Editorial: Bailout Watch 295: All The President's Plans

I am going to go out on a limb…sort of…and state the following: GM will go into bankruptcy within the next 60 days, and Chrysler will be liquidated. Dollars to donuts that will be the President’s plan… although in a highly disguised form. The public may see it as a rescue, but it’s really just the beginning of a long and painful readjustment coming for Detroit. So how did I reach this conclusion? Follow the breadcrumbs. Given the time necessary to craft the President’s bailout plan – likely to be presented by this Friday – this tells me that it’s going to be much more than just a loan with a few strings. Methinks it will have three key points:

• Immediate cash assistance to GM and Chrysler with adequate taxpayer protections;

Moody’s released a document this week outlining three possible scenarios for Detroit. Its most favored scenario, to which it ascribed a 70% probability, was “Pre Packaged Bankruptcy with Government Assistance.” Now how the heck could Moody’s possibly know that this was the most likely scenario? Oh wait, Mark Zandi, their on-board economist, did testify at the second automaker Congressional hearings that it would take $75 to $125 billion to restructure these companies without a bankruptcy.

The scary thing is that he’s right, and Secretary Paulson knows it and believes it. Hmmm, maybe the good Secretary did leak his thoughts to Moody’s so they could float this “pre-pack plan” out into the financial ether?

Second, during a live interview on CNBC on Tuesday afternoon, Hank “the Hammer” Paulson supported this conclusions. In his interview, Secretary Paulson outlined four elements in crafting the loan program:

• Temporary bridge loan only;

This means that any funds advanced will be of short duration only – for the next 30 to 60 days – to enable GM and Chrysler to come up with a negotiated plan. And there’s no way Obama will reverse this. It’s becoming more obvious every day that only a bankruptcy filing can restructure these two companies. Congress and the new President will have little incentive – never mind the ability – to change the inevitable outcome. But wait, there’s more!

There will be a requirement for each company to fully collateralize any loans with assets that would remain outside a bankruptcy filing. For GM, this would be some blanket collateralization of its unencumbered ownership stakes in its foreign entities. (GM’s Mexican operations have already been pledged for its secured bank line of credit.) Chrysler’s lenders have a blanket encumbrance on the entire company. Either Cerberus will have to offer another asset or cash as collateral or Chrysler goes away into the night.

And we’re going to get a “car czar” empowered by Treasury to manage the loan grants and upcoming bankruptcy proceedings. Look for Mitt Romney to become the “face of the government” upon the stakeholders– and he’s already written in the New York Times that bankruptcy is the only road to salvation.

The upshot of all of this: meltdown in Detroit. Ford has to pray that the liquidation of Chrysler goes smoothly, and that the shrinking of GM takes some time too. This will give their suppliers time to adjust to a new reality.

In the meantime, there will be great deals on GM and Chrysler products. Even with the plant shutdowns for January, there’s still a ton of iron sitting on dealer lots. And when the bankruptcy gets filed, the fire sale begins. Americans love a bargain, and new vehicles, even from a bankrupt automaker, can be sold at a price. But it’s also going to be the end for thousands of dealers.

So on Friday, the government will offer approximately $6b – $8b to GM, and a lesser amount to Chrysler, maybe only $4b – $6b. Collateralized. GM can do it. Chrysler can’t. There’s a gun to the head of the dog – put up something of equal value or don’t – you make the call Mr. Feinberg. In the end, it’s still going to be bankruptcy for both, with GM coming out the other side with Chevrolet and Cadillac, and Chrysler being parted out. Watch this space.