Today’s Rasmussen poll results, which show that Americans are arguably less likely to buy from a bailed-out automaker, raise some interesting questions. Like, does receiving a bailout constitute an inviolable black mark on an automaker? Do the size of the bailout, and the amount the government recovers make a difference? With a presidential election looming, these factors are worth knowing: after all, the government still has the choice of when to divest its shares in GM. And with GM’s stock down over 40% from its $33 IPO price last November, the government is looking at a significantly larger loss than it would have endured  had it divested immediately aftter the IPO. So, should the government dump now, anticipating larger losses in the near future, or should it hang on in hopes of a rebound, increasing the risk that “Government Motors” will become a political hot potato going into 2012?  The latest clue, via CNBC, remains as cryptic as ever…

Jim Cramer: GM, you had a great IPO, stock’s come down. What do you do? Shareholders are really getting hurt on this, but at the same time, should the government really blow out the rest of its stake here?

Timothy Massad, US Treasury Dept. assistant secretary for financial stability: No. we’ll be patient in our disposition of GM as well as our other assets. We have to balance the goal of divesting these stakes because the government should not be in the business of owning stakes in private companies, with the goal of maximizing taxpayer returns. [Emphasis added]

It’s too bad Cramer and company didn’t press Massad any harder on this (but hey, at least Jim Cramer disclosed that he’s an old school chum of Massad’s…), because the two implicit answers seem to be at odds with one another. The only reason for the government not to sell its GM exposure yesterday is that the stock price has been depressed for much of this year… one need look only at the recent Ford “bailout ad” kerfluffle to understand the political risks of holding onto a GM stake. In other words, exercising the “patience” that Massad advocates only makes sense if you’re trying to maximize the taxpayer return.

The Obama Administration has long emphasized the “balanced” approach to auto bailout divestment, likely to avoid the obvious political downsides of being married to either the “quick dump” or “market timing” approaches. But as the congressional TARP oversight committee found, those goals are fundamentally at odds with one another.  And I’d even argue that, a year after the IPO, the time to dump and run has come. After all, it’s fairly clear that the specifics of the loss or gain on bailouts have little bearing on public opinion: witness falling approval for the banking industry even though the bailouts of the biggest banks were revenue-neutral. Besides, Rasmussen’s poll numbers make it pretty clear that GM, more than any one politician, is going to bear the brunt of anti-bailout opinion. And because that backlash doesn’t seem to be tied to a specific amount of taxpayer loss, the Obama Administration would probably be well advised to cut ties with the automaker post-haste. Finally, holding on to GM stock doesn’t just make it a political issue. The real lesson of the For “Bailout Ad” drama is that, for better or worse, any attempt by the administration to boost the value of GM will be seen as worse politically than an extra $10b in government losses. And the longer Treasury holds onto GM’s sinking stock, the greater the temptation to meddle will be.

Besides, dropping GM stock fits best with the Obama Administration’s rhetorical defense of the auto bailouts, which is predicated on the notion that things would have been worse without the government intervention. If that’s true, and few make the effort to argue with the assertion any more, then who cares how much taxpayers lose on the deal? If the alternative scenario is as bad as the Administration has been arguing, wouldn’t avoiding it be worth $20b in losses? Even $30b? After all, the effect of a GM/Chrysler default on pensions alone would have swamped the PBGC by at least that much.

Are there downsides to cutting GM loose now? Sure. For one thing, GM will struggle to offset the larger taxpayer loss that will be pinned on it, rather than the Obama Administration. And at a time when GM’s stock already looks vulnerable, the market could interpret a government pullout as a vote of no-confidence, further depressing stock prices. And if GM can’t make traction in the equity market, there’s an added risk that GM could end up back in the government’s arms. But if GM is on a downward spiral, the government has little to gain by holding onto the stock now… and it will have a tough time defending its auto policy anyway. All in all, the government should probably stop waffling and just sell off its remaining shares in GM.

Mark Modica, a former Saturn dealer GM bondholder, has leveraged his financial loss at the hands of the government bailout into a blogging position at the National Legal and Policy Center, a conservative nonprofit that “promotes ethics in public life through research, investigation, education and legal action.” At the NLPC, Modica focuses on what he believes to be corruption surrounding the auto bailout, and has written a series of anti-GM posts that make TTAC look like a Detroit hometown newspaper (TTAC “bias police,” take note). Most recently, Modica has caught the attention of the auto media, including Automobile Magazine and Jalopnik, with a series of posts accusing Chevy dealers of “scamming” taxpayers by claiming the Volt’s $7,500 tax credit and then selling Volts as used cars. TTAC welcomes anyone seeking to cast more light on the bailout, but unfortunately, Modica’s attacks are too focused on making GM look bad and not focused enough on providing relevant information to the American people. Let’s take a look and see why…

In the piece that set off the current flap, Modica wrote

I recently set out to determine how honest General Motors is being when it claims that demand for the Chevy Volt is exceeding supply. It was not hard to discover that this is not the case as retail sales remain dismal. A web search on vehicle locator sites such as Autotrader and Cars.com exhibit sufficient supply of the Volt, one dealership within 70 miles of my location had six new Volts available for sale.

Even Ebay lists vehicles, many had no bids and one listing in Texas hadn’t even met reserve with only one day of bidding time remaining. But I discovered something far more disturbing during my search. Many Volts with practically no miles on them are being sold as “used” vehicles, enabling the dealerships to benefit from the $7,500 credit supplied by the American taxpayers on each car. The process of titling the Volts technically makes the dealerships the first owners of the vehicles, which gives them the ability to claim the subsidies.  The cars are then offered to retail customers as “used” vehicles.

The practice of dealerships purchasing from one another is not uncommon. “Dealer trades” are done all the time in the industry. What is very unusual is for the receiving dealership to be able to maximize profits at the expense of taxpayers by claiming tax credits of $7,500. It is also very rare for dealerships to part with any model that has higher demand than supply, as GM claims is the case with the Volt. In addition to qualifying dealerships for a $7,500 tax subsidy, the titling process also allows GM to record Volt sales even if the cars are sitting on dealership lots.

Modica’s attack is hamstrung from the start because his goal is to demonstrate that supply of the Volt exceeds demand. The simple truth is that the government’s tax credit, in combination with strong early-adopter demand and low production volumes, basically guarantees that Volt demand will outstrip demand in the short term. If Modica wants to prove that the market won’t support the Volt’s high price and complexity, he’s going to have to wait until production ramps up and the early adopters have satiated their “gotta have it” instincts.

Because he doesn’t appear to have the patience to watch the Volt fail on its own terms (which, it must be added, is not a foregone conclusion, depending on how GM handles production), Modica has to look twice as hard for potentially damning evidence. Since the availability of used Volts alone doesn’t say much about the supply-demand balance, Modica manufactures another “scandal”: that Chevy dealers are taking the $7,500 tax credit that the government intends for consumers, and then selling Volts as used cars with no tax credit.

This “scandal” quickly falls apart under the weight of its over-ambitious pretensions: after all, if demand for Volts is as weak as Modica wants to believe, surely absorbing the tax credit at the dealer level is a recipe for Volts languishing on dealer lots. Since Modica offers no evidence for high dealer inventory, his major thrust (proving that demand for the Volt is weak) falls apart. Furthermore, without a single case of a dealership claiming the tax credit and then selling a Volt to a customer under the pretense that it still qualifies for the tax credit, his research ends up well short of proving a “scandal.” As a result, Modica is left having to argue against dealers taking the credit on principle.

And here’s the tragedy: Modica is so focused on landing a political-economic “scandal,” he ignores the legitimate criticisms of both GM’s Volt-dealer policies and the government’s tax credit. Had he been less interested in the political side of things, Modica would have noted that GM’s hands-off approach to Volt dealers has led to dealers gouging early adopters. Sure, that storyline would have proven that short-term demand for the Volt was strong, but then Modica could have pointed to the contrasting situation at Nissan, where Leaf sales are pre-arranged online, cutting dealer markups out of the loop. This strategy also keeps Nissan dealers from taking the tax credit (at least in theory), and will prevent any “gouging fatigue” that could hurt Volt demand down the road.

From the other side of this issue, if Modica had been more interested in the politics of plug-in tax credits, he would have realized that manufacturing a poorly-proven “scam” was wholly unnecessary. As TTAC reported back in February, taxpayers have already lost some $7m worth of plug-in tax credits to fraud. In short, the Treasury Inspector General for Tax Administration has already proven that $33m of tax credits were claimed erroneously by everyone from prisoners to IRS employees ($7m of which is unrecoverable), offering Modica a well-documented scandal that has been undercovered in the mainstream media.

When industry and politics collide, the public deserves strong, independent information gathering and analysis to protect against inevitable abuses. But those who wish to take up that mantle have a responsibility to own up to their motivations: are they looking for legitimate issues regardless of their political or economic consequences, or do they set out with predetermined conclusions and gather up just enough information to support them? Unfortunately, Modica’s history and recent work seem to place him in the former category. Exploring the interaction between the US Government and the auto industry that it now interacts with more than ever, requires the ability to spot scandals without having to manufacture them. And the more you cover the inevitably tortured relationship between private business and public government, the more you realize that there are very few big scandals anyway… after all, free markets and fair governments almost always die the death of a thousand cuts rather than being taken down by a cartoonish scandal.

This is the Memorial Day weekend, when we commemorate our fallen heroes and raise our cancer risk by burning chopped beef. Listening to the media, it looks and sounds like the fallen heroes of the year are not the ones who gave and give their lives in ceaseless wars, but the auto industry. It didn’t quite die. It was medevaced in a TARP and helped by the PTFOA to get over its PTSD.

Instead of thanking the nation’s heroes (he did so in an afterthought, asking for “single acts of kindness”) VP Biden thanked himself:

“When President and I came into office, we faced an auto industry on the brink of extinction, total collapse. At the time, many people thought the President should just let GM and Chrysler go under. They didn’t think the automobile industry was essential to America’s future. The President disagreed – and, in addition, he wasn’t willing to walk away from the thousands of hardworking UAW members who worked at GM and Chrysler.”

By taking full credit for the bailout, Biden once and for all put the argument to rest that the bailout had been inherited from G.W., and that the heirs had no other choice. Time for another pat on the administration’s shoulders:

“Because of what we did, the automobile industry is rising again. Manufacturing is coming back, and our economy is recovering and it is gaining traction.”

Some (see below) have a different opinion. The video is above and in full length, but don’t let the hamburgers go up in flames while you watch.

Meanwhile, over at the National Public Radio, an organization which is generally not under suspicion of right-of-center leanings, Memorial Day was celebrated by yet another commemoration of the heroic rescue of our auto industry.

That program was headlined “Chrysler Repays Billions, Was Bailout Worth It?” Which signaled some skepticism.

NPR is a fair and balanced station, so they had someone who was pro bailout, and someone who was against.

The pro-bailout-person, Micheline Maynard, senior editor for CHANGING GEARS, the public radio project that looks at reinventing the Rust Belt, offered only lukewarm support for the bailout:

“There a lot of people who said the court system is available. Why don’t we put the auto industry – or at least General Motors and Chrysler – through that same system? But there were also fears because the recession was, I think, at its deepest point a couple of years ago, when this all – the subject came up.

There was also worries about the auto parts part of the industry, because if Chrysler had gone bankrupt, for example, and liquidated, these auto parts suppliers served not only General Motors and Ford, but Toyota and some of the other foreign carmakers. So that was part of the argument, that we can’t let the whole network go down.

But there is this other argument that you have other ways to do this, and this is the cost of doing business. Some companies make it. Other companies don’t.“

The anti-bailout-man, Dan Ikenson of the Cato Institute, generally called “a libertarian think tank,” first said that “I don’t think that we’re really in a position to measure” whether the bailout was worth it. But then he laid into the directors of the rescue operation:

“It should have gone to court. I think that we were in a sort of crisis mode, you know, as Rahm Emanuel, when he was in the White House, as he said: Never let a good crisis go to waste.

Paulson, former Secretary Paulson, told Congress they need to pass this financial bailout right away, or else we’re all doomed. It prevents us from really thinking clearly and with circumspection as to what we’re getting into.

So the costs of the rule of law, property rights were trampled with respect to the Chrysler bondholders, and this competitive process was stymied.

And so I think we need to – and if we look at the economy today, this regime uncertainty, which still persists – you know, we’ve been trying to come out of this recession. We’ve been moving slowly. Business is keeping money on the sidelines.”

We have linked to the full 30 minute program (sorry for the empty box …), but again, don’t forget those hamburgers.

It sure was a memorable Memorial Day. We’ll remember it as the beginning of the Presidential campaign 2012.

Did you check the $3 box on your tax return?

With GM’s share price slipping below $30, the cries are going up again around the internet about the government’s stake in the bailed-out automaker. Thus far the Treasury has remained mum on its exit strategy, only indicating that it would emphasize speed rather than maximum return as it charted the course for its sell-off. But now, Reuters reports that “a big chunk” of the government’s 33% remaining stake in GM could be sold “in the summer or fall.” With the government’s shares “locked up” until May 22, that could mean the government is bailing as quickly as possible at a time when GM’s stock is hitting post-bankruptcy lows, and its CEO offers little in the way of explanations beyond blaming the Japanese tsunami and rising fuel prices. The Wall Street Journal figures taxpayers would lose $11b on its “investment” in GM equity if the government sold at today’s prices (the stock must hit $53 for break-even), but reports that political motivations outweigh fiscal considerations. The White House does not want “Government Motors” to be an issue in the next election.

A Treasury spokesperson insists that

Planning for the sale of our remaining GM stock is still at an early stage and the IPO lock-up does not expire until late May. At that point, we will consider all of our options, based on our twin goals of protecting taxpayers’ interests and exiting as soon as practicable.

But, once you get folks off the record, the real issue emerges:

Government officials are willing to take the loss because the Obama administration would like to sever its last ties to the auto maker, the people familiar with the matter said. A summer sale makes it more likely Treasury could sell all of its stake in GM by year’s end, avoiding a potentially controversial sale in the 2012 presidential election year.

So how does the White House expect to sell early and not lose its shirt? Well, for one thing, it’s premature to use today’s stock prices as a measure because the sale likely won’t happen all that soon. The WSJ reckons that

a sale in May is unlikely because Treasury would need time to put together a deal once the May share sales restriction lifts.

Another issue: on April 21, the former bondholders of Old GM will receive warrants and stock, and will likely sell them, placing further short-term downward pressure on GM’s share price. June? Not likely either, as Bloomberg [via Automotive News [sub]] cites sources who claim

The U.S. Treasury Department will wait for General Motors Co.’s first-quarter earnings before deciding whether to sell more of its investment in the nation’s largest automaker

The second quarter doesn’t end until June 30, and earnings won’t be publicly reported until August. So much for June. Starting in July GM becomes eligible to file an S3 with the SEC (allow Treasury to sell shares without having to address SEC comments), but it would be strange if the government sold shares of a publicly-owned company after viewing earnings that hadn’t been publicized. Unless you enjoy a soft spot for conspiracies, you can rule out July.

Starting in August, GM’s Q2 earnings will be out, it will have an S3 filed, and the government will have had time to structure a deal [according to Reuters]. If gas prices aren’t making headlines, the government will likely think very hard about selling at this point. The only issue: an August sale would have to take place in the first half of the month, as Wall Street takes the second half off. Trading should be closed through Labor Day, meaning Treasury could have to wait into September if it doesn’t pull the trigger in early August. Then, after the Treasury sells its “big chunk,” its remaining stake would be locked up again, meaning a final exit might not take place before December.

Is the remainder of this year a good timeline for Treasury to pursue as it seeks to exit its unwanted ownership stake in GM? On face value, it’s not ideal, with gas prices continuing to threaten, and worries about executive shuffling and incentive dependence taking the shine off GM’s stock. More than anything else, GM needs to signal a sense of consistency to investors in order to calm fears about the restructured company’s ability to rebuild its empire. More time would help calm those jitters (provided things go reasonably smoothly in the interim), meaning waiting could be in the taxpayers’ fiscal interest.

But since politics seems to be driving the sale, and the future can’t be counted on to give GM time to prove its stability in its “new normal,” the sale will happen sooner. And luckily, the Treasury does have one ace up its sleeve, as Reuters explains:

GM is expected to join the S&P 500 index . Such an inclusion would likely generate additional demand from portfolio managers who benchmark their holdings against the index. The U.S. Treasury might be able to sell additional shares based on this demand in what is known as an index inclusion trade.

Will increased demand from institutional investors as a result of an S&P500 listing be enough to buoy GM’s stock? Maybe not. But then, the White House has insisted for some time that recouping its investment was not the main point of the bailout, and that as an emergency economic measure, it was already “worth it.” At this point, there’s not much choice but hope they’re right, but the very question about how to time the government’s exit raises an interesting point: even after a government-backed bankruptcy and a cash injection of tens of billions of dollars, GM’s position remains uncertain and its future remains unclear. If The General collapses again, and investor pessimism indicates that it’s a possibility, will the “emergency economic measure” still have been “worth it?” Will another such measure be forthcoming? Regardless of how much the treasury loses when it exits GM, this question will dog the auto industry for some time to come.

Exactly a week ago, Fiat said it would up its stake in Chrysler “within weeks,” and according to the Detroit News, the deed is now done. Having earned 5% of Chrysler’s equity by building a FIRE-family engine in the US (for use in the Mexico-built Fiat 500), Chrysler had to confirm that it has brought in $1.5b in non-NAFTA foreign revenue, and (according to Chrysler’s LLC agreement [PDF])

[execute] one or more franchise agreements covering in the aggregate at least ninety percent (90%) of the total Fiat Group Automobiles S.p.A. dealers in Latin America pursuant to which such dealers will carry Company products

in order to bring its stake up from 25% to 30%. We already know that Fiat will achieve this goal by rebadging Chrysler vehicles as Fiats for Latin American markets, a move that is technically compliant with the letter (if not the spirit) of the LLC agreement. But, it turns out that Fiat still had to get the Treasury to amend its agreement in order to bend the rules just a little bit more.

Exactly one week ago, a third amendment to the Chrysler LLC Operating Agreement [see gallery] was signed, making this second opportunity for Fiat to increase its share in Chrysler far easier. Whereas the original “Non-NAFTA Distribution Event” called for franchise agreements “pursuant to which dealers will carry Company [Chrysler] products” (note the plural), the amended version requires

“a distribution agreement… which shall (a) cover in the aggregate at least ninety percent of the total Fiat Group Automobiles S.p.A. dealers selling passenger vehicles in the European Union pursuant to which such dealers will have the right to carry one or more Company products (which may include Company products rebadged under any Fiat Group Automobiles S.p.A. brand name)” [Emphasis added]

The amendment also covers Brazil under the same language, which means Fiat was able to get Treasury to back off on a number of key conditions. First, Treasury only gets agreements to distribute Chrysler Group vehicles in Brazil and Europe, whereas the original called for agreements with Fiat dealers in all Latin American countries that Fiat has a presence. This was apparently too difficult for Fiat to negotiate with all of its Latin American dealers, so it was dropped (Chrysler dealers who were cut in the bailout-era dealer cull, take note). Second, the agreement went from requiring the sale of multiple Chrysler group models at Fiat’s Latin American dealers to requiring only one model to be sold in Fiat’s European and Brazilian dealers (so much for developing robust foreign markets for US-built Chrysler products). Finally, by agreeing in writing to Fiat’s rebadge request, Treasury has written the death warrant for any hopes of seeing Chrysler emerge as even a semi-independent company. Without any effort to push Chrysler’s brands in developing markets, Chrysler will become little more than the US manufacturing and retail arm of Fiat.

Are these amendments pragmatic? Possibly. It may not have been reasonable to expect Fiat to subvert its own global brand-building exercises to pump up Chrysler’s independent value, but that’s just what Treasury’s initial agreement with Fiat did. If Fiat was willing to agree to it when a bankruptcy-rinsed and publicly-refinanced Chrysler was on the line, why would Treasury back away from it after the fact? After all, Fiat was going to sell “at least one” Chrysler in most of its European dealerships anyway (as its Lancia line, and the Fiat Freemont), so why get rid of the multiple-vehicle requirement and leave aside the non-Brazilian Latin American markets? Chrysler Group’s vehicles would have had at least as good of a shot in Latin America as they have in Europe, particularly if Fiat had any intention of developing Chrysler’s brands outside of North America.

What this amendment acknowledges then, is that Chrysler’s opportunities for any kind of standalone independence are not something the Treasury is willing to fight for. Despite the rhetoric about “saving American automakers,” Treasury clearly has no intention of making any effort to preserve Chrysler’s options outside of being subsumed by Fiat. Like the green justifications for Treasury’s intervention in the auto industry, the “preserving American companies” justification has been abandoned in favor of a “we saved jobs” after-the-fact justification. Which would have been fine if Treasury had been upfront about it, and hadn’t signed agreements holding Fiat to conditions that made the bailout seem more favorable to American taxpayers, only to abandon them.

As things stand, Treasury has botched negotiations over Fiat’s “ecological commitment” (or purposefully made the agreement seem more significant than it is), and now it has pulled the teeth out of an agreement that was supposed to guarantee Chrysler some independent viability and access to foreign markets. It’s more than a little bit puzzling that, having been literally deadlocked over whether or not to save Chrysler at all, the president’s auto task force (and its successors at Treasury) decided not to save Chrysler, but to pump it with taxpayer cash and then doom it to becoming a Fiat subsidiary. That this would be accomplished while maintaining the impression that taxpayers were getting some kind of value out of the deal (in the form of the “ecological commitment” and “Non-NAFTA Distribution Event”), speaks to the fact that the rescue of Chrysler was, rather than the act of bravery it is so often trumpeted as, ultimately an act of cowardice.

Yesterday’s release of the Congressional Oversight Panel report on the auto bailout pointed out several fundamental problems with the government’s intervention in the auto industry, all of which stem from what the report termed the “mutually exclusive” goals of the Treasury in overseeing its investment in the industry. But that report focused entirely on the post-bailout management decisions by Treasury, ignoring the decisions made during the bailout itself. And though the White House has, in recent months, redefined its goals in bailing out GM and Chrysler to focus on the improved financial performance of the bailed-out automakers, this is clearly a recent recalibration of its political message. As I pointed out in my latest New York Time Op-Ed,

what Mr. Obama called his “one goal” — having Detroit “lead the world in building the next generation of clean cars” — is nowhere near being achieved.

And, as it turns out, the Administration’s actions in the bailout will inevitably come up well short of that goal in at least one important respect.

When the White House’s Automotive Task Force bailed out Chrysler by forming an alliance between the struggling US automaker and the Italian industrial concern Fiat SpA, it gave Fiat some 20 percent of Chrysler’s equity. Fiat also received the right to another 15 percent of Chrysler’s equity in three five-percent chunks, each contingent upon the completion of three government-negotiated commitments. First, it required Fiat to begin commercial production of engines based on its Fully Integrated Robotised Engine family technology in the United States, a goal that was achieved earlier this week. The second commitment requires Chrysler to record $1.5b in revenue from outside the NAFTA zone, as well as Fiat’s

execution… of one or more franchise agreements covering in the aggregate at least ninety percent (90%) o f the total Fiat Group Automobiles S.p.A. dealers in Latin America pursuant to which such dealers will carry [Chrysler] products.

The final commitment of the Fiat-Chrysler alliance has been widely reported in the mainstream media using the language of the White House’s press release, which describes the commitment as

introducing a vehicle produced at a Chrysler factory in the U.S. that performs at 40 mpg

But nowhere in the mainstream media has it been reported whether that 40 MPG number refers to a city, highway or combined rating or whether it refers to an “adjusted” (i.e. what consumers read on the window sticker) or “unadjusted”EPA number. Having received a number of emails seeking clarification on this point, TTAC was heartened to find a link in a footnote of yesterday’s COP report, which put us in possession of the complete Fiat-Chrysler operating agreement [All 168 pages available in PDF format here]. Here we found what the “real reporters” never bothered to dig up: Fiat’s so-called “Irrevocable Ecological Commitment.”

This “commitment” is enshrined in the following “annex” to Fiat and Chrysler’s government-negotiated operating agreement, and reads as follows:

The addendum, as written, seems to be promising: after all, 40MPG combined is far better than, say, 40 MPG highway. But what the “Irrevocable Ecological Commitment” doesn’t specify is what test the government requires for compliance: adjusted EPA, or unadjusted EPA. For this crucial bit of information a little more digging was necessary. Way down, buried in the “definitions” section of the agreement, we finally get our answer:

Here is the dirty truth that neither the government, Fiat, Chrysler, nor the mainstream media has ever bothered to tell the American people: the “green car” that the White House secured US production of will get 40 MPG combined, but that number is to be measured by the “old” (pre-2008), “unadjusted” EPA methodology, which significantly inflates a cars mileage over the number consumers read on an EPA window sticker.

Now that we know the actual criteria for Fiat’s accomplishment of this commitment, the question becomes: did the government secure “the next generation of clean cars” as President Obama promised? The answer seems to be a fairly resounding “no.”At best, the government barely managed to negotiate a commitment to secure production of a vehicle with efficiency equivalent to the “current generation of clean cars.”

40 MPG combined unadjusted translates to almost exactly 30 MPG combined on the “adjusted” EPA test cycle which is used to produce window stickers for vehicles currently on the market. This is hardly a benchmark for a meaningful “Ecological Commitment” in the sense that a significant number of currently-available mass-market cars currently achieve this standard, and the cleanest vehicles on the market exceed it by dramatic amounts. According to the EPA, at least 11 2010 model-year “compact cars” currently achieve the 30 MPG combined adjusted standard. At least six “midsize sedans” achieved the magic number for the outgoing model-year, as did two “upscale sedans,” two convertibles, two station wagons and three SUVs (although the SUVs are all derivatives of the Ford Escape Hybrid).

The most efficient vehicles on the US market also achieve considerably more than 40 MPG on the unadjusted EPA test cycle; for example, the Toyota Prius scores about 70 MPG on the “unadjusted cycle” and the Ford Fusion Hybrid scores around 54 MPG unadjusted. Clearly, the standard for “the next generation of clean cars” should be considerably higher than 40 MPG combined unadjusted.

After all, five percent of Chrysler’s equity, the price taxpayers have paid for this uninspiring “Ecological Commitment,” would be worth quite a bit of money to Fiat if Chrysler’s IPO goes as planned. UBS analysts place a post-IPO valuation estimate on Chrysler of between $11.8b and $27.5b, which means Fiat’s reward for building this car could range from $590m to $1.35b. That’s at least half a billion dollars of taxpayer value going to a foreign automaker for building a car that performs at a level attained by such vehicles as the 2010 Kia Forte, Toyota Corolla and Chevrolet Aveo. And, if the Chrysler insider site Allpar has the correct information, the base model of the “40MPG” car will probably achieve even less-inspiring numbers with its Chrysler “world gas engine.” Consumers will likely have to pay extra for “40 MPG” models using Fiat’s 1.4 liter MultiAir engine.

In his insider account of the auto bailout, Task Force member Steve Rattner writes that the government “struggled” to get Fiat CEO Sergio Marchionne to put up cash for his desired 35% stake in a bailed-out Chrysler, and that the attempt eventually failed. Rattner writes

Eventually, after hard bargaining, Ron [Bloom] succeeded in carving back Fiat’s initial ownership stake to 20 percent, requiring the company to meet meaningful milestones before receiving additional shares…

It’s not clear from Rattner’s account where the 40 MPG “meaningful milestone” came from, but he does relay one anecdote from the Oval Office meeting in which it was narrowly decided to rescue Chrysler which seems instructive:

The President rested his chin on his hands for a few seconds. Then he looked up and said, “I’ve made my decision. I’m prepared to give Chrysler thirty days to see if we can get the Fiat alliance done on terms that make sense to us.” He turned to me and Ron and added, “I want you to be tough and I want you to be commercial.” We took that to mean that we should insist that all our conditions be met in a way that was prudent from the taxpayer’s standpoint.

Not wanting the Chrysler discussion to end on such a down note, [National Economic Council member Brian] Deese -who is anything but shy- piped up from the couch. “I think it’s worth recognizing that there are positive attributes associated with the Chrysler deal if it gets done,” he said. “It’s not all negative, including the fact that while Fiat hasn’t committed money, they have committed themselves with their technology, including a commitment to build a forty-mile-per-hour car in the United States.” People began to laugh, and it took a couple of beats for Deese to realize what he’d said and started laughing along. Building a forty-mile-per-gallon car would indeed be significant — but a forty-mile-per-hour car probably wouldn’t improve Chrysler’s prospects very much.

The sad irony is that, as negotiated by the auto team, Chrysler’s forty-mile-per-gallon car won’t be anywhere near as “significant” as they thought. Just as Deese made a slip of the tongue, task force negotiators made the oldest efficiency calculation mistake in the book: confusing adjusted with unadjusted EPA MPG. Unfortunately, this time nobody will be laughing… except perhaps Fiat CEO Sergio Marchionne.

]]> http://www.thetruthaboutcars.com/2011/01/fiats-40-mpg-fiction/feed/ 77 http://www.thetruthaboutcars.com/2011/01/tarp-oversight-report-bailout-goals-conflict-moral-hazard-alive-and-well/ http://www.thetruthaboutcars.com/2011/01/tarp-oversight-report-bailout-goals-conflict-moral-hazard-alive-and-well/#comments Thu, 13 Jan 2011 21:14:49 +0000 Edward Niedermeyer http://www.thetruthaboutcars.com/?p=380444

The Congressional Oversight Panel, which oversees the TARP program on behalf of the legislative branch, has released an update on the auto bailout [full PDF here] acknowledging the successes of the government intervention, while airing a number of important concerns. As has been typical of mainstream media coverage of the auto bailout, the good news has already been well-reported. The report, for example, notes that the bailout brought GM and Chrysler’s capacity utilization up, labor costs down, and allowed them to “[start] to reverse” their decades-long declines in market share. Furthermore, estimated government losses on the bailout have been halved, from $40b to $19b. The report’s summary concludes

While it remains too early to tell whether Treasury‟s intervention in and reshaping of the U.S. automotive industry will prove to be a success, there can be no question that the government‟s ambitious actions have had a major impact and appear to be on a promising course. Even so, the companies that received automotive bailout funds continue to face uncertain futures, taxpayers remain at financial risk, concerns remain about the transparency and accountability of Treasury‟s efforts, and moral hazard lingers as a long-run threat to the automotive industry and the broader economy.

Which brings us to the concerns that have received considerably less media attention…

As COP Chairman Ted Kaufman points out in his video introduction to the report, it is functionally impossible to asses the success to the auto bailout for the simple reason that there exists no set standard for success.The report notes

To analyze the success of Treasury‟s intervention in the automotive industry, there must first be a definition of “success.” Treasury has provided its own views on what would constitute a success. In testimony before the Panel, senior Treasury advisor Ronald Bloom defined success as primarily a question of return on investment: “the greater percentage of the money that we invested that we get back, the greater success.” The investment was not, however, made purely for the purpose of seeing a return on those funds. Mr. Bloom also testified to the importance of job preservation and listed a number of other measures for determining whether the program was successful, including the question of “whether these companies have addressed the long-term problems that we identified,” such as “a declining market share, a poor profitability profile” and failing to increase their ability to provide “good, stable jobs.”  Austan Goolsbee, Chairman of the Council of Economic Advisers, appeared in a recent video [link added] released by the White House to explain the “Rebirth of the American Auto Industry.”  According to Mr. Goolsbee, although taxpayers may soon see a return of the funds invested, the investment “was never really about the stock market.  It was about saving American jobs.”

If the success of the overall automotive rescue, and of the government‟s means of implementing that program in accordance with the principles listed in Section H.1, above, is measured by Treasury‟s ability to meet its own definition of success, the program must: (1) provide a return on investment; (2) create or at least preserve jobs that would have otherwise been lost; and (3) set the companies on a path toward ongoing stability.  Treasury‟s challenge, given its goals, lies not only in the difficulty of the goals themselves, but also in the fact that they may be mutually exclusive at times. [Emphasis added]

The ways in which these goals conflict has long been a staple of TTAC’s bailout coverage, and include several key points.

• As TTAC pointed out back in May of last year when GM bought subprime lender Americredit, GM’s “need” for an in-house subprime lender conflicts obviously with the goals of the GMAC/Ally Financial bailout. To the extent that GM succeeds in improving sales through its new in-house lender, GMAC/Ally will suffer, hurting the taxpayer’s chances of repayment from that company. The report concurs, calling Treasury’s decision not to explore the option of folding GMAC/Ally back into GM “disconcerting.”
• The short-term success of both GM and Chrysler, which determines taxpayer payback, can conflict with their long-term viability, a reality that pits two of Treasury’s main goals against each other. TTAC has also noted:

GM’s understandable impatience with government ownership is pushing it into risky territory. And the dangers of redlining a car business through risky loans isn’t limited to the risk of default: brand degradation, falling resale values, and boom-bust bubbles all come with the territory. Which is not to say GM is incapable of handling more subprime business… but rushing into risky positions in order to goose short-term performance has been a consistent bugbear of The General’s.

• The financial turnaround of both GM and Chrysler required a significant loss of jobs.
• The relative success of GM’s IPO trades off with the chances of successful IPOs from both Chrysler and Ally. The report points out:

In the case of GM, Treasury still holds a substantial share of the common stock, which it must sell at a price approximately 64 percent above the IPO price to realize a profit on the government‟s overall investment.  Investor interest in GM must therefore remain high enough to absorb such a large number of shares.  GMAC/Ally Financial faces various uncertainties before investors are likely to welcome an IPO.  And, in the case of Chrysler, the earliest an IPO is likely to occur is 2012, making it difficult to predict both Treasury‟s ability to sell its entire stake and the amount Treasury is likely to receive in such a sale.  In any case, $3.5 billion of Treasury‟s investment in Chrysler has already been written off, so even a very successful IPO is unlikely to recoup all of the money invested in that company.  Moreover, as discussed in Section E above, Treasury holds only an 8 percent equity stake in Chrysler and is unlikely to be able to exercise its call option to obtain more.  This leaves Treasury with a stake that is too small either to command a control premium or to exercise any control over the timing of the IPO.  Finally, it is not clear whether the market will have an appetite for shares of another large American auto company soon after the GM IPO.

• The goals of the government as both an investor seeking to maximize return for taxpayers and the goals of exiting investments as quickly as possible as befits a “reluctant shareholder” also trade off with each other. The COP identifies the recent sale of Chrysler Financial as an area in which the Treasury demonstrably passed on an opportunity to maximize its investment, allowing Cerberus Capital to profit from its desire for a rapid exit. According to the report:

The case of Chrysler Financial may provide an example of the government forgoing potential upside in order to exit an investment as quickly as possible.  The issue is not that the implied value of Chrysler Financial increased by 33 percent in the seven months following the sale of Treasury‟s stake to Cerberus in May 2010.  The Panel acknowledges that there is no exact science to determining the most opportune time to exit an investment.  Rather, the government’s exercise of due diligence in response to the overture from Cerberus to buy out its stake appears to have been surprisingly limited and did not envision other valuation scenarios for Chrysler Financial that would involve a strategic buyer for the asset.

In short, the COP found at least two incidents in which the Treasury not only chose not to pursue maximum payback for taxpayers, but did so without fully exploring its options. The COP report charitably chalks these failures to Treasury’s conflicting goals, but they could just as easily be the product of sheer incompetence. Either way, Treasury did not stick strictly to its first goal (maximize return on investment). The success of its second goal (save jobs) is impossible to determine due to uncertainty about an alternative scenario, although the report does conclude that

It is likely, however, that, had GM‟s bankruptcy been a more prolonged process, a larger number of workers would likely have lost their jobs

As for the third goal (long-term viability), the report concludes that this goal is largely dependent on factors which Treasury can not control, arguing that

Even if the three companies‟ financials are relatively sound now, the domestic automotive sector as a whole must make a strong comeback in order for them to thrive

And even if all three of these goals are eventually fulfilled to the satisfaction of the COP, there remains one final problem: moral hazard. The report notes:

Treasury is now on course to recover the majority of its automotive investments within the next few years, but the impact of its actions will reverberate for much longer.  Treasury‟s rescue suggested that any sufficiently large American corporation may be considered “too big to fail,” broadening moral hazard risk from its TARP rescue actions beyond the financial sector.  Further, the fact that the government helped absorb the consequences of GM‟s and Chrysler‟s failures has put more competently managed automotive companies at a disadvantage.

And this, in a nutshell, has long been TTAC’s core complaint about the bailout. In a deeply competitive industry, where companies gamble with billions of dollars at a time, rewarding failure sets an incredibly dangerous precedent. Especially when the “more competently managed” competitors also employ Americans to manufacture a high proportion of their US sales volume domestically. The “additional views” addendum to the COP report holds up this invitation to moral hazard as “the most significant analysis” in the COP report (after noting that the bailout could have funded four Nimitz-vclass carriers or 25 years of NIH breast cancer research), arguing

The TARP has all but created an expectation, if not an emerging sense of entitlement, that certain financial and non-financial institutions are simply “too-big-or-too-interconnected-to-fail” and that the government will promptly honor the implicit guarantee issued for the benefit of any such institution that suffers a reversal of fortune.  This is the enduring legacy of the TARP.  Unfortunately, by offering a strong safety net funded with unlimited taxpayer resources, the government has encouraged potential recipients of such largess to undertake inappropriately risky behavior secure in the conviction that all profits from their endeavors will inure to their benefit and that large losses will fall to the taxpayers.  The placement of a government sanctioned thumb-on-the-scales corrupts the fundamental tenets of a market economy – the ability to prosper and the ability to fail.

One of the more admirable qualities of the blogging culture is a relentless underdog streak. Anyone who mans the ramparts of a decent blog is forever scouring the worlds of business, media and opinion for an opportunity to attack the most prominent voices of the day. And TTAC is no exception: we certainly came up by attacking the apologists and Polyannas who are still massively overrepresented in the world of automotive commentary. But what a difference a bailout makes. While the mainstream automotive media spent much of the leadup to the auto bailout making apologies and excuses for Detroit’s decline, TTAC told the unpleasant truth, gaining us new readers and credibility every step of the way. Now that I find myself being asked to contribute to one of the most prestigious opinion outlets in the world (the NY Times op-ed page) on a regular basis, TTAC is no longer the underdog, and other blogs have stepped into the breach to attack us as the new status quo. Fair enough… let’s do this thing.

After an embarrassing hacker attack left its commenter base vulnerable and seething, it’s no wonder that Gawker’s Jalopnik car blog decided to lead the charge against my latest Op-Ed on Detroit’s “Guzzling” ways. And because the entertainment-oriented car blog has wisely decided to hire the former Detroit Free Press reporter Justin Hyde, they actually have someone on staff worthy of taking up the debate. Unfortunately, however, Hyde seems more interested in penning a takedown than actually engaging in a debate about the issues raised in the piece.

Hyde thesis is essentially that “Niedermeyer wants to blame Detroit for building the pickups and SUVs that remain popular with buyers” and that “Detroit can rightfully claim a share of leadership in green cars.” Towards the end of the piece he distills the argument:

So according to the Times, if gas prices don’t rise and Americans don’t buy greener vehicles, then the bailout of GM and Chrysler fell short. If gas prices do rise — creating the demand for the more-efficient models Detroit has now shown it can produce — that’s also bad, because the credit markets will suffer, and then flying unicorns attack Detroit and its Bailout II: Electric Boogaloo.

The implication is that I am somehow responsible for creating this damned-if-you-do, damned-if-you-don’t dynamic. What Hyde clearly doesn’t understand is that I never took to a public forum and attempted to make a politically unpopular bailout more palatable among certain constituencies by claiming that it would transform Detroit’s automakers from truck and SUV-dependent “dinosaurs” (the White House’s words, not mine) into green car leaders. My op-ed wasn’t meant to suggest any particular policy, or to push Detroit into either being “Pelosimobile” pushers or SUV-dependent laggards, but to point out the disconnect between an important justification for the bailout (green transformation) and the reality (GM and Chrysler have the worst fleet fuel economy numbers in the business). Hyde accidentally puts his finger on this reality when he writes

It may be news to the anti-SUV crowd, but Detroit can rightfully claim a share of leadership in green cars.

The first half of this sentence explains why my op-ed was necessary (the second half is highly debatable, witness the fleet-wide efficiency reality). Like it or not, SUVs do have a terrible reputation around the world, and Americans who oppose them on moral grounds can’t be blamed for taking Obama at his word and assuming that the government-led “transformation” of Detroit would lead GM and Chrysler to de-prioritize large gas guzzlers. Nowhere do I state that the government should have forced GM or Chrysler to build certain vehicles, but I absolutely understand why Americans might be disappointed to find out that the green rhetoric surrounding the bailout turned out to be just so much hot air.

But there’s that Catch-22 again: either Obama had to intervene in the day-to-day operations of the automakers, exposing him to libertarian and conflict-of-interest critiques, or he had to let GM and Chrysler operate purely on the basis of profit motivation, allowing old, bad habits to continue unchecked. But did TTAC create this lose-lose situation, or did Obama himself create it by justifying the bailout on green grounds? The fundamental problem here is that the American people overwhelmingly opposed the auto bailout, and rather than simply sell the policy as “the right thing to do” (a line that did emerge in the Administration’s rhetoric, but only after the bailout improved the auto-sector job situation) he had to sweeten the pot by promising that Detroit would transform into green car crusaders. Obama, not TTAC, promised the “flying unicorns”… we simply pointed out that

the bailouts have created a perverse new dynamic. With G.M. stock now being publicly traded on Wall Street, taxpayers have every incentive to cheer on the bailed-out automaker as it overproduces vehicles and pushes cheap credit. After all, the sooner G.M.’s stock hits a certain level — likely around $52 per share — the sooner the Treasury can sell its remaining equity and get taxpayers out of risk.

There’s certainly an argument to be made that allowing Detroit to operate as a business, though detrimental to Obama’s green goals, was the lesser of the two evils. But, as is so often the case when Jalopnik strays into heavy opinion, Hyde refuses to even take that stand. Instead, he concludes with a paragraph that oozes the kind of thinking that has enabled Detroit’s complacency for decades:

For this holiday, I’d wish for a few days where we set aside the kvetching about what the U.S. auto industry is or isn’t, and simply enjoy the fact that we as a nation decided a couple hundred thousand people should earn a living in manufacturing instead of hearing their children ask Santa Claus to stop their electricity from being shut off. I would also wish for better insights into the auto industry from the New York Times op-ed page, but I know better than to ask for flying unicorns.

In short, the message is “quit your whining.” For a piece entitled What The New York Times Op-Ed Page Doesn’t Know About Cars, that’s a pretty weak payoff. The American taxpayers made a massive investment in an industry that is constantly plagued by boom-bust cycles, makes huge gambles that destroy billions in wealth, and follows interests which, in the eyes of many, fundamentally trades off with the well-being of America’s environment and economy… but Hyde would prefer that we didn’t discuss any such trade-offs inherent in this kind of intervention. Given that the piece in question raises a number of issues that aren’t huge problems at the moment, but are indicative of industry backsliding into old bad habits (fleet sales, incentives, etc), isn’t discussing their trade-offs and raising awareness of them a fairly reasonable topic for an opinion piece?

And this is where Jalopnik and Hyde let down the blogosphere’s proud tradition of attacking op-ed columnists: if you’re going to imply that someone knows nothing about cars, you need to do better than wishing an end to all criticism of the bailout, or discussion of its fundamental contradictions. Blogs are about ongoing debates, but rather than adding anything meaningful to the war of ideas, Jalopnik simply retreats into the kind of “leave Britney alone” apologia that screams “we can’t handle the truth.” Luckily, readers who share Hyde’s visceral disagreement with my words but want more substance than limp-wristed a plea for censorship can always turn to TTAC’s comment section, where a vibrant exchange of ideas is already under way. After all, we don’t mind at all when people disagree with us; we all learn by having their views challenged. But the debate must go on…

Ed Niedermeyer is too humble to say it, so it’s left to me: Ed just had his second third op-ed piece in the New York Times. Required reading.  Two core sentences:

“In particular, what Mr. Obama called his “one goal” — having Detroit “lead the world in building the next generation of clean cars” — is nowhere near being achieved. While the idea of improving G.M.’s and Chrysler’s fuel efficiency was doubtless a politically popular justification for the bailout, American consumers have not embraced the goal with equal fervor. Sales of fuel-sipping compact and subcompact cars have actually dropped this year, while pickup and sport utility vehicle sales grew by double-digit percentages.”

Honestly: Trying to tell customers what to buy fails. You have to make what they want. If they want dualies, give them dualies. It (still) is a free country. The mind-altering abilities of advertising are vastly overrated.

“And if Detroit’s slipping into bad old habits wasn’t distressing enough, the bailouts have created a perverse new dynamic. With G.M. stock now being publicly traded on Wall Street, taxpayers have every incentive to cheer on the bailed-out automaker as it overproduces vehicles and pushes cheap credit. After all, the sooner G.M.’s stock hits a certain level — likely around $52 per share — the sooner the Treasury can sell its remaining equity and get taxpayers out of risk.”

True, very true.

According to our latest sales data, the Detroit Three have enjoyed something of a comeback relative to the “foreign” competition this year. And though it’s not clear how long that trend will last, the media is catching the Detroit-boosting bug again.  The NYT’s Bill Vlasic epitomizes the mood, focusing on improvements in GM and Ford’s products in a piece titled American Cars Are Getting Another Look. Between IQS score improvements and anecdotal evidence of consumer interest in Ford and GM’s “gadgets” and “value,” Vlasic’s sidekick, Art Spinella of CNW Research, forwards an interesting theory for the death of the “perception gap” (a construct he helped create, by the way):

Ford has become almost the ‘halo brand’ for G.M. and Chrysler. Because of Ford’s success, people are less resistant in general to considering all of Detroit’s products.

Well, that’s not the dumbest thing ever said about the destruction of the perception gap… but it sure is a head-scratcher. Did Nissan and Honda just spend the last several decades skating by on Toyota’s sterling reputation (RIP)? Still, it might be interesting to hear Ford’s perspective on all this.

Sure enough, Ford’s Jim Farley tells Vlasic that the bailout was basically responsible for bringing Ford’s product improvements to the public eye. In the frantic days of debate over a possible auto bailout, argues Farley, something changed.

For the first time in many years, Americans debated the value of our industry. When the crisis happened, they started to notice that we were doing things differently and our cars had gotten a lot better.

Of course it helped considerably that Ford was the one company not receiving billions in TARP money from the government. But if Ford’s image benefited from being the conspicuous exception to Detroit’s bailout binge, how are GM and possibly Chrysler piggy-backing off of Ford’s image-boost now? After all, it’s not like these firms have paid taxpayers back yet.

The answer, if there is a definitive one, may well be found in a recent piece by The Atlantic’s business and economics editor, Megan McArdle. A libertarian-oriented commentator who admits to having opposed the bailout, McArdle traveled up to Lansing to watch Buick Enclaves being built. Her epiphany reflects a shift in perspective that has slowly emerged in a number of anti-auto-bailout commentators (er, both of us):

In the end, the bailout will probably cost voters a lot of money, and worse, more money than it had to. And there are all sorts of questions about whether other companies will be tempted to seek a government bailout, or whether the cost advantage that GM gained in bankruptcy might put pressure on other manufacturers’ margins, ultimately forcing them to follow suit.

On the other hand, had the government not stepped in, the GM liquidation would arguably have deepened the recession—not tumbled us into Great Depression II, as some more-hysterical bailout supporters claimed, but raised the unemployment rate and lowered GDP somewhat. A libertarian economist of my acquaintance recently confided that he thinks the bailout has been surprisingly successful—“not necessarily a good idea, but far from the worst thing the administration has done.”

After spending a few days in Detroit, this assessment strikes me as about right. The bailout wasn’t a good idea, and it will probably cost billions. But the government wastes billions of dollars every year, because for the United States, $1 billion adds up to the equivalent of less than one venti latte per American. At least in this case, we got something in return: a functional car company, resurrected from the ashes of the old GM’s bloated carcass. Americans probably won’t notice the few extra dollars they spent on the bailout. But they may eventually be glad when another shiny new Buick Enclave rolls off the Lansing assembly line, and into their driveway.

Which goes to show how far the erstwhile anti-bailout crowd has come on the role of consumer choice. For the sake of contrast, I predicted (in the height of bailout-debate mania) that GM’s relationship with consumers wouldn’t change post-bailout because it

has singularly failed to understand that the classic American narratives of rebirth and redemption begins with a dark night of the soul– not a trip to DC to ask Santa for a multi-billion dollar bailout.

But perhaps this distinction has been lost to most Americans. After all, most of the products credited with improving GM’s overall quality were on the market by the time the bailout went through, and once invested their manufacturer, taxpayers would be more likely to consider buying them. Especially when, as McArdle notes in her piece,

Jack Baruth, a reviewer on thetruthabout cars.com, recently wrote, “[The Chevy Cruze is] well-positioned against the Civic and Corolla. I believe that it beats both of those cars in significant, measurable ways.”

Certainly building cars that meet with the approval of respected independent reviewers like Jack will tend to make consumers more interested in their cars. Meanwhile, the argument that “things would have been worse” without the bailout takes a lot of the air out of lingering political opposition to GM. But with a GM IPO on the horizon, the final bill still has yet to be reckoned. And as the latest round of Volt hysteria has proved, GM still likes to use its political persecution syndrome as a PR crutch… and cudgel.

If Ford has overcome its image issues, and Chrysler is still dying by the side of the road (for now… it can’t enjoy a “perception gap” until more of its vehicles are actually better than people think they are)), GM is the dramatic figure, still struggling through the doors of perception. Depending on the value of its IPO, the amount taxpayers are finally paid back, and the path GM’s PR team treads between now and final payback, real improvements in the quality of its cars might not translate into improved market share. Certainly ham-handed attempts like “Payback-gate” won’t help. In fact, other than continuing to relentlessly improve product, GM’s biggest challenge is figuring out a way to address the bailout honestly, while taking advantage of the intellectual shift mapped by McArdle. Though consumers are learning (and liking) more about improvements in GM’s products, they’re still struggling to love The General.

Now that GM’s acquisition of the subprime lender AmeriCredit has had 24 hours to sink in, howls of protest are starting to surface. The charge is being led by Senator Chuck Grassley, who has requested a review of the deal from the SIGTARP, saying

If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first.  After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.

And though Grassley’s criticism could be read as mere partisan gamesmanship from a leader of “the party of no,” there are a number of very good reasons for opposing the deal.

A look around the blogosphere reveals that opposition to the AmeriCredit deal largely falls into three categories: one camp, led by Grassley, believes that GM is burning cash on the deal that should be going to taxpayers, another worry is that the deal is an excuse for GM to fall back into bad habits, while a third objection concerns the deal’s effect on GM’s former captive lender GMAC (now known as Ally Financial). Each of these criticisms has its own valid points, and together they form a solid basis for opposition to the deal for government overseers, taxpaying citizens and potential IPO investors alike.

Grassley, who was a leading critic of GM’s “payback” ads frames his criticism of the deal by holding up full taxpayer payback as the deal’s opportunity cost. Though Grassley is on the right track with his criticism of GM’s profligate spending, $3.5b would hardly make a dent in GM’s obligations to the taxpayer. The Treasury’s stake in GM currently stands at about $43b, or over 12 times the amount GM spent on AmeriCredit. Though paying back taxpayers would likely help GM’s sales by eliminating the sense of obligation to taxpayers, the idea of GM buying back equity from Treasury is nothing short of laughable given that its cash pile stands at about $30b (or about $14b short of what it needs).

But even if you remove the taxpayer angle from the equation, there are still good reasons for sharing Grassley’s misgivings about the deal. Perhaps the best-articulated criticism of GM’s deal from a cash-management perspective comes from the NYT’s Deal Professor Steven Davidoff, who argues

With more than $35.7 billion in cash and marketable securities on its balance sheet as of the end of the first quarter of this year, G.M. is paying cash for AmeriCredit, something it certainly could not have done without the tens of billions of dollars that it received in government assistance. G.M. is also paying a 24 percent premium to AmeriCredit’s closing stock price on the day before the deal was announced.

If I were an owner of G.M., and I suppose I am in part as a taxpayer, I would wonder if that cash might not be better used as a special dividend to G.M.’s shareholders. Certainly, the fact that G.M. is spending $3.5 billion will be noticed by its unions and seen as a sign that there is cash available for them too.

Taken with TTAC’s latest analysis of the GM IPO, it’s clear that GM still doesn’t understand that its government-supplied cash pile paints a huge target on its back. Given the political overtones to anything related to subprime lending, it’s hard to imagine the UAW not seeing this deal as a sign for it to start pushing concession rollbacks. Meanwhile, $3.5b might not be enough to make an impact on taxpayer ownership, it does represent a healthy amount of R&D spending, or most of the amount needed to rescue GM’s European division, Opel, or enough to affect any of the other cash outlays that GM will not be able to get away from over the next five years. Instead of looking at looming medium-term costs, GM jumped into AmeriCredit because, as Davidoff points out

Managers with too much cash to burn will burn too much cash. If you want a real-life example, simply read the beginning of “Barbarians at the Gate” and Ross Johnson’s epic struggle to spend all of the money that RJR Nabisco was throwing off in the 1980s.

If GM could expect a serious improvement in its business by acquiring a subprime lending arm, these criticisms might be easy to dismiss. Unfortunately, the “bad habits” critique offers strong evidence that this is not the case. Davidoff lays out the case thusly

First, when G.M. owns a captive lender, it subsidizes the plants, labor unions and dealers. Captured finance means nonmarket financing for buyers when they receive a loan. Think zero percent financing. In connection with the acquisition, AmeriCredit will also re-enter the lease financing business, raising similar issues. Lease financing for automobiles usually results in artificial residual pricing for the buyout price at the end of the lease. All of this helps empty dealer lots and keeps plants running. But it oversupplies cars. The problem of artificially oversupplying new cars (like new houses) is put off for another day.

Second, the subsidy ensures that people who may not otherwise qualify to buy new cars do so. They overconsume and overspend as they shift their buying from used cars to new cars. This may be an immediate net gain for an economy in distress, but it may be a drag as well, as consumers divert income that could be used for other things that would perhaps create more wealth over all.

And, as the Peridot Capitalist points out, fueling another boom-bust cycle through lax standards is a recipe for, well, another bust.

While I am sure those in the industry will praise this deal as a way for GM to maximize unit sales, we need not completely forget how cyclical economies work. Subprime lending pays off when the economy is improving but when the business cycle inevitably turns (as every economy does), the loans turn sour, the losses are crushing, and the cycle starts all over again. To me this highlights one of the core problems our domestic economy has developed over the last 10 or 20 years. We continue to follow the path of loose credit when things are going great and at the first sign of a downturn, credit standards increase dramatically. Once things stabilize, we hear that banks are slowly reducing their standards and loan volumes increase again.

Of course, this line of reasoning is vulnerable to exaggeration. The Atlantic’s Daniel Indiviglio notes that

The auto market also doesn’t really have to worry about the kind of bubble that struck the mortgage market, specifically because autos are a depreciating asset. Millions of people are going to hope to get rich quick by flipping their cars, for example. There’s an old industry adage that most people will keep paying their auto loan even after they’ve defaulted on their mortgage, because they need their car to get to work. They can default on their mortgage and rent, but they probably don’t want to have to walk if they lose their car. Moreover, if times really got tough, and they did lose their home, they could always live in their car temporarily.

Indiviglio’s defense of subprime auto lending is cogent and well-argued, but even that isn’t enough to convince him that the AmeriCredit deal was a good idea. He concludes

Of course, none of this means to imply that it makes sense for GM to purchase Americredit. While most other auto companies, particularly foreign ones like Nissan and Honda, have found it sensible to keep a captive finance company in-house, none of those are subprime. They generally cater to people with very strong credit so they don’t have to worry about strategy and can simply earn interest on loans that are a very safe bet. So it’s puzzling that GM wouldn’t just focus on building up a new prime borrower-driven captive unit instead. And it’s even stranger that the government wouldn’t raise its eyebrows when GM is making an acquisition rather than engaging in additional divestitures to try to pay back the billions it still owes Uncle Sam.

Underlying these criticisms are the obvious incentives that GM has to improve its short-term performance even at the expense of its long-term health. IPOs are notorious pressure-cookers, focusing an entire company on projecting a certain image for one discrete moment. Given GM’s history of overproduction and volume-boosting tricks that inevitably must be paid off in either falling resale or diminished profit margin, this line of criticism can’t be ignored. Especially because we already know that much of GM’s cash is essentially spoken for over the medium term.

The final criticism of GM’s AmeriCredit acquisition involves The General’s former captive finance unit Ally Financial. The criticism is a simple one: though Ally will continue to provide floorplan financing to GM dealers as well as some retail loans, AmeriCredit will inexorably grow closer to GM once its credit rating improves on the strength of its consolidation to GM’s balance sheet. Already losing out on GM retail loans, Ally could find itself replaced by AmeriCredit as GM’s main floorplan lender, dealing Ally a devastating blow. The WSJ [sub] puts the relationship between Ally and GM into context

Ally financed 33.5% of GM’s U.S. customers in the first quarter, compared with 30.3% as of Dec. 31. It financed 87.7% of the inventory in GM’s U.S. dealerships during the same period, compared with 90.9% in the fourth quarter.

The problem is that Ally still owes taxpayers $16.3b, and by buying AmeriCredit instead, GM may have doomed Ally to a much longer payback timeline, effectively increasing its impact on taxpayers. After all, GMAC might not have been rescued from its subprime mortgage mess had it not enjoyed its close relationship with GM, which the government was set on rescuing. It’s galling enough that GMAC was rescued as a “stealth bailout” for GM, but the fact that GM is now throwing Ally to the wolves is one serious twist of the knife.

On the other hand, had GM bought Ally, it would have been doing a great disservice to its balance sheet. Not only would buying GMAC have been expensive, it would have brought more government debt on board, and would have faced regulatory issues as well, as Ally is a bank holding company. Ultimately, it’s impossible to fault GM for not going with Ally… the blame belongs to the auto task force, which saw GMAC/Ally’s importance to GM without facilitating their long-term cooperation. Both GM and Ally insist that their relationship remains strong, but it’s hard to imagine GM acquiring a lender and not moving aggressively to consolidate its credit business with that lender. And once again, the taxpayers will be left holding the bag.

After ending the first quarter of this year with $35.7b in cash and equivalents, GM was in the best position it’s enjoyed in decades. And yet, with an IPO prospectus looming, The General is seeking a $5b line of credit and trotting out EBITDAPRO as its in-house measure of financial success. Both of these tactics are hallmarks of companies that are doing poorly, and GM has already learned how problematic loading up on debt and sliced-and-diced financials can be. So why is The General inviting criticism from outlets like Edmunds Autoobserver, which characterizes GM’s push towards an IPO as the rebirth of old bad habits? The simple answer: “business execution.” In other words, GM may have a lot of cash, but it’s got nearly as many demands on its resources as well… and these cash drains hardly add up to a coherent strategy.

GM still has yet to announce its Q2 financial performance, but already it’s clear from anecdotal evidence that GM is spending a lot more money than it has in several years. Much of it is going to marketing, as GM sponsorships have re-emerged post-bankruptcy for everything from Public Broadcasting to the giveaway of Corvettes to baseball players and business leaders. With a new marketing boss, GM is also re-shuffling its ad agencies, and has been buying up ads for new products like the Buick Regal, as well as older products with sagging sales, like the Chevy Corvette. Add increases to R&D for a number of canceled powertrain programs ($42m of which had been written off as losses at the end of last year) and the development of a number of potentially expensive new products (more on this in a bit) and you’ve got a sure-fire recipe for rising costs.

Meanwhile, GM’s sales have remained relatively stagnant. “Core brands” were up nearly 32 percent in the first half of 2010, but overall GM is outperforming its H1 2009 performance in US-market sales by a mere 13.2 percent, as the economy falters mid-recovery. Against a backdrop of sharply-increasing costs in marketing and R&D, the underlying mechanics of GM’s business are a crunch that will eventually require either another cutback in long-delayed marketing or R&D spending, or a real turnaround in sales not driven by profit-sapping fleet sales.

And that’s just the background to GM’s real dilemmas. The General will need to spend about $6b on its Opel and Daewoo divisions in this year alone, a move that will cut its cash pile by at least a fifth. Since these divisions develop the platforms and products that have made GM competitive once again, The General can’t afford to not keep them open, and no government seems willing to step in and help out.

Meanwhile, The General needs to be saving cash for a rainy day as well: it will have to pay $5.9b in unfunded pension costs in 2013, and another $6.4b in 2014. That’s roughly $18b of GM’s $30b cash pile spoken for before a single new car is developed, not counting any operating losses accrued along the way.

And new car development is a must if The General’s turnaround is to stay rolling along. Powertrains are one area where GM is said to be spending big money, and a new generation of full-sized trucks and SUVs are also in the works. A whole new RWD platform, known as Alpha, is under development at Cadillac and is said to provide the underpinnings for Cadillac’s new 3-Series competitor (ATS) as well as the next-gen CTS and Camaro. Though the costs for these projects aren’t being released, it seems safe to assume that capital expenditures in Q2 and beyond should accelerate significantly from Q1′s $800m number simply on the strength of these investments.

And here’s where it gets interesting: with Chairman/CEO Ed Whitacre now running product planning, a RWD Cadillac flagship is coming back onto the table, backed internally by both Whitacre and GM NA boss Mark Reuss. Though a modified Zeta platform is under discussion for the range-topper, GM had previously declared the platform unfit for luxury car duty, and there are reports of a new RWD platform known as “Beta” under development at GM Shanghai. If a new platform is being developed, the cost could easily amount to another billion dollars (if not more), which begs the question: does GM need a full-blooded flagship? How this plan impacts the Epsilon II+ XTS “flagship” that is probably even further along in development isn’t clear; the XTS was supposed to be the cheap route to a Caddy flagship, but now it seems more likely to be canceled or become a hybrid-only model.

But while Whitacre dreams of a world-class RWD Cadillac (and purportedly fights for the Chinese-market RWD Buick Park Avenue to come stateside), yet another force is stirring beneath GM’s feet. With the election of Bob King, the United Auto Workers have taken a distinct turn towards the internationalist left, as the union struggles for relevance in the post-bailout environment. And with profits at Ford inspiring talk at the UAW of rolling back long-overdue concessions, any sign of consistent profits by GM by next year’s bargaining session will be seen as an excuse for King’s fired-up negotiators to put the squeeze on GM. Especially if the union is able to dump most of its VEBA account holdings of GM equity, it would have no compunction in once again bleeding the goose that lays golden eggs.

In short, GM’s expenditures are rising even as sales remain sluggish. After a solid five years of starving powertrain and platform development, GM conservatively faces $5b in annual capital expenditures, plus an additional $6b in annual expenditures for 2010, 2013 and 2014 to maintain its pension plan and overseas divisions. That accounts for The General’s $30b cash pile right there, before making the investments needed to fulfill Ed Whitacre’s desire to make Cadillac a world-class luxury brand, or accounting for demands made by a newly invigorated UAW led by Bob King’s firebrand vision. Either of these could add billions to GM’s survival bill, especially during the 2011-2012 respite from pension and overseas obligations.

And then there’s the final piece of the puzzle: what this all spells for the government’s 61 percent stake in GM. Because of political pressure to exit its unwanted investment as soon as possible, the Treasury’s priorities are last in the growing line for GM’s cash pile. This is hardly surprising given that the cash came from Treasury in the first place, but GM also can’t ignore the deleterious effects that a huge taxpayer bath would have on its image with consumers. GM doesn’t owe Treasury full payback out of a moral obligation, but because its potential customers are footing the bill for their turnaround. With King, Country and Cadillac all lining up for a piece of GM’s dwindling cash pile, someone is going to get left out in the cold.

So, what’s a bailed-out automaker to do? Holding a hard line on the union is crucial, as it’s the one component of this balancing act that can be taken for granted (on the other hand, British Leland). And as much as we disdain GM’s plan to saddle Cadillac with the mass-market platform-derived XTS flagship, there’s no guarantee that Whitacre’s cherished RWD flagship would be worth the $1b-$2b it would cost to develop. If anything, GM should prioritize taxpayer payback for the simple reason that its obligation to the taxpayer (rather than, say, the fact that the government controls its day-to-day decisions, which it doesn’t) is a significant factor in its sluggish sales relative to Ford.

But the fact that GM is pursuing a $5b line of credit and diving into an IPO indicates that GM is willing to take a hit on its initial valuation and let Treasury take the loss, rather than forgo a number of expensive new development programs. This will serve only to extend GM’s financial burden beyond the 2014 window for its pension obligations, further hurting its long-term investment value. And this debt also hurts its short-term value compared to Ford, because the Blue Oval’s overleveraged balance sheet is one of the only things that makes GM look good by comparison.

With King, Country and Cadillac all lining up for GM’s liquid assets, it’s too soon to abandon austerity measures in the RenCen. There are more than enough tough choices ahead for General Motors.

Despite having more cash than debt for the first time in decades, GM is going back to Wall Street in search of fresh debt. Over the weekend, The General has been in talks with several banks to secure a $5b revolving line of credit to shore up its liquidity position ahead of an IPO that’s rumored to take place in August. At $5b, GM’s desired line of credit would essentially replace the $5.8b the automaker has repaid to the Treasury, and will help it deal with a number of pressing cash needs to maintain its shaky global empire. But with so many pressing uses for the cash, and political pressure mounting for a rapid IPO, can GM deal with its issues and take on more debt and be worth what the government wants it to be worth? Troublingly, the answers to these questions are not to be found on GM’s balance sheet.

GM’s money-losing European Opel division has lost over a billion dollars since the firm emerged from bankruptcy, and will require nearly $5b in restructuring funds, to be paid by GM since state aid from Germany fell through. On the other side of the Eurasian continent, another crisis is racking GM’s other most important overseas division, GM-Daewoo. Tradingmarkets reports that GM-DAT’s creditors (including the Korean Development Bank) have agreed to roll over some $900m in debt. And not just because they’re sweet people either. The payback was postponed on the condition that GM

transfer key auto technologies to its South Korean unit and dispatch an official to take charge of the subsidiary’s finances to keep it afloat

Needless to say, this $6b overseas money pit is a nasty bit of business given GM’s desire to hold an IPO this summer. Which is where the $5b credit line comes in. Unfortunately, GM isn’t having an easier time getting money from Wall Street than it did trying to get money from the German government.

In fact, GM is even keeping its options open to include asset sales, according to the FT. Possibly up for sale: GM’s stakes in Delphi and GMAC (now known as Ally Financial). But with nobody breaking down doors to get at either of those two struggling firms, credit is GM’s first line of defense against looming cash problems. After all, as IHS Global Insight’s Rebecca Lindland tells the Freep

Alan Mulally taught the industry, you can never borrow too much cash

And here we were thinking that the bailout proved that you could take on such crushing debt loads that the government has to rescue you. Speaking of which, Reuters reports that fellow TARP recipients, Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley, have agreed to each provide half a billion dollars to the GM revolving credit cause. The other $3b? No word on that front yet… and that’s not exactly great news when you’re about to ask the market to out a value on your stock.

GM says it has two weeks to line up the remaining $3b in credit, and sources tell Reuters that

GM is more likely to cut the valuation on the IPO than delay it and is looking for a broad investor base

And at this point the size and valuation of GM’s IPO is the crucial question. Treasury is staying cagey about just how much of its 61 percent stake in GM it will float, but 20-24 percent is being mentioned as a possibility. That would make sense, as it would be just barely enough to take the Treasury’s below the crucial 51 percent mark, theoretically freeing GM from the stigma of majority government ownership.

Reuters says that this 12.2-14.6 percent stake could be worth $10b-$12b, numbers that would give GM an overall value of around $80b. With GM planning to sell $3b worth of convertible securities, the Canadian and Ontario governments looking to move 20 percent of its 11.7 stake, and the UAW moving an undisclosed amount of its stake, Reuters reckons GM’s IPO could reach $15b-$20b. That would make it one of the biggest IPOs in American history.

If everything goes to plan, anyway. But here’s a problem: the $80b-ish market cap that this hypothetical IPO supports, is over twice the market cap of automakers like Ford Motor Company, Nissan (which stands on the brink of an EV breakthrough) and Volkswagen. Though smaller than Toyota’s $107b-ish market cap, this valuation would make GM one of the most valuable automakers in the world, despite modest post-bankruptcy operating profit, looming overseas division issues and $27b in pension shortfalls. That last issue alone could cost the company as much as $12b by 2014.

No wonder then, that GM’s IPO hypsters are using Ebitdapo, or earnings before interest, tax, depreciation, amortization and postretirement benefits to tout its financial health. But pretending like those pension obligations don’t exist doesn’t make it so. Is GM in better shape than it once was? Undoubtedly. Is it one of the most valuable automakers in the world? Almost certainly not. The fact that GM is determined not to delay its IPO is a product of political needs, not market-related concerns. If a mid-term election weren’t looming, the Treasury would wait to let GM deal with its numerous remaining issues before releasing the automaker into the wild. But it can’t have its cake and eat it to: if GM’s IPO launches this August, it will do so with so many potential cash sucks hanging over it, that an $80b valuation isn’t likely to be the result.

GM’s government-installed Chairman/CEO Ed Whitacre hasn’t been wildly popular with Detroit insiders, earning dismissive raspberries from more than a few corners of the industry’s peanut gallery. But now that his reign of executive terror is over, Detroit seems to be learning how to stop worrying and love the former AT&T man. As Whitacre prepares for his first visit to Washington DC as head of GM, the local media and other members of “Team Detroit” are making their peace with Whitacre. So what lies beneath the new united front?

GM’s Ed Whitacre is not your father’s car chief, screams the headline of Daniel Howes’ rehabilitation of the feared-rather-than-loved exec. According to Howes, Whitacre’s disruptive presence at GM isn’t a question of merely being an outsider armed with a government-sanctioned license to terminate executives with extreme prejudice. Though certain decisions, such as the re-assignment of designer-turned-Cadillac-boss-turned-designer-again Brian Nesbitt, seem to indicate that Whitacre simply sets goals and fires those who fail to meet them, there’s a method to Whitacre’s madness. Howes explains:

In a place that elevated bureaucracy and ponderous presentations to high corporate art, Whitacre is routinely moving in the other direction. Give him less data, he says, in favor of more facts, more answers and more solutions from the people closest to the problems.

It’s hard to overstate how challenging that turnabout can be to GM’s often-constipated culture, where studying something to death (products, business deals, whether to prepare for bankruptcy) too often was mistaken for actually getting things done. Not in what’s taking shape inside the GM of Whitacre, named CEO last December.

Monday meetings of his 13-member “Executive Committee” are typically wrapped up in a couple of hours — unless Whitacre is on a tear — compared with the daylong “Automotive Strategy Board” confabs of old that had a corporate ritual all their own.

Monthly sales reports have been simplified, and hourly updates on the final day of each month were abolished. Forward-looking production plans no longer are reported because Whitacre couldn’t understand why GM routinely aired such competitive information when many rivals did not.

Spending within GM’s multibillion-dollar capital budget now requires fewer approvals once the overall budget is approved. Operating executives, such as North American President Mark Reuss or product development chief Tom Stephens, are encouraged to tap resources already approved in larger budgets by Whitacre and the company’s board of directors.

The takeaway: Whitacre is a delegator, focused on creating a lean, efficient management structure that he can leave to its own devices. And in his struggle with GM’s infamous bureaucracy, he is courting rank-and-file workers with down-home Texas charm, touring plants in jeans and a sweatshirt. Even UAW boss Ron Gettelfinger appreciates Whitacre’s common touch, noting to Automotive News [sub] that both Whitacre and Chrylser CEO Sergio Marchionne are a breath of fresh air in the industry because:

they’re down to earth, not a showboat. This industry has had too many showboats.

But Whitacre isn’t making the effort to cozy up to Detroit’s workers, media and union leaders because he needs new friends to go rattlesnake killing with. GM may have had its balance sheet rinsed clean in bankruptcy, but it still faces plenty of challenges, and Whitacre needs allies in place to ensure the future of his company. The Detroit News reports that Whitacre will head to Washington DC this week to meet with members of Michigan’s embattled congressional delegation, coordinate with new members of GM’s paid lobbying staff, and hold an Earth Day pimp session with the Chevy Volt on the National Mall. What the DetN leaves out is Whitacre’s actual agenda for the trip. With Detroit now safely behind him, what will Whitacre request from his government sponsors?

One clue to the Whitacre agenda comes from the Wall Street Journal [sub], which reports that the Alliance of Automotive Manufacturers is already lobbying auto task force boss Ron Bloom for increased tax benefits for electric vehicles. Having heard President Obama’s call for 1m plug-in vehicles on the road by 2015, the industry lobby is gearing up to make sure the feds offer plenty of incentives for its ambitious goal. Having peeped a letter to Bloom by AAM president Dave McCurdy and Michael J. Stanton of The Association of International Automobile Manufacturers, the WSJ reports:

The administration has awarded funds from a $25 billion Department of Energy program to help auto makers retool plants to build electric cars. And the U.S. will offer a temporary $7,500 consumer tax credit for plug-ins. The administration has also awarded stimulus funds to electric-vehicle component makers and companies that build charging stations.

In their letter, Messrs. McCurdy and Stanton urged many of those programs to be extended, though their requests were conceptual and didn’t cite dollar amounts. The requests could add up to billions of dollars, though, given the cost of existing programs.

The lobbyists also criticized an aspect of the administration’s new fuel-economy standards, released last month, that will require auto makers to eventually score against electric cars carbon dioxide emitted from electric-power plants. The change will make it harder for auto makers to meet fuel-economy targets that call for a U.S. fleet-wide average of 35.5 miles per gallon by the 2016 model year.

“This policy discourages future production of plug-in electric vehicles by making automobile manufacturers responsible for the electric energy mix of the country or a given state,” Messrs. McCurdy and Stanton wrote.

With the Volt due to launch later this year, this is exactly the kind of issue Whitacre will want to discuss on Capitol Hill. The Volt will likely be priced at a disadvantage to competitors like Nissan’s Leaf, and (even more) government subsidies are the only realistic way for it to break into the market in any appreciable volume. And with the upstream C02 emissions issue, as well as the Volt’s official EPA rating still up in the air, Whitacre will want to be sure GM’s DC staff are going after regulatory opportunities as well as possible subsidy increases. After all, GM’s number one priority is to launch an IPO and free itself from government ownership, but that outcome is unlikely to happen until the Volt is commercially viable.

But that’s not all, folks: GM needs help from the government in areas that have nothing to do with the Volt as well. A recent GAO report exposing GM’s $27b in unfunded pension liabilities presents a similarly dire risk to GM’s long-term viability, and another entry on Ed Whitace’s DC to-do list. And once again, the advance guard of GM’s influence machine has already sprung into action. Senator Sherrod Brown and Rep Tim Ryan, both democrats of Ohio, have already written a letter to the Treasury [in PDF format here], urging GM’s masters to prevent the dumping of GM and/or Delphi pensions onto the struggling Pension Benefit Guaranty Corporation. The congressmen write:

According to the GAO, we are now facing an even greater liability in auto sector plans. The failure of additional auto sector plans would not only cost retirees tens of billions of dollars in lost benefits, it would also require the Pension Benefit Guaranty Corporation to assume an estimated $42 billion in unfunded liabilities.

As a majority owner of General Motors, the U.S. government must not put itself in the pensions [sic]. It also would be a poor outcome for the U.S. taxpayer to sell our interests in the auto sector only to have the U.S. government to assume [sic] the unfunded liabilities in their pension plans.

We would like to request a meeting with to discuss how Treasury and the Auto Task Force plan to resolve the outstanding pension issues in the auto sector and how you will ensure that the federal funding in the Automotive Industry Financing Program will protect pension plan participants and the PBGC from assuming the unfunded liabilities.

In short, we have the beginnings of the justification of another billion-dollar bailout of GM. No wonder Whitacre is rallying support in Detroit. Snagging more Volt-stimulating handouts, and tens of billions of dollars for bad pension plans will take another epic battle on Capitol Hill, and The General will need all its allies in the media and organized labor at its side in order to emerge with what it wants. Ed Whitacre has some wind at his back going into his Washington visit, but he’s also sailing into a politic environment that shows little appetite for more industry bailouts. Forget the bureaucratic shake-ups, Whitacre needs his folksy charm to go over well in Washington if he wants his company to move towards independence and viability.

Brussels used to be famous for its elaborate lace. Now, mass production of red tape has replaced the intricate textile. As you may recall, Nick Reilly circulated its alleged turn-around plan for Opel amongst European governments, with the intent to shake loose €2.7b in charitable donations. Reilly needs the money for Opel to survive. GM’s cupboard is bare.

On receipt of the plan, Germany’s Economics Minister Rainer Brüderle sent the document to Brussels, along with a request to “to examine critically whether the business plan is viable and whether competitive distortions in Europe can be excluded.” Other EU countries, such as Belgium, also asked the EU for an opinion. After all, it had been agreed that none of the EU states would act alone, and only after the EU Commission had vetted the plan.

Just in case Brussels wouldn’t find the time to study the plan, Brüderle supplied his executive summary: He has serious doubts about Opel’s restructuring plan. “The viability is questionable,” said a memo by Brüderle’s men.

A week after the files had been submitted to EU Central, the commissars replied. They said, sorry, the EU had already rendered an opinion on Opel, the new plans are not worthy of another assessment, no opinion will be forthcoming. This according to a report by Germany’s Rheinische Post.

Reilly’s plan is now stuck in a black hole somewhere between Brussels and Berlin. According to the German edition of the Financial Times, Berlin insists on a blessing from Brussels, but Brussels doesn’t want to touch the devilish documents. Berlin doesn’t want to get burned either and kicks the files right back to Brussels: “We insist that we find a solution which is based on a European examination” said Brüderle’s State Secretary Jochen Homann. Having made his point, Homann showered Brussels with probably not highly sincere praise: “We admire the wisdom of the commission, which was able to render an opinion after reading a short summary. We aren’t there yet.“

In Brussels, the commissars in charge of the matter have changed. Günter Verheugen and Neelie Kroes have finished their stint in Brussels. Ten days ago, they have been replaced by Antonio Tajani and Joaquín Almunia. Maybe, the freshly minted commissars from Italy and Spain are still learning the ropes. Or they are cognizant of the fact that the EU has other problems. Greece needs to be bailed out to the tune of €20b to €25b. Portugal, Italy, Ireland, and Spain could be next. Nobody has the bandwidth for Opel’s quandary.

For those who don’t want to help Opel, the situation couldn’t be more wunderbar: By mutual agreement, help for Opel needs Brussel’s placet, Brussel says there will be neither a yes nor a no, so any help for Opel is verboten. Sorry!

Devoid of an opinion from Brussels (on which he nonetheless insists, appearances must be kept) Brüderle ordered his officials to enlist the services of PricewaterhouseCoopers, says the FT. PricewaterhouseCoopers should audit the plan. It’s pretty much a symbolic act to buy time and rear-end coverage.

The first thing PWC will note is that Opel’s own auditors are not so sure whether the plan has merit. It could be the usual weasel-worded disclaimers, caveats and qualifications auditors like to insert into any opinion. However, the German magazine Focus says that Warth & Klein, the auditors enlisted by Opel to shore up their plan, found “numerous weak points” and “additional risks for the tax payer” in Opel’s restructuring concept. Opel’s own auditors aren’t so sure whether Opel qualifies for government money. They say the problems at Opel „were not only temporarily caused by the current economic crisis, but also by a technological deficit” in comparison to the competition. By Warth & Klein’s own assessment, Opel “has in the past demonstrated a limited disposition towards investments and innovations, caused by the corporate crisis at GM.“

Translation: Opel is not a victim of carmageddon. Opel’s lifeblood has been sucked out by Detroit vampires. With CPAs like these, who needs money from Berlin.

This is a neck-breaker. Money from the “Deutschland Fonds” is only available to innocent companies who became an unwitting victim of the market malaise. If they brought it upon themselves – sorry, please go and die, and don’t make a mess of it.

What’s worse, Opel’s own auditors warn that even with a governmental cash injection, Opel may run out of money by end of 2013, and that the money paid by Germany could seep through the borders and vanish abroad.

This confirms the German government’s worst nightmares, and it is all Brüderle wanted to hear. If Opel’s own CPAs, and by submitting the document, Opel itself, doubt the future, what are the guesses that PWC will come to the conclusion that all is rosy in Rüsselsheim?

After Price Waterhouse has taken the time and money necessary to come to their appraisal, it will read like this: “Based on the information provided by management, the Due Diligence Team at PricewaterhouseCoopers AG has come to the conclusion that Opel is done and should be disposed of in an environmentally responsible fashion.” Or more diplomatic words to that effect.

Opel has turned into the European tar baby, and nobody wants to get stuck with them in the brier patch between Brussels and Berlin.

Last Friday, Industry Commissar Antonio Tajani called a meeting of all 27 of Europe’s economy ministers in Brussels to discuss the future of the European auto industry. There was a lot of talk about over-capacities and sinking demand. “We need a coordinated approach on a European level to arrive at a sustainable recovery,” said Tajani after the meeting. Opel wasn’t mentioned. Tajani is a confidante of Italy’s Berlusconi. Italy’s Fiat would miss Opel just as much as Germany’s Volkswagen would miss Opel.

As time goes on, Opel’s chances to be rescued by an outside investor are dwindling. A member of the German government’s Opel Task Force told Reuters on Thursday that negotiations between GM and the two competing bidders (RHJ and Magna) for Opel could drag on longer than expected. The way it looks, the deal may never close—because GM doesn’t want to. There could be another rich sugar daddy: It’s you.

As far as Magna v.v. RHJ goes, “the process is just not far enough along from today’s point of view,” said Thomas Schaefer. In his day job, he is state secretary in the finance ministry of Hesse. On the Opel Task Force, he represents the interests of his state and three others that are home to Opel manufacturing plants.

Schaefer doesn’t understand what’s keeping GM from signing: “I believe there are only a limited number of issues still open. If one were to sit down and concentrate on working them out, a solution could be found in 24 hours,” Schaefer said.

GM doesn’t seem to look for solutions. They want to drag it out as long as possible. In the GM blog, Smith writes “We still believe this can be closed by the end of September.”

Dear John: You are delusional. The German national elections are on September 28. After that date, you won’t get a cent out of Berlin. Already, there is very little political leverage in Opel. German opinion has turned anti-bailout. Even the Social Democrats and their union buddies are amazingly subdued on the issue. Actually, the union buddies are distancing themselves from the Social Democrats: For the first time, the German metalworkers union will abstain from endorsing a party or candidate.

Dear John: Or maybe, you are not delusional after all. Maybe you never wanted to sell Opel. Maybe you wanted to buy time and collect the German €1.5b bridge loan. The Sueddeutsche Zeitung comes to the same conclusion voiced by TTAC a day earlier: “Quite possibly, GM doesn’t want to sell Opel. Hardliners at GM don’t want to set Opel free and want to keep them at all costs.” In a separate article, the Sueddeutsche writes that there is a scenario in which GM buys back Opel from the German trustees, using American taxpayer’s money. The Sueddeutsche picked up Vietnamesque rumors of “hawks” and “doves” at Government Motors. The hawks want to keep Opel. The doves want to sell Opel to an investor.

Dear John: In your blog, you deny that option, so vehemently that the grammar turns into collateral damage: “GM has not and will not approach the U.S. Treasury for funding to restructure Opel.” You also claim “GM does not seek to reacquire majority control of Opel, from any investor candidate.”

If that is true—honestly, we don’t think it is, unless these sentences are very carefully parsed—what’s keeping you from closing the deal in the 24 hours Herr Schaefer thinks it will take?

Here is the hawkish sentence parsing scenario: Your overlords in D.C. told you not to sell. You didn’t approach the Treasury for funding, Treasury approached you. They give you the money it takes to pay back Berlin’s bridge loan. Opel goes back to GM. That way, majority control doesn’t need to be reacquired from any investor candidate. Sound about right?

Did we say the Opel sale is getting messier and messier? GM seems to be in urgent need to attend remedial reading class.

There is the German government making noises that if GM doesn’t say “Ja” to Magna, the government can’t guarantee that another suitor gets loan guarantees. Which in German means, they won’t. GM can’t read the writing on the wall.

Then, GM wants a buyback clause. RHJ happily wants to give one. The German government says: No way. GM can’t read the writing on the wall.

Then someone leaks a supposedly confidential analysis that says that all bids are no good. The specter of bankruptcy is being raised. GM can’t read the writing on the wall. Magna immediately sweetens their bid. RHJ, GM’s darling, does nothing. GM can’t read the writing on the wall.

Now John Smith, GM group VP (and GM’s chief negotiator for the sale of Opel), goes on GM Europe’s website and writes with a supposedly straight face, “despite media reports to the contrary, GM has NOT specified its preference for a bidder.” They did not?

The German government sure thinks GM has a preference: RHJ. According to Der Spiegel, John Smith just received a letter from the German government in which he is reminded that the “loan guarantees come with conditions.” The letter was prompted by John Smith telling the German government that he prefers RHJ. GM can’t read the writing on the wall.

Just in case anybody missed the fact that GM can’t read the writing on the wall, John Smith clearly spells out a preference in the same post on the same website.

He word-smiths that the Magna bid “contained elements around intellectual property and our Russian operations that simply could not be implemented. GM has partners in other parts of the world who have joint ownership of these assets . . . we simply could not execute the deal as submitted.”

Supposedly, “discussions with Magna continue in earnest to resolve these challenges.” Yeah, sure.

What about RHJ, for which GM supposedly has no preference? Smith gets excited: “The bid from RHJI is completed and would represent a much simpler structure and would be easier to implement. It would require less monetary participation by the government and would keep our global alignments solid, while still creating an independent Opel/Vauxhall organization in Germany. This remains a reasonable and viable option to be considered as the very difficult issues around the Magna negotiations continue to be worked.”

Does this still sound like no preference?

GM either can’t read the writing on the wall. Or they just aren’t interested in selling Opel. They also are totally ignorant of German politics.

Germany is heading into an election in September. Economy Minister von und zu Guttenberg had opposed an Opel bailout since day one. Guttenberg still “cannot rule out an Opel bankruptcy,” writes the Manager Magazine. This position made the baron from Bavaria the darling of the people. Guttenberg just advanced to Germany’s most popular politician, before chancellor Angela Merkel. Even the Social Democrats, who are indicated to lose the elections by a landslide, don’t want to touch the hot potato Opel more than absolutely necessary.

GM quickly needs to find their glasses and read what it says in big letters on the wall: “No RHJ. No buyback option.” If they don’t, and especially if the matter is not settled until the elections, German politicians will remember what is recommended as the best prevention against swine flu: Wash your hands. Of the Opel mess.

If that happens, Berlin saves billions in loan guarantees. Opel goes bankrupt. Then, BAIC might get Opel after all. For real cheap.

It might be a bad day for GM but it’s a much worse one for Toyota. Really. The days (decades, really) of weak domestic manufacturers shooting themselves in the foot with bad design, poor assembly, and non-existent customer satisfaction in passenger cars are coming to an end. Toyota didn’t have to outrun the bear, it just had to stay ahead of GM, Ford, and Chrysler. Years of producing huge profits in North America hit the wall for Toyota in 2009, and they’re likely not to return. Ever. The game has now changed—and it’s not good for Toyota.

Thanks to US and Canadian taxpayer support, GM and Chrysler are about to get a new start. They’ll enjoy fresh balance sheets, with minimized legacy liabilities and serious money earmarked for new products. (The taxpayers are paying for Fiat to develop cars for North America; you didn’t really think that the Italians would take this risk on their own did you?) Ford, by dint of luck or smart management, borrowed what it needed years ago to make the transformation outside of court oversight.

By the end of this year, all three Detroit automakers will be restructured, resized to match production with demand, and re-energized. They will reenter the market as the lowest cost producers inside the U.S. market, with slimmer, trimmer product lines. These automakers are getting ever-closer to 100 percent capacity utilization.

Looking at product, Ford’s passenger car line up just keeps getting better. The 2010 Taurus looks hot, the Fiesta test drive campaign is generating good press with the Twitter/Facebook crowd, and a new Euro Focus will be here in a two years. Slowly but surely, more Americans are considering a Ford passenger vehicle. Its trucks still lead the category and will continue to do so. Better products, increasing quality, and slowly increasing market share is building FoMoCo momentum.

GM’s go forward brands—Chevrolet, Buick, GMC, and Cadillac—still have some vehicles that don’t cut the mustard with consumers. But the balance is starting to tip back towards the positive. The Malibu and Camaro represent some better efforts. The gorgeous new Buick Lacrosse might give the new Taurus a run for the money. Cadillac will extend the CTS line and bring a new SRX to the market shortly. The Corvette still leads the pack in dollar performance value. And maybe, just maybe, the Cruze and Viva will live up to GM hype machine.

GM’s perhaps two to three years behind Ford with its product development cycle. But it can now concentrate on fewer models. Recent successful launches suggest that GM just needs time to plug the holes for the weak sisters. It now has the money to do so and you can bet (if you’re taxpayer, you already have) that the efforts on fuel efficient passenger cars will receive the bulk of the dollar spend. GM won’t abandon trucks (no matter what Nancy Pelosi thinks) and volume wise, GM leads.

Chrysler can’t do anything under their new pasta-fed management until the re-tooled imports arrive here for production two years hence. Its cars still (mostly) suck, except for the higher-performance versions of its LX cars. But it isn’t going away and will still find some buyers for its products at the pace of the recent past. So this company will just hang on . . . and on . . . and on.

Now, stop and think about this. What has Toyota done for you lately? Is there one single passenger car from Toyota that excites you?

Let’s keep the new Prius out of this discussion for the moment; it’s not a car for drivers but techno-geeks and greens mostly with excitement provided by the fuel gauge, not vehicle dynamics. The Camry might lead the C/D class in sales for now, but will this continue? What happens when Americans actually consider a Malibu or Fusion-based product instead? In terms of design appeal, the Camry looks dowdy or boring (take your pick) and its reliability isn’t any better than the Fusion. Put a four-cylinder EcoBoost engine in that Fusion and Ford wins.

Go through the rest of Toyota’s passenger car line up and compare each vehicle to the current and near future offerings from GM and Ford. The question is: will Toyota customers do the same?

Toyota (or Honda) products have been the default choice. That “Easy Button” is starting to get harder to press for buyers. Yep, Americans will begin to come back to consider Detroit products (at least GM and Ford), and that’s not good for Toyota. And we’ve really never left Detroit for our big pickups and SUVs, whle the Japanese are still mostly playing catch up.

Yep, it’s a bad day for Toyota and a great day for America. You can look forward to a new Detroit that will be competitive, if not lead, in cars and trucks for mass market Americans. Count on it.

Still smarting from the public flogging the German ministers administered after the meeting, GM is in heavy backpedaling mode. It’s all a big misunderstanding, GM CEO Fritz Henderson told Bloomberg. Fritz should have gotten his derriere over to Berlin in the first place, preferably with PTFOA member Ron Bloom alongside.

When the Germans found out during Wednesday night that the Treasury staffer was absolutely useless, they established a quick videoconference with Bloom, desperate for someone who makes at least a bit of sense. To be sure, Germany’s SecState Steinmeier called his colleague Hillary Clinton for help. For what it’s worth, Hillary offered her “utmost support.”

Back to Henderson: Fritz says GM didn’t ask for additional funding for its Opel unit from the German government. Das ist ein Mißverständnis. GM’s request for a $2.1 billion bridge loan remains unchanged. GM just needs the money a bit faster: $630 million upfront. The German government had thought the immediate needs were $140 million, Fritz explained. “Any confusion that was caused by this we take responsibility for,” Henderson says with as much contrition he can muster.

That will go down just swimmingly in Berlin. They were already confused that night in Berlin, because numbers kept changing; some doubted whether the US delegation knew the difference between dollars and euros. Now, it’s $630 million instead of the $415 million that made the Germans hurl carefully crafted invectives westward ho. Everybody: On your knees and pray that nobody reads Bloomberg in Berlin.

Henderson tells the sob story that all GM is doing is try to “protect its European operations, including Germany-based Opel, before a US government-imposed June 1 deadline to restructure or file for bankruptcy.” We’ll see tonight how much sympathy he will get for that one.

One participant of the Wednesday meeting already picked up his ball and went home, to Torino. Fiat’s Sergio Marchionne said he will not make any more concessions, and he will not take part in the second round of meetings tonight, and he did not get full disclosure of the Opel books, and he’s not willing to take on any additional risks. Arrivederla, signora e signori! The other part of the truth is that someone on the inside had leaked that “Fiat is out,” as Der Spiegel reports.

Magna is just about to get up and leave also: Since 6 a.m. (local), Magna has been negotiating with Forster et al. in the Berlin Hotel Adlon, right across from the Brandenburger Tor. Forster must not have talked to the contrite Henderson. The meeting isn’t going anywhere.

Not having learned anything from Wednesday night, GM “is constantly making new demands” BILD Zeitung was told. Yesterday, Magna was ready to help with the $415 million bone of contention. Now they are mad as hell, and are close to saying “Jetzt reicht’s” (Enough is enough.). “They are ready to get up and leave,” BILD reports.

With the negotiations in increasing disarray, a bankruptcy of Opel gets ever more likely. The Frankfurter Allgemeine Zeitung reports that Opel has hired insolvency expert Jobst Wellensiek, along with the Clifford Chance lawfirm, which is working on a bankruptcy package to file with the court. Even chancellor Angela Merkel, who so far had taken the presidential high road, now doesn’t want to rule out an Opel bankruptcy, reports Der Spiegel.

It may be the cheaper solution all around. Germany’s economy department calculated that a shuttered Opel would cost the government €1.1 billion—assuming that all 25,000 workers will remain unemployed and find no new jobs (a nuclear winter scenario). Total government costs for an alive Opel: €4.5 billion under the Magna model, €6 billion if Fiat gets it. Germany’s other car manufacturers would be glad to take up the slack.

GM and Magna have until 2p.m. GMT to agree or disagree on a deal. If they agree, the German government will probably accept the deal without much fuss, says the FAZ. If there’s no deal, then the meeting tonight will be short. The bankruptcy of Opel shall be blamed on the ugly Americans, and Germany will go back to more important things. Who will win the fall elections?

Don’t touch that dial . . .

The moment the Chrysler – Fiat hookup was announced, savvy pistonheads nasally ejected their coffee. Chrysler and FIAT? That’s like throwing a drowning man an anvil. Ignoring the brands’ histories of complete crapitude, the mainstream media took the idea seriously. Their complicity/complacency has done wonders for the executives and elected officials in charge of this epic non-starter, but it does nothing to serve the public interest. After all, we’ve got to pay for this turkey. Now that Chrysler is about to axe dealers, permanently shutter plants, fire union workers and ditch a big ass chunk of their pensions and benefits, the MSM is beginning to consider the possibility that the deal sucks. Or, as the ever-faithful Detroit News puts it, “After bankruptcy, Chrysler still faces uncertain future.” Ya think?

After bankruptcy court, the Auburn Hills-based automaker must survive on American and Canadian loans now pegged at $6 billion until vehicles inspired by its new partner, Fiat SpA, begin rolling off North American assembly lines in 2011.

Let’s see . . . It’s 2009. Chrysler lost $4.7 billion this year AND sucked-up $6 billion in kiss-’em-goodbye “bridge loans” and $4 billion in federal zombie maintenance payments. So now they’re going to stretch $6 billion over two years. Riiiiight.

Key actions Chrysler must take to bridge the gap include slimming its dealer network, further reducing its hourly work force, piggybacking on Fiat’s foreign dealer network and global buying power, and hustling some Fiat technology to Chrysler’s U.S. assembly lines.

So Chrysler is going to save money by using Fiat suppliers and Fiat’s going to sell Chrysler’s abroad. Riiiight.

At the same time, car sales can’t take a dramatic plunge from the 10 million vehicles predicted for this year. And gas prices can’t spike, since Chrysler’s product line is tilted heavily toward pickups, sport utility vehicles and minivans.

Notice the word “dramatic.” And says who? David Cole! The head of the Center for Automotive Research, whose chicken little study laid the foundation for this $65 billion—and counting—boondoggle.

“Chrysler has lowered its structural costs, reduced its break-even point and put itself in a position to be very profitable in the midterm with a Fiat alliance,” Cole said.

I guess we’re putting our money where Cole’s mouth is. Again. Meanwhile, The Wall Street Journal has discovered that Chrysler’s propensity for building horrible cars could be a problem on the sales side of things.

Michelle Payan loves the styling and roominess of her 2006 Chrysler 300 sedan, but a defective air conditioner and transmission have turned her against the brand. “I’m not buying another Chrysler,” says Ms. Payan, a 26-year-old insurance-claims adjuster in Phoenix.

In announcing Chrysler LLC’s government-negotiated bankruptcy filing, President Obama expressed the hope that new-car seekers would consider buying American. But new car buyers are less accustomed to seeking advice from the president than from Consumer Reports. In its annual automotive issue last month, Consumer Reports recommended 166 models—not one of them a Chrysler, Dodge or Jeep, the three Chrysler nameplates.

Uh-oh! It looks like we have a perception gap perception gap.  

But while Ford and GM are largely battling outdated perceptions of questionable reliability, “at Chrysler it’s a reality,” says George Peterson, president of AutoPacific Inc., which each year surveys about 40,000 car owners. “To survive, Chrysler needs to get its quality at least to the level of Ford and GM.”

This reliance on cross-town qualitative measurement has isolated GM and Chrysler execs from reality, and destroyed their ability to compete. Despite C11, Motown’s media lap dogs continue to enable this suicidal self-delusion. The WSJ article, which starts with a bit of Hai Karate, ends-up on its back, feet wiggling the air. Shame on them all.

The government-directed reorganization plan of Chrysler calls for it to merge with Fiat and start making Fiats in the U.S. In Europe, Fiat has received low rankings in reliability studies, but its performance has been improving.

Meanwhile, Chrysler will continue making trucks and SUVs. Its Jeep Wrangler and Jeep Grand Cherokee, by nearly all accounts, lead the pack in off-road performance, and both sport an iconic design that sets them apart. Similarly distinctive is the mammoth Dodge Ram pickup. But all of those models have suffered reliability problems. Of seven full-size pickups reviewed by Consumer Reports, only one — the Dodge Ram — failed to make the recommended list.

Yet there is hope. The redesigned 2009 Dodge Ram is winning rave reviews for performance and style, and is expected to win endorsements if it proves largely free of defects.

And Chrysler has a history of staging comebacks from product-driven financial quandaries. The quality problems of the Dodge Aspen (and its sister, the Plymouth Volare) contributed to the crisis that led Chrysler to seek a government loan in 1979. After recovering from that brush with bankruptcy, Chrysler entered a nearly two-decade period of winning kudos for its cars, trucks and minivans.

And so the cycle continues . . .

Back in the day, I recommended Chapter 11 for GM and Chrysler. With court protection, the American automakers could ditch non-competitive union contracts, pare bloated dealer networks, terminate extraneous products and sell-off non-core brands. In ’05, consumer confidence was strong. All three automakers had plenty of cash and assets. If they had filed then, they could have reinvented themselves and . . . Forget it. I was wrong. These automakers are so poorly run that an earlier bankruptcy would only have prolonged the misery. How could I think otherwise when Chrysler and GM’s idea of a “surgical” bankruptcy is to swing an axe at the patient’s diseased limbs, laugh at their next of kin, storm out of the operating theater, hand the case over to another doctor and repair to Aruba?

Earlier today, GM CEO Fritz Henderson mirrored a previous statement by Chrysler Co-Prez Jim Press. Henderson revealed that GM also had no idea which dealers would get the old heave-ho and which would help the “new” automaker pay back American taxpayers for their [next not previous] multi-billion dollar “investment” in American jobs (or some such thing). Like Press, Henderson assured his store owners that the cuts were definitely on his “to do” list.

GM’s indecisiveness is almost understandable, given that not making decisions is a key part of their corporate culture. But Chrysler is the automaker whose private equity owners told us time and time again that their main advantage was speed (fast decisions, not amphetamines). Chrysler’s been in Chapter 11 for eleven days. And yet . . .

“Unfortunately, there will be dealers who will not go forward,” Press said on a conference call with retailers. “We do not have a finalized plan. We don’t have identification of who. We don’t know when. We don’t know how. We have nothing to announce today other than this is all in flux.”

In fact, it looks like Chrysler won’t be paying some 25 percent of its dealers for warranty work already performed or incentives already earned. Any possibility of either automakers creating some team spirit (a.k.a. “shared sacrifice”) down at the dealer level—to accompany the birth of the new Chrysler and new GM—has been strangled in its crib.

While aggrieved consumers have every reason to savor the fact that GM and Chrysler are doing the same thing to their dealers that their dealers did to them re: warranty claims—waffle, prevaricate and then tell them to FO&D—both GM and Chrysler’s survival depends on its stores. Keeping the franchisees in limbo is madness. These guys have lawyers, and they know how to use them.

As we reported earlier, Chrysler is bouncing checks to customers and recently suspended lemon law payments. We’ve also chronicled the red tape surrounding federally subsidized payments to GM and Chrysler’s beleaguered suppliers. And no one knows who’s gonna build what, when or where. Not to put too fine a point on it, Chrysler is disintegrating into chaos. GM is showing every sign of following suit.

All this before GM and Chrysler’s key suppliers go belly-up, and the real action starts down at the courthouse, when creditors do everything in their power to make sure they get a piece of whatever there is left to get a piece of. And then Chrysler and GM have to deal with integrating (i.e., surrendering) to their new foreign partners (i.e., masters). All while their competitors get leaner and meaner, and the American public learns than bankruptcy means never having to say you’re sorry.

Clearly, Chrysler and GM didn’t prepare for bankruptcy. Equally pellucid: neither automaker is equipped to deal with it now, or in the future, when things will get a whole lot more complicated. Then again, why would they?

Both automakers have the same schlemiels that got them into this mess trying to get them out. GM CEO Fritz Henderson is no less a product of the “GM Way” than ex-GM CEO’s Rick Wagoner, the man whose failure will be the fodder of business school curricula a hundred years hence. Henderson may be trying to make a good job of an impossible situation. But he isn’t.

Meanwhile, Chrysler CEO Bob Nardelli is . . . hey, where IS Chrysler CEO Bob Nardelli? Anyway, putting Nardelli in charge of the recovery would be like hiring the man who ran Home Depot into the ground to lead a major manufacturing company. Oh wait . . .

The blame for this mess—and by that I mean the current and future mess rather than the mess that lead to this mess—falls squarely on the shoulders of the Presidential Task Force on Automobiles (PTFOA). While I was against “bridge loans” to GM and Chrysler and oppose any further subsidy to these zombie automakers, the PTFOA had one chance and one chance only to “save” Detroit: appoint honest-to-God leaders at the top of both companies. They blew it. And now we’re all paying the price. Literally.

Well, the initial pleadings have been filed. Chrysler’s argument is essentially that it’s a “dead man walking.”  In its opening memorandum of law in support of its motion to approve the sale, Chrysler argues that if the “sale” doesn’t close on the accelerated timetable proposed, it will wither on the vine, resulting in “a rapid and severe loss of value.”  (Mem. at 10).  Surprisingly, though, Chrysler’s opening memorandum doesn’t squarely address the issue laid bare in my previous post and in the preliminary objection of the dissident lenders; that is, why isn’t the proposed transaction a sub rosa plan of the kind prohibited under the law of the Second Circuit?

In dancing around this question, Chrysler’s lawyers submit a two-pronged response, arguing that the transaction should be approved because, first, Old Chyrsler is receiving “fair consideration” in the transaction and, second, Chrysler’s going concern value will be preserved, jobs will be retained, and an extensive network of independent dealers and suppliers will live to see another day.

Chrysler’s opening memorandum of law, however, does not address the important question of why, absent the consent of the dissident lenders, 65% of the equity in New Chrysler should go to junior creditors in satisfaction of their respective claims against Old Chrysler while the claims of senior dissenting lenders go unpaid?

One thing’s for sure, Chrysler’s (and soon GM’s) court battles will afford us a rare opportunity to witness one of bankruptcy law’s most fundamental questions being litigated in the highest stakes battles of all time: when does the “absolute priority rule” which establishes a hierarchy of recovery rights among creditor classes, take a back seat to the “fresh start,” rehabilitative policy of chapter 11?

Chrysler’s opening memorandum touched upon this question by focusing on the US Supreme Court’s pronouncement in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984). The Court stated that the “fundamental purpose of reorganization is to prevent the debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.” This principle, Chrysler argues, is paramount and (quoting NY’s judicial patriarch, Bankruptcy Judge Lifland, in the old Eastern Airlines case) “all other bankruptcy policies are subordinated” to it.

Many, however, will surely disagree with Judge Lifland’s statement from twenty years ago that all bankruptcy policies should be subordinated to the reorganization objectives of the Bankruptcy Code. Indeed, even on a practical level, as “Chapter 11′s Failure in the Case of Eastern Airlines” note, such a policy is a failure:

Eastern Airlines’ bankruptcy illustrates the devastating effect of court-sponsored asset stripping—using creditors’ collateral to invest in negative net present value “lottery ticket” investments—on firm value. During bankruptcy, Eastern’s value dropped over 50%. We show that a substantial portion of this value decline occurred because an over-protective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear Eastern should be shut down.

And what of Northern Pacific Railway Co. v. Boyd?

Following the Panic of 1893, shareholders and bondholders combined in a proposed reorganization plan to transfer the debtor’s assets to a new company that they would own, while freezing out the railroad’s general unsecured creditors, whose priority fell between the bondholder and shareholder classes (sound familiar?).

The unsecured creditors argued that the foreclosure sale contemplated by the plan “was the result of a conspiracy between the bondholders and shareholders to exclude general creditors” from the new company.

The trial court overruled the unsecured creditors’ objection. They held that as the debtor was insolvent and there was no value for unsecured creditors (or in this case, the dissident lenders). So the unsecured are entitled to nothing.

Nowadays, collusive efforts to squeeze out the dissenting middle are often called “reverse cramdowns.” As noted previously, the Third Circuit held that plans proposing “reverse cramdowns” may violate the so-called “absolute priority rule.”

More significantly, the Second Circuit in Motorola, Inc. v. Official Comm. of Unsecured Creditors, addressed attempts to squeeze out the middle in the context of a settlement that the debtor sought to have approved under Bankruptcy Rule 9019.

That case provided critical guidance in gauging the authority of Judge Gonzalez to approve the proposed “sale” transaction, in contravention of the requirements of the absolute priority rule. The court stated:

Motorola claims that a settlement can never be fair and equitable if junior creditors’ claims are satisfied before those of more senior creditors. The phrase “fair and equitable” derives from Section 1129(b)(2)(B)(ii) of the Bankruptcy Code, which describes the conditions under which a plan of reorganization may be approved notwithstanding the objections of an impaired class of creditors, a situation known as a “cramdown.”

Bottom line: the court must be certain that parties to a settlement have not employed a settlement as a means to avoid the priority strictures of the Bankruptcy Code.

Glaringly absent in Chrysler’s motion in support of the sale: reference to Bankruptcy Rule 9019. This could be fatal.

While Section 363(f) permits sales free and clear of liens, nothing in Section 363 contemplates the kind of restructuring of rights preposed. Given the seemingly narrow instances in which the Second Circult would authorize a compromise that violates the absolute priority rule, the omission may be intentional.

It’s surprising that the dissident lenders didn’t raise this point in their preliminary objection to the sale, but I suspect it won’t be long before they do.

[Steve Jakubowski works for the Coleman Law Firm]

I used to worry that TTAC was too negative. I’d publish “good” news to try and balance-out our no-holds-bared criticism of Motown’s follies. At some point, I gave up trying to find a silver lining. It wasn’t simply the fact that there wasn’t one. Or that the news coming from Detroit became undeniably dire. It was more of a personal “come to Satan” moment when I realized that making people happy wasn’t my first, best destiny. My job: tell the messy, pay-no-attention-to-the-logical-fallacy-behind-that-PR-curtain truth about cars. But there are times, like now, on the cusp of Chrysler’s C11 (or worse), when I wonder what good can come of all this. Will we ever look back on this time and think that the Motown bailout was, somehow, a good thing?

The people [currently] in charge of propping-up Chrysler and GM would have you believe the federal bailout is accomplishing/will accomplish three main objectives. First, it lessens/postpones the impact of the automakers’ failure on the wider U.S. economy. Second, it protects American jobs (same as No. 1, but who’s voting anyway?). Third, it helps usher in a new era of environmentally-friendly vehicles, creating “green jobs” as hydrogen fuel cells—I mean “the electrification of the automobile” begins.

Of these, only the first is remotely credible, or, if you’re an electric vehicle booster, relevant. And when I say remotely credible, I mean it in a completely theoretical way. After all, how can we really know what the impact of a “uncontrolled” Chrysler and GM collapse would have been without actually experiencing it?

Whether true or not, the proposition that an earlier, non-governmental Chrysler and GM chapter 11 would have unleashed The Great Depression II is hardly what you call compelling. As I’ve mentioned before, only someone suffering from OCD believes that the lack of catastrophe is incontrovertible proof that questionable preventive measures were fully justified.

In other words, if Chrysler and GM’s collapse HAD triggered economic Armageddon, Americans would not have begrudged them their money. As it didn’t, over 70 percent now say your mother and I agree: enough is enough, Mr. Motown. No more loans for you, son. Or, more accurately, you lying, money-sucking, house wrecking, uninvited whore.

The ongoing Detroit bailout bodes badly for the American voters’ relationship with their elected officials.

But what about the bank bailouts, apologists cry. Beyond investing the money people give them, banks are a mystery to most folks. The auto industry they understand. They “get” that Chrysler and GM put itself in this mess by making products people don’t want to buy and/or not standing behind them (the cars) when they broke. They’ve figured out that Chrysler and GM are not victims of circumstance. Otherwise Ford would also be bellying-up to the bailout buffet.

Clearly, voters aren’t happy about Detroit’s welfare checks. They will be even less happy with the next round. And even less happy with the round after that.

Barack Obama and his Presidential Task Force on Automobiles (PTFOA) think it can overcome the public’s growing anger and resentment by appealing to their “can-do” American optimism. Forget the old Chicken Little routine. The PTFOA will sell the “new” Chrysler and/or GM as the second coming on wheels. It’s a new dawn it’s a new day it’s a new life and you should be feeeeeeling good. ‘Cause we’ll always be together, together in electric dreams.

No one will buy it. Literally. If GM and Chrysler had gone through a non-governmental bankruptcy back when they should have, when the U.S. new car market was healthy enough (circa 2005), consumers would have played second life with the damaged Detroit duo. Now? Nope. Sales will tumble. More federal funds will follow. The fed-up factor will flourish. And that’s a good thing.

Think of it this way: the Detroit bailout will sour Americans on government “investment” in private enterprise. Again, AIG what? Credit default huh? But John Q. Public will surely grasp the message coming from Washington re: the “new” Chrysler and/or GM. Their tax money is supposed to lead to dramatically better cars. Better than the opposition’s. ‘Cause that’s how you make money, right? Of course, that won’t happen within this administration’s first term; if only because carmaking requires a three to five-year development cycle. Not to mention all the other reasons.

The PTFOA’s inability to resurrect the automakers’ fortunes will not go unnoticed. With every new cash infusion in “our” car company or companies, with every lost point of market share or red ink-laden financial quarter, Obama’s wider plans for federal interventionism will lose appeal.

Of course, some will see this “failure is possible” scenario as a bad thing. The exception that screws-up the long overdue rules that would lead to a more equitable society for the average working man and woman. But then I have little time or sympathy for that kind of negative thinking.

Britain’s recently presented budget contains a new vehicle scrappage incentive, making Old Blighty the final major European economy to jump on the alleged “green stimulus” bandwagon. Thirteen other European nations, including France, Germany, Italy, Spain and Poland, have introduced similar measures, which provide government incentives to new car buyers who scrap an older vehicle. But will Britain’s new program (which offers up to $2,900 in incentives) have the same salutary effects on new car sales as France (March sales up 8 percent) and Germany’s (March new registrations up 40 percent)? Closer to home, how will the solidified Euro-consensus on scrappage schemes affect the chances of a similar program in the US? Although the programs have already been hailed as the savior of European new car-sales, these things don’t always translate well across different markets. Under a critical lens, issues with the latest British plan indicate a number of problems with bringing such a program stateside.

Britain’s plan to provide about $3K towards a new car purchase per 10-year-or-older scrapped vehicle seeks to limit the measure’s impact on an already-tight budget, likely in response to Germany’s massive oversubscription to the program. As our Bertel Schmitt has reported, what began as a €1.5 billion program has ballooned into a €5 billion expenditure. To limit this kind of cost overrun, the British plan (sensibly enough) limits the offer to “only” 300,000 purchases. But beyond the numerical limitation, the British government is also requiring the “auto industry” to provide half of the incentive, about $1,500 per car. Who will be responsible for providing the second half of this incentive (importers, retailers, manufacturers)? Still no word from Downing Street.

Commentators like The Telegraph‘s Mike Rutherford have expressed concerns as to whether the industry will actually step up with the extra $1,500. It’s safe to say that the industry’s  enthusiasm level likely won’t equal the government’s, which will see its modest outlay more than returned by new vehicle VAT receipts. Moving past the question of whether this is a $1,500 incentive not a $3K incentive, Rutherford isn’t alone in expressing serious doubt as to whether consumers will materially benefit from the measure.

A web-based auto retail manager defines part of the problem to Bloomberg: “The U.K. car market is entirely different to those on the continent in that buyers typically change their car after three years when the finance agreement and warranty expire.” Besides a possible shortage of older cars to be scrapped, there’s also an issue of new vehicle availability, as imports to the Isles have been cut in line with falling demand.

And, as Rutherford points out, many 10-year or older vehicles may be worth considerably more than even the manufacturer-matched full $3K (especially considering Britain is crawling with classic and near-classic car nuts). Even more troubling, the incentive could end up shrinking the massive incentives already offered by manufacturers on new cars. $7,000 incentives on Fords and 40 percent discounts on Opels could dry up in the face of government stimulus, actually creating worse conditions for new car buyers. Throw in the likelihood of a dramatic drop-off in sales when the stimulus runs out (assuming it functions as planned) and the devastating effects on newer used car prices and fleet values (estimated to wipe out nearly $9 billion in value nationwide) and the British plan appears fraught with potential problems, even having learned from the experiences of continental cash-for-clunker experiments.

Back in the states, there seems to be little doubt that some form of cash-for-clunker scrappage bill will become law. Reuters reports that Goldman Sachs is already upgrading FoMoCo’s rating on the twin assumptions that GM and Chrysler will enter bankruptcy and that a clunker bill will be passed. Two competing bills have already been introduced (Tom Harkin’s S.3737 and Betty Sutton’s H.R.1550) and industry lapdog John Dingell has promised to include a similar provision in the upcoming climate change bill. This despite warnings from Britain that clunker bills are extremely inefficient as an environmental measure at best, and could actually increase carbon emissions.

The major concern with a possible US clunker bill is the indication that only “domestically produced” vehicles would qualify for federal bob. Both Harkin and Sutton’s bills have some form of “Buy American” stipulations. Harkin’s is particularly protectionist, while Sutton’s includes vouchers for certain vehicles built in North America (although at lower levels than vehicles “manufactured in the US”). Dingell will certainly try his darndest to funnel voucher money directly to Detroit. Though these measures seek to mitigate a lack of manufacturing stimulus that has been a noted criticism of European scrappage bills, yet more unintended consequences await such provisions: namely challenges on free-trade terms from Canada and Europe.

But such measures will be necessary to ensure any benefit at all to the US industry, which has weaknesses in its small-car portfolio, where scrappage-stimulated sales have been boosted the most. Absent environmental and manufacturing benefits (assuming the US wants to avoid a nasty trade war), a scrappage bill will benefit only scrap yards and new-car dealers. And yet an overabundance of dealers is fundamental to the auto industry’s wider woes. Though Europe’s scrappage results look good on paper to a sales-starved US industry, the consequences don’t seem to outweigh the benefits.