Martin Crutsinger, AP Economics Writer, On Monday May 17, 2010, 9:25 pm
WASHINGTON (AP) -- The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009. Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.
Treasury said Monday that Chrysler repaid $1.9 billion of a $4 billion loan, which was extended before the company filed for Chapter 11. The government hopes to get another $500 million from the company that emerged from bankruptcy, Chrysler Group LLC.
Treasury officials said that the government had no plans to boost its stake in the new Chrysler to cover those losses. It also acknowledged another $1.9 billion in potential losses from a separate loan that had been made to the company that went through bankruptcy proceedings. It indicated slim hopes of recouping much if anything from that separate $1.9 billion loan.
The original $4 billion loan was made in January 2009, when the Bush administration was scrambling to rescue Chrysler, GM and their auto financing arms.
The Congressional Budget Office estimated in March that the government's $85 billion bailout of the automakers would cost taxpayers $34 billion.
Much of it will depend on how much the government recovers from its eventual sale of nearly 61 percent of GM and about 10 percent of Chrysler.
GM has said it could conduct a public stock offering later this year. Chrysler officials have said a public stock offering is not likely before 2011.
The Treasury Department made the announcement about the loss from Chrysler on a day when GM reported its first quarterly profit in nearly three years. That moved GM closer to a stock offering that would repay at least part of the $43 billion it owes the government.
Chrysler Holding is the parent company of the old Chrysler. It is owned by private equity firm Cerberus Capital Management. Cerberus bought Chrysler from Daimler AG in 2007.
Chrysler came close to running out of money at the end of 2008, so the U.S. government stepped in, authorizing $15.5 billion in aid and appointing Fiat SpA to run the new Chrysler after it emerged from bankruptcy protection. The old Chrysler's assets, along with its finance arm, became Chrysler Holding.
Treasury said it has received repayments of $3.9 billion to date, including the $1.9 billion repayment and a $1.5 billion loan paid off by Chrysler Financial. Chrysler also assumed $500 million of Old Chrysler's debt, reducing the debt to the government.
Showing posts with label As Goes GM. Show all posts
Showing posts with label As Goes GM. Show all posts
Monday, May 17, 2010
Monday, June 22, 2009
Clunker
June 18 (Bloomberg) — A $106 billion war-spending bill won final congressional approval after the Senate voted to retain a “cash for clunkers” provision aimed at helping the auto industry.
Action by the Senate today sends the measure to President Barack Obama for his signature. The Senate passed the bill on a 91 to 5 vote; the House approved the measure earlier this week.
Senator Judd Gregg, a New Hampshire Republican, led the effort to drop a provision providing as much as $4,500 to people who trade in their vehicles for more fuel-efficient models. He said the plan, which would cost $1 billion, was a poor use of tax dollars when the government is projected to run its biggest budget deficit since 1945.
“It is a clunker,” Gregg said of the plan. “Why should our children and our grandchildren have to pay the bill” for the government subsidizing “somebody to buy their car today? How fiscally irresponsible is that?” he said.
Senator Debbie Stabenow, a Michigan Democrat, said the proposal was needed to help auto dealers hit by an “economic tsunami.” She said the plan would “help those who have been having an extremely difficult time just holding their head above water.”
Sunday, June 14, 2009
Property Rights Take a Hit
Peter Schiff
Jun 13, 2009
"Crony capitalism" is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week's events demonstrate that the phrase now more aptly describes our own country.
On Monday, the Supreme Court refused to hear an appeal from Chrysler's secured creditors based on the government's argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.
When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.
Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?
Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.
The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa's body.
As if this wasn't bad enough, testimony on Thursday from former Bank of America CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from B of A shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.
Again, the justification for the interference seemed to be the "greater economic good" the merger would serve. The right of B of A shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.
More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.
As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments. However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat. The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness.
Wednesday, June 10, 2009
Welcome To The New Banana Republic Of The United States of America and Black Markets.
Government Outlaws
Welcome To The New Banana Republic Of The United States of America and Black Markets.
We would not, under any circumstances, believe our government would make decisions flying in the face of sacred United States contract law. What they have done to auto company bondholders is to favor unions for political votes forcing bondholders into a lower, non-preferred payment order. This says corporate contracts in the United States are now meaningless.Auto union people were moved to the head of the bankruptcy line while bondholders with a preferred first lien position by CONTRACT LAW, are now forced to the end of the line.
If your government will do this to auto bondholders, what will they do to the Sheeple?
News this morning told of GM bondholders finally reaching a settlement providing $.17 on the dollar in two parts as GM shares trading was halted. Further news stated GM shareholders are receiving 1% of the deal. Watch for a following clarification as to what all this might mean.
In Our View It’s All Just Grave Dancing
We expect Chrysler for sure and GM being a strong maybe, to enter their final resting places in the automobile manufacturing graveyard. For these companies to survive, they have to build and sell cars. We project years of falling vehicle sales with more lean years afterward. We think they have zero chance to continue in business in the longer view. Ford has a long shot chance to survive IF they can downsize the company another 35-50%. We would suggest their chances are one in three to get through it all and expect their bankruptcy as well. If Ford makes it, Chapter 11 comes first.
I just saw a report that FDR taxes in the 1930’s were temporarily as high as 80-90%. I have not confirmed this but pass it along for what it’s worth. Destruction of wealth by the Obama administration is moving breathtakingly faster in escalation mode reinforcing Marc Faber’s prediction of certain hyperinflation.
Should the Federal Reserve stop their reliquification-reflation program, the whole system could cave-in overnight. So far, they’ve tossed roughly $2 Trillion of taxpayer cash at all these problems but Bill Gross at Pimco says they must inject a total of $6 Trillion to begin to cover the messes creating a recovery market reaction.
We would expect a world-wide systemic crack-up at around $4 Trillion as key components of the global credit and bond markets in Europe, Asia and the U.S. will simply not be able to take it. Our expectations for the next 90 days are for convoluted choppy markets with a mild stocks’ selling event in the shorter term.
After Labor Day, this fall, we forecast a false stock market rise followed by most professional traders selling into strength with ferocity. September, 2009 30-year bond futures are trading this morning at 115.12. Next support is 112.50, 110.00, 108.00 and then 106.00. Our longer range forecast is 80.00 with larger potential for something much worse. We told our readers it gets scary when the 30’s sink under 120.00. Well folks we have arrived.
Our new forecast for later September, 2009 through early October would be a 62% crash from the early fall high. This means a selling event of at least 4-6,000 points lower on the Dow Jones.
Numerous Reasons For System Failure
The big U.S. investment banks wrote crooked deals (derivatives) destroying our financial system. Our Federal Reserve (not federal at all but composed of these same crooked bankers) along with the U.S. Treasury have stolen nearly a trillion to replenish the banks’ capital and financial footing.
Those banks were supposed to lend the money to make the economy find support and rally. Most of these funds have been bank-held to meet capital-to-loan ratios. No loans; no help for businesses.
A further expansion of (TARP), The Troubled Asset Relief Program, will be expanded to cover U.S. states’ budgets shortfalls. The worst example of this problem is California. Obama when asked if he would bailout California said, “No.” This means they get bailed out along with several others crying and pleading for help after recklessly spending their individual states into the fiscal ground.
Many of these idiotic state governments have still not made any serious moves to cut spending. They keep expecting the gravy train to continue on forever. It won’t as the tax revenue crashes.
The administrations’ policies cover funding of two current wars in Iraq and Afghanistan with a new expansion into a third in Pakistan. Potentially, additional wars will open with North Korea and increased action relative to the forthcoming Israeli-Iranian nuclear conflict. We not only cannot afford all these war costs, but do not have the men, women and equipment to manage all of this war-mongering simultaneously.
In our view, enemies of the US are determined to pull us into several wars, and drain the US Treasury destroying America and turning its residents into rural serfs and economic slaves. They seem to be getting a good head start.
We suspect the increased aggression from North Korea is a test to see how Obama manages foreign policy. Since he has no foreign policy except to waffle and hide under the covers and wish it would all go away, these conflicts and new international tensions shall escalate. In our view, this is a lot worse than our economic problems.
Our country is at risk floating in an ocean of disasters with no captain at the helm. Neighborhood organization as a vocation is quite different in scale than leading the engagement of international conflicts going potentially nuclear. Mr. Obama giving the visiting U.K. Prime Minister Gordon Brown some plastic gift K-Mart DVD’s was a strong and meaningful signal this kid is way out of his league.
U.S. housing mortgages of several toxic varieties began their final descent in June, 2005 when we predicted the housing crash. At that date lumber futures tipped-over and the handwriting was on the wall. With skidding lumber prices and Mr. Greenspan’s cash giveaway on the table, the only final solution was a housing meltdown. We were correct in our predictions and the worst is yet to come.
Contrary to current Pollyannish opinions, housing cannot see a new base until 2012 at the earliest, in our view. In recent days we were wondering out loud thinking this might be too optimistic. Our latest forecast is for housing to fall another 30% nationwide on the national averages.
Obviously, some false green shoots appear randomly as bottom feeders bargain hunt, but 95% of America is dead housing hay turning rotten and moldy. This summer in some down-trodden urban areas, housing hay catches fire in an escalation of riots and violence. This is not the preferred method of urban renewal.
Builders are currently operating at 25% of normal capacity. Our new forecast says this number sinks to 10% of the formerly 1.7mm new homes per year; building 170,000 homes annually if they are lucky.
Automobile sales for North American cars and trucks sank from 17mm to roughly 9mm. Our new forecast is a further skid to 5mm. This is why Chrysler, GM and probably Ford cannot survive.
National US unemployment is now officially posted between 8% and 10% depending upon the poll- takers. In our view, current national unemployment is 20%. In Michigan, the rate is 24% and will soon be 30% after the auto manufacturer bankruptcies take hold later this year. In the 1930’s, 25% unemployed was the worst number posted and it was probably accurate.
For a Greater Depression low, national US unemployment could hit 35% with Michigan at 40-45% before World War III provides military employment for millions more.
War is the usual path to finally escape the trauma of depression. This was true in the pre-US Civil War depressions of 1840-1843 and in the early 1850’s. Preceding WW I we had the Panic of 1907 and its previous US depression of the early 1890’s. We had a preceding 1930’s depression in 1920-1921. This was followed by the 1930’s depression and then World War II finally taking us out of it.
On the K-Wave cycle timeline, our current depression was to begin in 2000. And, in fact it did with the crash of the Nasdaq but was artificially delayed by Mr. Greenspan’s billions of free cash and low interest rate pump-priming. His market interference helped delay the inevitable and cause worse conditions to last much longer. While there is open debate that 2000 repeats 1930 or, in fact it was delayed ten years to 2010, smart analysts compare the chart overlays of 2000-2010 with the 1930’s and they are scarily identical.
Consumers are busted and broken. Unemployment is rampant and escalating daily. Wages are stagnant to down. Homes, cars and other property are being repossessed. Hundreds of thousands of homeless people are living in cars, tent cities and on the beaches of warmer states. Consumer credit is shot. Families are doubling and tripling up to survive. Some households have only one person with a job feeding several. Consumers have lost most of their buying power. They represented 70% of the economy. There is no engine of growth to produce any economic rebound that we can see.
Welfare caseloads are skyrocketing and some states’ funds are nearly empty. Elderly are eating dog food to afford utility bills. Many will die in this forthcoming hot summer and freezing post-crash winter. Meanwhile governments are not equipped to help as they are disorganized. They all have food and money but no logical organization or distribution means. This suggests millions go hungry while stacks of food reside in warehouses as beltway idiots say things are better and do nothing.
The Sheeple are girding for economic and potentially civil war. Gun and ammunition sales are off-the-charts. Tea parties are growing. The next stage will be street violence confrontations and more civil disobedience. Governmental pushback will only incite more riots and escalate troubles. States are releasing inmates from over-crowded prisons to save money. Crime shall soon go to the moon.
Meanwhile, our president is flying to Las Vegas (where he told others not to visit), to politic and raise funds for the party. He supposes his current Supreme Court nominee will ethnically encourage large Nevada donations to his party. Maybe it will but we also heard news reports of widespread suspicion of this move in the Latin community. More of the voters are catching onto these political games; from both parties. Politics exists to hold power, control the Sheeple and take their money for vote promotion. That is all it is pure and simple. Will we see a new and more voter responsive third party?
In the forthcoming mid-term elections, we would suggest administration powerbrokers get a hard lesson at the 2010 polls followed by something infinitely most harsh on the streets. People vote with their pocketbooks and today and into the longer range future, those wallets are empty. Beware!
This is not a game nor is it a passing bump in the road. This dire situation presents very big trouble with a potential for bank runs, seizure of pension plans to be converted for government usage (theft) and higher taxes. The newly proposed VAT tax could take an additional 25% more of your spendable income. Most will think this is outrageous. We suspect political criminals give it a testing try.
Now is the calm before the storm. This is the eye of the hurricane. This is not a Saturday evening warm gentle rain; this is a systemic fiscal tornado and many will be economically maimed, or destroyed. You cannot imagine how swiftly events could disrupt our system. Picture the arrival of ten simultaneous Katrinas, or even worse with no warning whatsoever. You get the idea.
We are normally, easy-going and not prone to these kinds of discussions. Our view is one of optimism. I am always seeking the brighter side with ideas to protect our homes, families and retirements. However, the quickening deterioration of current events has sincerely frightened me during the past few weeks.
This is not a simple changing of the political guard but perhaps Armageddon. If you think the government is in control and has a handle on these emergencies you are only kidding yourself. They are careening from one disaster to another. More new ones seem to come each day.
Bad news arrived with a rush and its becoming nastier with each passing day. We’ve seen so much scary stuff we are reluctant to report most of it lest we upset the trading teacart. Batten down the family hatches and count on nothing from anyone to help you. Plan for the worst and hope for the best.
Those who mostly drop out of our phony system and take care of themselves should be winners. We heard similar advice from a premier lady analyst on Jay Taylor’s VoiceAmerica radio show last week.
Markets are nearing a peak in precious metals shares that generally follow primary stock indexes. When the current stock market peaking descends into the Sell in May, PM shares normally follow. With each cycle we think gold and silver shares might sell less posting higher lows. This could be decided on the shorter term by how low S&P’s trade. We expect 800 to 850 with 800 being more probable.
Do not get tangled-up in daily noise. Keep studying the larger view and buy precious metals after each profit-taking correction. Headwinds are building into an economic hurricane. Take care of business right now. My dire fall prediction might surprise us and arrive earlier. Time is short.
Personally, I can see unbelievable opportunities to trade that we would never see again for many years. Turn these problems into opportunities. Those on the right side of the trade might get rich. Those on the other side are just victims. Stay Alert. –Traderrog
Sunday, June 7, 2009
Lenders Ask Supreme Court To Review Chrysler's Sale
Lenders Ask Supreme Court To Review Chrysler's Sale
By Tomoeh Murakami Tse
Washington Post Staff Writer
Monday, June 8, 2009
A small but persistent group of lenders has turned to the U.S. Supreme Court in its last attempt to challenge the government-backed sale of Chrysler's assets to a company run by Italian automaker Fiat.
Three Indiana state pension and construction funds late Saturday filed documents requesting that the sale be delayed so that the Supreme Court can hear their appeal. Two lower courts have already rejected the lenders' objections. On Friday, the U.S. Court of Appeals for the 2nd Circuit ruled the sale could go forward after 4 p.m. today or earlier if the Supreme Court declines to take up the case.
The Indiana funds' emergency application was made, under Supreme Court procedures, to Justice Ruth Bader Ginsburg, who oversees the 2nd circuit appeals court. Ginsburg could rule on her own or refer the matter to the high court.
The Indiana funds contend that the sale of most of Chrysler's assets to a new company -- to be jointly owned by Fiat, the United Auto Workers union and the U.S. and Canadian governments -- breaches numerous laws. For one, they argue, the process tramples on the funds' rights as senior lenders to Chrysler because they would recover less than junior lenders. The Indiana funds hold about $42 million of the $6.9 billion in secured loans. Under the agreement hammered out by the Obama administration with most of the first-lien lenders, the group would recover about $2 billion, or 29 cents on the dollar.
The funds also contend that the quick bankruptcy proceedings pursued by Chrysler and the Obama administration -- a federal bankruptcy judge approved the sale 32 days after the automaker filed for one of the largest bankruptcies in U.S. history -- did not comply with bankruptcy law. The Indiana funds are also arguing that the Treasury illegally used money from the federal Troubled Assets Relief Program, meant for financial institutions, to prop up Chrysler.
"Absent a stay, the Court will be deprived of the opportunity to decide critical, nationally significant legal issues relating to management of the economy by the United States Government," the Indiana funds wrote in their Supreme Court application. "The public is watching and needs to see that, particularly, when the system is under stress, the rule of law will be honored and an independent judiciary will properly scrutinize the actions of the massively powerful executive branch."
Joining the Indiana funds in requesting a stay is a coalition of consumer protection groups and tort claimants who are objecting to the sale of Chrysler's assets "free and clear" of product liability claims.
If the Supreme Court takes the rare step of granting the stay, it could threaten the Obama administration's rescue plan for the auto industry, which has cost taxpayers nearly $40 billion. General Motors is pursuing a type of bankruptcy similar to that of Chrysler, and both companies say a quick sale of their assets is critical. Indeed, Fiat can walk away from the Chrysler deal if a sale is not completed by June 15. The alternative, Chrysler's executives have testified in court, is liquidation and the loss of thousands of jobs.
Chrysler and others in favor of the sale last night were preparing to file responses to the high court but have said that first-lien lenders are getting 100 percent of the value of the sale and that no laws were violated.
Tuesday, June 2, 2009
"Automotive Task Force" - Not a single person from the auto industry
Where do I buy my Lada?
Auto task force taking shape
Cabinet members, senior advisers and staff to tackle the restructuring of GM and Chrysler.
David Shepardson and Gordon Trowbridge / Detroit News Washington Bureau
WASHINGTON -- The White House said Friday its 10-member Presidential Task Force on the Auto Industry would be comprised of cabinet members and other top officials, but senior policy aides would handle much of the day-to-day work.
The 10 senior aides advising the task force include economists, professors and former Obama campaign aides who are already hard at work reviewing a number of issues related to the restructuring of General Motors Corp. and Chrysler LLC.
In restructuring plans submitted to the government this week, the automakers sought up to $21.6 billion in more aid on top of the $17.4 billion they've received to date. They face an urgent March 31 deadline to win concessions from their unions and bondholders and to prove their viability or the government could recall the loans. GM and Chrysler also warn they need billions next month to avoid bankruptcy.
The co-chairs of the task force, Treasury Secretary Timothy F. Geithner and White House National Economic Council Director Larry Summers, held the first task force meeting at the Treasury Department Friday.
They directed the 10 policy advisers at the meeting to "conduct additional analysis and form initial recommendations" that will be presented at a cabinet-level meeting of the task force that is expected as early as next week.
The two "emphasized the urgency of the issues affecting the auto industry and the need for fundamental restructuring to achieve long-term viability," the Treasury Department said.
The task force includes the secretaries of Transportation, Commerce, Labor, Energy, the director of the Office of Management and Budget, the administrator of the Environmental Protection Agency, the director of the White House Office of Energy and Climate Change and the chair of the Council of Economic Advisors.
Transportation Secretary Ray LaHood was one of just 32 House Republicans who voted in favor of a $25 billion bailout of GM and Chrysler in December. The bill died in the Senate, and President Bush stepped in. LaHood criticized Detroit's Big Three CEOs for traveling to hearings last year in corporate jets.
Other cabinet officials have been harshly critical of the auto industry in the past. EPA Administrator Lisa Jackson once criticized the Bush administration's rejection of an effort by California and other states to set their own emissions limits, a move automakers oppose as too costly.
"When it comes to the auto industry, the EPA apparently is the Emissions Permissions Agency," Jackson said in 2007.
Two task force slots remain open. Obama's labor secretary nominee, Hilda Solis, has yet to be confirmed amid Republican opposition. The California congresswoman has close ties to organized labor. Her mother was a UAW member while working at a Mattel factory, and Solis was a board member of American Rights at Work, a pro-union group founded by former Michigan congressman David Bonior.
Gerald Meyers, a University of Michigan business professor and former American Motors Corp. chairman, said the task force and staff could prove unwieldy. He noted officials "may seek to protect their turf and seek to accomplish their own aims." He joined Michigan politicians in criticizing the administration for not including anyone with automotive experience.
The staff designees include: Diana Farrell, deputy director of National Economic Council and a former McKinsey consultant; Gene Sperling, counselor to the Treasury Secretary; Jared Bernstein, chief economist to Vice President Joe Biden; and Joan DeBoer, chief of staff at the Transportation Department.
Sperling, a top adviser to Geithner, was a longtime Clinton administration official, serving four years as a White House economic aide. He recently defended UAW officials from conservative demands that any help for automakers come with a requirement for drastic wage and benefit cuts.
Other designees:
• Lisa Heinzerling, senior climate policy council to EPA administrator Lisa Jackson. The Georgetown law professor represented California and other states before the U.S. Supreme Court in a case in which the court said the states have the authority to set their own carbon emissions limits.
• Austan Goolsbee, a University of Chicago economist, was one of the Obama campaign's top economic advisers even after the Clinton campaign criticized him for reportedly telling Canadian officials that Obama's criticism of the North American Free Trade Agreement was campaign rhetoric. In November, he told CBS's "Face the Nation" that an auto industry collapse would be "quite harrowing, really."
• Heather Zichal, a former Obama campaign aide, is deputy director of the White House Office of Energy and Climate Change.
• Rick Wade, acting chief of staff at the Commerce Department, was a senior campaign adviser. He was in South Carolina Gov. Jim Hodges' Cabinet.
• Edward Montgomery, an economist and senior adviser in the Department of Labor, is a former Clinton-era Labor Department official who taught briefly in the 1980s at Michigan State University. He has advocated for stronger action to protect manufacturing workers from the effects of international trade.
• Dan Utech, an assistant to Energy Secretary Steven Chu, is a former Senate staffer who was a top energy adviser to then-Sen. Hillary Clinton.
The team includes several other consultants and advisers, including Ron Bloom, a special assistant to the United Steelworkers president. He is a special adviser to the Treasury on auto issues and leads the effort to help hammer out concessions between automakers, the UAW and the companies' bondholders necessary to prove the companies' viability.
GM - Government Motors
Somewhere along the way, the administration and its Automotive Task Force thought it could do a better job and decided to run these companies. The discharge of Rick Wagoner, former CEO of GM, by the Task Force, without even consulting GM's board, was the "shot heard round the world" announcing that the feds were in control. Since then they have made four mistakes, which will profoundly affect the future of the automotive industry in this country.
--Chrysler was merged with
--The Task Force failed to get a competitive labor agreement from the UAW. Although some of the worst abuses, like the JOBS bank, subsidized Viagra and overtime pay without 40 hours work, have been "suspended," no active employee has suffered any reduction in base hourly pay, health care or pension. The UAW continues to control numerous sourcing, product and investment decisions, such that GM cannot put on an additional shift in Mexico without the UAW's permission.
--The administration's decision to dramatically toughen the CAFE laws, just at this time of industry weakness, will hurt GM and Chrysler in their areas of strength (full-size SUVs, minivans and pick-ups) and force them to compete head-to-head in the hybrids and small cars where the Japanese dominate.
--Finally, the government, in a burst of hubris, has gone from its necessary role as a creditor to that of majority owner. It could have taken preferred stock and given some ownership in GM to the former shareholders and some more to the bondholders. The preferred dividend could have been rolled over until GM could pay, and the shares could have been convertible to equity if the creditors failed. Instead the administration went for a so-called "total equity wipeout" and squeezed $27 billion of bonds down to 10% of new equity. The administration has now maneuvered itself into a "you broke it, you bought it" position, from which it cannot easily retreat.
While both Presidents Bush and Obama were initially correct to provide short-term liquidity to GM and Chrysler, the Obama administration and the Automotive Task Force have subsequently lost their way. Their errors, arising from a Masters of the Universe over-confidence, coupled with a Big Government, Big Labor, Big Green social agenda, will keep GM and Chrysler as a dependent, taxpayer-supported wards of the state for the rest of the Obama administration, and probably beyond.
Logan Robinson is a professor of law at the University of Detroit Mercy. He is the former general counsel of ITT Automotive,
Monday, June 1, 2009
As Goes GM, So Goes America
General Motors files for bankruptcy protection
General Motors files for bankruptcy protection in New York
- On Monday June 1, 2009, 9:33 pm EDT
NEW YORK (AP) -- General Motors entered Chapter 11 bankruptcy protection Monday with a near-complete plan to quickly emerge and potentially become profitable again, having already nailed down deals with its union and bondholders and arranged to sell off some brands and most of its Opel operations in Europe.
GM's bankruptcy filing is the fourth-largest in U.S. history and the largest for an industrial company. The company said it has $172.81 billion in debt and $82.29 billion in assets.
"The General Motors board of directors authorized the filing of a Chapter 11 case with regret that this path proved necessary despite the best efforts of so many," GM Chairman Kent Kresa said in a written statement. "Today marks a new beginning for General Motors. ... The board is confident that this New GM can operate successfully in the intensely competitive U.S. market and around the world."
The plan is for the federal government to take a 60 percent ownership stake in the new GM. The Canadian government would take 12.5 percent, with the United Auto Workers getting a 17.5 percent share and unsecured bondholders receiving 10 percent. Existing GM shareholders are expected to be wiped out.
As it reorganizes, the fallen icon of American industry will rely on $30 billion of additional financial assistance from the Treasury Department and $9.5 billion from Canada. That's on top of about $20 billion in taxpayer money GM already has received in the form of low-interest loans.
Late Monday, U.S. bankruptcy court judge Robert Gerber gave interim approval for the Detroit-based automaker's use of a total of $33.3 billion in bankruptcy financing, with $15 billion available for use over the next three weeks. He will rule on final approval of the financing on June 25.
The judge also set GM's sale hearing for June 30, putting the automaker on a path similar to that of rival Chrysler LLC, which held its sale hearing about 30 days after filing for Chapter 11 bankruptcy protection. Objections in GM's case are due on June 19, with any competing bids required to be submitted by June 22.
"Our agreement with the U.S. Treasury and the governments of Canada and Ontario will create a leaner, quicker more customer and completely product-focused company, one that's more cost competitive and has a competitive balance sheet," CEO Fritz Henderson said at a news conference in New York. "This new GM will be built from the strongest parts of our business, including our best brands and products."
The Detroit automaker said warranty coverage, service and customer support will continue uninterrupted, plants will continue to make cars and trucks, and essential suppliers and GM's 235,000 employees worldwide will continue to be paid. GMAC Financial Services said in a statement that it will continues to provide automotive financing to GM and Chrysler dealers and customers, and the federal Pension Benefit Guaranty Corp. said workers' pension plans remain safe.
GM will follow a similar course taken by smaller rival Chrysler LLC, which filed for Chapter 11 protection April 30. A judge on Sunday gave Chrysler approval to sell most of its assets to Italy's Fiat, moving the U.S. automaker closer to a quick exit from court protection, possibly this week.
GM shares fell as low as 27 cents in Monday morning trading, their lowest price in the company's 100-year history, but rebounded to rise 10 cents from Friday's close to 85 cents in afternoon trading. On June 8, Cisco Systems Inc. will replace GM in the Dow Jones industrial average, which excludes companies that have filed for bankruptcy. Standard & Poor's also will remove GM from its S&P 500 index Tuesday, with secondary education provider DeVry Inc. taking the automaker's place.
The government's partial stake in GM comes on top of a far smaller ownership of Chrysler, as well as significant federal equity in banks, the AIG insurance giant and two mortgage industry titans -- all victims of an economic crisis unrivaled since the Great Depression.
But the president said the actions were part of a "viable, achievable plan that will give this iconic company a chance to rise again."
The president said the government would refrain from playing a management role in all but the most critical areas.
"Our goal is to help GM get back on its feet ... and get out quickly," he said.
Henderson declined to offer a firm timeline for how long it would take the government to sell its stake in GM, but he indicated it could take some time.
"These are a substantial block of shares," Henderson said. "This is a question of years, not months."
GM said it expects the bankruptcy court process to last 60 to 90 days. If successful, GM will emerge as a leaner company with a smaller work force, fewer plants and a trimmed dealership network.
"We're confident that we will move fast," Henderson said. "Not with a sense of urgency. We're talking about pure unadulterated speed."
GM said Monday that it will permanently close nine more plants and idle three others.
The Pontiac, Michigan, and Wilmington, Delaware, assembly plants will close this year, while plants in Spring Hill, Tennessee, and Orion, Michigan, will shut down production but remain on standby. One of the idled plants, or GM's Janesville, Wis., plant that closed in April, will be retooled to build a small car that GM had originally planned to build in China.
Seven powertrain and parts stamping plants will be closed starting in June 2010, while an additional stamping plant will be idled but remain in a standby capacity.
GM will move forward with four core brands -- Chevrolet, Cadillac, Buick and GMC -- and cut four others. The company plans to cut 21,000 employees, about 34 percent of its work force, and reduce its 6,100 dealers by 2,600. GM said it was finalizing a deal to sell Hummer, and plans for Saturn are expected to be announced within weeks.
The third of the one-time Big Three, Ford Motor Co., has also been stung hard by plunging sales of cars and trucks, but it avoided bankruptcy by mortgaging all of its assets in 2006 to borrow roughly $25 billion, giving it a financial cushion GM and Chrysler lacked.
Ford issued a statement Monday saying it "remains absolutely committed to continuing to make progress on our transformation plan without accessing emergency taxpayer assistance from the U.S. government."
The bankruptcy filing represents a dramatic downfall for GM, which was founded in 1908 by William C. Durant, who brought several car companies under one roof and developed a strategy of "a car for every purse and purpose." Longtime leader Alfred P. Sloan built the global automaker into a corporate icon.
GM first sought help from the Bush administration and Congress last year as it was in the midst of being staggered by $30.9 billion in losses and seeing its cash resources shrink by more than $19 billion.
Consumers, worried about the economy and the future of GM, shied away from the company's cars and trucks this year even after President George W. Bush promised loans and Obama followed through with billions more in assistance -- plus a stiff set of new requirements GM was ordered to meet.
When GM failed to do so by a March 31 deadline, Obama forced out CEO Rick Wagoner and replaced him with Henderson.
Wagoner served at the helm since 2000 and was the face of GM when he first flew on a company jet to ask Congress for aid. After a firestorm of negative publicity, Wagoner rode in a hybrid Chevrolet Malibu from Detroit to Washington for a second set of withering questions before lawmakers.
But that amounted to only a sideshow as the automaker's financial position worsened. Its revenues plunged almost 50 percent in the quarter ended March 30 and it racked up another $6 billion in losses.
The Henderson-led GM faced a government-imposed June 1 deadline to restructure, slash costs and modify contracts with its union and dealers. But meeting most of those demands, plus a late agreement by many bondholders to swap the $27 billion in debt they are owed for shares in a new GM, were not enough to prevent the court filing.
Some bondholders might still fight GM's reorganization plan, but the company and Treasury hope the 54 percent who supported the debt-for-equity offer will convince the judge that its a fair deal.
It was an all-out sprint to Monday's filing, as GM quickly sought to nail down deals with its union, bondholders and sell off brands along with most of its Opel operations in Europe to appear in court with a near-complete plan to quickly emerge with a chance to become profitable.
The German government on Sunday agreed to lend GM's Opel unit $2.1 billion, a move necessary for Magna International Inc. and Russian-owned Sberbank to acquire 55 percent of the company.
In the U.S., the UAW's ratification of concessions, announced Friday, will save GM $1.3 billion per year. The new deal freezes wages, ends bonuses
GM earlier outlined a plan to cut about 1,100 of its dealers by the end of 2010. It also plans to shed about 500 dealerships that market the Saturn, Hummer and Saab brands.
But just cutting labor and overhead costs won't be enough to save the company. It also has been working to streamline its engineering and design, as well as standardize many parts so they can go into multiple models.
Lehman Brothers Holdings Inc.'s Sept. 15 bankruptcy filing is the largest in the Untied States with $691.1 billion in assets, and it likely served as a catalyst for GM and Chrysler's downfall, as it hastened the erosion of credit markets, making it impossible for GM to borrow money and difficult for consumers and dealers to finance new vehicles.
Washington Mutual Inc. and WorldCom Inc. are the second and third largest U.S. companies to file for bankruptcy protection.
Friday, May 15, 2009
More auto cuts: GM will eliminate 1,100 US dealers
General Motors to eliminate 1,100 dealers nationwide on top of hundreds of cuts by Chrysler
- On Friday May 15, 2009, 9:41 pm EDT
NEW YORK (AP) -- General Motors on Friday told about 1,100 of its dealers -- one in five -- that they would be dropped by late next year, adding to the economic pain radiating from the beleaguered Detroit automakers to cities and towns across the country.
Including Chrysler's decision a day earlier to eliminate a quarter of its own, about 1,900 dealerships -- many pillars of their communities and heavy advertisers for local media -- learned in a matter of 48 hours that they would be forced either to sell fewer brands or close altogether.
The GM dealerships will be eliminated when their contracts end late next year.
"We're 98 years old. We're two years from a hundred, and I don't want to go out at 99 years," said Alan Bigelow, whose family runs a Cleveland-area Chevrolet dealer that learned it was on GM's hit list.
While GM doesn't own the dealers, the company says its network is too big, causing dealers to compete with each other and giving shoppers too much leverage to talk down prices and hurt future sales.
Several hundred of the GM dealers knew already they were headed for closure, but most of them learned for the first time Friday. The National Automobile Dealers Association, an industry group, says the GM and Chrysler cuts combined could wipe out 100,000 jobs.
Both GM and Chrysler are scrambling to reorganize and stay alive in a severe recession that has pummeled car and truck sales for U.S. automakers, which had already been losing market share to foreign companies for decades.
Chrysler LLC is already in bankruptcy protection, and industry analysts say General Motors Corp. is making its cuts now in preparation for a bankruptcy filing June 1. The company says it would prefer to restructure out of court.
GM declined to reveal which dealers will be eliminated. Many dealers vowed to fight, first through a 30-day company appeal process, then possibly in court.
GM's dealers are protected by state franchise laws, and the company concedes it would be easier to cut them if it were operating under federal bankruptcy protection. GM says it's trying to restructure outside of bankruptcy because of the stigma of Chapter 11.
Chrysler dealers have fewer options because the company has already filed for bankruptcy protection, and federal bankruptcy judges generally trump state law. And Chrysler said on Thursday that its cuts were final.
GM outlined a plan to cut about 40 percent of its 6,000-dealer network by the end of 2010 in hopes of getting the company back on its feet. Besides the 1,110 dealership cuts, the company will shed about 500 dealerships that market the Saturn, Hummer and Saab brands, which GM plans to phase out or sell.
And when the surviving dealers' contracts are up in late 2010, GM will cut still more by not offering renewals to about 10 percent of the dealers who are left. Dealers could stay open selling used cars or other brands, but GM and Chrysler cuts will still leave cities across the U.S. with empty buildings, vacant lots and perhaps hundreds of thousands of dollars in lost tax revenues.
FedEx letters bearing the bad news began arriving Friday morning at GM franchises around the country. The letter states that dealers had been judged on sales, customer service scores, location, condition of facilities and other criteria.
While the targeted dealers represent about 20 percent of GM's total, they make only 7 percent of its sales, the company said.
The cuts will allow the surviving dealers to expand the size of their markets, so they have a better chance of staying healthy and attracting private investment, said Mark LaNeve, GM's North American vice president of sales and marketing.
"Over time, they just can't afford to invest in their business to the degree the competition has," LaNeve said.
Toyota, for example, generally has larger and newer showrooms and service departments than GM and Chrysler dealers -- making those dealerships more attractive to potential buyers.
The Obama administration's auto task force, which is overseeing the GM and Chrysler restructuring because both have received billions of dollars from the government, was aware GM would cut dealers, LaNeve said. But he stressed the company made the decision on how many and where.
Chrysler is aiming to close its nearly 800 dealers by June 9, and those outlets may try deep discounts to clear out their remaining inventory. But in the long run, prices for cars and trucks will probably rise for customers as dealerships disappear.
"No longer will people be able to shop between three or four dealers within 15 minutes of each other for the best cutthroat price," said Aaron Bragman, an automotive industry analyst with the consulting firm IHS Global Insight.
As GM and Chrysler lost market share to Japanese and other overseas brands, they ended up with too many dealers. So did Ford Motor Co., which has managed to stay healthier than either of its Detroit siblings.
In the 1980s, GM, Chrysler and Ford accounted for more than 75 percent of U.S. sales, but that dropped to 48 percent last year. GM alone held nearly 51 percent of the market in 1962, but only 22 percent last year.
Bigelow was stunned to get his termination letter. He said he believed the dealership was meeting all of GM's criteria to stay in business. He said sales had dropped in the recession -- but he didn't know of many dealers who were doing better.
Many of the dealership's 45 employees have been there for 30 years or more. He said they pledged to stay and fight the closing "until there's no more fight left."
Thursday, April 30, 2009
Chrysler succumbs to bankruptcy after struggle
DETROIT (AP) — After months of struggling to stay alive on government loans, Chrysler finally succumbed to bankruptcy Thursday, pinning its future on a top-to-bottom reorganization and plans to build cleaner cars through an alliance with Italian automaker Fiat.
The nation's third-largest car manufacturer filed for Chapter 11 bankruptcy protection in New York, with ambitions to emerge in as little as 30 days as a leaner, more nimble company, probably with Fiat as the majority owner. In return, the federal government agreed to give Chrysler up to $8 billion in additional aid and to back its warranties.
"It's a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry," President Barack Obama said from the White House.
Starting Monday, Chrysler said, it will close all its plants until it comes out of bankruptcy. At least three Detroit-area factories sent workers home Thursday after suppliers stopped shipping parts over fears they would not be paid.
CEO Robert Nardelli announced he would step down when the bankruptcy is complete and take a post as an adviser with Cerberus Capital Management LP, which will give up its 80 percent ownership of Chrysler under the automaker's plan. Vice Chairman Tom LaSorda, who once ran the company when it was owned by the German automaker Daimler, said he would retire.
"A lot of us are scared," said Steve Grabowski, 33, who has worked at a Warren, Mich., parts stamping plant for seven years and was sent home Thursday. "We knew something like this was going to happen, but we didn't think it would be so soon."
Chrysler's bankruptcy filing is the latest step in a drastic reordering of the American auto industry, which has been crushed by higher fuel prices, the recession and customer tastes that are moving away from the gas-guzzling SUVs that were once big money makers.
Lee Iacocca, the retired chairman and CEO who led Chrysler through a government bailout in the late 1970s, said it was a sad day.
"It pains me to see my old company, which has meant so much to America, on the ropes," he said in a written statement. "But Chrysler has been in trouble before, and we got through it, and I believe they can do it again."
The government has sunk about $25 billion in aid into Chrysler and rival General Motors Corp.
GM faces its own day of reckoning on June 1, a date the administration has set for it to come up with its own restructuring plan. GM has announced thousands of job cuts, plans to idle factories for weeks this summer and has even offered the federal government a majority stake in the company as it races to meet the deadline.
"We understand that there will be more pain for people in Michigan," said Sen. Debbie Stabenow, a Michigan Democrat.
When Chrysler emerges from bankruptcy, the United Auto Workers union will own 55 percent of the automaker and the U.S. government will own 8 percent. The Canadian and Ontario governments, which are also contributing financing, would share a 2 percent stake.
Under the deal, Chrysler would gain access to Fiat's expertise in small, fuel-efficient vehicles. The U.S. automaker eventually wants to build cars that could get up to 40 mpg, far more economical than its current fleet focused on minivans, Jeep SUVs and the Dodge Ram pickup.
In exchange, Fiat would initially get 20 percent of the company, but its share could rise to 35 percent if certain benchmarks are met, and Fiat said Thursday it could get an additional 16 percent by 2016 if Chrysler's U.S. government loans are fully repaid. Fiat would also get access to the North American market through Chrysler factories and dealerships.
Fiat CEO Sergio Marchionne said he planned to spend time meeting Chrysler employees and touring its plants over the next few weeks.
He said Fiat was preparing for Chrysler to "re-emerge quickly as a reliable and competitive automaker." Fiat also plans to reintroduce brands like Alfa Romeo in North American markets.
First, though, bankruptcy court Judge Arthur Gonzalez will have to sort out the issue of Chrysler's creditors, who hold $6.9 billion of the company's debt. The company's first hearing is set for Friday.
The Treasury Department's auto task force had been racing for the past week to clear the hurdles that led the government to reject Chrysler's initial survival plan one month ago. Along with the Fiat deal, Chrysler adopted a cost-cutting pact with the UAW on Wednesday.
Four of the largest banks holding 70 percent of Chrysler's debt agreed this week to a deal that would give them $2 billion. But a collection of hedge funds refused to budge, saying the deal was unfair and would only return a small fraction of their holdings.
When the hedge funds refused a sweetened offer Wednesday, Chrysler and the government resorted to bankruptcy.
Obama chastised the funds for seeking an "unjustified taxpayer-funded bailout."
One lender, OppenheimerFunds Inc., said it rejected the government offer because it "unfairly asked our fund shareholders to make financial sacrifices greater than the sacrifices being made by unsecured creditors."
Later Thursday, one of the hedge funds that had been a holdout issued a statement agreeing to the offer.
"We believe that this is in the best interests of all Chrysler stakeholders, and our own investors and partners," said the statement from Perella Weinberg Partners. The fund said it was working "to encourage broad participation in the settlement."
The White House said Chrysler could comes out of "surgical" bankruptcy in 30 to 60 days. Under normal circumstances, it would be difficult to complete such a large bankruptcy so quickly.
But John Pottow, a University of Michigan professor who specializes in bankruptcy, said the government's level of involvement is much greater than a typical corporate bankruptcy.
"If you have the president of the United States who wants something to happen, I think anything's possible in bankruptcy protection," he said.
The Fiat deal and bankruptcy cap a disastrous time for Chrysler.
The Auburn Hills, Mich.-based company lost $8 billion last year and its sales through March were down 46 percent compared with the same period last year, leading some auto industry analysts to question whether Chrysler can survive even in bankruptcy.
But company executives told reporters Thursday that Chrysler vehicles with Fiat's fuel-efficient technology should reach showrooms in 18 months.
Vice Chairman Jim Press said Chrysler has cut expenses to operate profitably at a lower sales volume, and he said it would be able to take advantage of Fiat's distribution network to sell more vehicles globally.
Also, the company has new products coming out such as the new Jeep Grand Cherokee, which debuts in early 2011.
Press said the company predicts that small-car sales will rise dramatically around the time the Fiat products hit the U.S. market.
"The real volume pickup opportunity for smaller cars is going to start to ramp up about two years from now," he said.
Despite the turmoil with Chrysler and GM's looming deadline, Obama urged consumers to keep buying cars.
"If you are considering buying a car, I hope it will be an American car," he said.
Sunday, January 4, 2009
Treasury Opens Door to Aid for Broad Array of Firms, Industries
Treasury Opens Door to Aid for Broad Array of Firms, Industries
By Rebecca Christie
Jan. 1 (Bloomberg) -- The U.S. Treasury threw the door open to taxpayer financing for a widening array of companies and industries by drafting broad guidelines on aid to the auto industry.
The Treasury’s guidelines, published yesterday, would let officials provide funds to any company they deem important to making or financing cars. That leaves room for the government to provide money from the Troubled Asset Relief Program beyond loans already committed to General Motors Corp., GMAC LLC and Chrysler LLC.
“There are going to be other industries that are going to have just as good a case,” as the auto companies, former St. Louis Federal Reserve Bank President William Poole said in an interview on Bloomberg Television. “We don’t know what those other industries are going to be. Where does this process stop?”
Shares of auto suppliers including American Axle & Manufacturing Holdings Inc. and Lear Corp. jumped yesterday after Treasury announced the guidelines. The Motor & Equipment Manufacturers Association has been lobbying for the use of federal funds as a backstop in case parts makers can’t collect money the auto manufacturers owe them.
Analysts have speculated that companies such as GM’s bankrupt former parts unit Delphi Corp., might be eligible for assistance. The Treasury guidelines may encourage more guessing on what companies and industries are next, said Vincent Reinhart, resident scholar at the American Enterprise Institute in Washington.
‘Constructively Ambiguous’
Treasury officials “much prefer discretion, and so they would view the statement as being constructively ambiguous,” Reinhart said. “It’s appropriate that they end the year the way they spent most of it -- that is, adding uncertainty into an environment in which there’s a lot of uncertainty.”
The guidelines don’t bind the government, so the lack of specifics gives President-elect Barack Obama plenty of leeway to decide who succeeds and fails when he takes office in three weeks. The bailout was originally designed to buy assets from banks and has instead become a fund for Treasury to prop up lenders, insurers, carmakers, auto-finance companies and, now, any firm that may be important to those industries.
Slippery Slope
“The further you go, the slipperier the slope becomes, the more you open the door to anyone who says, ‘Look, my firm is in trouble, I need help too,’” said Lyle Gramley, a former Fed governor and now a Washington-based senior economic adviser for Stanford Group Co. “We don’t want to go any further down that road than we absolutely have to.”
The Treasury already has provided $6 billion in aid to GMAC, the financing arm of GM, and up to $17.4 billion in financing for GM and Chrysler, using funds from the $700 billion bank-rescue package.
“Treasury will determine the form, terms and conditions of any investment made pursuant to this program on a case-by-case basis,” the Treasury said in the new guidelines. “Treasury may consider, among other things, the importance of the institution to production by, or financing of, the American automotive industry.”
The government will weigh “whether a major disruption of the institution’s operations would likely have a materially adverse effect on employment and thereby produce negative spillover effects on economic performance” or on credit markets, the Treasury said.
Supplier Shares Leap
Shares of American Axle, GM’s largest supplier of axles, and Lear, the world’s second-largest maker of auto seats, both leapt in the minutes after the Treasury’s announcement yesterday. Detroit-based American Axle rose 56 cents, or 24 percent, to $2.89 in New York Stock Exchange composite trading. Southfield, Michigan-based Lear, which gets almost a third of its revenue from GM, rose 26 cents, or 23 percent, to $1.41.
This week’s funding agreement between the Treasury and GMAC opened a new rescue program for the auto industry as part of the TARP. Treasury said then that the GMAC agreement was “part of a broader program to assist the domestic automotive industry in becoming financially viable.” A Treasury official said there’s no cap or deadline for aid to the auto industry under the TARP.
“We would not be surprised to see additional government funds to GM to support a Delphi solution,” JPMorgan Chase & Co. analyst Himanshu Patel said in a report Dec. 30.
With this week’s funding for GMAC, the Treasury has now earmarked $358.4 billion out of the $700 billion bailout. Its actual spending has been less -- for example, the department so far has handed out only $172.5 billion out of the $250 billion designated for bank capital injections.
Treasury Checkbook
When Congress approved the TARP in October, it gave the Bush administration the first of two $350 billion tranches. After injecting capital into GMAC on Dec. 29, the Treasury reiterated its call for legislators to release the rest of the money.
The auto-rescue program could range anywhere from full bailouts of specific companies to merely keeping others going while in bankruptcy to ensure production isn’t interrupted, said Kirk Ludtke, an analyst at CRT Capital Group Inc. in Stamford, Connecticut.
“The Detroit three are still at risk,” Ludtke said, referring to GM, Chrysler and Ford Motor Co. “The government is acknowledging it needs to assure at least an orderly restructuring of the key players in the auto industry.”
To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net;
Tuesday, December 23, 2008
It’s the End of the Line for S.U.V.’s
JANESVILLE, Wis. — Even a federal bailout could not save three of the last remaining plants in the United States still making sport utility vehicles.
Reeling from its financial problems and a collapsing S.U.V. market, General Motors on Tuesday closed its factories in this city and in Moraine, Ohio, marking the passing of an era when big S.U.V.’s ruled the road. The moves followed the shutdown last Friday of Chrysler’s factory in Newark, Del., which produced full-size S.U.V.’s.
The last Chevrolet Tahoe rolled off the line here in Janesville shortly after 7 a.m. in the 90-year-old plant, which had built more than 3.7 million big S.U.V.’s since the early 1990s.
Most of the plant’s 1,100 remaining workers were not scheduled to work the final day, but many showed up for an emotional closing ceremony. Dan Doubleday, who had 22 years on the job, broke down in the plant’s snowy parking lot afterward.
“I was a fork lift driver,” he said, glancing at his watch through welling tears. “Until about seven minutes ago.”
At the Mocha Moment coffee shop around the corner, two co-workers, Michael Berberich and Lisa Gonzalez, exchanged Christmas presents just as they had most years since they were both hired in 1986.
“For a while we had it made,” Ms. Gonzalez said. “I just wish it would have lasted.”
The fate of the Janesville, Moraine, and Newark plants was sealed this spring, when rising gas prices suddenly made S.U.V.’s unpopular, and long before President Bush approved $17.4 billion in emergency loans last week to keep G.M. and Chrysler out of bankruptcy.
While the overall new vehicle market has dropped 16 percent so far this year, sales of big S.U.V.’s have plummeted 40 percent.
With consumers shifting rapidly to smaller, more fuel-efficient cars, G.M. no longer needed to produce big S.U.V.’s in Janesville as well as in a plant in Texas.
Still, some Janesville workers felt G.M. broke a pledge in its 2007 contract with the United Automobile Workers to keep the factory running.
“We didn’t deserve this,” said John Dohner Jr., shop chairman at U.A.W. Local 95. “We’ve all put a lot of hard work into trying to secure a future here.”
Shrinking market shares have forced G.M., Chrysler and the Ford Motor Company to close more than a dozen assembly plants and shed tens of thousands of workers in recent years. The moves have devastated communities from Georgia to New Jersey and from Michigan to Oklahoma.
Even so, G.M. and Chrysler are likely to close more manufacturing facilities as they overhaul their operations to meet conditions of the federal loans.
“The companies are moving very fast now to close plants, but it may be too little, too late,” said John Casesa, a principal in the Casesa Shapiro Group, a consulting firm. “They’re doing now what they should have done 15 or 20 years ago.”
G.M.’s Moraine plant was the last to build the midsize Chevrolet Blazers and GMC Envoys that were once among the best-selling vehicles in the country.
The Janesville factory built three of the biggest and most profitable vehicles in G.M.’s lineup, the Chevrolet Tahoe and Suburban and GMC Yukon. The Chrysler plant in Newark also made big S.U.V.’s — the Dodge Durango and Chrysler Aspen.
Their closings leave the Big Three with only one factory each still devoted to making traditional big S.U.V.’s — Ford in Kentucky, G.M. in Texas, and Chrysler in Detroit.
The Janesville plant once employed more than 5,000 workers and turned out 20,000 Tahoes, Yukons and Suburbans each month. With its closing, residents worried about the future of this city of 64,000 people, about 75 miles southwest of Milwaukee.
“Janesville will lose a lot,” said Patti Homan, as she finished a strawberry-topped waffle at the nearby Eagle Inn restaurant. “I expect my electricity to go up, water rates to go up, property taxes to go up, and the value of my home to go down.”
Ms. Homan worked in the plant for 23 years, and her father, brother and husband all retired from the factory. “It’s generation after generation for so many families here,” she said.
The empty feelings in Janesville were echoed in Moraine, a suburb of Dayton and last week at the Chrysler plant in Newark.
More than 1,000 workers were laid off at the Moraine plant. Under terms of the U.A.W. contract for all its members, they and the workers in Janesville and Newark will collect unemployment checks and payments from G.M. that together equal about 80 percent of their take-home pay.
But those payments will only last about a year. And with the U.A.W. prepared to suspend its “jobs bank” program as a condition of the federal loans, there will be no safety net after that.
Some workers will have an opportunity to transfer to other plants. But with the industry contracting so quickly, there is little job security in making a move.
“I can’t risk transferring,” said David Williams, one of the remaining 1,100 workers at the Newark plant when it closed. “I don’t want to go 1,200 miles away to get laid off again.”
Mr. Williams installed a sunroof on the last Dodge Durango to come down the assembly line in Newark. Now he plans to take massage-therapy classes and pursue a new career far from the factory floor.
“Enough with the concrete,” he said. “It’s time for some carpet and climate control.”
On the last day for the Newark plant, 84-year-old Woody Bevans unlocked the weight room at the U.A.W. union hall and began brewing coffee for a handful of retirees who passed the time there.
A Texan who started work at the plant when it opened in 1952, Mr. Bevans recalled how the factory was first used to build tanks for the Korean War. He retired in 1983, but thought the plant would go on forever.
“We had hope right up until the last,” Mr. Bevans said. “We’re really going to feel it when it shuts down. There’s a big chain reaction, believe me.”
The University of Delaware is negotiating with Chrysler to buy the plant and redevelop the 270-acre site with academic buildings and a technology park.
After the plant closed, one of the workers, Merle Black, drove directly to a Delaware Department of Labor office and registered for job openings. He is hoping to become a heavy equipment operator, and possibly be involved in the demolition of the factory where he used to install airbag parts.
“If I can get in there to help take it apart, I don’t mind,” Mr. Black said. “That’s where I spent the last 19 years. That’s what I know.”
The closing of an auto plant draws a crowd, with some people somber and nostalgic and others defiant and energized.
Outside the Janesville plant on Tuesday, a few workers posed for pictures in front of the building while others said their goodbyes as they loaded gear in their snow-covered S.U.V.’s
One man had two small children with him on the last day. Another man wearing an orange ski mask waved a large American flag as departing workers drove by.
Many of the workers trudged over to a one-story, cinder-block building on the grounds of the factory, a bar called the Zoxx 411 Club. A sign said “customers only” and forbade reporters and media from entering.
Outside, a cluster of reporters, including a documentary film crew from Japan, tried to interview workers about the last days of the S.U.V. plant.
“It’s been a good ride, man,” said Frank Hereford, a body shop worker, as he left the plant with a microwave oven that heated up countless lunches during many of his 38 years with G.M. “Good people worked down here.”Friday, December 19, 2008
A $17.4 Billion, 3-Month Lifeline for Automakers
WASHINGTON — President Bush agreed to an emergency bailout of General Motors and Chrysler, giving them a few months to get their businesses in order, but left to President-elect Barack Obama the difficult political decision of ruling on their progress.
The plan pumps $13.4 billion by mid-January into the companies from the fund that Congress authorized to rescue the financial industry. But the two companies have until March 31 to produce a plan for long-term profitability, including concessions from unions, creditors, suppliers and dealers.
The bailout plan sets “targets” rather than concrete requirements about what those concessions may be, meaning that Mr. Obama and his advisers have enormous latitude to decide how to define long-term viability.
While Mr. Obama has broadly insisted that the auto makers radically increase the fuel efficiency of their fleets, reduce carbon emissions and save the maximum number of jobs possible, he will have just nine weeks after taking office to press for a detailed transformation of an industry whose problems have been building for three decades.
At a news conference in Chicago, Mr. Obama embraced the plan but said he had not had enough time to study the details. He never addressed the question of how he would turn a program designed as a short-term bridge loan into a long-term restructuring.
“I do want to emphasize to the Big Three automakers and their executives that the American people’s patience is running out, and that they should seize on this opportunity over the next several weeks and months to come up with a plan that is sustainable. And that means that they’re going to have to make some hard choices.”
He said it was his intention to preserve jobs “for years to come” and that he wanted to make sure “that it’s not just workers who are bearing the brunt of that restructure, that they’re not the ones who are taking all the hits.”
Yet as the economy falters and joblessness balloons, Mr. Obama will be under extreme political pressure not to be too tough on the industry.
Already, Ron Gettelfinger, the president of the United Automobile Workers union, said he was “pleased” that the administration acted on the loan requests, but said the President added “unfair conditions” that singled out blue-collar workers.
Mr. Gettelfinger said the union expects to appeal to Mr. Obama to alter the expectations for wage and benefit cuts. According to Treasury Department officials who drafted the wording, Mr. Obama would be free to change the requirements and loosen the standards, especially on how much workers will have to give up.
Mr. Bush announced the plan early Friday, before markets opened, and took no questions about its details. The day before, he conceded that he had been forced by the severity of the economic downturn to ignore many of the free-market principles he came to office embracing.
G.M. said it expects to draw on the first installment of its loans by Dec. 29. Soon after it pays suppliers and workers, the troubled automaker will begin implementing drastic downsizing plans, outlined to Congress earlier this month, that includes eliminating more than 30,000 jobs, shutting factories, shedding dealerships and determining the future of its Saab, Saturn and Pontiac brands.
In Detroit, a visibly relieved Rick Wagoner, G.M.’s chairman, told reporters that the loans will allow the automakers to pay their bills and prevent a financial crisis from spreading through the industry’s suppliers and dealers.
Mr. Wagoner, who has served as G.M.’s chief executive for eight years, added that he had no plans to step aside during the automaker’s difficult months ahead. “Do you think I would have gone through what I’ve gone through in the past two months, if I didn’t want to stay?”
His reaction was echoed at Chrysler. “We intend to be accountable for this loan, including meeting the specific requirements set forth by the government, and will continue to implement our plan for long-term viability,” Chrysler’s chairman, Robert Nardelli, said in an e-mail to employees.
Even before the March 31 deadline, it might fall to the Obama administration to persuade Congress to release the second $350 billion of the Treasury’s huge financial system stabilization program — a request that the Bush administration is reluctant to make because it will face angry criticism by lawmakers.
Without the release of those funds, $4 billion in additional loans for G.M. could not be made available in February.
Beyond the initial hurdles to provide all of the money, it will be left to the new president to make the tough judgments needed about the future of the industry. Are enough jobs being cut and factories being closed? Have the right product lines been consolidated? Are all of the stakeholders sufficiently on the same page to make the long-term viability plans workable? And how should financial viability be defined, anyway?
On paper, Mr. Obama will inherit a club to wield against the automakers and the unions: He can threaten to “call” the loans and require repayment in 30 days.
Yet as a practical matter, demanding immediate repayment would be enormously difficult to do, unless Mr. Obama chose to drive the two icons of American industrial strength into bankruptcy court during the first 70 days of his administration.
His aides know that he will come under tremendous pressure, including from the U.A.W., which supported his candidacy and helped fund his campaign. “What we’ve seen from the U.A.W. already forces Obama to make a decision over whether to throw the U.A.W. under the bus,” said Brian Johnson, an analyst with Barclay’s Capital.
The bailout Mr. Bush announced is missing one major element: A “car czar” to administer the program, a key feature of the legislation that was defeated in the Senate last week. Until the end of Mr. Bush’s presidency, in just over a month, Treasury Secretary Henry M. Paulson Jr. will play that role. But it is unclear what will happen after Mr. Obama is sworn in.
For now, his auto braintrust is mainly composed of Paul Volcker, the former Federal Reserve chairman, who was on the board for the Chrysler bailout in 1979; Austan Goolsbee, whose expertise at the University of Chicago has been the economics of industrial organizations; and Joshua Steiner, who is experienced about financial restructuring issues.
In addition, Lawrence H. Summers, who will head Mr. Obama’s National Economic Council, and others collect advice from academic, financial and restructuring experts. While many elements of the loan requirements are drawn from legislation that failed in Congress, there is one crucial difference between Mr. Bush’s plan and the one the House considered: it strips away a requirement that Cerberus Capital Management, the private equity firm that owns 80 percent of Chrysler, be held liable for any losses experienced by the taxpayers.
Instead, Cerberus on Friday said it would give the first $2 billion to the government if it ever sold Chrysler Financial, the company’s financing arm. While it has not asked for immediate government assistance, the Ford Motor Company said it welcomed the assistance to G.M. and Chrysler because of the fragile, interdependent nature of the industry and its vast network of suppliers.
Both G.M. and Chrysler outlined a turnaround program calling for deep cuts in operations and expenses in their original requests to Congress for government loans.
But the White House appears to be expecting more than conventional restructuring strategies. Mr. Bush called for the companies to extract major concessions from their bondholders, creditors, dealers, suppliers and the U.A.W.
Under the Bush administration plan, G.M. and Chrysler would each have immediate access to $4 billion upon the signing of the emergency loan agreements with the Treasury.
G.M. would then have access to an addition $5.4 billion on Jan. 16 and another $4 billion on Feb. 17 provided that Congress has released the remaining $350 billion for the Treasury’s financial rescue program.
The companies would be required to limit executive pay, eliminate “golden parachute” severance packages and sell their private corporate jets. While the loans are outstanding, the companies would be barred from paying shareholder dividends.
The loan deal also requires the companies to quickly reduce their huge debt obligations by two-thirds, mostly through debt-for-equity swaps, and to reach agreements on wage and benefit cuts with the unions by Dec. 31. According to the loan documents, average wages per hour and per employee must be “competitive with” the average wages per hour and per employee of Nissan, Toyota or Honda.
Friday, December 5, 2008
Auto Executives Face a Hard Sell on Capitol Hill
WASHINGTON — The chief executives of America’s foundering automobile manufacturers returned to Capitol Hill on Thursday and found themselves confronting years of pent-up anger, the harsh politics of a recession and the realization that even their strongest supporters might not be able to muster the votes to save them.
Fiscal hawks are worried that taxpayers will lose billions. Pro-labor lawmakers are furious that union workers are being blamed for causing the automakers’ problems, even as tens of thousands face layoffs. Environmentalists like House Speaker Nancy Pelosi are fed up after years of battles over fuel-efficiency rules. And Congress, as a whole, is suffering from acute bailout fatigue.
“I don’t want to raise expectations that that is going to be easy at all given the climate in the country,” Senator Christopher J. Dodd, Democrat of Connecticut, said after Thursday’s hearing before the banking committee, which he leads. “That’s a tall order.”
In a sign of the growing pessimism among the Democratic leadership, Mr. Dodd; Ms. Pelosi; Representative Barney Frank of Massachusetts, the chairman of the House Financial Services Committee; and the Senate majority leader, Harry Reid of Nevada, wrote to President Bush after Thursday’s hearing urging him to rescue the auto industry.
Mr. Dodd supports a taxpayer rescue but called on the Bush administration or the Federal Reserve to save the automakers because Congress might not do so. Mr. Dodd said that he would persist in trying to reach a legislative agreement, even as it continued to be clear that Democrats in Congress, furious over how the administration has handled the $700 billion bailout of the country’s financial system, were reluctant to put more taxpayer money on the line.
There were almost as many reasons as there were lawmakers. Republican fiscal hawks, like Senator Bob Corker of Tennessee, suggested that the companies might be doomed after years of trailing their foreign competitors and might not be worthy of taxpayer expense.
Mr. Corker, whose state is home to Nissan’s North American headquarters, also asked why taxpayers should give Chrysler money when Cerberus, the private equity firm that owns 80 percent of Chrysler, was unwilling to invest any more of its own cash.
Confirming fears that taxpayers could lose out, the economist Mark Zandi, of Moody’s Economy.com, said that automakers probably needed much more than their requested $34 billion and perhaps as much as $125 billion. He predicted that the automakers would ask for more money by next fall.
Even among lawmakers who have supported government interventions in the past, bailout fatigue is now gripping much of Capitol Hill. Mr. Dodd and Senator Charles E. Schumer, Democrat of New York, said they favored helping the automakers but only with strict oversight by a board or special trustee, perhaps a Cabinet secretary, to be sure the companies used the money as intended.
But that proposal would require writing and passing complicated new legislation that could be difficult to achieve, given the tight calendar.
Senator Richard C. Shelby, the senior Republican on the panel, whose home state, Alabama, has sizable Toyota and Honda operations, has consistently voted against government interventions in private industry, including the Chrysler bailout in the 1970s and the recent rescue. But his criticism of Detroit was merciless. “The firms continue to trail their major competitors in almost every category necessary to compete,” he said.
Senator Bob Casey, Democrat of Pennsylvania, and other pro-labor lawmakers, said they resented that the United Automobile Workers union was being blamed for causing the automakers’ financial problems. “There wasn’t much discussion about the upcoming sacrifice and concessions that labor is making, and I was trying to point out some of the previous concessions they have made,” Mr. Casey said. “They are substantial.”
The White House said it stood ready to aid the auto industry by speeding up access to $25 billion in loans approved as part of a 2007 energy bill, an idea Ms. Pelosi has resisted, and accused the Democrats of trying to pass the buck after failing to win support for their own plan. “They can’t get Congressional support for their idea,” said Tony Fratto, the deputy White House press secretary. “So they want us to do it instead.”
After being sent home to Detroit empty-handed two weeks ago, the chief executives of General Motors, Ford and Chrysler made a show of contrition: driving to the Capitol in some of their most fuel-efficient vehicles to deliver the detailed reorganization plans that Congressional leaders had said were lacking last time. But within moments of the opening gavel it was clear that even a flawless presentation might not be enough.
Mr. Shelby grilled the executives about how they got to Washington, suggesting he regarded driving as a stunt. “Did you drive or did you have a driver? Did you drive a little and ride a little? And secondly, I guess are you going to drive back?”
That prompted Mr. Dodd, laughing, to interject: “Where did you stay? What did you eat?”
“The chairman wants to make light of this,” Mr. Shelby said. He was not smiling. And he got his answers. It was hardly the only uncomfortable moment for the executives, Rick Wagoner of G.M, Alan R. Mulally of Ford, and Robert L. Nardelli of Chrysler.
G.M., in particular, is in dire straits with some predicting that the company might be forced into bankruptcy. From the start, the executives took an apologetic tone in making their cases for the government-financed bailout: G.M. asked for $12 billion in loans and a $6 billion line of credit; Ford for a $9 billion line of credit that it can draw on if needed; and Chrysler for an immediate $7 billion loan.
“We’re here today because we made mistakes, which we are learning from, and because some forces beyond our control have pushed us to the brink,” said Mr. Wagoner. “Most importantly, we’re here because saving General Motors, and all this company represents, is a job worth doing.”
Ford is not seeking loans for now. But its chief executive, Mr. Mulally, echoed the comments of his counterparts at G.M. and Chrysler that an automobile company could not survive a bankruptcy filing.
“Any threat of a company going into bankruptcy would really, really hurt sales,” Mr. Mulally said. “Sales would fall off so fast that you couldn’t restructure fast enough.”
Much of the questioning from senators zeroed in on whether the companies were simply seeking loans to forestall inevitable failure. But over the course of nearly six hours of questions, some lawmakers belittled or dismissed aspects of the companies’ plans. In a reminder that the automakers are seeking help after a long line of banks before them received taxpayer funds, many with few strings attached, a large chart stood just to the side of the dais titled, “Taxpayer-Funded Bailouts.”
With large blue bars, it showed $300 billion for Citigroup; $200 billion for the mortgage giants, Fannie Mae and Freddie Mac; $150 billion for the insurance conglomerate, American International Group; $29 billion for the failed investment bank, Bear Stearns.
At the bottom of the chart were three more blue bars, each with a red question mark after them: $18 billion for General Motors; $13 billion for Ford; $7 billion for Chrysler.
Perhaps the only consensus at the hearing was that the automakers, particularly G.M., were in grave trouble and that the government might have no good options at this point. Mr. Zandi, of Moody’s, said allowing one or more of the companies to fail would be disastrous. “Bankruptcy at this point in time would be cataclysmic for the economy,” he said. “So I think you need to help them now.”
But some conservative lawmakers have called for letting one or more of the Big Three fail. Senator Mike Crapo, Republican of Idaho, repeatedly pressed the question about bankruptcy as an option during Thursday’s hearing.
Senator Robert Bennett, Republican of Utah, raised a new idea that would call on financial firms receiving assistance under the Treasury’s $700 billion program to convert any auto company debt that they hold into equity stakes, easing the cash liquidity problems of the Big Three, and potentially allowing additional infusions of government cash into the financial firms.
Mr. Casey said that Congress must act. “For me, this debate is pretty simple: as complex as the financing, as complex as the challenges are, it’s about jobs,” he said. “The atmosphere in America today is frankly pretty negative for any kind of assistance,” he said. “We have some work to do to get the votes that we need.”
“Nothing concentrates the mind like a death sentence,” Mr. Dodd said. “And we’re looking at a death sentence here if we don’t respond.”
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