Today is election day, the time when good Americans process all the negative advertising they’ve seen over the previous months and decide on the lesser of several evils. But the best thing about election day isn’t the sense of civic pride or even the knowledge that you’ll be able to avoid political ads for at least a few months afterwords. The greatest thing about elections is that, for one moment, the nation gets a snapshot of itself, a picture of what really matters to us as citizens. So this seems as good a time as any to ask you, TTAC’s Best And Brightest, how you feel about the potency of the Auto Bailout as an issue. After all, the bailout is currently caught in limbo; impossible to undo, at yet still far from resolution, good or bad. If anything, the latest indicators show that the GM bailout was fairly compromised, in the sense that the new company will be worth about what the taxpayers put into it (in the $50b range).

But does it matter at all how much taxpayers get out of GM’s (and eventually Chrysler’s) IPO? And if so, is it important that GM repay the taxpayers completely, or do the bailed-out firms need only to be sustainable for a certain period to make the bailout a success? As I see it, the question isn’t so much one of politics. After all, the rescue is hardly the definitive political issue for any citizen not directly affected by it (a relatively small group compared to the American electorate). The real issue seems to be whether political opposition to the bailout will affect sales at GM and Chrysler, and whether achieving certain financial or taxpayer payback goals will eliminate any such political impacts on sales. Do the bailouts affect your relationship with GM and Chrysler, and if so, what do you need to see in order to leave the bailout in the past?

As Automotive News [sub] reports, GM has gone ahead and finalized the 500 dealer cuts that made up its bankruptcy-bailout-era dealer cull, despite resistance from some 22 members of the US House of Representatives. And despite the congressional pressure, a damning SIGTARP report, and an ongoing criminal investigation, GM hasn’t changed its tune about cutting dealers, telling AN [sub] that delaying dealer cuts

would only divert our collective attention at a critical time and would ignore the independent decisions of arbitrators and individual settlement agreements between GM and its dealers

Meanwhile, just what affect has the dealer cull had on surviving dealerships? Are they thriving? Well, not exactly…
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Reuters has followed up its look inside the Government’s involvement in GM with a breaking report on the specifics of The General’s IPO. According to Reuters sources, the IPO will include 365 million common shares for $26 to $29 each, for a total of between $9.5b and $10b. The Treasury is expected to sell between $1.5b and $2b of its 61 percent stake in GM, likely to “four or five sovereign wealth funds,” bringing its stake down to 43.3 percent. The Canadian and Ontario governments are expected to sell down their stake from 11.7 percent to 9.6 percent, while the UAW VEBA trust-owned stake is likely to to drop from 17.5 percent to 15 percent. A Reuters source concludes that

The IPO would likely value the entire company at close to $60 billion, below the $67 billion needed if U.S. taxpayers are to break even on the common stock held by the Treasury

The WSJ adds

At the midpoint of the proposed price range, GM’s stock outstanding, including warrants, would be worth about $50 billion, roughly the same level as Ford Motor Co. The IPO’s underwriters are hoping to sell at the top end of the range, and for the stock to rise 20% or more when trading begins. At that level, GM could be worth $60 billion or more.

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Ever since it became clear that the government would rescue General Motors and Chrysler, the Treasury Department has made it clear that it would stay out of “day to day” decision making at the rescued automakers. Allowing the rescued firms to operate independently was a political calculation based on the desire to keep politics from affecting sales at the two rescued automakers, but according to a Reuters special report, Treasury has not been able to keep its hands completely out of important decisions concerning the future of the two firms. Particularly in terms of setting up GM’s Initial Public Offering, Reuters found that the Treasury made important decisions affecting

its speed and size, the fees paid to the bankers and the potential involvement of offshore investors

Though this has kept the IPO out of election season and all of its potential for political problems, there is some downside to the Treasury’s involvement, particularly because it will not be exiting its equity position in GM until about 18 months after the IPO. As a result, analysts predict problems securing investors in a firm that may still be subject to ongoing government control. Morningstar’s David Whiston tells Reuters

I’m sure that there will be some institutional investors, and even some individual investors, that it scares away

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With about $7.84b of cash on-hand and $7.4b in debt to the US and Canadian governments, Chrysler wants to take a page out of GM’s IPO playbook and secure a Wall Street refinance of its government debt, which bears interest of between 14 and 20 percent. CEO Sergio Marchionne had already complained that servicing its government debt prevented Chrysler from achieving profitability in the second quarter. According to Automotive News [sub] Chryler is shopping banks as it seeks loans at newly-low interest rates in order to shore up its balance book ahead of an IPO sometime next year. Chrysler needs $3b of cash on-hand for its operating and debt servicing costs, so a failure to secure new funding could cause its cash levels to dip to dangerous levels. GM has said that its recently-acquired $5b revolving credit line would not be tapped right away, but would provide a liquidity cushion of the kind that Chrysler arguably needs even more than The General. On the other hand, it’s easier to borrow money when you have money, and GM is sitting on considerably more cash than Chrysler. Meanwhile, Fiat has yet to inject a single Euro of cash into Chrysler. Maybe this is Marchionne’s chance to put some real skin in his Chrysler play.

News that the government will sell only $6b-$8b worth of its GM equity has been joined by an even more surprising GM IPO announcement: GM will buy the Treasury’s entire $2.1b holding of preferred stock in the initial offering. GM has not announced how much it will pay for the stake, and the Detroit News reports that it’s not yet clear if GM will also buy some $400m in preferred stock held by the Canadian and Ontario governments. We’re also getting word via Twitter that GM will put $4b in cash and $2b worth of its stock into its overdrawn UAW pension fund, as well as making a $2.8b payment to the UAW VEBA account. With a $5b line of credit secured, GM says these and other steps will reduce its debt by $11b over an unspecified timeline. And speaking to Reuters, GM CEO Dan Akerson made it clear what the point of these moves are:

It’s up to people like you and me, the burden we share, that we deliver on the promise and return the investment to the American taxpayers. We are going to do our level best to make that happen, and we will only do that by expanding our industrial base and entering new markets and being a better competitor.

Of course, we’ll have to see what value The General places on the preferred stock to know how seriously Akerson should be taken. After all, talk is cheap and money isn’t. [UPDATE: It appears that GM will buy the preferred stock for $25.50 each, essentially giving the Government its book value of $2.14b]

No automaker has more to gain –and lose– in the early-adopter EV game than Renault-Nissan, and CEO Carlos Ghosn knows how the game is played. Nissan is investing $4b to rollout electric cars in the US, Japan and select Western European markets at the end of this year, but despite being committed, Ghosn insists that EVs aren’t ready to stand on their own yet.He tells Automotive News [sub] that

The recent bailout of America’s auto industry began with approval of so-called “Section 136” loans to help automakers retool factories for higher-efficiency automobiles. Ford, Nissan, Tesla and Fisker have already received their portions of the Department of Energy  loans, but GM and Chrysler have had their payouts delayed due to the program’s strict “viability” requirements. But now Reuters reports that Chrysler’s request for $10b in low-cost government retooling loans is nearing approval. It’s not clear how much of that $10b will be approved, but according to Pentastar spokesfolks

Our application covers a wide variety of technologies including electric vehicles, (gasoline/electric) hybrids and advanced gasoline engine technology

Chrysler still owes some $5.7b to the US Treasury, and the cost of servicing that debt (interest on ChryCo’s existing government debt ranges from 7.22 to 14.33 percent) is considered a major reason for Chrysler’s second-quarter loss this year. GM is also seeking over $10b in 136 loans, but with only $16.5b remaining in the $25b 136 fund, either Chrysler or GM will have to receive less than their entire request. GM’s request will reportedly be approved sometime after Chryslers.

Ohio Republican Reps LaTourette and Boehner have officially requested that President Obama suspend GM’s dealer wind-down agreements until the Special Inspector General for TARP (SIGTARP) completes an investigation of the government-approved GM and Chrysler dealer culls. The representatives focused on the fact that SIGTARP’s initial report on the dealer cull, which had criticism for GM, Chrysler and the government task force, wasn’t publicized until after arbitration for culled dealers ended. WKYC quotes the representatives’ statement as saying

There is too much at stake to proceed in an atmosphere where dealers were denied so much crucial information in a process rife with secrecy. As the findings of this investigation may shed much needed light on the proceedings affecting hundreds of dealerships nationwide, we believe it is necessary to thoroughly analyze its results before continuing with the closures of hundreds of dealerships, and the potential loss of thousands of jobs.

And Republicans aren’t alone in urging a halt to wind-down proceedings pending the SIGTARP’s latest investigation… Democrat Dennis Kucinich has already staked out the position now occupied by the House Republican leader. And did the artist sometimes known as “Government Motors” blink in the face of bipartisan pressure?

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Fiat could do more if it could cut off Italy

Having been handed a bankruptcy-rinsed Chrysler by the American government, Fiat’s Canadian-born CEO Sergio Marchionne is beginning to see Italy as nothing more than aging, uncompetitive factories and troublesome unions. And now he’s not just telling the Italian media that not only would Fiat be better off without the country that birthed it. According to Reuters

The CEO added that not a single euro of the 2 billion euros ($2.8 billion) of trading profit that Fiat is targeting for 2010 will come from Italy, where all Fiat car passenger plants are loss-making.

The funny part: Chrysler still holds a value of precisely zero dollars on Fiat’s balance book. And with the Fiat and Alfa-Romeo brands headed to the US, Italian-ness is still an important element of Fiat’s identity. But until Marchionne’s Chrysler revival and Italian invasion take hold stateside, and as long as mother Italia is a drain on its resources, Fiat might be best described as a Brazilian company.

Italian speakers can enjoy Marhionne’s interview here.

Back in July, the Special Inspector General for the TARP program (SIGTARP) released a damning report on GM and Chrysler’s efforts to cull dealers during their government-overseen bailout-bankruptcies. The upshot: GM and Chrysler handled the culls either inconsistently or subjectively, and the President’s auto task force pressed the issue unnecessarily and “without sufficient consideration of the decisions’ broader economic impact.” And though that report, the product of a year’s worth of investigation, made the automakers and their government “saviors” look mighty stupid, the awkward walk-back of most of the dealer cuts had already made the point fairly well. But with the TARP program now largely rolled up, the SIGTARP’s office has been bulking up on investigators, targeting fraud and criminal activity around the entire TARP program. And, according to Automotive News [sub], the dealer cull is on the agenda. SIGTARP won’t “disclose the targets of the investigation or the actions being probed,” but it has “opened a follow-up investigation of possibly illegal activity in the [dealer-cull] effort.”

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With some 17.5 percent of GM owned by the UAW’s VEBA trust, workers have been finding that their union has a hard time juggling its ownership and union responsibilities. And since workers have no real recourse against their union, GM is giving them the opportunity to profit from their sacrifices… and pay back taxpayers in the process. Automotive News [sub] reports that

GM is offering [a directed] share program as part of an IPO scheduled for November… giving about 600,000 employees and retirees [and dealers] in the United States and Canada the chance to buy stock in the company’s upcoming initial public offering at the IPO price.

The only downsides: you have to register by the 15th, and the minimum buy-in is “expected to be greater than $1,000.” Otherwise, getting in on the ground floor of GM’s IPO is a swell opportunity to keep GM’s merry-go-round spinning. Sure, the UAW VEBA fund is likely to dump all its stock at the first possible opportunity, likely driving down post-IPO values. And yes, the government will eventually have to sell off its entire stake in The General as well, meaning another 60 percent of the company’s equity will also be up for sale in the short-to-medium-term, likely depressing prices even further. Still, GM is going to need all the help it can get if it wants to be valued at or above the $50b taxpayers put into it. It’s time for the employees, retirees and fanboys to step up, put their money where their pro-bailout rhetoric is, and take their beloved company off the taxpayers’ hands.

Bloomberg reports that the credit rating firm Fitch Ratings has given GM a BB- credit default rating, the same as Ford Motor Credit. The difference: Ford has over $20b in debt, while GM is sitting on less debt and more cash. So why the identical rating? Fitch’s Stephen Brown explains:

Although they have similar ratings, you sort of get to them from different paths. GM doesn’t have a whole lot of debt, but they have very large pension obligations. Ford’s pension obligations are significant, but they’re lower than GM’s by quite a bit. But Ford has a lot of debt.

At the end of the first half of 2010, GM had $32b in cash and $8b in debt, while Ford had $22b in cash and $27b in debt. GM’s pensions, on the other had, are underfunded to the tune of $27b, while Ford’s are underfunded by $6.1b. Analysts have consistently suggested that GM’s IPO valuation should be in the neighborhood of Ford’s $40b market cap, and an identical credit rating seems to confirm the wisdom (or at least the popularity) of the comparison. Unfortunately, a $40b GM valuation would fail TTAC’s last standard for even marginal bailout “success.” After all, if GM is worth less than the $50b taxpayers put into it, there’s going to be no chance of spinning the IPO as a success.

While some have questioned why TARP was used to support the automotive industry, both the Bush  and Obama Administrations determined that Treasury’s investments in the auto companies were
consistent with the purpose and specific requirements of EESA.  Among other things, Treasury
determined that the auto companies were and are interrelated with entities extending credit to
consumers and dealers because of their financing subsidiaries and other operations, and that a
disruption in the industry or an uncontrolled liquidation would have had serious effects on financial
market stability, employment and the economy as a whole.

Translation: credit dependence killed the car companies. And from the 0% Red Toe Tag Sales to GM Daewoo’s $2b currency gambling loss, the glove fits. It’s a lesson that isn’t brought up often enough, and it’s one of the only passages of note in the Auto Industry Financing Program section of Treasury’s two-year TARP retrospective [PDF here]. Otherwise, the document is swallowed up in accounting for the billions spent on banks, despite the fact that

We now have recovered most of the investments we made in the banks.  Taxpayers will likely earn a profit on the investments the government made in banks and AIG, with TARP losses limited to
investments in the automobile industry and housing programs.

So, why not explain why projected auto rescue losses were reduced to $17b with more than just a footnote? [#2 on Figure 2-B shown above]

With GM repositioning its IPO to target US retail investors, we find ourselves motivated to once again sound the alarm about one of the major drains facing The General’s taxpayer-provided cash pile: the restructuring of its European Opel division. Opel slated its Antwerp, elgium plant for closure earlier this year, but at the time GM was trying to find a buyer for the plant. In May we noted that automotive overcapacity on the continent made finding a buyer for Opel Antwerp a tall order, and sure enough, Bloomberg reports that a buyer has not been found. What Bloomberg leaves out of its write-up: GM is now stuck with the €400m ($530m+) bill to pay off all those unemployed workers. A half-billion here, a half-billion there… soon you’re talking about real money.