Some taxpayer-funded turnarounds just have a little more turnaround than others, according to the GAO’s recent report on the auto bailout [PDF here], which tracks the progress of the Detroit patients and considers their futures. Sure, GM received quite a bit more government money than Chrysler, but the improvements in GM’s financial performance compared to Chrysler’s are clear. But the GAO still has a number of concerns about the “more than $34 billion” of taxpayer value that’s still floating around, unrecouped, in the rescued automakers. Feel free to peruse the GAO’s full 59-page report, or you can hit the jump for the highlights.
Now, our strategy continues to be to exit these investments, and just today Chrysler announced that it intends to raise the money it needs to repay the government. Two years ago, no one would have expected us to be in this position today, and it shows the success of the strategy the President implemented and the skill and dedication of Chrysler’s employees. We are looking forward to the full repayment of our loan to the company.
Treasury Secretary Tim Geithner, speaking in Detroit, makes strategic use of the singular tense in order to use the phrase “full repayment” without actually revealing the losses taxpayers have already taken. After all, the $1.9b Debtor-in-Posession loan made to “Old Chrysler” in May 2009 isn’t the loan Geithner is referring to (that one was “extinguished” in liquidation). Nor is the $4b “bridge loan” from January 2009 the loan Geithner is referring to, as a mere $2.1b repayment was counted as “satisfaction in full of the remaining debt obligations associated with the original loan.” Geithner may be “looking forward to full repayment” of the one loan he considers “ours” (as are we), but that’s not the whole story. Once again, a slickly-phrased “payback” claim trumps any sense of responsibility at Treasury to be transparent with taxpayers. And a quick survey of the media indicates that Geithner’s use of the singular has worked quite effectively.
TTAC has always taken pride in its outsider status, and we’ve taken pains to cover the industry from a safe distance in order to continually bring a fresh perspective to developments. As a result, we’re not always on the same page as trends in the industry at large, which tends to be far more given to wild optimism than the average TTAC analysis. But, based on a new study by Booz & Company [PDF], it seems that the “carpocalypse” of recent years has driven the industry to a more TTAC-esque pessimism. According to responses by executives at both OEMs and suppliers, the industry generally feels that the bailout was either a missed opportunity or it didn’t do enough to address fundamental weaknesses… and as a result, executives see challenges ahead.
That’s right folks, for the first (and likely only) time, Fiat will be putting cash on the table for Chrysler’s equity, as Reuters reports that Fiat’s new credit facility will include $1.5b with which to exercise the 16% call option in its agreement with the US Treasury. At that rate, Chrysler’s market value would be under $10b, considerably less than the nearly $13b spent on Chrysler’s rescue (not counting assistance to Chrysler Financial). But what is Chrysler actually worth? Hit the jump for a look at what Chrysler’s Shareholder Agreement says about valuation in a Fiat Call Option scenario. Read More >
With Fiat flying towards taking a majority stake in its Chrysler subsidiary, Reuters reports that the necessary private loans are very close to being arranged.
Goldman Sachs Group Inc, Morgan Stanley, Citigroup Inc and Bank of America Corp are in advanced discussions with Chrysler to finalize a deal that will replace all of its roughly $7 billion government loans with term loans and bonds, these people said on Thursday.
In addition, the banks will also arrange a revolving credit facility for the automaker’s future liquidity purposes that will remain undrawn, these people said. The revolver will not be used for paying down government loans.
Look for Chrysler to wrap up a deal sometime after it reveals its Q1 financial performance next month.
Back in November of 2009, when GM announced that it would repay its government loans, it didn’t take much investigation to realize that The General was simply shuffling government money from one pocket to the other and that true “payback” was still a ways off. The New York Times asked me to write an op-ed on the subject, and I took the opportunity to point out the reality of the situation and note
G.M.’s global interests are far too diverse for it to serve its taxpayer owners faithfully, and it can’t afford to subjugate its business prerogatives to the political needs of its major shareholder in the White House. So, unless Americans develop a sudden obsession with G.M.’s $40,000 Volt electric car just in time for an I.P.O., taxpayers will be stuck with tens of billions of dollars in losses.
Afterward, while our government contemplates its runaway deficit and getting rid of its 8 percent of Chrysler’s equity, perhaps we’ll get an admission that General Motors still owes the American people. Without one, the relationship between the public and the automaker, and the Obama administration as well, may never be the same.
And now that our government finds itself “contemplating a runaway deficit and getting rid of its 8 percent of Chrysler’s equity,” would you believe that a similar federal money-shuffle is under way? Believe it.
Automotive News [sub] reports that Fiat is “weeks” away from concluding an agreement in which 90 percent of its Latin American dealers will sell Chrysler vehicles, triggering a government clause that will increase Fiat’s stake in Chrysler from 25% to 30%. Known as the “Non-Nafta Distribution Event” in the Chrysler operating agreement, it calls specifically for
execution by the Company of one or more franchise agreements covering in the aggregate at least ninety percent (90%) of the total Fiat Group Automobiles S.p.A. dealers in Latin America pursuant to which such dealers will carry Company products.
And that’s it. Why does it matter that this agreement isn’t any more specific? Because Fiat has no plans to sell any Chrysler Group brands anywhere. Products, yes. Brands, no.
The trade war that erupted between the US and China late last summer may have cooled to an angry simmer, but its effects are once again being noticed in the automotive industry. After President Obama slapped a 35% tariff on imports of Chinese-produced tires, the Chinese government started casting around for potential objects of retaliation, and, as Bertel reported, US auto exports to China made “a good tit-for-tat.” The US imported $1.8b worth of Chinese tires in 2009, while China imported $1.1b worth of US-built cars (including transplant brands) in 2008. You shoot our dog, we’ll kill your cat.”
Now, the Chinese Ministry of Commerce has concluded its “investigation” into US auto dumping and illegal subsidies in the Chinese market, and it just so happens to single out the two automakers who are partially owned by the US. Coincidence? Not so much. [Hat Tip: Michael Banovsky]
As galling as the auto bailout was for many Americans, the hidden “stealth bailouts” that occurred during the government-led industry reorganization are often even more galling. Today the final chapter of one of those “stealth bailouts” has taken place, as GM has sold its stake in its spun-off supplier Delphi for $3.8b, booking a $1.6b gain on the deal. So, how is GM divorcing its former in-house supplier a stealth bailout? Back in the dark Summer of 2009, the government organized a GM-led rescue of Delphi, which had been languishing in bankruptcy since 2005 (after GM. By buying a chunk of Delphi for $2.5b of the government’s money and selling it back for a profit, GM’s helped itself to a little extra bump of public money. Oh, and did we mention that GM dropped all kind of pensions in Delphi’s lap when it spun the supplier, including workers who had never been employed by Delphi.
But that’s not the worst part: any guesses as to why GM’s stake in Delphi is suddenly worth so much more? A recovering industry, perhaps? Wrong. Shortly after GM bought back its stake in Delphi, the supplier dumped $6.5b worth of pensions onto the government’s Pension Benefit Guarantee Company, causing huge benefit cuts and hidden government costs. What did the PBGC’s stake, given as “partial compensation” for that pension dump, yield it? A cool $594m. Meanwhile, thanks to the government ‘s arguments, GM still had to top-up UAW retiree pensions, leaving non-union retirees and members of other unions out in the cold [read all about it in a just-released GAO report in PDF here]. A shell game inside of a political payoff inside of another shell game, in other words. There’s nothing to not love here…
Automotive News [sub] reports that GM has sold $1b worth of preferred stock in Ally Financial, the bank holding company that emerged from the wreckage of GM’s former in-house lender GMAC. GM will book $300m on the deal, which will take its ownership stake in the lender to 9.9 percent. GM will likely continue to reduce its exposure to Ally, which is 74% owned by the US Treasury, as its new CFO seeks to rebuild its in-house lending capabilities. GM’s move away from Ally has intensified competition between the financial firm and GM’s new financing arm, which has been built on the acquisition of subprime lender AmeriCredit. This mounting competition has been criticized by the TARP Congressional Oversight Panel, which rapped GM for failing to find a win-win solution for its own financing needs and the viability of the taxpayer-owned Ally. Amman’s strategy for avoiding further conflict: sticking with subprime and floorplan lending, leaving prime auto lending to Ally. But, argues analyst Maryann Keller
Floor-plan lending is about building an individual relationship with a lender. To get them to switch, you need to get people on the ground and get out and talk to dealers and build those relationships.
Meanwhile, with its stock struggling to achieve the value projected for it by several analysts, GM has approved a second quarterly dividend of $0.594 per share on its Series B mandatory convertible junior preferred stock. More cash and a new dividend seem likely to pump up GM’s stock price a little, but it is unlikely to reach the $55-ish price needed to pay back the government’s equity investment in the short term.
As the former “car czar,” who led the government’s restructuring of GM and Chrysler, Steve Rattner has a considerable interest in portraying his pet projects as having turned the corner. But in a recent CNBC appearance, Rattner acknowledges that the market is “spooked” by GM’s increased reliance on incentives and the “unexpected” departure of its Chief Financial Officer. Ford, meanwhile, simply gets rapped for not communicating a slightly lower Q4 profit than Wall Street expected. And though Rattner’s not the guy to press the point home, there’s a clear distinction to be made between a much-hyped stock aligning itself with expectations (while making a tidy $6b+ profit) and a company that’s losing key personnel while leaning on incentives to recover the volume lost on brand and dealer cuts. But Rattner’s got bigger worries than short-term financial performances, or incentives or personell changes… he sees another, equally familiar problem that’s fixing to give GM (and, to a lesser extent, Ford) the fits: rising gas prices. Read More >
The Senate’s Congressional Oversight Panel, which has been charged with monitoring the TARP program, has released its final report [PDF] before it disbands next month. Given TARP’s importance in this country’s historical sweep, we’d recommend that everyone at least glance through the document. But, if nothing else, TTAC’s readers should at least check out the section on the Auto Bailout, which not only summarizes the government’s actions, but also points out problems that arose during the bailout as well as problems that could still emerge as a result of the bailout. The “Lessons Learned” portion of the Auto Bailout section is of special interest, and so we are republishing it below the fold. For all of the hot air and ink that’s been spilled over the bailout, the reality is that it was simultaneously a success and a failure. As a purely short-term, cost-no-object effort, it very clearly prevented what could have been a messy collapse in the auto sector. But because the true costs and long-term effects of the bailout aren’t yet known, it’s still impossible to say if that short-term rescue was worth the costs or will even prevent another industry meltdown in the future. Read More >
According to Steve Rattner, Chrysler was such a sick puppy in the immediate pre-bailout period that it would have only generated about $1b had it been liquidated in bankruptcy. Thanks to around $14b in government assistance, however, Chrysler is now worth a whopping $4.8b according to a Reuters analysis of its filings. But wait, you say, how does Chrysler have a valuation if it hasn’t yet launched an IPO?
Chrysler arrived at the valuation to set pay for its top executives, including Marchionne. Senior executives are paid partly through so-called deferred phantom shares, which will convert to shares in the company at a later date.
In June 2009, each share was worth $1.66, according to the filing. By the end of 2010, the value of each share was $7.95.
The Detroit News reports that top White House economic adviser Austan Goolsby indicated today that the government would be exiting its equity position in GM in the short term. The DetN’s David Shepardson quotes Goolsby as saying
The writing is clearly on the wall that the government is getting out of the GM position. The government never wanted to be in the business of being majority shareholder of GM. It was only to prevent a wider spillover, negative event on the economy. So we’re trying to get out of that. We’re not trying to be Warren Buffet and figure out what the market is doing
And he’s not kidding: GM’s stock just closed at its lowest level since the IPO, after GM’s Q4 results came in below analyst expectations and the overall market experienced turmoil due to Middle East unrest.
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