Category: Bailout

By on June 10, 2010

One might believe that GM’s forthcoming IPO marks the second coming of Christ.  GM, once the world’s largest corporation, faced oblivion in the winter of 2009.  The train wreck of this former company reemerged from burial last summer through the generosity of the US and Canadian taxpayer as a new company shorn of most of its former financial liabilities, unproductive assets, and brands it no longer could support.  Everything that Jerry York (R.I.P.) told the automotive world in January 2006 that GM needed to do to survive back then finally came to pass.  And now, it’s preparing an IPO to swap ownership from the governments to the public. Ed Whitacre and his team will get the credit for a most remarkable turnaround while Obama will bask in the light of his stewardship of public monies.  Let’s get the story straight.

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By on April 19, 2010

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?

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By on February 21, 2010

Opel’s Nick Reilly is casting worried glances towards Berlin and Brussels. What he hears from there makes him double his Maalox dosage. Or pop some local Rennies, if the heartburn meds are in short supply at the Apotheke in Rüsselsheim. Which they undoubtedly are. Nobody wants to help Reilly. Berlin doesn’t want to. Brussels doesn’t want to. Even Opel’s own auditors are no help. This tale would be better told by Kafka. He’s dead. I’ll try. Read More >

By on July 31, 2009

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?

By on July 29, 2009

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.

By on June 1, 2009

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.

By on May 29, 2009

Today, Berlin will re-attempt to save Opel after the disastrous Wednesday night / Thursday morning confab. From most accounts, that meeting was a remake of The Three Stooges, with the actors sent by central casting in Washington and Detroit. Berlin is still fuming about the “impertinence” (finance Minister Peer Steinbrück) of the junior Treasury staffer who demanded an extra $415 million more in short-term cash, above the bridge financing of $2.1 billion Berlin had been ready to sign that night. They also are still grumpy about being lied to, or handed “information with a short half-life” as the finance minister put it ever so politely.

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 . . .

By on May 13, 2009

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 . . .

By on May 11, 2009

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.

By on May 5, 2009

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 & Bildisco465 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]

By on April 26, 2009

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.

By on April 23, 2009

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.

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