[Once again, our anonymous bankruptcy lawyer has put his skills to use on our behalf. His C11 plan’s a bit technical, and it sounds crazy, but it just might work.] The process kicks off with a GM Chapter 11 filing. The U.S. Treasury then gives GM a secured debtor-in possession line of credit for $40b. The line of credit is secured by a first security interest on all GM assets, being junior only to the existing secured line of credit. The fed’s $10b of the line of credit is used to support essential suppliers through loans and pre-payments, perhaps tracking the existing GM model for financing its suppliers.

On the first day of the case, the bankruptcy court gives interim approval to $5b of the total credit line and schedules a hearing ten days later to approve the balance of the $40b loan facility. It’s likely that GM would prepay essential suppliers before filing Chapter 11, and could get court approval to make pre-payments for post-chapter 11 shipments.

A GM chapter 11 case will be expedited. The chief judge assigns multiple judges to handle different aspects of the case, recognizing that speed is essential to a successful reorganization. The case is filed on a Friday evening; the initial financing approvals is in place before the markets open on Monday.

The reorganization plan itself is fairly straightforward:

-Taxpayers have a $40b first lien on all assets. If GM’s debtor-in-possession financing cannot be refinanced, then the taxpayers can negotiate the terms upon which they will extend their loan to GM. Taxpayers will get warrants to buy New Equity to reward them for the risk of financing GM in Chapter 11.

-$40b of bondholders get their pro rata share of any new unsecured debt issued by GM ( the New Debt) and their pro rata share of the new common shares (the New Equity) issued by New GM. No interest will be paid on the New Debt until taxpayers are paid in full.

-Trade payables of $39b, the $25b owed to the UAW, and any other unsecured claims, also get their pro rata share of the New Debt and New Equity.

-Old equity gets nothing

-New management gets a bonus incentive pool consisting of five percent of the new equity

-Old management gets their pick of a gold watch or a HUMMER

And there you have it. Although the size, scope and possible failure of a GM C11 is daunting to management, unions, suppliers and political representatives, a filing is the only way that taxpayer money can be protected– short of witholding federal funds entirely.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dear President-elect Obama,

Upon taking office, you will immediately face some tough decisions about the future of the government’s role in “saving” Ford, GM and Chrysler. As you know, the Detroit-based automotive industry has already bent the ears of your political colleagues, particularly Speaker Pelosi and Senate Majority leader Reid. These Democratic leaders in Congress seek membership approval to provide taxpayer dollars to prevent these automakers from impending collapse. While we respect the efforts of Congressional leadership, and we share their desire to enhance and protect America’s industrial base and employment therein, we ask that you spare a moment to listen to the opinions of people who do not share their belief that massive federal funding will achieve these goals. First, our qualifications.

We have been involved with the American automobile industry for decades. We are factory workers, designers, engineers, managers, mechanics, dealers, part suppliers, enthusiasts, journalists, and consumers. Together, we represent the combined voices of the “front lines” of our industry. We are loyal to our country’s economic self-interest and seek but one outcome: an American auto industry that builds vehicles admired and desired by the American public.

Over the last three decades, for reasons too numerous to elaborate, the majority of Americans (especially passenger car buyers) have switched their loyalties to foreign-owned brands. You will hear various explanations for this failure from the men in charge of Detroit: unfair foreign trade, currency manipulation, fuel economy regulations, health care costs, union collective bargaining agreements, the current credit crisis and more. We urge you to discard these explanations and only look at sales trends for the past three decades. Again, for whatever reasons, American consumers mostly abandoned Detroit.

By the same token, American automakers abandoned their customers, by failing to invest its profits in flexible assembly techniques, new powertrains and platforms, and better design. By failing to spread their investments in a range of vehicles to meet consumer needs, or fully embrace the fuel efficient future that Congress has dictated. To rectify this situation, urgent action is required. But you, as president-elect, must face this crisis with a clear understanding of the limitations you face.

First, accept the fact that jobs will be lost no matter what you do. The American automobile industry has too many products, brands, bureaucrats and dealers relative to the size of its market share. Until it can recapture– or at least maintain– market share, it will continue to contract. As any process of recovery will be slow and arduous, Ford, GM and Chrysler will have to shed thousands more jobs. With or without federal aid, this “downsizing” should continue, and sometimes with less than gracious outcomes.

Second, admit that Chrysler has no future. Actually, it had no future when Daimler sold it to Cerberus. Worse, Cerberus never had any intentions to invest the capital necessary to make a go of it. It has no future products in the pipeline today, and hence is undeserving of rescue.  To best protect Chrysler’s past and present employees’ pensions and interests, Chrysler must be allowed to fail and be liquidated.  At least some jobs will be saved as the company’s best assets get sold to other automakers, and proceeds will be returned to the debtor’s estate for apportionment among its stakeholders.

Third, understand that GM and Ford needs bespoke funding solutions. Your administration would be well advised to create a menu of funding options, each with different levels of security interest and control assumed by the federal government. Ford and GM’s executive management and their Boards will have the option to choose among a variety of solutions to resurrect their companies’ fortunes.  If an initial solution does not work, any return to menu will incur significant costs and dilution.  A “one size” solution to the problems of both automakers is not wise and simply doesn’t work.

For example, the cash needs of GM vastly outweigh those of Ford. GM does need a massive financial restructuring, Ford doesn’t. Taking a few billion here and there at GM won’t restore profitability at the company, it just prolongs the agony. Any analyst will tell you that GM needs perhaps $25 to $50b as part of a proper restructuring that includes a major “cramdown” on all stakeholders (including the United Auto Workers’ health care association). This “last resort” menu option then gives the taxpayers a significant interest in the company in return for the cash, with a small piece left for the creditors. And as its largest stockholder of sorts, the Feds get to call most of the shots at GM.

At Ford, the company has done most of the work necessary to restructure itself to long-term profitability in the near future – when auto sales come back to trend if not sooner. The amount of government assistance needed to ride through the crisis is considerably less than what’s required at GM. As a result, Ford will take a different menu option. Less money taken with less risk to taxpayers means less government influence and equity dilution for existing stockholders.

Fourth, the current management team at GM must be replaced, even if GM selects the lowest funding level option off the menu we prescribe. While we do not believe that government should involve itself in the highest levels of American enterprise, if it does, it should do so whilst protecting the financial interests of the American taxpayer. Any funds to GM must come with a wholesale revamping of this company’s Board of Directors and its senior management team.

Fifth, do not fall into the political trap of demands made by the UAW as deserving of a bail-out of their VEBA plan, regardless of what happens to each of the Detroit Three. The UAW itself is a business, with its own motivations for profit (for its members) and metrics of success. Its fortunes must rise and fall with its respective employers and not be treated as an independent party at the political bargaining table for government funding. If you grant a payout to the UAW, you set a future course for enterprise in this country that has long term negative consequences by insuring employment stability. Russia abandoned that principle two decades ago, and for good reason.

We wish you all the best for your future and that of our country.

Senator and president-elect Barack Obama held his first post-election press conference on Friday– the same day that Ford and GM revealed their respective arterial sprays of red ink and third degree cash burns. Rather than highlight those stats and go for the close, bailoutwise, Obama played his political cards close to his chest. The exact text of his remarks are extremely revealing, in that politicians don’t really reveal anything unless they absolutely have to kinda way. “The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil.” Translation?

Obama’s opening salvo reveals that America’s next President expects Detroit to stop messing with Democratic promises to improve America’s vehicular fuel efficiency, buckle down and build fuel sippers.

The implication doesn’t exactly plow new political ground. Lest we forget, Detroit and Washington have been at loggerheads regarding Corporate Average Fuel Economy (CAFE) regulations since they were first introduced in 1975. For CAFE’s most recent update, Motown [once again] lobbied Democrats to keep the standards as low as possible, then cried poverty when it was clear they’d lost the fight. The Department of Energy loans were designed to assuage Motown’s sore-headed losers by providing access to $25b to do what they’re legally obliged to do.

Bottom line: any new federal money for The Big 2.8 will come with the same old strings attached. In case you missed the point…

“I would like to see the Administration do everything they can to accelerate the retooling assistance that Congress has already enacted.”

Retooling = building more fuel-efficient cars. As TTAC has highlighted, federal foot-dragging is not Detroit’s enemy. The regs for the $25b Department of Energy loans have been written with unprecedented haste. In fact, they’re more or less done. The more part is that they’re done.

The less part is that Detroit can’t use the money for anything other than which it was intended (fuel efficient cars not corporate liquidity). What’s worse, GM, Ford and Chrysler don’t qualify under strictures regarding financial viability. Obama’s message was code: tacit clearance for Congress, the DOE, President Bush, someone, anyone to pervert the legislation’s original intent and current restrictions.

Does Barack Obama know that the situation is well beyond retooling? If he does, he ain’t admitting it. And if he doesn’t, his economic advisers might want to write a memo on that one. STAT.

“In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States.”

Weather the economic crisis. Now that’s what Detroit’s talking about! The first part of the statement is a not-so-clear signal to Motown (plausible deniability rules) that financial assistance will arrive via the Troubled Asset Relief Program, another economic relief stimulus bailout pork barrel package, and whatever clever shit the Obama administration and Congress can devise (tax credits for loan interest, etc.). But the second part of that statement… again with the fuel-efficient cars.

Clearly, Obama doesn’t want to be seen using taxpayer money to help Detroit build more SUVs, pickup trucks or automotive gas guzzlers. Which puts Motown in even more of a bind than before. Before, they could meet CAFE regs by balancing production of small, relatively fuel-efficient, uncompetitive, unprofitable small cars with sales of large, gas-guzzling, competitive, profitable trucks. Reading between the lines, Obama’s not going to let one red cent of public money sustain that mix.

So Detroit’s being painted into a corner: build competitive, fuel-efficient cars or fuck off and die. But what are the chances that GM can build these fuel-efficient machines and sell them in enough quantity at enough of a profit to make enough money to pay off their existing loans PLUS the federal assistance? Teen-tiny. Ford. Slim. Chrysler. None.

“I have asked my team to explore what we can do under current law and whether additional legislation will be needed for this purpose.”

Translation: Obama is not throwing the weight of his political victory– assured in no small part thanks to Motown/UAW-friendly states– behind a wider Detroit bailout (under some sort of new economic stimulus passage). Not yet.

For Detroit, that’s an industrial-size mixing bowl of not good. Without Obama’s unqualified support, and soon, they’ve got a real PR mountain to climb. On a more general level, the same “lack of urgency” that put GM, Ford and Chrysler where they are today could ruin their chances in the political sphere. If so, it’s game over.

[Another one from our anonymous bankruptcy lawyer.] I’ve had a look at the rules for the $25b Department of Energy (DOE) direct loans for development of advanced technology and manufacturing facilities. To qualify, an automaker must prove that it is solvent. Either that or it must meet one or more of the stated tests that relate to financial liquidity– tests that can be met even if the automaker is insolvent on a balance sheet basis. In announcing its huge third quarter loss, GM has made a statement that suggests that it may not meet the liquidity tests and may not qualify for the DOE direct loans.

GM is balance sheet insolvent to the tune of $59b. So perhaps GM could persuade the DOE to consider their projected cash flows for the next few years as an indication of ability to repay. But the automaker hasn’t released its pro forma projected cash flow statements or given any indication how they will meet the loan eligibility tests enumerated in the DOE interim rulemaking.

Based on what we know about GM, its recent losses, and its obligations in 2009 and 2010 to repay billions in unsecured debt (the $1.3 billion unsecured  Series D convertible debt due on June 1, 2009) and fund the retirees’ health plan trust administered by the UAW, GM will need to have the liquidity standards relaxed to qualify for DOE loans. If the DOE does so, it should do it in a way that protects taxpayers.

The starting point: find a way to meet the DOE’s solvency/liquidity requirements. This might be done using a (get ready for this fans of The Jerk) capitalized special purpose entity (a.k.a.“SPE”). An SPE is a separate legal entity, often organized under the laws of Delaware. GM and other companies already use  SPEs to finance specialized assets. To qualify for the DOE loans, the SPE would have to be solvent or adequately liquid. Solvency/liquidity could be created in a few ways.

Automakers already have budgets/projected expenditures for alternative technology vehicles. As a starting point, GM, Chrysler and Ford would each make a capital contribution of $500m to the SPE, and then would make quarterly payments to the SPE as additional capital contributions. This would give the SPE significant liquid/current assets and help assure taxpayers that the automakers’ ability to divert the DOE loan for other purposes is limited.

The DOE proposes it get a first lien/security interest in all property acquired with loan funds. However, this approach does not adequately protect taxpayers; the security interest does not extend to existing assets/technology that may be an integral part of the technology being developed.

Therefore, any automaker seeking DOE loans should be required to transfer all existing intellectual property, patents, trademarks and technical know-how in any way relating to alternative technology vehicles to the SPE. These transfers would give the SPE more assets, helping it meet the ongoing test for solvency and liquidity. Any new technical advances and the related intellectual property for alternative technology vehicles would be owned by the SPE.

The SPE would grant any participating automaker a non-exclusive, nontransferable license to use all the intellectual property owned by the SPE. Any loans by the DOE would be the primary obligation of the SPE as the borrower, guaranteed by the automakers and secured by the stock of and the assets of the SPE. The SPE would control how the DOE loan is disbursed and monitor the use of the money.

Having demonstrated their incompetence, automakers should not be allowed to run the SPE. The SPE should have an independent board of directors with its own scientific advisors, charged with the obligation of eliminating duplicate alternative technology development efforts. The SPE would have a detailed budget open to public inspection and comment, with a website which it posts detailed quarterly financial statements showing the use/disbursement of taxpayer funds.

The purpose of the orginal legislation was clear: funding new, fuel-saving automotive techology and products. Money from the DOE should not be used, directly or indirectly, to prop-up automakers that are failing, or to fund automaker obligations to creditors and bondholders. By using an adequately capitalized SPE, GM– and Ford and Chrysler– can qualify for DOE direct loans without endangering federal funds. In the event of a Chapter 11 filing by one of the automakers, having the DOE-funded assets in the SPE assures taxpayers that their investment in advanced technology will have priority. The money will be protected.

It’s the morning after the day of. The day General Motors admitted to the world that they don’t have enough cash to last until the end of the year. And for once, GM’s standard-issue PR ploy– leave the bad news until Friday afternoon, reveal some corrective action (axing 7k jobs) and downplay its significance– worked against the General’s generals. GM’s impending bankruptcy was buried beneath and within President-elect Barack Obama’s first press conference. The story was denied bailout-fueling urgency. It’s the ultimate condemnation of GM CEO Rick Wagoner’s administration: they can’t even exploit their own incompetence for the company’s survival.

“Red Ink Rick” bears no small amount of responsibility for this, the ailing American automaker’s final PR debacle. In an interview with GM goodfella Phil LeBeau, Wagoner contradicted the public statement accompanying The General’s cataclysmic third quarter financial results, which read as follows: “Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.”

“As we close the quarter, we’ve got 16.2b in available liquidity,” Wagoner soothed the CNBC reporter. “Um, that’s well above, ah, what we think our minimum operating crash requirement is.”

Huh? When Tracinda investor and Lion of Las Vegas Kirk Kerkorian scored a seat on GM’s board for Jerry York, his consigliore pegged the amount the General needed to keep the lights on at $10b. (Back when $10b was a lot of money.) Other sources say it’s $14b. Even using York’s lower number, GM’s currently burning through cash at a rate of $3.2b a month. So, at best, GM’s got two months to go. They won’t make it to New Year’s.

So why isn’t Wagoner facing the inevitable and telling the American public “bail us out or we’re NSFWed?” Because, apparently, the CEO who’s been at the helm during GM’s descent into desperation reckons his latest cost-cutting measures will make the company’s fourth quarter cash burn “look more like the first two quarters of the year.” Even assuming GM’s burn rate returns to a retro-style $1b per month, the automaker has what, an extra six months?

As the scorpion said, it is in my nature; Wagoner is a born prevaricator. Now that the company has passed the point of no return— the point where even $25b in direct federal aid can’t resurrect GM’s market share, strengthen/trim brands, develop market-leading products, promote those [theoretical] products and bank enough profits to pay off existing debt (never mind any new obligations to American taxpayers)– Wagoner will continue to bluff and bluster until all hope of a C11 resurrection disappears.

No surprise there. But I must admit that I am surprised by the mainstream media’s reaction to this non-turn of events. TTAC’s Best and Brightest have crammed my in-box with links to stories analyzing GM’s Q3 results, and the looming prospect of a Chapter 11 filing. The AP’s Tom Krisher’s report, “GM’s Running on Fumes,” is typical of the coverage: we knew it was bad, but not this bad, but anyway, Congress will bail ‘em out. In other words, GM’s admission of a terminal liquidity crisis is a bit of a false sunset.

None of the reports puts the focus where it should be: GM’s busted business model. The fact that House Speaker Nancy Pelosi’s United Auto Workers-shaped trial balloon– we’ll stuff $25b into the Detroit union’s VEBA health care fund– wasn’t immediately shot down as the most ineffectual bailout idea ever created by hand of man reflects the ongoing myopia afflicting the press.

GM’s bailout boosters will eventually come ‘round to the idea that there must be some kind of radical change at GM for the company to qualify for federal aid. But their idea of “radical change” is likely to be politically rather than economically-driven. Jobs, jobs, jobs will be the order of the day. Not cars, cars, cars. Wagoner, Lutz and the rest of the gang who couldn’t talk straight may be forced out (to survive on the hundreds of millions they plundered from their employer). But the priorities will not shift.

What GM needs is root and brand overhaul, a cathartic cleansing of existing dealer agreements and union contracts and obligations. Not to mention an entirely new mindset regarding product development and brand promotion. As we’ve stated here for the last three years, the only way GM can accomplish these tasks is through the federal protections of bankruptcy law.

Rick Wagoner’s ultimate argument against doing the right thing, the only thing that can save GM: no one will buy a car from a bankrupt automaker. By the same token, no one with any sense buys a car from an automaker headed for bankruptcy. With or without intelligent press reporting, GM’s death throes are becoming clearer every day. As is the final, inevitable result

With a bit of luck, I’ll finish this editorial before House Speaker Nancy Pelosi tells America how Washington will save Detroit by spending your tax money on a domestic automobile industry beyond salvation. I doubt it. As we’ve previously reported, our duly elected representatives have already met with the titanic captains of Ford, GM, Chrysler and the U.A.W. in a closed-door session. I’m sure they got their ducks— and our bucks— in a row. Nancy will sing an ode to the working man and pen a paean to the importance of American heavy industry. Grim faces will then face a grim task: figuring out the fastest way to put Ford, GM and Chrysler on federally-funded life support.

GM first, of course. It’s out of money. Today’s third quarter financial report admits that the American automaker doesn’t have enough cash to last until the end of the year (actually next month). While GM’s impending implosion virtually guarantees prompt federal mammary provision, “prompt” may not be good enough. In truth, GM is a breached and rudderless ship slipping into a sea of red ink. If Pelosi and pals don’t get the bailout done in a couple of weeks, the public will see GM’s situation as one that’s beyond repair.

Now that the GM bankruptcy story has “broken,” the mainstream media will start asking the tough questions that TTAC’s been asking for years. Such as, who is this NSFW who’s run GM into an iceberg, and ram it repeatedly? Why was this corporate helmsman paid over $100m in salary and benefits to do so? (Someone might even mention Wagoner’s bankruptcy-proof pension.) Why should we believe a thing he says? And why is he still here?

When Congress doled-out $700b to the financial industry, the average American had no clue what the Hell the money was for, why it was needed and what was going to be done with it. Credit swaps? Sub-what? They revolted. And then the stock market dropped and the bailout bill passed. But cars are a different matter. Cars they know. What are the chances that GM’s going to build a car I want to buy using my tax money? Sure, I want to protect jobs. But I also want to protect my tax money. So… screw it.

GM has but one weapon to counteract this argument: the plug-in hybrid electric – gas Chevrolet Volt. The Volt is a damp squib stuck in development Hell. GM may have fooled the financial community (and itself) with its constant talk of the next Next Big Thing, but with gas prices hovering at $2 a gallon, the wind has gone out of the Volt’s sails (sales?). It’s too much, too late.

Detroit’s bailout backers face another problem: there is an alternative.

Our anonymous contributor’s pro-bankruptcy editorial contains the kernels of a GM bailout backlash, based on sound business principles. Once Ms. Pelosi’s emotional appeal to working class values loses its emotional resonance, pundits will argue against “throwing good money after bad.” The General’s public will cotton-on to the idea that it’s not a case of bailout or die. It’s a case of bailout AND die.

As Bill O’Reilly would say, the bailout bonanza also has an “unresolved problem” segment. Cerberus. Chrysler’s owners are a deep-pocketed private equity firm. If they glom onto a federal bailout– and ChryCo CEO Bob Nardelli was in that room with Pelosi– voters will NOT be happy subsidizing Feinberg’s fat cats. Or, for that matter, the Ford family, who still control The Blue Oval through their special class of stock.

It’s no wonder we’re hearing rumblings that Detroit is willing to consider taking federal bailout bucks with ”strings” attached. They recognize that the PR war– and thus the bailout itself– is not a done deal. They know they need to appear “willing to work” with legislators to “ensure that taxpayers’ money is protected.” Yada yada yada. Just get this thing done. Whatever it takes.

Of course, the truth of the matter is that there’s nothing federal funds can do to “save” Detroit. Chrysler is a basket case, and Ford and GM have no long-term future  without a Chapter 11 reorganization.

Under C11 protections, using debtor-in-possession financing, GM and Ford can shed onerous labor contracts, kill brands, terminate dealers and get out from underneath mountainous debt and build something American want to buy. In fact, there’s only one way the feds can help GM and Ford, and the hundreds of thousands of current and former workers who depend on their survival: withhold our money from their coffers.

GM is dead. Chapter 11 is the only method by which a new GM can rise from its ashes.

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

Background

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

Secrecy, Secrecy, Secrecy

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

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

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

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

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

GM is woefully insolvent and should file Chapter 11

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

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

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

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

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

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

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

More secrecy and lack of disclosure

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

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

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

More non-disclosure

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

Deepening insolvency is likely

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Everybody who knows me knows I’m a tightfisted son of a bitch. I may own Benzes for their profits, but gas sippers are my daily drivers.  My wife’s daily driver has been an old Volvo wagon (which she loves). And like many of you, I’m nearly OCD when it comes to buying quality on the cheap. When Robert asked me to find him a $5000 car, I found a $4000 car. Why? Because $4000 is the new $5000. For those of you contemplating a new ride and have the cash, now’s a good time to buy. The Manufacturers’ Suggested Retail Price (MSRP) is dead.

Reality check. At the moment, there are only two types of car companies: the living and the dying. Brands such as Toyota, Honda, VW, Porsche, Mercedes, BMW, Audi, MINI and Nissan still have healthy balance sheets and great products. As long as they stay true to their core talents, today’s recession will lead to long-term global progression. But even though these brands offer quality vehicles, the money to support the demand has disappeared. That’s bad for some customers. Good for everyone else.

Most credit-driven customers have been cut off. Many of the banks that were ‘helped’ by the recent bailout are also among the largest auto finance lenders in the U.S.: Capital One, Citibank and Bank of America. The bank’s balance sheets are looking better– in the same that clothes can hide leprosy. Unfortunately for the ‘fleeced’ taxpayer, and the political ‘yes’ men, the banks are hoarding their new found, taxpayer-funded wealth.

This net drop in the amount of money truly available has resulted in a cliff-face 20 to 40 percent drop in new car sales for even the “good” brands. Although these manufacturers aren’t selling vehicles at Buick levels, the previous customer dealer paradigm has rolled-over and died. To say it’s a buyer’s market would be like saying a jailhouse crack dealer has sway over an incarcerated junkie.

The consumer strategy required to make the best of a bad situation (for the dealer) is simple enough. When you visit that big fishbowl called the dealership just say no to whatever’s on offer and wait. Or leave. There’s no ‘take it or leave it’ or ‘you really need to buy today’ when the inventory is stacked to the roof and the customers are none deep. If you want to squeeze the best deal, all you have to do is say ‘No!’ for a week and enjoy what amounts to a Chinese auction.

Sticker? What sticker? Brand new 2008 Mercedes GLs are going– or not– for $14k off sticker. The same vehicle can be had for a three-year lease for $5k down, $800 a month. Did I say $800? How about $700? $600? I’ve never seen anything like it. Pay no attention to Edmunds or anyone else. Published deals have nothing to do with anything anymore. Desperate doesn’t even begin to cover it.

The same reality applies to the used car markets. Last night I saw a 2003 Mercedes SL500 go for a mere $20 grand, a 2006 Scion Xb sell for $9200, and a loaded 2008 Hyundai Santa Fe Limited with less than a thousand miles no sale at $17k. All of these cars were in strong demand when they were first released. Now they’re just casualties of a credit-driven economy and a repo-saturated car market. In a recession, used car vehicles pick up some of the slack. But not today. Even the market leaders of not too long ago are in a depreciation death spiral.

Then we have the ‘patients.’ GM, Ford and Chrysler are fighting for their survival. Many of their models will not be replaced (through Ch11 or otherwise), and virtually all have record levels of supply. From a 200+ day supply of Corvettes to fields of near-new rental crapmobiles (e.g. Pontiac Grand Prix and Chrysler Sebring), there’s nothing but metal to be moved. Buickman is sending brand new Chevy Silverados our the door at $10k. Again, just say no and reap the rewards. Stupid deals are smart. Don’t be what William Shatner calls timid negotiatiors these days: “mamby-pamby.”

The situation is even more ridiculous at small dead brands such as HUMMER, Saab and Volvo. Their dealers face the morbid task of selling cars that with virtually no marketing dollars behind them. A 2008 Volvo S80 may theoretically compete with the Lexus LS and Mercedes E-Class, but no one knows or cares. A non-competitive product with no market presence will eventually go out the door for a price that is closer to the lower car class.

RF and I are still debating the ‘when’ of car buying during this current carmaggedon. I believe now’s a great time to buy. Robert points at the sheer volume of unsold inventory at the new and used car level, and the lack of consumer confidence (tied to the housing market). Whatever the scenario, however long it lasts, however MORE desperate things become (fancy buying a C11 Malibu for under $5k?), MSRP for all but the most exclusive vehicles is RIP. Go get ’em tiger!

General Motors is on a crash course towards bankruptcy. The company once known as the world’s largest automaker is burning cash so rapidly most experts agree that it won’t last through next year. Although Ford has more money at hand, having mortgaged everything up to and including its logo, the Blue Oval is also spending its way towards C11. Chrysler? DOA. In response, Congress recently approved massive loan guarantees for the industry. But Motown’s supporters are clamoring for another, equally massive handout. As our duly elected representatives argue how best to save Detroit, its champions warn of looming disaster. Still it must be asked: should The Shrinking Three be left to face market forces unaided by Uncle Sugar?

The D2.8 are huge, their supporters say. The domestic automakers supposedly account for six outside jobs– dealers, suppliers, service station attendants, and hosts of others– for every job within. In a worst-case scenario, two million jobs could disappear, says David Cole, head of the Center for Automotive Research in Ann Arbor. Through unemployment and/or Medicaid, those workers would quickly soak-up tax money, Cole claims.

“Because of the fragile state of suppliers, a dying GM or a Ford would take key suppliers with it,” says Cole. That would bollix the supply chain for the transplants. But Cole says that a mere $10b worth of prevention could be worth $100b of cure– his estimate for the costs of bailout and cleaning up the mess, should the companies be allowed to fail, respectively. (This is a downsized estimate; Cole’s Center’s “catastrophe studies”predicted a $200 – $300b hit to the economy from an automaker’s failure, equivalent to 2 percent of GNP.)

An odd consequence of failure to bail might be to hamper environmental protection, says Greg Nowell, a political science professor at SUNY Albany. Since the early 1980s, when the US gave the Japanese an offer they couldn’t refuse (“voluntary” import quotas), the Japanese manufacturers have always more than met US environmental standards. They’ve “let Detroit do the foot-dragging” in the political arena, says Nowell. With Detroit gone, however, they might resist tighter regulations by threatening to take their marbles and go home. “In terms of environmental regulations, [the demise of the US industry] would be a game-changer,” says Nowell.

Nonetheless, neither Nowell nor three other experts interviewed by TTAC favor bailout. “Cole assumes that [following bailout] they will start getting a positive cash flow, which is not a foregone conclusion,” says David Dapice, an economist at Harvard and Tufts Universities. “It’s one thing to have a cash transfusion so you can keep operating at a loss, and another to have a game plan for profitability.”

Cole insists US cars are improving. “My wife has the new Saturn Outlook,” he says. “The execution has improved dramatically.” But the December issue of Consumer Reports recommends against the Outlook, and says GM is a “mixed bag,” while “Ford’s reliability is now on par with good Japanese automakers.”

Dapice suggests that socializing health care costs might be a better approach than helping the auto companies directly. This would eliminate the transplants’ advantage of having younger workers with lower health care costs, and far fewer pensioners. According to the Detroit consulting firm Harbour-Felax, for each car it manufactures, GM spends $1,635 on health care for both current and retired American workers. For Toyota, the comparative figure is just $215.

Socializing health care costs would also have the advantage of avoiding picking winners, or in this case, losers. “I don’t think the US does well with industrial policy since it’s so political,” says Dapice. And “If you want a stimulus package, it might make sense to give money to [the city of] Detroit, or the state, so they can keep their bridges from collapsing. But I don’t think it makes sense to just pump money into failing companies.”

Regarding Cole’s warnings about key suppliers going under, Chris Knittle, a professor of economics at UC Davis isn’t worried. He says that if GM goes out of business, other manufacturers will pick up the slack.

If past is prescient, the demise of the shrinking three would brook no loss to automotive innovation, says Knittle, Volt notwithstanding (its projected price, 40 Gs, insures scant market penetration). The U.S. industry has not exactly been on the cutting edge for at least the last half century.

“What is fundamentally wrong with the US automobile industry?” Nobel economist Robert Solow asks rhetorically. “Why has it been unable to compete adequately, even with American plants owned by Japanese, European, and Korean automakers?”

“[American automakers] have a lot of corporate inertia,” says Knittle. And “when they can always fall back on the government to bail them, there’s even less incentive to change.” Noting that the market culls the unfit, breaking ground for new companies, he says that through bailouts, “You are taking out one of the mechanisms in which a market economy improves productivity.”

Chrysler is dead. Look for a Chapter 7 filing soon; that’s a liquidation plan, not reorganization. The judge will part-out and sell ChryCo’s few valuable assets to the highest bidders. There will be no “Hail Mary” pass to General Motors, no government rescue, no money from Cerberus to keep its corpse from the grave. Yes, the mythical three-headed dog of Hades does keep souls from escaping Hell, try as they might.

Despite GM’s desire for the $9b in cash supposedly on Chrysler’s books, the money comes with even bigger liabilities: health care, pensions, taxes, supplier obligations, the works. In fact, Chrysler is saddled with as much as $27b worth of claims. Those claimholders have no interest in letting Chrysler unwind in the hands of GM– which would keep all those claims unpaid. Better to just get it over with and pay it out now. The best idea for Chrysler is, was and will be immediate liquidation. Add the proceeds from the sale of Chryco’s assets to that cash pile and there might be as much as $20b+ to disburse.

The first ones to dine on the cash are Chrysler’s lenders, led by Goldman Sachs and JPMorganChase. They originally lent Cerberus about $10b or so to fund the acquisition from Daimler, with the hopes they could then sell the debt off to bigger schmucks. Well, they mostly failed at selling it, unloading only a portion, maybe about 40 percent (or so we’ve heard) at discount to some greater fools.

The banks are still stuck with the rest and they aren’t happy about it. If you were a sane banker in troubled financial times, would you transfer your repayment risk to General Motors, an equal if not even worse credit than Chrysler today? GM was counting on a government loan to GM to pay these lenders off– or at least guarantee their debt. Give Hank Paulson credit; he simply said “no way.” The Feds aren’t gonna take the heat for paying Wall Street off while jobs are lost.

So no, the bankers will never agree to a GM-Chryco Motors tie up. Better for them to take the priority position they get in liquidation today and take what they can. After all, Chrysler’s cash pile only gets smaller every day Chrysler continues to operate.

The second group that has a claim on Chrysler’s cash: vehicle owners. Yep, warranty claims out into the future. Remember, most recent vintage Chrysler vehicles (in service beginning in 8/07 and later) have powertrain for life warranties. The bankruptcy judge has to set aside funds to cover those claims. Say… $3b worth.

The third group: labor. The United Auto Workers (UAW) negotiated a contract that requires Chrysler to shovel $10b into a health care trust (a.k.a. VEBA) for retirees. Even the UAW wasn’t crazy enough let GM takeover Chrysler and absorb this liability when GM can’t even pay what it promised to the union. In any case, this is an unsecured claim. It’s doubtful the UAW could legally stop a sale to GM, but they can make life unpleasant for an automaker.  Heck if the workers are going to lose their jobs anyway, they might as well get what they can now for retirees.

And last: working capital claims for the balance. Unpaid vendors, employee wind downs, taxes, and the rest. Maybe another $4b or so. All told, $27 billion in claims against the cash plus whatever the Court can sell the rest of the assets for. Call it $10 to $15b. Best of all, assets sold out of bankruptcy come with no liability tail for the buyer, which make them much more attractive. No pension obligations, no warranty claims, no retiree health care. Clean and simple. And you don’t even have to take the UAW contract!

I reckon that there are four major components of Chrysler that will get sold. First, the Jeep brand. Although known worldwide, it really has only has one unique product (the Wrangler). But it’s cheap to build, generates a ton of profit per vehicle and will never go out of style. Yep, wrap that up. Maybe it’s worth $3b?

Second, the minivan biz. Already having consolidated assembly in one plant (Windsor), it’s easy to just supply other automakers like GM and VW. Hmm, do I hear Magna calling? So let’s say it’s worth $5b.

Third, RAM trucks hecho in Mexico. Nissan needs a truck and they’ve already agreed to buy their next Titan built in Chrysler’s Saltillo plant. Ok, so maybe it’s 100k units per year only. Might as well buy the plant and the rights to the truck. How much did it cost Toyota to develop the Tundra and build its now underutilized San Antonio truck plant? Let’s put a $2b price tag on this.

And fourth, Chrysler’s parts supply division. I don’t know how many Chryco rigs are on the road, but they’re going to need parts for a long time. Existing parts inventory that’s worth something plus profits from sales that will continue for years. So we’ll put a $1b price tag there.

So are you getting my drift now? There’s no GM-Chrysler deal ever. The government can’t stomach funding a deal where jobs are lost with taxpayer money. Better to shut Chrysler down in bankruptcy, and let Cerberus lick its wounds. Those jobs were going to be lost with or without GM in the picture.