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.

There are growing indications that GM’s “surgical bankruptcy” is imminent. They are already scrubbing down the surgical theaters around the world. The operation may just happen within a few weeks, and the “good brands”/”bad brands” not-so-final solution will create another mushrooming government agency that would be loath to put itself out of business. One of the many indications for rapid action: The patents tug-of-war between Opel and General Motors (or rather between the German and US governments) appears to be solved.

Bloomberg reports that “General Motors Corp. and its Adam Opel GmbH division reached an agreement on exchanging patents for debt. The accord, requiring U.S. government approval, would make up for billions of euros worth of technology that Rüsselsheim, Germany-based Opel has transferred to the parent company in previous years and protect the division in the event GM files for Chapter 11 bankruptcy in the U.S.”

The Süddeutsche Zeitung (Southern Germany Newspaper) goes into more detail. It reports that the swap became super urgent, because Opel had “sold” its patents to the mothership years ago. The invoice, however, was never paid. According to the Süddeutsche, GM is in arrears to the tune of “several billion Euro.” If GM goes C11, which the paper expects “shortly,” Opel would have to write off the receivables. Opel would have been caught both patentless and penniless and would have to close down.

The Süddeutsche says everything is cool between Opel and GM. All that is missing is a signature of the US government, which has to bless the deal. Opel management thinks that Washington will be amenable. Actually, DC should find the solution “charming” because it lowers the debt on the books of GM. Quite ominously, the usually well informed Süddeutsche adds: “Politically, Washington should have no interest in added problems concerning Opel.”

With the patent question solved, Opel can go about finding an investor. The Abwrackprämien boom and the Insignia’s success have washed fresh money into Opel’s coffers. Opel is liquid at least until August, the paper reports. “We now have time to build Opel Europe” said Klaus Franz, chief of Opel’s workers council.

Any private deal to take over Opel is likely to include some form of government help. Even with fresh money, Opel will need loan guarantees of €3.3 billion to make an engagement interesting to an investor. Both the German national government and those of the federal states in which Opel facilities are located have expressed interest in keeping the company afloat.

“How that might be accomplished is a hot-button political issue,” Deutsche Welle reports. “The Social Democrats and others have pledged that they would go so far as taking a stake in the company to rescue it from extinction. Chancellor Angela Merkel and her Christian Democratic colleagues, meanwhile, say providing preferential loans or issuing bonds is as far as they would be willing to go.”

According to Deutsche Welle, at least six investors have signaled interest in taking a stake in the company’s German-based subsidiary Opel.

“These are serious people,” GM Chief Executive Fritz Henderson said. “Many of them are financial players, some of them are industrial players. I would expect that work would get done in the next two to three weeks.” No names were named, rumors are running the gamut from sovereign wealth funds in Asia and the Gulf all the way to Fiat. Yes, Fiat. The very same that is supposedly rescuing Chrysler.

Fiat may form an alliance with General Motors’ core operations in Europe and Latin America, a source “familiar with the matter” told Automotive News on Friday. The deal would be on top of Fiat’s plan to merge with Chrysler LLC and would create the world’s second-largest auto group. No doubt with Sergio Marchionne on top. A frightening thought.

Luca di Montezemolo, the company’s chairman, quickly poured cold water on that rumor. “They’ve written about it in the newspapers? No, no,” he told reporters. As a result, “Fiat shares raced higher in relief,” writes Reuters.

In the meantime, the cutting of the umbilical cord between Opel and GM has progressed so far that even a new Opel CEO is being floated.

Reuters says that Bernd Pischetsrieder, ex-CEO of Volkswagen “could be a suitable head of a new Opel company independent of troubled US parent General Motors Corp” if an Opel dealer group in Germany gets its wish. When a new Opel company is established in Europe, it should be led by a person independent of GM, the head of German automobile retail trading group AVAG Holding AG, told Automobilwoche [sub]. AVAG is the biggest Opel dealership in Germany. Opel dealers want to participate in a rescue plan for the German car maker by taking as much as a 20 percent stake in a new company.

Pischetsrieder was chief executive of Volkswagen between 2002 and 2006. Pischetsrieder couldn’t get along with Piech, and was succeeded by Piech confidante Winterkorn. To this date, Pischetsrieder is still on VW’s payroll, but Wolfsburg would probably be happy to close that chapter also. One well placed—and obviously Winterkorn-washed—VW source said on the phone: “We wouldn’t mind Pischetsrieder in Rüsselsheim. He would make sure that Opel won’t be much of a threat.”

As TTAC approaches its 500th Bailout Watch, the autoblogosphere is abuzz with bailout-related news. But first, a word from a TTAC reader experiencing schadenfreude by proxy. “Robert, I think you are going to need some counseling if GM doesn’t crash and burn. Your little columns are getting more breathless by the week. Best to make some therapy appointments in advance, cause it aint going to happen. Keep up whatever it is, I enjoy glancing at it.” [Jeff, is he saying my therapy sessions ain't gonna happen?] [Robert, yes, he is.] So, as I remind my electronic correspondent to remember to turn off the lights on the way out, here’s what’s going down in the Motown district of Bailout Nation . . .

Obama plays the class card – President Obama has addressed the pressing political problem we can loosely term “why the NSFW are giving these Detroit guys a second chance?” The Detroit News reports:

Obama on Tuesday defended his decision to give the two automakers more time to resolve their problems, despite harsh criticism from Republicans who said the companies had made no progress.

“We owed that not to the executives whose bad bets contributed to the weakening of their companies, but to the hundreds of thousands of workers whose livelihoods hang in the balance. Entire towns, entire communities, entire states are profoundly impacted by what happens in the auto industry,” Obama said.

Obama’s Fervent Hopes for Change – I suddenly “get” the beauty of Obama’s “Hope and Change” ethos: you can hope for change, but if it doesn’t happen, you avoid the blame. Here’s what I really, really hoped for. But hey, NSFW happens. Don’t blame me. I did the vision thing. AND I did my best to make it happen. They screwed it up. Bad them! Bad bad bad them! (What was my therapist’s number again?)

“It is our fervent hope that in the coming weeks, Chrysler will find a viable business partner and that GM will develop a business plan that will put it on a path to profitability without endless support from the American taxpayer.”

Fiat CEO: No Union Concessions, No Deal – As TTAC commentator PCH101 has pointed out at least 1,245 times, the United Auto Workers’ (UAW) and Canadian Auto Workers’ (CAW) contracts with American automakers are not the be-all end-all of their profitability, or lack thereof. In fact, in this case, the UAW’s genetic recalcitrance may be a convenient excuse for Fiat to extricate itself from the do-or-die (for Auburn Hills) Chrysler—sorry, what do you call it? Merger? Marriage? Co-dependency?

Anyway, The Globe and Mail scores the scoop that Fiat CEO Sergio Marchionne’s ardor for ChryCo isn’t quite so fervent anymore, with less than two weeks to the feds latest hard stop on life-sustaining Chrysler “loans.”

“Absolutely we are prepared to walk. There is no doubt in my mind,” Sergio said. “We cannot commit to this organization unless we see light at the end of the tunnel . . . The minute you talk to me about historical entitlement in an organization that is technically bankrupt, it’s a nonsensical discussion. There is no wealth to be distributed.”

Fiat CEO: True Story. It’s All About Me – I didn’t bother reporting on rumors that Fiat’s CEO was looking to take over the top slot at the ailing American automaker from Bob “You Want Me to Leave? You Gotta Pay Me” Nardelli. I mean, why would anyone expect the Presidential Task Force on Autos to install an Italian CEO at the head of an American automaker looking to for a double-dip of US taxpayer billions?  My bad.

Short of injecting funds into Chrysler, Mr. Marchionne said Fiat will do whatever it takes to revive Chrysler, including offering himself up as CEO. “Fundamentally, that’s possible, but the title isn’t important,” he said. “What’s important is that they hear me. It’s possible that I will have to divide my time between running Fiat and running Chrysler.”

GM Retirees Wake-Up to C11 Pension Disaster – Although the federal Pension Benefit Guaranty Corp. (PBGC) has previously warned both GM and Chrysler employees that the companies looted their pension funds (to the point where a C11 would wipe out the majority of their money), The Detroit News serves-up this timely reminder:

“The fact is that people are going to see some reductions that obviously they hadn’t planned for,” PBGC acting director Vince Snowbarger said. “They have had a promise made to them that is not being kept and all we can do is try to step in and help out a little bit.”

Define little? When GM terminates its pension plan, the PBGC says it would assume $4 billion of the $20 billion promised. At Chrysler, the PBGC would assume $2 billion of the $9.3 billion shortfall.

Looks like I’m not the only one who’s going to need some therapy (what’s the bet the feds fund the UAWs?). Oh, wait. This isn’t going to happen. Carry on then.

It’s time to buy Ford stock. It’s the big winner from the Presidential Task Force on Automobiles (PTFOA) announcement today– although you wouldn’t know it listening to the MSM. That’s the way Ford wants it… below the radar, off the screen, out of the limelight. They’ve been getting a dead cat bounce already; never has silence been so golden. The dictum “never gloat in the misery of others” makes for good business sense, since one never knows when the table will turn. Anyway, here’s why Ford will ride high. 

First, Chrysler will go away thirty days from now. There is no deal with Fiat that saves Chrysler – ever. Why would Fiat take a stake in a company where the US taxpayer gets paid ahead of the Italians? Would you transfer your engines, your cars, your expertise and get zero return on your money for years? And add the fact that it will be at least two years before pasta-powered cars show up in America– with no guarantee that Americans really want very small Euro cars anyways. How does Chrysler survive in the interim? Will six billion dollars in assistance carry Chrysler for that period? I think not.

Then let’s examine the fact that Chrysler, unlike GM, has mostly secured debt lenders which are owed only $7 billion. Are they going to surrender their debt for an equity stake in a company that likely has no future even when run by the Italians? Heck, they’re better off with the liquidation proceeds. And that’s what they’ll do: give the Presidential Task Force on Automobiles the middle finger and hold firm on getting repaid. Hello Chapter 7 for Chrysler. 

And GM? Do you really think that there’s any plausible way for GM to restructure its entire business in the next sixty days? Nope, and the PTFOA and GM know it. Today’s “conditional bailout” is really just a prelude to pre-packaged bankruptcy. It’s a breather that gives the company the time to get its ducks in a row before the filing. As the Viability Report acknowledges, General Motors has to sacrifice brands and dealers. Only a bankruptcy allows those changes without facing massive liabilities. Count on a GM bankruptcy as a fact, not speculation.

So with Chrysler gone to nothing but an asset sale, and GM rapidly downsizing to a much smaller company worldwide (likely consisting of only two brands in North America), the playing field for Ford just opened up. No more rabid discounting wars led by Chrysler. GM will be spending time to figure out a proper restructuring with management tied up in a court reorganization.  Wow, in the midst of an auto meltdown, Ford sneaks through by staying the course on a plan designed two years ago.

it’s a new day dawning for Ford. The Blue Oval Boys will pick up a significant share of the commercial fleet business. That’s the big companies and government agencies that buy vehicles and mostly only from domestics. The three domestics currently split roughly 600k vehicles a year. The number is set to increase with the “stimulus package. With Chrysler gone and GM downsizing all of its excess capacity, Ford will see orders roll in. And with less competition, prices go up. Smell those profits.

On the consumer side, Ford will have a new Taurus this spring. The 2010 Fusion is rolling into showrooms now. Next year, a Euro Focus hits our shores (although built in North America). New turbocharged engines are on their way. And of course, Ford’s stalwart truck business continues.  More units sold with better pricing can only produce more cash flow and profits for Ford.

Ford Europe benefits from GM’s struggles here. GM’s Opel can’t survive on its own. Without German government assistance, it’s more likely than not that Opel joins the dustbin of failed automakers. But even if the German government steps up, Opel still suffers from an “also ran” image in Europe. As a ward of the German government, Opel will make all the wrong decisions.  Don’t forget, German really has its own “Green Party” as a voice in the legislature.  

Sure, Ford’s balance sheet isn’t pretty with the company leveraged to the hilt. But it will accomplish a debt exchange since the carnage of a bankruptcy (thank you Chrysler and GM) leaves the creditors with… not much. Better to take the equity today and some cash for a stake in the future with Ford. While it will dilute existing shareholders, positive earnings of any kind will put a fire under Ford’s stock.  And that’s going to happen sooner than later. The US car market is way below trend at a nine million units SAAR – and can only rebound above trend when buyers return. Ford will be there to benefit. Count on it.

The U.S. government (ostensibly representing “the taxpayers”) is right to insist on conditions to the second round of federal loans to Chrysler and GM. As always, the devil is in the details. As always, the government has put politically motivated strings onto every moving appendage in this latest example of federal largess. The fundamental question here is not whether or not these strings– from a shotgun marriage between Chrysler and Fiat to a GM bondholder haircut– will rescue either company from liquidation. It’s whether or not the federal government should be involved in bailing out any company in any industry. Period. Though others may disagree, I believe that only companies absolutely essential for national defense/security might qualify for direct taxpayer support. Might. Otherwise, NFW.

This is not a left/right debate. When President Bush approved $17.4b worth of bailout bucks for GM and Chrysler– against the wishes of Congress– the Republican administration lost any credible claim that they were friends of the free market. This brazen betrayal of stated principles paved the way for the Obama administration to go whole-hog into national industrial policy. Although the sitting president is selling his latest plans for Chrysler and GM on a rational economic bases, his intercession is, in fact, a purely political maneuver. Bailout II is not designed to “save” the American auto industry. It’s tailored to favor, through political policy, certain groups at the expense of others.

In this case, the second round of bailouts is meant to ensure that the United Auto Workers (UAW) survives intact and unscathed from a debacle that is, in part, a product of their own intransigence and short-sighted greed. (Although the union’s democratic support is a given, Obama didn’t ascend to the highest office in the land without remembering to secure and nurture his base.) As a secondary goal, the still undisclosed amount of federal money headed towards Chrysler and GM is aimed at “encouraging” Detroit to produce “green” cars. High mileage machines that conform to president Obama’s and the Democrat’s political priorities– the free market be damned.

Economics (the free market variety, anyway) is all about creating wealth and expanding “the pie.” Politics is about dividing wealth up in a zero sum game: someone wins, someone loses. This is why socialism ultimately fails every time it’s tried: it subordinates economics to politics; wealth making to wealth sharing. Profit incentives to create and expand are sacrificed to punitive political incentives to conform and obey. Ultimately, there is little wealth left to share. The same endgame applies whether you’re talking about an entire economy, or a single industry.

On Sunday, U.S. Treasury Secretary Geithner refused to be drawn out on a simple question: is GM too big too fail? Geithner claimed he didn’t want to preempt the president’s announcement. In truth, he didn’t want to even admit the possibility that doing nothing, simply letting GM and Chrysler fail, was a viable alternative. But if GM and Chrysler had been refused new funding, what would happen in the long run– aside from the inevitable short-term pain the companies, their employees and shareholders (and bondholders) would have to suffer? The same thing that happens when any business or industry goes bust. New opportunities arise.

Opportunity eventually finds its way to create new businesses and industries out of failed ones. Over time, sales lost by either company would have been absorbed by other automakers, helping to maintain their “viability.” To a certain extent, other auto companies would have picked-up the jobs lost by either Chrysler or GM. Other industries would eventually absorb “excess” jobs. Over time, Ford, Honda, Nissan, Hyundai, Toyota and others would assume GM’s and Chrysler’s “lost” production, at least to the extent the market demanded it. The concomitant industry supply chain would cater to the new source–and level– of demand.

In other words, if market forces for punishing failure were allowed to actually work in this case, far from being the end of the world, the auto industry would eventually emerge HEALTHIER, with far less excess capacity and more productivity. The result would be a much better, more profitable business overall. This would in turn actually ATTRACT capital into the auto industry, and set the stage for long-term growth.

But no, we can’t stomach losing jobs in the short run– especially union jobs. So instead of letting nature take its course, the federal government spare us the pain that comes from producing goods or services that the market doesn’t want. And in doing so, president Obama and bailout suporters guarantee the laws of unintended consequences will have their day. The Brits learned this lesson the hard way back in the ’70s. So why are we bent on repeating the British Leyland epic failure here? Are we really that weak, cowardly and naive?

You’d kinda hope that the Presidential Task Force on Automobiles (PTFOA) would negotiate with Chrysler, GM, the United Auto Workers and GM’s bondholders down to the wire. After all, the actual deadline for the yes/no decision on the next round of bailout billions is March 31. So it kinda makes sense to hold their feet to the fire until the very last minute, forcing them to satisfy the conditions laid down by the first, $17.4b federal bailout. But nooooooo. Six days out from the deadline, the leaky ass quango known as the PTFOA has let slip the fact that they will, indeed, bless (a.k.a. “loan”) Chrysler and GM with $22B of your hard-earned tax dollars. Maybe more! But that’s OK, ’cause THIS TIME there will be strings! Timelines! Deadlines! The Wall Street Journal reports . . .

Interviews with task-force members indicate that the administration doesn’t want to let General Motors Corp. and Chrysler LLC slip into bankruptcy protection, a course advocated by some critics of the industry. Instead, the task force is expected to say that it sees viable futures for both GM and Chrysler, but only if there are sacrifices from their managements, unions and GM’s bondholders. The team will also lay out a firm timeline for action.

And now, the NSFW about how hard the PTFOA worked to get to the point where they’re happy to use federal money to [continue to] prop-up America’s zombie automakers.

In session after session in a warren of offices at the Treasury Department, the team has sat through tutorials on dealer financing, studied basic data and debated the future of U.S. car sales. They have spent days trying to understand the complexities of the hundreds of companies that supply the car companies with axles, seats and other parts.

Perhaps if they’d hired someone who already knew how the industry worked, they could have avoided those terrible all-nighters. As if that’s not enough of an insult to any industry worker’s intelligence, there’s more!

“It’s like a Rubik’s cube, trying to untwist it and trying to get all the colors to line up,” [Steven Rattner, a former journalist-turned-investment banker] said in an interview. “So we’ve learned a lot about how car dealers work, and how companies get paid when they sell a car to a dealer, and why there are a certain number of dealers more than are optimal. Have we learned everything? Of course not, but I think we are learning what we need to learn to do this job.”

So industry vets can work for forty years to gain enough knowledge to run a small business—successfully—in the automotive trade. But an investment banker and his boyz can get a handle on the entire industry in what, a month? Boy, they must be smart!

Mr. Rattner dismisses the idea that his team may not have enough auto expertise to tackle the job. “We are not trying to run car companies,” he says. He compares the work to what he and others have done in the private sector. “This is the type of investment decision that many of us on this team are used to making.”

Pride. Fall. Goeth. Rearrange. But don’t take my word for it. Here’s the WSJ’s report on the meeting between the PTFOA and Fiat, re: Fiat’s small car “alliance” with Chrysler.

Mr. Bloom focused on minute aspects of the business strategy, and Mr. Rattner, on how the deal would be structured. People on the Fiat team came away thinking that the task force’s questions betrayed a limited understanding of the industry. “It’s fair to say we walked out of the meeting and were a little unsettled,” says one member of the Fiat team.

If you’re thinking about forgiving the political appointees’ ignorance and laud them for, at least, standing apart and stepping back from the current meltdown, you know, to take the long term view, think again.

Several auto experts who’ve met with the panel say they’ve been struck by the group’s focus on trying to determine exactly when car sales will rebound. “They are absolutely concerned with the short-term, so it’s hard to see them grasping the medium or longer-term issues,” says Daniel Roos, an automotive expert at the Massachusetts Institute of Technology, who briefed the team in Washington on March 6.

I guess they’re listening to Deutsche Bank’s auto analyst, Rod Lache, who told the PTFOA to ignore the data. “This is a policy decision, not an economic one. One way or another, GM will have to be saved.” Of course they will! Because it’s all about jobs! jobs! jobs! Well, one job, anyway.

At the Chrysler Dodge truck assembly plant, located in nearby Warren, Mr. Rattner says, the importance of the task force’s work hit home. “At the end of all the numbers we are generating,” he says, “there are real people.”

In 1979, Chrysler was staring down the barrel of bankruptcy. ChryCo’s charismatic CEO stepped forward, publicly lobbying for $1.5B worth of federal loan guarantees. Lee Iacocca captured the American taxpayer’s respect and trust—to the point where the automaker’s ad folk made Lee the company’s pitchman. “If you can find a better car, buy it!” he dared. They did and they didn’t. Either way, Iacocca’s communication skills were beyond reproach. Contrast that with today’s mumbling, bumbling Motown CEOs, who’ve managed to alienate well over half of the American public, who no longer want to buy Detroit’s cars OR provide them with a second (third) chance. And no wonder. The CEOs have demonstrated an abject inability to call a spade a spade, or sell the spadework that must be done (which is largely grave digging by now). Wagoner, Nardelli and Mulally’s failure is what it is. But what about the little guy in all this? Who speaks for them?

I’m not talking about Detroit’s unionized workers or their white collar counterparts. As much as I sympathize with their plight—caught-up as they are in a poisonous corporate culture not of their own making—they are hardly a downtrodden, voiceless minority. Their Motown overlords have Washington’s ear. The fact that Chrysler and GM have scored over $50 bn in federal handouts of one sort or another (loans, retooling loans, finance company bailouts, etc.), while Ford has arranged a $9 bn line of credit, speaks for itself. Detroit’s dealers, captive finance companies and suppliers are also well represented. But what of everybody else in the American automotive industry?

I refer to the foreign nameplate automakers and their workers. Other than some gentle murmurs of encouragement, we’ve heard nothing from Toyota, Honda, Nissan, Hyundai and the rest of America’s so-called transplants re: Chrysler and GM’s federal trough snuffling. The transplants should be a force to be reckoned with; they currently account for more than half of all automotive sales within our borders. They aren’t technically bankrupt, or facing bankruptcy. Yet their tax money (like ours) must now pay for Detroit’s chronic mismanagement.

The transplants’ productivity and success, their ability to create goods and services that American consumers want at a price that makes the company a profit (in accordance with all U.S. laws and regulations), is now subsidizing Detroit’s ongoing incompetence.

Of course, it’s worse than that. This is not a general taxpayer bitch and moan thing. It’s a government using tax money to distort the will of the American consumer by propping-up a dead competitor trading thing. In a severely contracting market, no less. I know: jobs! jobs! jobs! But what about the jobs! jobs! jobs! of all the productive, hard-working non-Detroit autoworkers laboring within U.S. borders?

The current economic meltdown has forced Toyondaissan to curtail American production, cancel scheduled factory openings and lay off thousands of workers. Would those curtailments have been as severe if Chrysler and GM had been “allowed” to go belly-up? Of course not. Common sense tells us the transplants would have scooped-up a [yet] larger share of the suddenly smaller pie, supporting American jobs and American communities. There’s no getting around it: the federal bailout is taking food of the tables of American workers.

There’s plenty of room to debate the advisability of encouraging foreign nameplates to manufacture cars in the U.S., relative to, say, Detroit-based automakers. (Who’ve shown no reluctance about importing vehicles into the U.S. market.) We’ve engaged in that discussion here on TTAC many times. But where is the voice of the transplants and their workers in this debate?

Again, there are thousands of workers and dozens of communities spread throughout the U.S. who build cars for Toyota, Honda, Nissan and Hyundai. Workers who manufacture a quality product for American consumers. Workers who pay their taxes. Workers who are NOT sucking off the federal teat, either directly or indirectly. Who speaks for them? Are they not outraged by their own government’s willingness to put their jobs at risk to support a business model that’s broken beyond repair?

If they’re not, they should be. Last year, they went to bed and woke-up in a world where free and fair competition, combined with the sweat of their own brow, assured their family’s future. Now, who knows? A cabal of corrupt financiers blew a hole through U.S. banking regulations designed to protect the average wage earner from economic ruin. These insiders opened the door; the feds have come traipsing in, paving Detroit’s road to hell, forcing American autoworkers to compete against their own government.

It’s time for them to tell Washington that these enormous, unrecoverable “loans” to Chrysler and GM are a cancer on their beliefs. I understand the transplants’ desire to keep a low profile and wait for the dust to settle. But America’s traditional values are at stake. Their workers must step up and say no to Bailout Nation.

Bankruptcy is more than a financial reckoning. It’s a psychological way-point, from “we’re doing our best” to “re-do.” Let’s call that middle point “we blew it.” That’s not too harsh, is it? I mean, if Chrysler and GM didn’t blow it, they wouldn’t be bankrupt. Oh wait; they’re not bankrupt. Which means Chrysler and GM don’t have to face the otherwise inescapable fact that they NSFWed-up. Of course, they should face reality. You know: the first step to recovery is admitting you have a problem. But as long as they’re supported by enablers, they’re happy to stick with “we’re doing our best”—even though their best is nowhere near good enough. Uncle Sam’s support I get. But the media’s participation in this delusional denial is unconscionable. I speak specifically of, you guessed it, The Detroit News.

TTAC’s Best and Brightest know that I regularly OK routinely give The Detroit News NSFW. As the hometown paper, the News could have steered their readership towards a greater understanding of the domestic carmakers’ predicament. They could have been at the forefront at the debate over the automakers’ future (if indeed there is one). Instead, they stayed on the sidelines, pom-poms in hand, perpetuating every excuse proffered by the piss-ant PR pansies blowing smoke up America’s NSFW, actually cheering the automakers’ multi-billion dollar raids on the public purse. And they’re still doing it.

“Give GM, Chrysler some breathing room” is yet another example where The Detroit News gets it badly, completely, foolishly, dangerously wrong.

Leaders of President Barack Obama’s auto task force now say that deadline isn’t likely to be enforced, taking away a gun from the heads of Chrysler and GM and allowing them more time to carefully put together their new business plans.

It makes sense for the government to provide that flexibility. No one will be able to say for certain whether the two automakers are viable until the administration thaws the credit freeze and Americans regain confidence in the economy.

The auto industry is not suffering as much from a failed business strategy as it is from the inability of its customers to get loans and the wariness of consumers to make big purchases.

Are these guys NSFWing nuts? Well, yes. Obviously.

Obviously, Chrysler and GM’s unions and bondholders can’t be “encouraged” into ripping-up and re-writing their agreements with the automakers if there isn’t a gun to GM’s head. Why would they?

Obviously, waiting for the economy to recover is not a viable “plan” for either Chrysler or GM.

Obviously, Chrysler and GM (NOT “the auto industry”) were and are suffering from a failed business strategy. They were losing money and market share hand over fist when the economy was booming.

The really tragic part about this: The Detroit News and, by extension, the automakers, actually believe that they can keep dancing the waltz as compartment after compartment fills with water. They are willfully ignorant of their plight. They refuse to abandon ship—even if it means taking tens of billions of our hard-earned tax money down with them. Well, it already has. So tens of billions of additional dollars.

Notching down the urgency level a bit ought to give everyone the room they need to make sound decisions.

The task force can do one more thing for the automakers: Approve the next round of loans to help them continue operating until the market rebounds. Rattner has before him $22 billion in loan requests from GM and Chrysler, and acknowledges they need the money.

But taxpayer backlash to bailouts makes additional loans dicey. The money would be well-used.

WHAT!? In fact, correct me if I’m wrong (I know you will) but it’s the taxpayer that’s going to be well-used. The News begs to differ.

Chrysler, which needs $5 billion by the end of the month, says it is making progress in its alliance talks with the Italian automaker Fiat.

The alliance would allow Chrysler to cut its expenses and expand its markets, and place it back on the road to profitability.

GM has showrooms filled with attractive product and is negotiating a new labor pact with the United Auto Workers union that should sharply reduce its operating costs. Once consumers start buying vehicles again, it should be in good shape.

There’s a light out there at the end of this tunnel. If GM and Chrysler are given the time and the help they need to reach it, the entire economy will benefit.

Not to coin a phrase, the light at the end of the tunnel is the headlamp of an oncoming train. Somebody should pull the brake on this bailout express, ’cause full speed ahead is only going to make things worse, not better. Or, to return to our original metaphor, preventing Chrysler and GM from bottoming out will guarantee their death in the gutter.

The president who did more to expand the federal government than any other in modern history began his first term assuring Americans that the only thing they had to fear was fear itself. Flash forward seventy-six years and FDR’s spiritual successor wants his fellow countrymen to live in fear—so his administration can achieve the same Big Government goal. Lets call it the Fram filter doctrine. Remember the old Fram filter ad? “You can pay me now or you can pay me later.” There’s your philosophical justification for the Detroit bailout. We have to bail out Motown (and everyone else) NOW or the whole economy will go to hell and we’ll WISH we’d made the “investment.” Rubbish.

There’s only one way Bailout Nation makes sense: if you accept the supposedly “inevitable outcome” of failing to prop-up failed enterprise. Oh, hell. You don’t even have to accept it; you just have to be afraid that it’s true. If GM catches a cold, Americans will die of plague. Are we really that stupid?

Cravenly, disgustingly, to their eternal shame, GM and Chrysler Gulfstreamed to Washington to flim-flam the fruits of their epic mismanagement as a threat to all taxpayers. Their CEOs testified that if we didn’t hand them $19.4B worth of taxpayers’ money, the “ripple effect” of a Chrysler and GM Chapter 11 would kill the economy dead.

No! Worse! If we “let” GM and Chrysler slide into bankruptcy, it will destroy America’s entire industrial base. Foreigners—foreigners!—will steal our middle class and, eventually, turn us into their bitch.

So we paid up. And now the zombies are back, using the same tactics that loosened the public purse strings the first time. Pols and press are busy perpetuating the same flawed, fear-based logic which obviously, catastrophically, nearasdammit immediately failed. In fact, we’re post-Fram. The new thinking: we can pay them MORE now and we can pay them MORE later. And… that’s it. Oh yes, we eventually get electric cars. 

Here’s another idea. How about we pay Chrysler and GM NOTHING now so we don’t destroy the entire United States economy later? I’m serious. Forget debtor-in-possession financing. If the markets won’t embrace Chrysler and GM’s C11 turnaround plans why should the American taxpayer?

If America wants to clean up the aftermath of a Chrysler and GM C11 by creating a new health care, pension and unemployment safety net, if John Q. Public feels sorry enough for displaced auto workers to spread boondoggle billions over the bankruptcy-blighted landscape, go ahead. But for God’s sake, let these automakers die. It’s gonna be ugly. But over-capacity is over-capacity. There’s no way for GM to avoid the consequences of its inability to make itself indispensable. None. When the bailout music stops, GM still won’t have a chair.

If we continue to bail out Detroit, and extend that largess to automotive suppliers, dealers, etc., we’ll screw-up the economic fundamentals that made this country the world’s greatest economic power: minimal government intervention in fair, free and open markets. We’ll be stealing food from the tables of those companies and workers that didn’t end up in DC. Who didn’t use threats, bribes and extortion to avoid the consequences of their own actions. And we’ll be running-up the price of transportation for the average consumer.

Bankruptcy was designed for this exact situation. Do we really have so little faith in our existing institutions that we want to create some special exemption for a gang of bombastic millionaires that somehow got the idea that they deserve a pass that we, the people, would never receive? What’s wrong with Chapter 11 anyway? GM and Chrysler are afraid of that no one will buy a car from them in bankruptcy. And they want us to “take ownership” of their fear. With our cash.

Someone needs to stare these fear-mongering whiners in the face and tell them to man up. If it’s true that consumers won’t buy your products after you’ve declared bankruptcy, it’s your fault. Not ours. YOU killed your brands, not US. Instead of holding a gun to our head, why don’t use your valuable—make that expensive—time devising a way OUT of bankruptcy. Find some way to come back from the dead that doesn’t steal money from the mouths of productive citizens and taxpayers.

Yes, we’re afraid for our economic survival. Yes, we feel for others who will suffer for their boss’ incompetence, arrogance, short-sightedness and greed. But we must not abandon who we are as Americans and what we believe in. 

Faith, hope and charity are wonderful, noble ideals. But they’re not what makes America strong. That would be independence, creativity, hard work, determination and a deep-rooted belief in fair play. Now is not the time to abandon our principles.  Now is the time to embrace them, come what may. Yes, we can pay Detroit now. But mark my words: we will pay for it later.

The viability plans presented by Chrysler and GM to the US Treasury and the public yesterday signaled the end game. The plans amount to nothing more than begging for enough cash to stay afloat until the market turns upwards. Not only are the automakers’ arguments based on flawed assumptions about the US car market, but they singularly fail to address the fundamental problems that brought Chrysler and GM to their knees. The fact that anyone would take these pleas seriously indicates the simple triumph of fear and over common sense. You’d have to be willfully ignorant not to see these plans as the worst kind of cheap fiction. Well, maybe not so cheap . . .

Of the two submittals, Chrysler’s plan was worse. It was a non-plan. To start, Chrysler pointed to its reduction in warranty claims, its lower rate of recalls, and other “proof positive” of a turnaround in quality which justifies further Federal money into the money pit called Chrysler. Too bad all the quality rating folks like JD Power and Consumer Reports still rank Chrysler at or near the bottom.

And when the total number of rigs on the road sold in the last few years goes down, warranty payments should be reduced as well. Funny thing, Chrysler’s total sales have dropped about as much as their warranty claims in the last three years.

As for future vehicles? Nothing but speculative hype about future cars from Planet Gullible. And by the way, ChryCo’s cutting three vehicles previously destined for death (Aspen, Durango, and PT Cruiser). But there’s a new Grand Cherokee coming! And Fiat with its “not ready for American prime time” Euro cars. Perhaps Fiat should be talking to the Saturn dealers instead?

Chrysler’s first lien bank lenders have not agreed to any cuts whatsoever. Why would they? They’ve got priority over the government loans already. The UAW hasn’t agreed to the cut in the health care VEBA for retirees (same goes for GM too). And by the way, Chrysler needs an additional $5B to keep going.

The coup-de-jour: Jim Press said that the dealers stepped up in February and ordered 78k rigs—thanks to $2k of dealer cash. And who do you think paid for this channel stuffing? Hey, Jim, what happens in March when your 150-day supply of cars becomes 180 days? How big will the bribe be then?

GM’s plan was too late. It’s the plan that should have been implemented in 2005. Saab will return to Sweden—if the government there forks over the 17 kroner necessary. Otherwise Saab will be toast by the end of the month. Saturn and HUMMER will wither and die—unless Chindia gets tired of waiting for a C7 liquidation.

Don’t think so. India’s auto tycoons aren’t stupid; they’ve watched Ratan Tata drive Land Rover/Jaguar straight over the metaphorical bridge to nowhere. Mahindra & Mahindra has stopped making noises about entering the US with rough and tumble SUVs and chicken tax surmounting mid-size pickups. China may buy a US brand or they may not. If they do, GM will get pennies on the dollar, if not actually having to pay someone to make Saturn, Saab and HUMMER go away.

In fact, no matter what, GM’s going to have to pay to make its excess brands disappear. Wagoner faced the cameras yesterday and blithely assured reporters that GM would fight terminated dealer franchise dealer lawsuits on a state-by-state basis. All together now: who’s paying for that? And speaking of money . . .

GM said they need another $18B (on top of the $13B already received) to make the plan work. And that’s before we get to the UAW retiree health care issue, the cost of mopping-up Delphi, guarantees to suppliers, and god-knows-what-else. That doesn’t include the Section 136 loan money (none given so far) authorized and appropriated for “viable” auto companies and parts suppliers to improve fuel economy.

When does it stop? Or is that where? GM is also holding a gun to Europe, Canada, Britain, Thailand and Australia, extorting money to keep its operations going.

Truth be told, we don’t know the total bailout funding required. Figure $40B-$50B dollars as a lowball estimate. And that’s just short term misery extrapolated over five years (Comrade). Let’s not forget the US pension contributions due in 2013/2014. Or shall we?

This is bad craziness. Never mind the cost. Or the fact that the bailout is doomed to failure. Government money provided to private enterprise on this basis completely distorts the function of the marketplace. It rewards incompetence. It perpetuates incompetence. The bailout does nothing to address GM’s fundamental inability to sustain car brands with class-leading products. Nor can it. It is not the government’s responsibility to pick a winner in a free market. Nor is it the government’s responsibility to “save” a loser.

Ever heard a movie hero say, “It sounds simple, but it just might work!”? Humans have a natural tendency to over-complicate problems and, thus, devise inherently delicate solutions. Have a look at Operation Eagle Claw, the 1980 Iranian hostage rescue attempt. Or, consider the upcoming Presidential Task Force on Autos. The PTFA will waste countless hours with Chrysler and GM auto execs, union reps, dealer council chiefs, supplier supremos, investment bankers, outside analysts and not a single average car buyer. They will devise a clever plan that will please no one and fix nothing. What a waste. In this case, all the Obama administration need do is nothing whatsoever.

Chrysler and GM are trussed-up with ropes made of Gordian knots. Their brands are a disaster, but they can’t kill brands without violating 50 states worth of franchise laws. Their debt is mountainous, but they can’t get the paper holders to swap obligations for equity. They can’t shut excess to capacity factories, but they can’t afford not to shut factories. They can’t work with United Auto Workers (UAW) work rules, but they can’t get rid of them. The need to improve their products STAT, but they can’t afford to and, even if they could, the market sucks.

The best way to sort this out: bankruptcy. But since we’re paying people to over-analyze the situation, let’s drill down.

Debt

Assuming GM can eliminate $18B of unsecured bond debt, they’ll still need at least $18B of new debt ($9.4B already advanced so far by Uncle Sam and the need for an equal amount more a certainty than not) thus netting a debt reduction of zero. Nothing to see here folks, move on.

And Chrysler? There’s zero chance of its bank lenders ($7B owed) of swapping anything. The parts are worth more than the whole and they’ll get (most of) their money back after selling off the minivan plant, Jeep, and anything else which they’ve got covered by security agreements. But Chrysler took on $4B from the government and is looking for $3B more. That’s a total of $7B—exactly the same amount as the existing bank debt. So eliminating existing bank debt and taking on IOUs to Uncle Sam places the company back where it started.

Union obligations

Bringing union wages and work rules into parity with transplants’ might be helpful in the long run, but labor costs represent under 10 percent percent of Chrysler and GM’s total running expenses. And we’re only talking about US labor—not for the rest of GM’s (crumbling) global empire. At best, a new deal with the UAW might save GM North America a billion dollars. Not enough to right a ship that’s losing $2B+ a month in cash flow. Chrysler’s rapidly shrinking workforce and increasingly undesirably product portfolio render any union cost discussion irrelevant. Period.

In terms of the automakers’ obligations to stuff their union’s health care superfund with cash, the UAW won’t go there. Unless they can get the US government (that’s you and me) to guarantee the proposed paper. If that happens, his retiree flock will realize Barack Obama’s dreams: guaranteed health care above and beyond existing Medicare/Medicaid coverage. Obama can’t be that stupid, right?

But even if he gets this guarantee, GM and Chrysler both have to still come up with billions of dollars before January 1, 2010, to fund the new VEBA anyways. And where is that money supposed to come from? Profits and positive cash flow in 2009? Not a chance.

So the take so far—assuming even these companies can hit the targets outlined by the government for the loans—is that it’s still not enough to keep these companies afloat. Existing debt swapped for new paper plus new government debt nets nothing. No savings. A zero change in the debt balances. The new VEBA still will require a cash down payment—a non-trivial amount too. And labor savings that might provide value later but are relatively meaningless in the depressed car market of 2009.

Brand, model and dealer reductions

How much will this cost without a bankruptcy? Dealers won’t go away quietly in the night. They’ve got an army of state attorney generals to protect them. And while Saturn might be a “new kind of car company” with operating agreements, not franchises, among its dealers, it won’t prevent lawsuits. GM can’t give away Saab or Hummer at any price so no easy out there. And it’s not clear that Chrysler could even kill one brand amongst its troika without inflicting a mortal wound. (Assuming it’s worth saving Chrysler.)

Conclusion

All that’s filler, of course. The only thing that needs saying, or doing: let both companies go into bankruptcy now, without crafting any governmental solution whatsoever to prevent it. Then we can see what’s worth saving and how much it will cost. Simple, eh?

TTAC proofreader and Editor Jeff Puthuff has been helping me chase down the Chrysler–Cerberus story, trying to identify the automaker’s secret co-investors. In the midst of that pursuit, Jeff has unearthed this heretofore unreported document: “U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring” Dec. 3. 2008 (Prepared for Members and Committees of Congress).” The Congressional Research Service (CRS) drafted the report for elected representatives contemplating whether or not to loan Chrysler and GM money to prevent their bankruptcy. The U.S. Senate and House of Representatives eventually failed to create a bill to fund the loans (though not for lack of trying). Then-president Bush stepped in at the eleventh hour and provided $17.4b worth of federal loans, by stretching the provisions of the Troubled Asset Relief Program (TARP). There are some startling—and not so startling—insights.

Widely quoted Center for Automotive (CAR) Research Study Debunked, Rejected

A general criticism of this analysis is that it assumes that the suppliers and all other automakers, aside from the the initially failed company or companies, would see their output drop to zero, and that they would be merely passive observers of an industry collapse. There are many examples in recent years of bankrupt or financially distressed suppliers being supported by their OEM customers, or by other suppliers that acquire parts of the business to gain new contracts or to be able to continue servicing their own contracts from a failed subassembly producer…

While CAR posits, for the sake of analysis, that, in the first year, no auto manufacturing in the United States could survive a major Detroit 3 bankruptcy, in actuality, such an extreme outcome is unlikely. Immediate and radical restructurings among suppliers is a more likely outcome, and other brands would continue to produce.

U.S. Auto Manufacturing Employment Declining Generally, Anyway

Automotive manufacturing employment has also fallen as a share of total employment in manufacturing. While total manufacturing employment has fallen by more than three million jobs since September 2001, employment in motor vehicle manufacturing dropped at an even faster rate, with its share of total manufacturing employment falling from 7.4% to 6.4%. During this period, total automotive sector employment, including services fell from 5.1 million to 4.6 million, while total U.S. employment grew by six million. As a result, automotive employment, including both manufacturing and services, as a share of total U.S. employment, fell from 3.9% to 3.3%.

GM – Chrysler Shotgun Marriage Still An Option

GM’s plan to acquire Chrysler and merge the two companies, which was widely reported in October 2008, was similarly withdrawn when the companies could not find sufficient funds, including proposed federal financial support, for the deal. The plan could still be resurrected as part of a general plan of government financial assistance for the Detroit 3.

Chrysler / GM Chapter 11 Could Increase Consumer Confidence

One might question whether the recent urgent requests for financial assistance do not diminish consumer confidence at least as much as would a bankruptcy filing designed to reorganize the company and lead to financial viability . . . filing under Chapter 11 could boost consumer confidence in the troubled automakers.

Feds Could Back Vehicle Warranties

If Congress finds that concern about warranty coverage is an issue that would doom a reorganization, it could be possible to provide for alternative warranty coverage. This might be funded with premiums paid by automakers, similar to premiums paid by financial institutions to the Federal Deposit Insurance Corporation (FDIC).

Loan Default Risk

However, direct loans from the federal government commit government money more immediately than would loan guarantees. Several have questioned the advisability of extending such loans, fearing that the troubled automakers may be unable to repay them even if the loan terms are very favorable.

Loans Could Leave Federal Government SOL

Under current bankruptcy law, the loans, if unsecured, would enjoy no priority status under 11 U.S.C. § 507. This means that the government potentially could “stand in line” with the other non-priority unsecured creditors and ultimately might receive only a few pennies for each dollar of outstanding loan balance. In the worst case, there might be no funds to divide between these creditors.

Chrysler Pension Plan Funding Unknown

As a privately-held company, Chrysler is not subject to the same SEC reporting requirements as are GM and Ford. Current information about pension plans was not available at the time this CRS report was written.

Loans Less Onerous Than Previous ChryCo Guarantees

By comparison to the broadly defined elements of these plans, the Chrysler loan guarantee legislation of 1980 was far more prescriptive in exchange for a loan guarantee that was worth far less than the $25 billion requested by the Detroit 3 in 2008, even allowing for inflation.

Clearly, the U.S. Congress had enough information to know that providing GM and Chrysler with federal loans was an extremely risky not to say stupid idea. As did President Bush. By making these loans, the president pushed “the Detroit problem” down the line to president-elect Obama.

The bottom line: adding more fuel to Chrysler and GM’s pyre is just as boneheaded now as it was then.