections.

In a pre-arranged Chapter 11 case, the U.S. Treasury could extend to GM a secured debtor-in-possession line of credit for say $40b, a line of credit secured by a first security interest on all GM assets, being junior only to GM’s existing secured line of credit of $4.4b.

A portion of the U.S. Treasury line of credit should be available to support essential suppliers through loans, letters of credit and pre-payments. On the first day of a pre-packaged Chapter 11case, the bankruptcy court is likely to give interim approval to a portion of the total credit line. Ten day’s later, they’ll have a hearing to approve the balance of the loan facility.

Since the government lacks experience in administering secured loans to insolvent companies in Chapter 11 reorganization, it might be preferable to have the loan guaranteed by the US Treasury. Funds would be advanced periodically by a consortium of financial institutions experienced in lending to Chapter 11 debtors. They’d be better able to monitor day-to-day compliance within the terms and covenants of the loan.

This would not eliminate oversight by the US Treasury and Congress. But it would delegate the devilish details of loan administration to experts.

GM’s Chapter 11 reorganization plan can be expedited

Given the importance of US automakers to the economy, and the need for a successful reorganization to preserve jobs, a GM Chapter 11 reorganization case will be expedited. The chief judge can assign multiple judges to handle different aspects of the case, recognizing that speed is essential to a successful reorganization. Bondholders and other creditors should support expedited handling of their claims– a successful reorganization is the best way for creditors to realize value.

A pre-packaged plan can be approved quickly; the plan has been negotiated and accepted by creditors entitled to vote before the Chapter 11 case is begun. In a partial “pre-pack,” the largest creditor groups informally approve the general principles of the plan before the case is filed. Formal solicitation and voting take place under the supervision of the bankruptcy court.

By using accelerated schedules, a prepack can be accomplished in months, not years. Pre-filing negotiations over the terms of the reorganization plan often result in agreement on difficult issues: payments to suppliers, support for the dealer network, honoring customer warranty claims, and even changes to employee work rules and benefits. All of these agreements can be rapidly documented.

Treatment of claims and shareholders under a GM reorganization plan

Given GM’s own statements about its shortage of cash for the foreseeable future, it’s unlikely that GM would make any cash distributions to existing creditors. Cash will be needed to retool plants and complete ongoing restructuring efforts. It will also be needed to eassure trade creditors that enough cash is available– so that trade creditors will extend new trade credit to GM.

Under a reorganization plan, creditors and shareholders are put in classes. Creditors having the same priority in payment often grouped in the same class. A simple GM reorganization plan would have the following elements:

-Taxpayers have a $40b first lien on all GM assets for monies lent by the US Treasury and the DOE. If GM’s debtor in possession financing cannot be refinanced by commercial banks, then taxpayers will finance GM’s exit from Chapter 11. Taxpayers should get warrants for 10 percent  of GM’s new common shares, to reward them for the risk of financing GM in Chapter 11.

-GM’s existing $4.4b secured line of credit will retain its lien on GM’s assets and be extended.

-Consumer warranty claims are expressly assumed under the Chapter 11 plan.

-$40b of unsecured bondholder debt will receive its pro rata share of any new unsecured debt issued by GM and a pro rata share of GM’s new common shares. The common shares will trade on the public market and will have an immediately realizable value. No interest will be paid on any new debt until all taxpayer loans to GM are paid in full, with interest

-Trade payables of about $39b (the $17 to $27b owed to the retiree trust,) and any other unsecured claims get their pro rata share of any new debt and new common shares.

-The retiree trust may merit special treatment, although potential future liabilities to the trust of $27b not only would weigh heavily on GM’s post reorganization success, but also would depress the market value of any new common shares issued by GM. With creditor consent, the retiree trust could receive subordinated debt, with future maturity dates timed to GM’s future profitability. Without access to GM’s cash flow projections, it is hard to suggest what treatment would be fair to retirees while still protecting GM’s other creditors.

-Old common shares do not vote on the plan, get no distribution, and are canceled. Existing stock options are eliminated

-A new Board of Directors selected by creditors is in charge of reorganized GM, with board representation for the major creditor constituencies.

GM’s Hypothetical Post-Reorganization Balance sheet

Projected Assets: $90b

Estimated Liabilities
$4.4b: existing secured line of credit
$10b: secured term note to US Treasury
$12b:  secured term note to the Department of Energy (GM’s share of the DOE funds for alternative vehicles)
$1b: trust or secured letter of credit established to guarantee payment of consumer warranty claims
$2b: current tax liabilities

Subtotal: $29.4b of secured and priority claims

$9b: accrual for consumer product warranty liability
$10b: for current claims arising in during the Chapter 11 case which will be paid by GM in the ordinary course of business
$5b: new unsecured debt (payment in kind) set aside for miscellaneous claims, with maturities deferred and no cash interest payment
$5b: subordinated debt, issued with laddered maturity dates timed to fund the retiree trust only if it runs out of money in the future
$15b: accrual for pension and retirement obligations for current employees
$5b: leases and other obligations, including liabilities to foreign subsidiaries

Subtotal: $39bof unsecured debt and unsecured liabilities

Total estimated liabilities: $78.4b

Equity distribution
90 percent of newly issued GM common shares distributed to bondholders, the retiree trust, and other unsecured creditors
10 percent of new equity reserved for the US Treasury

Final thoughts on labor, management and Detroit

The UAW represents labor in negotiations with GM management. GM’s management, not labor, has been behind the GM steering wheel as GM went over the cliff of Insolvency. UAW negotiators are tough, well-informed professionals. The UAW is not inflexible; witness its recent agreement to defer $1.7b of payments to the retiree trust, a deferral which has helped GM stay alive. The UAW has its own staff of accountants and restructuring professionals who are prepared to sit down and negotiate and help GM propose a viable reorganization plan

GM’s Board of Directors, its management and the UAW have made mistakes. But their serious efforts to restructure GM should not be doubted. Rick Wagoner has spent 30 years at GM, but his efforts have been overtaken by circumstances. In reorganization the board will be replaced, as will some of the operations managers and senior executives.

Undue criticism of GM’s management and the UAW distracts from the need to urgently develop and implement a viable pre-packaged reorganization plan. GM’s management needs to get down to business and develop a reorganization plan that will protect taxpayers and earn the support of Congress.

Anyway, GM’s chapter 11 case should be filed in Detroit. The birthplace of the American auto industry should be the place of GM’s rebirth.

(Mr. Tilton is a corporate bankruptcy attorney. He represented creditor banks in the Chrysler restructuring and has represented creditors and debtors in prepackaged Chapter 11 cases. He is the editor of the book Bankruptcy Business Acquisitions, Second Ed., published by the American Bankruptcy Institute in 2006)

Detroit’s financial predicament today rests squarely on the shoulders of its executive leadership going back nearly four decades. The American auto industry failed mostly in its will to succeed in a changing business environment marked by the entrance of new competition, adoption of new technologies, and demands for greater fuel efficiency. Had Detroit taken those actions necessary to be leaders, rather than laggards, its overall situation of falling market share, reputation for poor quality (in comparison to certain foreign competitors like Toyota and Honda mostly), and weakening financials might have been avoided.

The automotive industry undergoes significant changes as measured over any ten year period. Each decade since the beginning of the automotive era starting in 1900 has witnessed rapid and unpredictable volatility due to market forces, economics, new technology, and more recently, vehicle production economics and global competition. This has tested the ability of each auto company to adapt to these elements of change. The equity markets place a premium on those auto companies that have organizational, product and production flexibility to best respond. No forecaster can accurately predict the most basic aspects of the industry from the actual sales volume of the next decade to the model mix and market share distribution or profitability from any individual automobile manufacturer. Over the last 100 years, auto companies succeeded or failed on the appeal of their vehicles, their corporate resources and the talent of their managements, which reduced the field of U.S. assemblers to only four (GM, Ford, Chrysler, and AMC) some forty years ago from a much larger field of competitors.

But in the forty years since then, profound and rapid changes in the US domestic auto market have occurred unlike in the past. Two factors stand out: oscillation in energy prices and the growth of foreign brands. And in response to both, Detroit failed. It could not repel the Japanese invasion as a result of the first and second oil crisis in the 1970s with its lack of will to build competitive small, fuel efficient vehicles. Then, as imports grew in scale and scope of product offerings, Detroit looked elsewhere for profit opportunities without fixing its core North American auto business.

At the same time, Detroit often blamed a host of factors beyond its control for its shortfalls. To wit, currency manipulation, rising health care costs, unfair trade, and labor intransigency would be cited. But the sad fact remains that Detroit is still losing market share as consumers gravitate to the import brands. Strangely, it is not a matter of pricing – Detroit vehicles, especially in passenger cars and CUVs, are less expensive to acquire than those from mainstream competitors. The Wall Street Journal recently ran a story documenting the price differential between the Honda Civic and comparable offerings from Detroit.

Now with GM’s and Chrysler’s admissions of impending failure, a firestorm of debate has erupted as to whether Detroit is deserving of government assistance. That is not the question. In fact, there should be no debate as to whether the United States, as a modern economy, should have its own domestic automotive industry. Without it, we sacrifice our ability to determine our own solutions to future transportation needs. In fact, the current crisis offers a historic opportunity to complete recast the direction of this industry to prepare it for the future. It now remains a question of how many US automakers will make it to the next decade and who should lead them.

I submit that the US should have two remaining auto companies: General Motors and Ford. Chrysler is not viable as an auto company as it lacks future product development capabilities having its engineering capabilities mostly gutted by Daimler and Cerberus.

General Motors does have prodigious engineering talents worldwide which it can leverage. What’s been missing has been executive will to apply this talent to its North American business in recent decades. Only recently have we seen a slow rejuvenation of some products, but the overall portfolio of vehicles remains too broad and non-descript. “Too little, too late” might be the most apt description. In addition, the company has never addressed its multiplicity of overlapping brands, vehicles, and dealers. All of its efforts so far have mostly been to reduce installed production capacity.

With any government assistance to GM, one key requirement should be for wholesale reform of its Board of Directors and top executive management team. They should all be jettisoned for their failure to address known and obvious problems. This is not an ad hominem attack; rather the results of the business in North America over the last forty years mostly prove the point. What’s needed are new executives willing and enabled to make those hard decisions, not beholden to the past practices and culture within this giant corporation. Giving money to executives schooled in the past is no recipe for future success.

Ford Motor Company was, until 2006 and the arrival of Alan Mulally as CEO, in exactly the same situation as GM today. But as an outsider, Mr. Mulally took a fresh look at the company and its operations. By the time of his arrival, Ford had implemented the first of its “Way Forward” plan – which was to reduce installed capacity. But this would prove to be ineffective. Instead, Mr. Mulally outlined his “One Ford” plan – which jettisoned extraneous brands (Jaguar/Land Rover already and Volvo soon) while integrating vehicle platforms between Europe and America. Moreover, with new executive talent recruited from other auto companies/distributors, Mr. Mulally has reoriented his management team with fresh thinking.

Ford, unlike GM, does not face immediate prospects of demise (barring a bankruptcy of General Motors). It has outlined for the industry a view of its future, its new products, and the expectation that by 2013, there will be 100% commonality of its European and American platforms. I credit Bill Ford Jr. with understanding his company’s need to place a skilled executive at the helm, with the full backing of the Board to make the painful but requisite actions. So in Ford, we have seen an example of how a change in top leadership can make a difference – though profitable results may be years off and interim government financing may be necessary.

So for the American auto industry to survive and prosper, we need Congress to understand that importance of a domestic auto industry. Second, Congress should recognize that it too must make some hard decisions with taxpayer money. This would be to allow Chrysler to fail and be sold in pieces to others. It must also recognize that labor cannot be protected to any more degree than other creditors. Jobs will still be lost; VEBA’s underfunded for the time being. Third, Congress needs to craft a funding program tailored to the needs of the remaining two automakers. In the case of GM, even without a bankruptcy, a complete recapitalization and restructuring of the company must occur. This will require new leadership at the Board and executive management levels with the will to succeed. And Ford just needs time and a little bit of money.

If you think about flying to Stuttgart tomorrow, better book now. It will be a full house tomorrow at Porsche’s annual “Bilanzpressekonferenz.” The presentation of annual numbers to the press. At this confab, the information-hungry media will be fed with finger food and glossy brochures, drowned in champagne and a sea of PowerPoint charts. Why would anyone be interested in a small maker of sports cars that was nearly bankrupt when Wendelin Wiedeking took over? How did P.J.O’Rourke put it so nicely? “In the gutter in front of the razed crack houses was a brand-new Porsche 928 flipped on its back and wadded like Kleenex.”

That was then, this is now. Now, Wiedeking promises to reveal his timetable for the takeover of Volkswagen. “Waitaminute,” I hear you say. “Don’t they own VeeDub already?”

Not exactly. Currently, Porsche holds 42.6 percent of the common stock of Volkswagen. It is also written that Porsche owns 31.5 percent in VW options, strike price and time to expiration unknown. Will Wiedeking say tomorrow when they’ll finally go for the whole shebang? We doubt it. Will they go over 50 percent this year, as planned? Will they go to 75 percent soon as rumored? We believe, Wiedeking will keep everybody guessing. Despite the fact that Porsche is rolling in money, they are Swabian.

Swabians are rumored to be Scots who had been extradited for being too stingy. Wiedeking already said that he will only buy Volkswagen if the stock isn’t too high. Of course, this was forgotten when, last month, the VW share traded above €1000, due to adroit machinations by Wiedeking and his CFO Holger Härter. The definitely non-dummkopf duo had engineered the classical short squeeze. Hedge funds all over the world unwittingly financed Porsche’s takeover of the world’s third largest auto maker.

Die Welt already calls Porsche “a bank with a subsidiary that makes cars.” Wiedeking’s take-home salary is widely guessed at $100m a year, not quite in Wagoner’s league, but close. And considering that G.M. sold 9.4m units in 2007, while Porsche sold a measly 98K of what P.J.O’Rourke called … but you know that by now. What makes the difference: Porsche had a pre-tax gain of €8.6b last year, on sales of just €7.5b, whereas Wagoner … but you know that by now. Will we know tomorrow where Porsche is going?

At the peril of repeating ourselves: We don’t think so. If Volkswagen would be a regular German company, and if Porsche would own 75 percent, then Porsche could book all of VW’s profits as theirs and rule Wolfsburg from Zuffenhausen. But there is that nasty “Volkswagen-Gesetz” which precludes the Porsche power grab. It gives the State of Lower Saxony (holder of 20.1 percent of VW’s shares) veto power. Brussel said it’s illegal. Berlin passed a new “Volkswagen-Gesetz.” Brussels says it’s still as illegal as the old one. Brussels wants to take Berlin to court over it. But the wheels of justice will grind a few years before the matter is settled. Then, there are the workers. The workers are represented in the Supervisory Board and tend to ally with the State of Lower Saxony in matters of keeping jobs and money in Lower Saxony. So, if you would be Porsche, why buy more shares than necessary? Would go against the grain of any true Swabian.

Last Friday, the Supervisory Board of Volkswagen convened, Ferdinand Piech presiding. Piech is part of the Porsche clan, but thickheaded. When Wiedeking suggested that Piech’s pet projects, like the Phaeton or the Bugatti should make some money, Piech was not amused. At Supervisory Board meetings, Piech’s vote is never a given for Porsche. This time, Piech didn’t even need to intervene: The Porsche clan wanted to kill a committee that controls (and in Porsche’s eyes, torpedoes) “business relationships between stockholders” – meaning, at the moment, dealings between Porsche and Audi. The Porsche faction couldn’t get rid of the pesky committee. The factions representing the unions united with the factions representing the State of Lower Saxony and said “nein.”

“Labor representatives forced Porsche to seek board approval from the special committee each time it planned a cooperation with VW’s luxury unit Audi — a potential rival to Porsche’s own business,” said Reuters. “The move to keep the committee came as a surprise on Friday, since Porsche less than a month ago said Volkswagen’s chairman Ferdinand Piech would table a motion to dissolve the committee.” Volkswagen, a world full of surprises.

The committee remains. It will be “optimized.” In VW’s euphemism factory, “optimize” usually stands for “eliminate.” Such doesn’t seem to be the case this time. If Porsche wants to do business with Volkswagen or Audi, or, lo and behold, influence anything (such as Audi’s sports car aspirations,) Porsche must ask the committee. And the committee, loaded with representatives of the unions and Lower Saxony, will go: “Tut-tut, bad boys.”

It looks like there will be many more chapters to this never-ending saga. It doesn’t look like the timetable revealed tomorrow will have many high speed trains in it. At least there was another bit of good news for Porsche today: The Volkswagen stock lost 13 percent at noontime. The VW stock sold for €286.69 at noon. Well on its way to become affordable, even for a Swabian. Automobilwoche asked an analyst of the Norddeutsche Landesbank, and he thinks, €100 or lower would be a fair price. Wendelin Wiedeking would probably agree.

When I moved to the UK, I was shocked by the price of petrol. “Britain’s an oil PRODUCING nation,” I kvetched to my accountant. “How could the populace allow their government to tax their petrol to the point where it’s the most expensive gas in Europe?” “Do you have any idea how much income tax you’re paying?” my personal pencil pusher asked. “If I were you, I wouldn’t worry about it.” In the same sense, I wouldn’t worry about GM CEO Rick Wagoner’s Gulfstream. It’s as nothing compared to the amount of money he’s pissed away on, well, everything else. Of course, it’s not the money, it’s the principle.

Now if you think I’m about to launch into a boilerplate tirade about Wagoner’s spendthrift ways in relation to the sacrifices made by the hard-working men and women who’ve either lost or are about to lose their Generous Motors entitlements, think again.

Firstly, I’m not convinced that any member of the United Auto Workers (UAW) has made what I’d call a genuine sacrifice in the last, oh, thirty years or so. Whenever the MSM announces “job cuts” at GM, they singularly fail to mention the fact that the UAW members are not looking at a final paycheck and a faretheewell. They’re paid some 90 percent of their working salary not to work. If they agree to go, they get a big kiss-off. Benefits cessation? As if. There are professional parachutists who can’t manage that kind of soft landing on a clear, windless day.

Symbolically speaking, Rick’s jet is no more “gold-plated” than the UAW’s compensation.

The real affront here is the same one identified by Car and Driver writer Brock Yates back in the day, and Michael Karesh in his recent editorial: GM’s disconnect with its customers.

Yates described a corporate culture in which no perk was beyond reproach. From an endless succession of immaculate automobiles to personal riches beyond imagination, GM’s suits were the big swinging dicks of Detroit. Despite— and also because of— their rewards, they lost any sense of accountability to the people who kept them in the style to which they became accustomed.

Rightly or wrongly– and I’m thinking rightly– Wagoner’s jet travel signaled the taxpayer (and thus the taxpayer’s duly elected representatives) that Detroit’s sense of entitlement has not changed. The Gulfstream as revealed Wagoner as a Big Wig who literally flies above the concerns of the common man. Sure, lots of CEOs have jets. But they’re not asking for a publicly-funded bailout by threatening the entire country with economic collapse.

Americans aren’t stupid— especially when it comes to their money. They “get” the connection between a CEO swanning around in a big ass jet and his company’s inability to build a product that Joe the Consumer wants to buy. They can also connect the dots between that failure as the CEOs appearance in the nation’s capitol with The Mother of All Begging Bowls.

“I had several business meetings this morning,” Wagoner told ABC, when confronted by his jet-oriented corporate profligacy. GM’s CEO instinctive reply shows that he believes his importance is more important that appeasing misinformed public sentiment (from people who clearly can’t identify with the demands placed on the CEO of the world’s largest automaker). In this Wagoner’s woefully mistaken.

Wagoner’s mach .88 Grosse Pointe myopia failed not one but TWO constituencies. First, GM’s “base,” the millions of people who drive a GM product or depend on same for their living. Hey Rick, come see what it’s like to drive one of your cars! Second, taxpayers. Voters who love America, but don’t love wealthy people who think they know better than they do, when, clearly, they don’t. Once again, still, GM has shown that it’s forgotten who puts food on their table.

So now what?

Chances are Wagoner will return to DC via a commercial flight. He might even, hold your nose, fly economy. Wrong answer. That would make the CEO the butt of humor and embolden the press to dig even deeper into the real disgrace: his salary. It will be seen, rightly, as cynical posturing, rather than genuine contrition.

Alternatively, commentators have suggested that the CEO should drive to Washington in a plug-in hybrid electric – gas Chevy Volt prototype. It would demonstrate that GM has something called “a future.” Wrong again. This kind of grandstanding will invite examination of GM’s product plans, which are now frozen, delayed and or disarrayed. Call it The Emperor’s New Automobile.

The only possible PR angle that will work here: Wagoner arriving via an American-made compact car: the Chevrolet Cobalt. To successfully suckle, Rick needs to do commute in GM’s penalty box, to display a politician’s knack for the “common touch.” Of course, Wagoner doesn’t have the slightest idea what that really means. Which is why he had to go to Washington in the first place.

The most ardent fans of Detroit accuse those who don’t buy domestic cars of being disloyal, if not downright un-American. But loyalty only makes sense when it runs in both directions. And Detroit has not been loyal to Americans, whether they be its workers, its suppliers, or its customers. But, assuming General Motors and Ford survive the current crisis, it’s not too late. Let’s focus on car buyers. What might Detroit do differently to deserve our loyalty?

Well, a few things. But the most significant would be providing customer care that deserves the name. Most of those who refuse to “Buy American” do so because they were burned by an “American” car, sometimes multiple times. In these cases, not only did the car require too many repairs—which was bad enough in itself—but the manufacturer did little or nothing to accept responsibility for the design or manufacturing defect and take care of the affected car buyer. If Detroit does nothing to assist car buyers when design or manufacturing defects lead to expensive repairs, then why should car buyers support Detroit when it needs assistance?

Some of Detroit’s apologists pretend that these experiences occurred decades ago, with cars like the Vega and Pinto, and that at this point Detroit deserves to be forgiven. This simply isn’t true. Operating TrueDelta’s Car Reliability Survey, I continue to learn of new horror stories. And in the past five years I’ve had the misfortune to experience both Ford’s and Chrysler’s “customer care” first hand.

In one case, a 1996 Ford Contour V6 lost compression in three cylinders at 66,000 miles. I learned from an insider that the most likely cause was a known engineering defect. When engineers had learned of the defect a few years earlier, they had recommended recalling the entire model year. Management had balked because of the potential cost; instead, they had authorized only a partial recall. My car fell outside the dates of the recall. As a result, the recall was not performed, the known failure occurred, the engine was badly damaged, and I took a big hit when I traded the car.

In the second case, the wheels on a 3.5-year-old 2002 Chrysler PT Cruiser (wife wanted one) required replacement because they corroded so much they could not form an airtight seal with the tires. Then the torque converter grenaded, taking the transmission pump with it, with only 52,000 miles on the car. Then the control arm bushings failed. Chrysler picked up half the cost of the wheels, and none of the cost of the other repairs.

Of course, neither company had a legal obligation to pick up any of these repair costs. After all, the warranty had expired. But, when a warranty is strictly enforced, the implication is that the car buyer accepts responsibility for any design or manufacturing defects that reveal themselves after the warranty expires.

Put another way, the car buyer is forced to bet on the quality of the manufacturer’s work. It has not served Detroit well to force car buyers to decide whether or not to place this bet. More and more Americans have “left the casino” after losing this bet a time or two. When speaking with Ford’s and Chrysler’s “Customer Care” people, I presented this logic. I asked them what they’d do if they had to choose between picking up the cost of the repair and losing a customer. Both said they’d rather lose the customer.

Customer care deserving of the name wouldn’t mean paying for any and all repairs indefinitely. But whenever a known design or manufacturing defect results in thousands of repairs, it’s time for the manufacturer to accept responsibility and cover the costs. And not on a case by case basis—they already do this much—but as a matter of publicly-stated policy. A reasonable trigger might be a failure rate of 10 percent before 100,000 miles, or 20 percent before 120,000 miles. As long as cases are decided arbitrarily rather than by such a clear, publicized rule, confidence in the manufacturer won’t receive much of a boost.

Now, it’s not clear that Detroit’s customer care is significantly worse than that of foreign manufacturers. Horror stories exist for any model, foreign as well as domestic. Oil sludge in Toyotas and failing transmissions in Hondas come to mind. But Toyota and Honda aren’t desperately in need of car buyers’ loyalty at the moment. General Motors and Ford are. (Chrysler’s independent existence is all but over at this point.) Pretending that horror stories are all in the distant past isn’t going to do the trick. If Detroit wants earn forgiveness for its sins, and regain the loyalty of American car buyers, it must put what little money it has left where its mouth is and provide customer care that can be counted on.

So, the Motown millionaire’s beggars’ banquet blew town, retreating from Washington’s corridors of power to their Detroit lairs to lick their wounds. To say the CEOs of Chrysler, Ford and GM were unsuccessful in their televised attempts to “liberate” $25b from the Troubled Asset Recovery Program would be like saying the Detroit Lions are struggling to get to the Superbowl. In many ways, it was over before it started. The CEOs arrived woefully unprepared, and left with admonishments to return next month after, how do I put this delicately, getting their shit together. House Speaker Nancy Pelosi and Senate Leader Harry Reid switched into CYA mode. As part of their campaign, they’ve written a letter to Detoit, telling that what needs doing the second time ’round. Having secured a copy of this missive, TTAC contacted our own Ken Elias to read between the lines on your behalf. As the automakers run out of cash, it all comes down to this.

November 21, 2008
Dear Messrs Wagoner, Mulally, and Nardelli:

Ronnie G. – You have no standing at the table. Get lost. You should have killed the JOBS bank years ago. Yea, we love your union dollars but you’d vote for us anyways.

We recognize the importance of the domestic automobile industry and are committed to working with you to ensure its viability in the years to come. One in 10 American jobs is related to auto manufacturing; our national security depends on the industry’s technologies and manufacturing capacity; and our competitiveness in a global economy depends on its pursuit of excellence.

Boiler plate mostly, just shows that Congress does care…kind of.

As you know, Congress has provided President Bush, the Chairman of the Federal Reserve, and the Treasury Department the authority they need under the Emergency Economic Stabilization Act (EESA) as well as other authorities to provide short-term financial assistance to the auto companies.

If Bush was your friend, you might have convinced him.  But he didn’t act, thank god.  That would have been truly stupid to give your companies money with no strings.  See below.  You’ll have to stick with the Dems now, and we’re going to prove to the public that we aren’t just “tax and spend” liberals.  There’s a new sheriff in town boys.

Unfortunately, the Bush Administration and the Federal Reserve have thus far declined to use their powers to improve our nation’s financial stability by assisting the auto industry. Notwithstanding existing authorities, this Congress is prepared to consider additional legislation that would give the assistance you seek, provided that you submit a credible restructuring plan that results in a viable industry, with quality jobs, and economic opportunity for the 21st century while protecting taxpayer investments.

Dems will take credit, not Bush. Just another chance for us to stab Bush. God I hate that man! We’ll blame him for not funding you guys…although it’s clear from this letter that you flunked the test we gave you in your first go around at the well. It took a lot of chutzpah to come in Gulfstream jets and ask for money.

In order for Congress to act in a timely manner, this plan must be presented to Congress by December 2nd, specifically to Senate Banking Committee Chairman Christopher Dodd and Financial Services Committee Chairman Barney Frank.

These Committees already grilled you. Think it’s gonna’ be any easier this time?

It is critical that you meet this deadline since we have announced we are prepared to come back into session the week of December 8 to consider legislation to assist your industry. We intend to give pertinent agencies within the executive branch, the Government Accountability Office, the Board of Governors of the Federal Reserve, as well as outside experts, the opportunity to comment on your work.

Yea, we’re going to get other people involved in reviewing your plans. Like folks who can read an income statement and balance sheet. And the big question is “who are these outside experts?” You don’t want to know since none of them will have ever been on your payrolls.

The plan must:

• Provide a forthright, documented assessment of the auto companies’ current operating cash position, short-term liquidity needs to continue operations as a going-concern, and how they will meet the financing needs associated with the plan to ensure the companies’ long-term viability as they retool for the future;

You’re going to give us a current cash balance as of November 30th and tell us in plain English how much cash you need to keep the lights on. That’s all the money you’re going to get.  And I know that none of you can get additional financing for a turn around. So either get your lenders and everyone else who you owe money take a lot less cash, or else file for bankruptcy. Yea, that’s right. Even though I said that’s a last resort, well, it is.

provide varying estimates of the terms of the loan requested with varying assumptions including that of automobile sales at current rates, at slightly improved rates, and at worse rates;

Don’t show Congress a plan based on a wing and a prayer of some “normalized” sales rate. This economy isn’t turning around any time soon. And smart people, like TTAC, have told my aids that you can’t possibly become profitable at 11MM SAAR. So do what you need to do…no matter how much it hurts. Hey Bob Nardelli – I remember what you did to those workers at Home Depot, cutting their wages while enriching yourself. And you thought I forgot!

• Provide for specific measures designed to ensure transparency and accountability, including regular reporting to, and information-sharing with, any federal government oversight mechanisms established to safeguard taxpayer investments;

No more hiding for Cerberus. And since the taxpayers are the public, you’re going to have to show the world that you’re really not the smartest guys in the room. Heck, we’re squeezing you so tight that you might have to liquidate Chrysler.

protect taxpayers by granting the most senior status for any government loans provided, ensuring that taxpayers get paid back first;

The only way to do this is to get approval from your senior lenders. For them to allow this, they’ll want a plan that works too. But if you’re going to ask for subordination from your lenders, you might as well ask them for a debt for equity exchange. This is your opening for the cram down. Don’t blow it now.

• Assure that taxpayers benefit as corporate conditions improve and shareholder value increases through the provision of warrants or other mechanisms;

Dilution to current shareholders for sure.

• Bar the payment of dividends and excessive executive compensation, including bonuses and golden parachutes by companies receiving taxpayer assistance;

Limit CEO compensation at $1MM/year.  And Rick you should probably quit now, your arrogance in front of the committees was just too much to bear. Asking a Senator if he could guarantee when the economy would come back…what balls! I’m giving you a chance to take that parachute today.  Just go away. Nardelli, you agreed to a dollar salary, so just do it. I feel bad for Mulally, he made a deal to leave Boeing, and he’s probably worth the money having inherited a mess he’s been asked to clean up. But the public will insist on a salary cap – so do it.

include proposals to address the payment of health care and pension obligations;

That’s right, the UAW needs a cram down too on the VEBA. Learn to live with the same benefits everyone else gets (except us of course). And we want those pension obligations funded out of current operating cash flow – don’t show us a plan where taxpayer dollars fund those obligations.

• Demonstrate the auto companies’ ability to achieve the fuel efficiency requirements set forth in the Energy Independence and Security Act of 2007, and become a long-term global leader in the production of energy-efficient advanced technology vehicles; and

The Greens are holding you accountable to your promises. I’m also telling you that the funding mechanism will be out of the Energy Department funds we already appropriated – which means a limit of $25 billion total to be put out by the government. The Republicans won’t challenge us too much as there’s no new money involved. And if that’s not enough dough for GM or Chrysler to have a go forward plan, then you need to figure something else out.

require that government loans be immediately callable if long-term plan benchmarks are not met.

It means the government can force a bk any time it wants. Get over it.

The auto companies’ shareholders, business partners, and prospective benefactors—the American people—deserve to see a plan that is accountable to taxpayers and that is viable for the long-term. In return for their additional burden, taxpayers also deserve to see top automobile executives making significant sacrifices and major changes to their way of doing business.

Yo’ Rick W.  Wake up…that means you. Change your business in a big way now.

The auto companies’ shareholders, business partners, and prospective benefactors—the American people—deserve to see a plan that is accountable to taxpayers and that is viable for the long-term. In return for their additional burden, taxpayers also deserve to see top automobile executives making significant sacrifices and major changes to their way of doing business.

Get it now?  Sacrifices. Major changes in how you do business – like restructure now. This will force the cramdown at GM and it might just liquidate Chrysler. It’s what needs to happen, and most of the public will think we did the right thing and not blow their money. Ford – you sure you can really make it as you’re capitalized today? You better have a good case.

We look forward to working with you to ensure a viable American automobile manufacturing sector for decades to come. If we are successful, we can ensure a brighter future for the automobile industry, our nation, and our planet.

Now having read this letter, if you can’t see Obama’s hands in this, then you’re really stupid. Don’t think the Messiah will treat you any better – because THIS IS HIS PLAN!

Thank you for your prompt attention to this matter.

Prompt means by December 2nd, don’t stall.  I really don’t want to call Congress back but I’m willing to do it IF I see you made some really big changes – and got your creditors and the UAW to contribute. Capiche?

Sincerely,
Nancy Pelosi Harry Reid
Speaker of the House Senate Majority Leader

There may be another nasty aspect to the bailout: a full-scale trade war, launched by countries that don’t (or even do) bail out their auto industries themselves. Bloomberg writes that “a U.S.-triggered spate of global carmaker-bailout proposals may spark trade disputes over whether the Americans are unfairly trying to subsidize their industry.” Egged-on by the US bailout money that may, or may not, or may, or may not be in the offing, manufacturers all over the globe are holding up their tin cups. At the same time, the European Union threatens to lodge a complaint against any U.S. bailout on the grounds that it’s unfair to the auto makers in the rest of the world, not to mention Renault, Fiat, Volkswagen, Daimler, BMW et al. China also may complain, although their complaints will ring a bit hollow, as the government owns most of the big automakers already.  Probably won’t stop them. “Now that we are in the WTO, we might as well use it.” Payback is a bitch.

The U.S. has long bitched about foreign governments subsidizing their industries. Airbus comes to mind. GM, Ford and Chrysler never missed a chance to kvetch about unfair state-financed health-care, retirement benefits, currency policies and whatnot. (Did they/could they build American products specifically tuned to these “exclusionary” markets at a price the locals could afford? China JVs excepted, they did not.) During his presidential campaign, Senator Obama complained that South Korea created disadvantages for American car makers– even as GM imported Korean-made Aveos to bolster their otherwise impoverished small car lineup.

If you think that all this xenophobic, America-first rhetoric was lost on foreign automakers and governments, think again. An American bailout package will be taken apart– and to court–  if it violates WTO rules. How could it not? Under these rules, certain kinds of subsidies are allowed. For instance those to protect the environment (hence the additional green sheen on most offers of green). Other subsidies–specifically the alteration of the U.S. Department of Energy’s fuel-efficiency -oriented $25b loans for “liquidity-enhancement”– are completely against WTO law.

If other countries do give bail money, then it’s “stones and glass houses,” according to Garel Rhys, professor of automotive economics at Cardiff Business School in Wales “Everybody has been at this game for their own interests; nobody is pure.” Anti-bailout-warfare could be complicated by the industry’s web of cross-border subsidiaries. Imagine: Germany closes down Opel in retaliation to US bailout of GM, and then sends money to save Opel’s jobs. War is hell.

However, the European Union’s antitrust chief Neelie Kroes admonishes the bloc’s 27 nations to avoid the “costly trap of a subsidy race” that would give some countries unfair advantages. If his warnings are heeded, the coast would be clear for a backlash against American bailouts. As noted in today’s WAS, Ford Germany is not eager for government Euros. Even Opel did a sudden 180, and said they didn’t really mean it. Any politically motivated bailout, such as from Opel’s home state Hessen, could be withdrawn with no political backlash: “Brussels made us do it.” Noses clean, Europe could use the WTO to kick Detroit while Detroit is down.

Already, proponents of intergalactic trade warfare are building a fifth column stateside. David Littmann, economist for the Mackinac Center for Public Policy in Michigan, calls the U.S. bailout a “hypocrisy at the economic level and the political level. We tell others to open up their markets and reduce barriers, and we are doing the opposite.” A WTO wrench thrown into the slow-moving gears of Washington. What’s the next chapter in that saga? Chapter 11? Or skip back to Chapter 7?

Loans and leases are getting hard to come by for anyone interested in a car or truck from GM, Chrysler or Ford. Banks now routinely put out lists with “red lines” through makes and models they no longer want to finance. Those products are increasingly domestic in origin.  Redlined vehicles are harder to sell, forcing down values, rendering loans even more unattractive, making those cars and trucks even harder to sell, forcing down… you can see where this is going. Major lenders in the US are not waiting for The Big 2.8 to file for bankruptcy. They’re treating them like it’s a done deal.

To be fair, the money supply has tightened for everyone– whether you’re buying a Maytag or a Mitsubishi. Credit scores of 750 used to mean no problem, your car will be ready in a hour. That’s no longer the case. Banks have become mice at a falconry tournament, and it’s not hard to see why. They never really knew what their mortgage tranches were worth, and that bit them good. They thought they knew what SUVs were worth. Ouch again. Twice bitten is what? Four times shy?

SUVs and trucks first caused banks to uncap their red pens way back in the beginning of 2008, as gas prices began deflating values. By July, independent lenders like NBT Bank shut off leases for a litany of vehicles, citing gas prices as the raison du rouge. Their list included the still decent selling Porsche Cayenne and went on: No Ford trucks or SUVS, Chevrolet SUVs or Toyota SUVs. Then they started to broaden their negative horizons. No Chryslers, Jeeps, Hummers, GMCs, or Cadillacs. A little lending war had begun with Detroit. While this seemed extreme at the time, other money men followed suit, though not always with the same card.

Bank of America, for instance, does not say no. It’s more like not so much. They cut back on the amount of money they will front for certain vehicles. For example, last year you could finance 120 percent of the cost of your Suburban. This year, 110 percent. While this doesn’t seem too draconian, it’s yet another way of making some products harder to buy than others. Again, those hard-to-buy cars and trucks are turning out to be domestics.

Other lenders, like U.S. Bank, take yet a different approach. On November 1, they hiked their rates on Chrysler, Dodge and Jeep products, across the board. Unsure of what those products might be worth six months, let alone 48 months, from now, they’ve gotten skittish. They now rate Chrysler iron high-risk and price their loans accordingly.

The net result of turmoil in Detroit, then, is more turmoil. Timorous lending has been across the board, but that affects domestic more than foreign marques. Reason one: as has been reported here frequently, a lot of the car-oriented money men (e.g. GMAC) had notoriously louche lending standards.  If a dealer had someone with shaky credit, that customer was pointed towards more Cobalts than Civics.

That’s over. The playing field has been leveled.  Whether or not a lender is playing favorites, there is no more easy money. An advantage that was Detroit’s is lost.

Reason two: money for trucks and SUVs constricted first and most severely. GM, Chrysler and Ford were (and are, relatively speaking) more dependent on these products than their competitors, both in terms of market share and return on investment. So Toyota loses, but The Big 2.8 lose bigger.

Reason three: new vehicle buyers– and there are still millions of them– are choosing a foreign car over a domestic because the transplants are “saved by zero.” Now is the time nul points financing can really move the metal. And now is the time the domestics can’t offer it. Here, Detroit doesn’t just lose, one of the competitors gains. They get to watch market share shift.

The biggest hit to Detroit is in the area of confidence. Banks are competitive. They don’t all get together every couple of months and decide to simultaneously screw a couple of major US corporations. They are each arriving at the same conclusion separately. GM, Ford and Chrysler products are difficult to value.  The only safe thing to do: cover the bet. Even better, stay away completely.

You can hardly blame the average consumer for taking the same stance. Mainstream cars and trucks are mostly fungible. If you can’t get bought on a Malibu, step this way. Hows about a Camry/Ultima/6/Accord/Galant/Sonata/I’m probably-forgetting-a-few? For most people, the differences just aren’t that noticeable when compared to whether or not the company’s around this time next year. As a selling point, that probably ranks up there with the AUX jack, number of cup holders and ideas about patriotism.

So, if Wagoner, Nardelli and Mullally are worried about perception, they can now relax. The stench of bankruptcy has already set in, and set in good.

Informa Global Markets (IGM) “is a world-class international supplier of real-time news and analysis to market professionals in the fields of foreign exchange, sovereign fixed income and corporate bonds.”  It’s the stuff brokerage houses and investment bankers pay a lot of money for in order to look smart with their clients. Would definitely bust TTAC’s budget. Some of my friends in high finance still hold a job, and one of them (you know who you are) was nice enough to forward me yesterday’s IGM “Markets At Midday” issue. Reads like “Markets At Midway.” With the appropriate ending: The bad guys lose.

The issue deals with – you guessed it – our least favorite topic: GM. And what a blow it deals. The usually dryly written report starts with a headline that could have been typed by a tasteless scribe like yours truly: “Forget The TARP, Get A Body Bag”

The piece chronicles yesterday’s plummeting GM share price; it sank to a low not seen since the last Great Depression. It continued to fall to a penny off its all-time historical low: $1.69. That’s what a share of GM was worth on June 4, 1938 (a Hershey bar went for a nickel the same year.) The report further recounts yesterday’s rebound– to $3– on the news that a bipartisan group of Senators from states afflicted by the motor malaise reached a tentative deal on a bailout package. Three bucks a share would have bought 30 packs of Oreos in 1938; we’re talking major value here.

The analyst, and they are paying them big bucks for taking a contrarian view, doesn’t share the newfound optimism that rallied the share. The writer singles-out United Auto Workers boss Ron Gettelfinger. (We take a somehow broader approach, but hey, it’s still a free country.)

“Consider these ironies. According to Mr Gettelfinger, it takes 78 workers to produce 2,500 cars at GM, while at foreign manufacturer’s plant it only involves 33 workers. According to one auto analyst, last year when GM closed a plant in Linden,NJ, they were obligated to carry those idled workers on the payroll for an additional 40 days. It is estimated that every single car that rolls off the assembly line costs US automakers $1,500 to $2,000 in legacy costs.

“Why? Because of the same Mr. Gettelfinger who is figuratively blackmailing the government into expanding the parameters of TARP. The same Mr. Gettelfinger who, while wanting the taxpayers to save the Big Three, is unwilling to renegotiate terms of the union contracts. The same Mr. Gettelfinger who, over the years, has sucked the US auto industry dry to the point that you can no longer get blood from a stone.”

Gettelfinger doesn’t appear to be on the analyst’s Christmas list. And v.v. As bad as it is, all is not lost. Apparently.

“But while there is strong opposition on Capitol Hill to dip into the already-approved loan to jump-start the green, fuel efficient initiative, there are certainly others ways that, if absolutely necessary as Mr Gettelfinger maintains, to, not bail out, but lend aid to the auto industry mired in 20 years worth of mistakes.”

Unlike three private-jet-friendly CEOs we could name, the analyst has a plan to save the industry while appeasing those who are against “lending a helping hand to an industry that has literally driven itself into the ground.” He lays down five “suggestions and requirements for the automakers to receive $25b in aid.”

1) “Let them declare bankruptcy before handing over a dime.” It would keep GM alive, and allow them to reorganize, renegotiate contracts and raise capital. The latter would be a bit tricky, given the dire straits of the credit market. Hence the government loan.

2) “Let, or force, GM and Chrysler, or better yet, all three, to merge.” Cut costs, workforce and eliminate a glut of non-selling models.

3) “Replace top management at all three automakers with turnaround specialists.” Specialists with a proven track record. A track record which the analyst says the current executives don’t have. In other words: Fire them.

4) “Trim the workforce to the level of their foreign competitors (33 versus 78 per vehicle).” This in a last ditch effort to “save most of the 3m jobs that Mr. Gettelfinger says would be lost.”

5)”Instead of trusting the automakers to make good use of the $25b, a government-appointed trustee should dole out the funds.”  Some of the bailout bucks should go to dealerships to keep them afloat. Some should be used for a buyer incentive program (the discriminating, but non-discriminatory writer suggests $3k for a hybrid and $1k for a Tahoe.) Some should go into a government-guaranteed warranty program “to quell the fears of consumers buying a vehicle from a bankrupt company.” (Think FDIC for cars.) And, finally, “Take the liability of the pension and health care expenses of retirees off the hands of the automakers.”

[Unwritten, but obvious to the not so innocent bystander amongst IGM’s subscribers in the sovereign funds and private equity field:a company that underwent all five of the above would be a very juicy target for people with real money.]

“Don’t forget the toe tag,” the analyst’s piece ends.

Minutes later, the report was on the desks of market professionals in the fields of foreign exchange, sovereign fixed income and corporate bonds. But even as the analyst typed his last lines (remember, it was a mid-day report), the news broke that the bipartisan boondoggle was dead. GM’s stock promptly shed several Oreo packs (at 1938 prices) and closed at $2.88.

A run on the bank. That’s what will happen as soon as Congress adjourns without a bailout plan for the Detroit 3. Hard-pressed suppliers and creditors will force GM to do what must be done: Chapter 11. I guarantee it. GM and Chrysler will sink into bankruptcy before they even think about the annual Holiday shutdown. A few Senators and hundreds of thousands of workers within America’s automotive industry don’t want to see that sad day arrive. But arrive it will. And as the Capitol Hill hearings proved beyond a shadow of a doubt, Detroit needs a thorough cleansing.

The hearings didn’t do much of anything to bolster the case for bailing out Chrysler, Ford or GM; or the industry as a whole. In between the grandstanding and the personal stories by our elected officials, a few key questions were asked. And neither GM CEO Rick Wagoner nor Chrysler CEO Bob Nardelli could give a straight and honest answer.

Simple questions like when would you run out of money? (“Uh, it’s hard to say.”) If we give you this money, how do we know you won’t come back looking for more? (“We have a plan in place, we think it will work.”) What changes will you make to restructure your business? (“We have already restructured and we’re doing more.”) The only real answer we got was from the guy whose union has had Detroit’s nuts locked in a vice for years; he accurately ranked the depth of despair among the Three. GM’s in the worst shape of all and everyone knows it.

Bingo! That’s all the supply chain needed to hear. If Congress doesn’t allocate the “bridge to nowhere” loans, they’ll all be looking for immediate payment on their invoices before they ship one more part to GM and Chrysler. (Give credit to Mulally, he was smart enough to say he doesn’t need the money now, or maybe ever. Just wanted to have access to it if needed.) And that’s why Rick and Bob can’t answer the question about running out of cash. No loan, it’s the next day. Loan granted, and we stay afloat for three or four months.

Uh, Rick…Bob…you two geniuses just sealed your fate. Kind of like the mistake the prosecution made with O.J. You didn’t go for the kill and put the burden on the defense to prove otherwise. Just waffling on the answer about the cash end game gave Congress the excuse it needed not to get into a political showdown. You had to put the onus on Congress that this situation can’t wait for Messiah Obama. It’s a clear and present danger – and you didn’t scream loud enough. And you forgot to show everyone a truly credible plan too.

Congress won’t act. Pelosi owes the “Greens” too much (she’s from the land of fruits and nuts) for her job and they won’t let her touch the Department of Energy money. No chance. Pigs will fly before they give that up to save Detroit. Hank Paulson won’t even discuss tapping the TARP billions for the auto industry. He’s an ex-Wall Street guy and that money goes to save his buddies, not union employees. The Republicans won’t let a new bill get passed; they’ve got all the auto industry they need right there in the South.

So it’s a deadlock. Congress will do some posturing, but will punt on coming to an immediate solution. Maybe they’ll come back in December for a more thorough hearing on the situation but that will be too late. Another round of deliberations on the road to nowhere.

Even if Detroit gets the $25 billion to stay afloat, it’s just money that enables management to keep making all the same mistakes as before, rewarded for their own incompetence. But it’s not the end. Based on their current cash burns, all of these companies will use nearly the exact amount of cash as their respective share of the loans by the end of the first quarter of 2009. By then, GM will have more than $53b in debt and no turnaround in sight. Chrysler will be back at the starting line, with no new products and no hope. Ford probably won’t even tap into the line but will need the funding later.

Congress should take the easy road on this one and do nothing. It’s the right thing to do. Inaction is action. That’s the message to the Detroit 3 – fix your own house. You made the mess of things, and didn’t come to us with ANY plan how you were going to change the way you do business. Half of the country doesn’t want to help you and they don’t buy your products. And Congress shouldn’t set a precedent of becoming the lender of last resort for troubled industries.

And when Congress doesn’t act, the chips will start to fall. The market will determine its own solution fast enough, within hours. The cash calls at GM and Chrysler from suppliers will overwhelm these two companies faster than a Corvette ZR-1 or a Dodge Viper SRT-10 ACR. It’s going to be an ugly crash.

We made a huge mistake with our “SAIC may buy GM” story. We paid for our sins. The story created so much traffic that it literally melted two servers. TTAC’s China Syndrome. As you are painfully aware, TTAC was out of commission several times yesterday. A day after the story broke, the story broke our servers. Hit counters for all stories are currently SNAFU; they just gave up and went home. A huge amount of traffic keeps pouring in from China. And no wonder: a Chinese search for the same story produces 76,500 hits. If we’d run this story a few months ago, a wagon would have pulled up outside of TTAC World Headquarters, and they would have taken us away in straitjackets and a Thorazine drip in our veins. Now, a lot of people think GM is crazy for not doing the deal. A Connecticut hedge fund manager, who we reached for comment, looked at the screen, said “Ugh, the market is ugly.” When prodded to focus on GM and SAIC, he said: “If I’d be GM, I’d be in Shanghai right now, negotiating the deal. Then I would go to Congress and say: What are you going to do about it?”

Taking over GM would be just one in a long series of Chinese foreign deals. As early as 2003, Sinochem had invested $105m for the acquisition of gas assets in the United Arab Emirates. In 2004, Computer maker Lenovo bought IBM’s personal computer business for $1.75b. The Chinese consumer electronics firm TCL Corp. purchased the television business of French manufacturer Thomson SA, and with it the rights to the RCA logo. In 2005, China National Offshore Oil Company Ltd. (CNOOC) bid $18.5b, all cash, for Unocal. The deal was viewed as a threat to America’s security, and was withdrawn. Unocal settled for a $17b buyout by Chevron, in cash and shares, a good deal less than what the Chinese did bid.

In the same year, China’s appliance manufacturer Haier, assisted by private equity firms Blackstone and Bain Capital, bid $1.3b for Maytag.  Haier was after the same what SAIC would get from GM in spades: A household brand name, and a nationwide distribution network that could vastly expand its sales. The Maytag man in blue would have been a good fit, and the strategic importance of washers and dryers would have been manageable. However, political pressure did set in again, and the lonely Maytag man remained without Chinese company.

“In 2007, acquisitions in the United States by foreign ventures hit $407 billion, up 93 percent from the previous year, according to Thomson Financial. The top countries investing were Canada, Britain and Germany; the Middle East and Asia — especially China — are quickly catching up,” wrote the Wall Street Journal. Last year alone, China bought nearly $10b worth of US companies. The same year, China liked working with Blackstone so much, that they bought at $3b stake in the private equity firm. A $5b stake in Morgan Stanley followed. The buying spree was caused by the lower dollar. Since July, the dollar went sky high. But wonders of wonders, the Chinese did not adjust their currency to the higher dollar, in Yuan terms, buying American is just as cheap as it was.

Yesterday,  we discussed the huge spike of traffic with our friends at Gasgoo, in Shanghai. The same day, Gasgoo intensively grilled Philip Wylie and Joseph Gang, two leading professionals from Houlihan Lokey, U.S No. 1 restructuring investment banking firm. Said Gang: “The Chinese companies are quicker in evaluating and closing acquisitions today than they were five years ago. They have more capital from years of profitability and rapid growth in the domestic market to make foreign investments and many leading companies globalize through M&A which is a strategic priority.

“During the past one or two years, if we look at the larger deals in the automotive industry, you would find the Indian companies have been more aggressive in global auctions for controlling stakes and faster than Chinese companies. There are not many examples of Chinese companies purchasing foreign assets in the automotive industry.  The most successful cases involve Nanjing Automotive acquiring the MG Rover brand and related assets in the Europe, and Wanxiang acquiring multiple component suppliers through primarily minority purchases of distressed assets in the United States.”

“The operational challenges of managing the complexities of integrating a global business would not be materially different for any foreign companies, whether Chinese or Indian.”

China doesn’t like to be overtaken by India. Again, Chang hints what may be going down. China teams up with private equity firms, some of which it already owns: “For Chinese companies who intend to expand into international markets through M&A, it could be an alternative to team up with a private equity group for not only financing (albeit at the cost of sharing ownership), but also operations and governance support.” Translation: If a private equity firm buys out a company like Chrysler (as it happened), nobody cries about reds under beds. And it just so happens that China owns a good chunk of a private equity firm. Along with a chunk of Morgan. Along with a big chunk of the U.S. Treasury.

Today, the Straits Times reports that “China is now officially the US government’s largest foreign creditor after overtaking Japan, in a development that signals Washington’s increasing reliance on Beijing to save its economy.” According to US Treasury Department figures, China became the largest foreign holder of United States Treasuries. As of September, the U.S. Treasury owes China $585b. With GM’s market cap now standing at a pocket change rate of  $1.35b, and getting cheaper by the minute, China could buy 433 General Motors with their T bills alone.