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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

Bailing Out the Bailout: Don’t Hold Your Breath

Watching Congress in debate is like subjecting yourself to a parade of television commercials. You hear an unending stream of features and benefits—as well as a zillion reasons why you shouldn’t buy the other guy’s product.

Tuning in to C-Span last night (always an uplifting experience), I heard speaker after speaker lambasting the financial bailout bill Congress passed in September. Republicans in particular were hosed about the $350 billion that went to AIG and other banks and which has produced zilch as far as freeing up credit goes.

That’s the background in which the Senate will debate today the newly passed (by the House) auto bailout bill. At this point, passage looks doubtful. On C-Span I heard a lot of talk about throwing good money after bad. What I didn’t hear was how really dismal our economic picture is right now, and how dependent we are on the auto industry, still.

Compromise, as in politics, was tried in the auto bill. That doesn’t seem to have worked—or at least brought Republican Senators to heel to the President. In the Senate discussions, it would help to focus debate on the realities of the car industry instead of praise and blame for past actions, or promoting more features and benefits of the proposal at hand. Here are some things the World’s Greatest Deliberative Body might want to consider:

1. The auto industry’s greatest problem, as David Leonhardt pointed out, is not really labor cost (only about 10% of vehicle cost); it’s the fact that “many people don’t want to buy the cars Detroit makes.” The Big Three cannot survive in anything like their present form.

2. What is the real purpose of the bailout bill? It can’t solve the basic economic and management problems of the industry. If Congress needs to create a holding action until March, then it should take the three months to study and adopt the best reorganization plans because each of the Big Three is in a different financial situation and requires different treatment. In other words, adopt the bridge loan concept that the bill proposes. The larger question: how far is the U.S. prepared to support and/or subsidize its basic industries?

3. If the purpose of the bill is to provide economic stimulus and prevent job loss, it’s not a bad deal. Keeping people in their jobs is lots cheaper than providing unemployment or creating new jobs. So $14 billion may not be a bad price to pay for keeping some 2 million workers from being dumped on the streets. Plus giving the industry some breathing room.

Finally, as often happens, Congress is attempting to solve massive (and different) problems through a piece of hastily considered legislation. Get your priorities straight, folks. The main difficulty here is time: the possibility that GM will be out of cash by the end of the year.

As a footnote, a new Bloomberg/LA Times poll finds that “47% of Americans favored some sort of financial rescue for automakers, slightly more than the 42% who opposed a rescue.”

As of 6:00 p.m. Thursday, Republicans are proposing an alternative bill. Do you think Congress can still thrash out a solution? Or will it come to bankruptcy? Let us have your comments!

–jgoods

Still Squabbling Over the Bailout

The media told us we’d have a deal sometime Monday. Now it’s Tuesday a.m., and they are still inching toward a financial rescue package. One General Motors exec reportedly is already talking about the need for more than the $15 billion under consideration. Meanwhile GM continues to burn through cash at a reported $2 billion a month, and the fire has spread abroad as Fiat seems to be seeking a suitor. The CarGurus Blog wrote on this unhappy trend last week.

Senator Bob Corker (R-Tenn.), a thoughtful man, was quoted as saying the plan “appears to be weak and lacking the benchmarks we believe are necessary to put these companies on a viable, sustainable path.”

Most in the Congress want a viable long-term reorganization plan for the companies, with strict accountability and “haircuts” for all the stakeholders (unions, management, suppliers, dealers, investors), and you can be sure these are going to come, one way or another.

The unions have already taken a big hit. As UAW Chief Ron Gettlefinger put it, “To my knowledge, no one has proposed cutting the compensation of everyday active or retired bankers, bond traders, and office or building personnel who work at AIG, Bear Stearns or the numerous banks that have received billions in federal aid.”

Does he have a point? What’s fair is fair, right? Well, of course, it all depends on where you sit.

If you’re Barney Frank (D-Mass.), your draft bill includes taxpayer protections, prohibitions on bonuses, golden parachutes, private jets and payment of stockholder dividends. If you’re Czar-in-Chief in the Oval Office, you’ll want to appoint a new Car Czar to act as principal enforcer so there won’t be any indecision or temporizing.

If you’re sitting at home waiting for the next shoe to drop in the unfolding economic chaos, sit tight and stay tuned. This bailout bill won’t make anybody happy.

Is the present bailout bill the right thing to do for the auto industry now? Leave your comments below.

–jgoods

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