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Here’s $7.5 Billion. Have a Nice Weekend.

CBUSINESS-US-GM-UAW GMAC got another big handout from the feds last night. The car finance company, now a bank, received $5.9 billion in December of last year. Along with yesterday’s $7.5 billion from Treasury, the lender will now be permitted to issue debt insured by the FDIC (Federal Deposit Insurance Corporation) to the tune of $7.4 billion. That money will help it finance daily operations, according to the New York Times.

If you want more details, here they are. The good part: Both buyers and dealers need to finance car purchases, and GMAC will now provide a good chunk of that money for Chrysler and GM vehicles. The government badly needed to prime this pump. The bad part: GMAC failed the recent stress tests appallingly, coming up $11.5 billion short of what it needed to withstand a still-worse economy. And it desperately needs new capital. The ugly part: The feds have made a very big commitment to support the auto industry, and they probably aren’t done yet.

What do you think? Is enough enough, or will the government need to do more to get the industry on its feet?

—jgoods

The Road Ahead for GM and Chrysler

bankruptcy-loan Most informed analysts think we’re going to have a quick managed bankruptcy for both companies, with the U.S. emerging as majority shareholder. That’s the view of Steven Pearlstein, whom I respect as one of the least hyperkinetic and most measured observers of the economic scene.

Big haircuts will be the order of the day for all sides, because the government has the power to dictate a restructuring rather than putting the companies through liquidation and a piecemeal sale of assets. The UAW seems to recognize that it has no real leverage and has made concessions; it will have to go further.

Both Chrysler and GM bankers, however, are fighting for a lot bigger share of the pie than the government is offering. They want more cash and less equity in the failing companies, but it’s doubtful they will get it. Treasury asked Chrysler to slash 85 percent of its secured debt; the bankers yesterday offered 35 percent. It’s a high-stakes game of chicken, as some are calling it.

You can expect that this dispute will get hotter, since the government has already given a flat turn-down to the lenders’ proposal. Here’s Pearlstein’s scenario for the outcome:

Given the amount of money it is likely to put into the automakers, the government will be entitled to more than half of the stock of the reorganized companies. Then there is the union’s health fund, which will probably be entitled to stakes of 20 to 25 percent, reflecting not only the reduced cash payments it will receive but also all the other concessions made by active and retired workers. At Chrysler, there’s also the matter of Fiat’s contribution of technology and management services, which it offered for a 20 percent share.
That leaves only about 10 to 15 percent of each company. Bankers and bondholders will kick and scream and call it unfair, but in the end they’ll take it because, like everyone else in this adventure, they’ll conclude that it’s better than the alternative.

Yes, we are going to have an auto industry. What do you think it will look like after the presumed bankruptcy?

—jgoods

Ford Stock Nearing $2.00; UAW Stock, $0

big3-negotiation Well, they had to do it—sign a deal with Ford, that is, and make the concessions needed to keep the company alive, even if many UAW workers hated the deal. They gave back hard-won gains the union had negotiated years ago.

One of these was the retiree trust fund for health care (VEBA). The company will now fund half its $3.2 billon contribution due next year with its high-flying $2.00 stock instead of cash. And yes, that will likely soon make VEBA kaput. Other concessions include:

jobs bank ended
no cost-of-living increases
no performance bonuses
cuts in break time; other work rule and schedule changes.

Most important for the company, hourly labor and benefit costs will resolve to $55 an hour, compared to $48-49/hour for transplant auto workers. Ford will reach parity with them, the company says, in two years.

Ford's Rouge Plant

Ford will also close some plants, move production to others, and, for the moment, avoid having to beg like its Big Three cohorts for government aid. The new pact clearly will set the pattern for negotiations with GM and Chrysler. But the VEBA deal Ford struck—half cash, half penny stock—won’t work for Chrysler, a privately held company owing almost $10 billion to VEBA by year’s end.

Last week Ford offered its bondholders a similar cash-and-stock deal. It’s doubtful that GM can match this. And so the dance continues.

The VEBA deal will net Ford about $500 million in annual savings. How quickly do you think they will burn through that?

—jgoods

Once More, This Time with Feeling

Let’s dig into some of the headlines we saw this morning:

GM, Chrysler Push for More U.S. Aid After Legacy of Mistakes (Bloomberg)

Auto Maker Bankruptcy Looms (Wall Street Journal)

“YOUR TIME IS UP” (Steve Parker, the Car Nut)

The Tres Amigos are not showing up in person this time; two of them (Chrysler and GM) will be filing their reconstruction plans electronically late today. That is a good thing, as we don’t need another circus. They are probably having their own private circus with the UAW as the bargaining continues in Detroit over the $47 billion GM obligation for retiree health care. Yikes.

The money involved in all this is truly mind-boggling. It’s not just the industry’s tremendous fixed and legacy costs, its expensive and inefficient dealer network, its total fall-off in sales. As Bloomberg reminds us, it’s the cost of rebuilding that also must be built into any plan.

GM and Chrysler must show progress in getting creditors and the UAW to accept equity in place of billions of dollars in scheduled cash payments. The automakers must also ensure that future models will meet environmental rules that may require $100 billion in new technology.

The real deadline for the GM and Chrysler plans is March 31, when President Obama’s car task force (the car czar idea is out) will determine whether and how the industry goes forward. Heavy hitters Tim Geithner, Treasury Secretary, and Lawrence Summers, National Economic Council chairman, will have help from others.

One of these is Ron Bloom, an expert in restructuring whose advice, we can predict, nobody will like. Says the Journal,

Mr. Bloom, a Harvard Business School graduate who spent 10 years at investment banks before joining a team advising the steelworkers union, is seen as one of the chief architects of a consolidation of the steel industry that has involved about 35 bankruptcies over several decades. He’s known as a blunt communicator. . . .

In a 2006 speech at a corporate turnaround conference in Scottsdale, Ariz., he described his approach to restructuring as “dentist-chair bargaining,” in which the patient “grabs the dentist by the b — and says, ‘Now let’s not hurt each other.’”

Under Mr. Bloom’s guidance, the United Steelworkers gave up pay, job security and benefits in a bid to help the industry recover. In some cases, thousands of steelworker jobs were lost when union leadership agreed to large-scale reductions in restructured companies. Mr. Bloom also negotiated benefits for union members and retirees that kicked in once reconfigured steel companies became profitable. Such solutions could also come into play at the automakers.

Finally, Steve Parker. After showing us a picture of dictator Benito Mussolini in his Alfa Romeo and reminding us how the crowd pulled him out and hanged him, Steve offers this tidbit about the impending Fiat-Chrysler deal:

Last week, a right-wing legislator in Italy called for public protests if any Italian money is used to pay Chrysler’s debt to taxpayers. Their government essentially owns Fiat and all its ancillary companies, and it’s the country’s largest manufacturer of any kind. Even a loan—or money used by Fiat to purchase Chrysler—may well be seen by Italians as their taxes going to the U.S. government, which is probably one reason Chrysler is willing to cede control of the company to Fiat for not one penny—or lira.

You and Ron Bloom both realize that there are 3 million jobs tied to the U.S. auto industry. How are you going to save them?

—jgoods

Detroit Gets a Christmas Present . . . Sort of

Can you believe it? George W. Bush has saved the car industry. All those cheerleaders for instant bankruptcy, like Sen. Richard Shelby (R. Tenn.), can now go back to their drawing boards, along with the automakers.

Chrysler Line Worker Gets Paulson TARP Blood

Chrysler Line Worker Gets TARP Blood from Paulson

Chrysler and GM got a transfusion of $13.4 billion in loans to tide them over to March, with the prospect of $4 billion more to come in February if necessary. The deal is pretty much the same as the earlier bailout bill Congress offered that last week went down to defeat. It essentially buys the industry time to come up with a viable (much debate on the meaning of that term) plan for reorganization.

A couple of interesting add-ons to note: the administration, according to the Washington Post, “has set as a target that the companies convince holders of up to two-thirds of their outstanding debt to accept stock in exchange, and that half of the payments into a union benefit fund be made in company stock.”

The idea is to get all major stakeholders to take a haircut, sharing both the present pain and the risks to come.

Cerberus Capital, the buyout firm that owns Chrysler, agreed “to hand over [its] equity in the company’s automotive operations to labor and creditors as part of its loan agreement with the U.S. government.” GM boss Rick Wagoner acknowledged that the road ahead would be tough but also called the federal loans a blueprint for the company’s second 100 years.

So who is going to oversee all this? There is talk that Secretary Hank Paulson will function as the new car czar. Hmm. This is the guy who opposed helping the automakers in the first place and refused for months to take any money out of the TARP funds—which they have done, finally, to support this bailout.

And for the moment, Mr. Bush seems to have given over his talk yesterday of an “orderly bankruptcy,” though that may well be down the road for the industry in any case. The President said he didn’t want to drop this financial bomb on the President-Elect in his first day in office. But it looks like Mr. Obama will have to defuse it anyway.

Can you think of a worse person than Hank Paulson to oversee the bailout? Let us have your nominations.

—jgoods

Don’t fear collapse

Talking about the loss of Ford, GM or Chrysler scares a lot of people.

It seems like those companies have always been a part of the American economy, so their possible collapse is likened to the crumbling of a major American support pillar. In fact, the entire manufacturing industry in America is on the decline. FOX News recently reported that in Trenton, NJ in the 1950s, 1 in 2 people “made something” as a career. Today that number is less than 1 in 10.

Manufacturing in America will never go away completely. America will always innovate and will always succeed.

A quick example lies in a little American company called Carbon Motors, who sees an opportunity to build a better police car.

Traditionally, police cars are modified sedans built by Ford or GM. Carbon Motors is building a car from scratch with one use in mind: law enforcement.

Called the E7, the car has flashing emergency lights embedded in the frame for visibility and aerodynamic purposes. The front seats are designed with extra space to accommodate an officer’s utility belt. The rear passenger area is sealed off from the cockpit. The back seats are molded plastic for easy cleaning and to prevent prisoners from hiding anything.

And how Knight Rider is this: front-mounted cameras automatically scan license plates of nearby vehicles and alert police when they find a car flagged as stolen or involved in some other crime. Plus the car can detect nuclear and biological threats, all while delivering combined fuel economy ratings of 28-30 mpg.

See? Innovative. I’m not saying that Carbon Motors is the American car company of the future, but they prove the point that there’s always a better way to do things. Ways that may not be as old as GM’s, but are certainly more forward-thinking and better suited for a changing America.

If one of the Big 3 collapses, don’t fear the consequences. Be excited for whatever or whoever comes to fill their gap.

Are you afraid of losing Ford, GM or Chrysler?

-tgriffith

Last Auto News Blog

Here’s $7.5 Billion. Have a Nice Weekend.

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