[The following analysis was sent to TTAC by a New York City bankruptcy lawyer who wishes to remain anonymous. It's twice as long as our usual editorial, but I think you'll find it's well worth your time. Thanks to you-know-who-you-are.] Cerberus Capital, a highly secretive NYC-based vulture investment fund, wants the U.S. government and taxpayers to bailout its failed investment in Chrysler and its failing investment in GMAC. Its partner in this raid on the US Treasury is General Motors, a woefully insolvent automobile manufacturer whose CEO is paid $40k each day. Here’s why a bailout for GM and/or Chrysler is a bad idea.
Background
Cerberus Capital uses hedge funds as the vehicles in which to invest in various companies. Apparently, the hedge fund known as Cerberus Series 4 is the owner of an 80 percent interest in Chrysler and a related fund owns or controls a 51 percent interest in GMAC. Not surprisingly for a company known for its secrecy, Cerberus has not disclosed which entities actually own the interests in Chrysler and GMAC, has not disclosed what fees Cerberus has taken or accrued from its investments, and has not disclosed what severance payments would have to be made if GM actually acquired Chrysler. For example, would Chrysler CEO Bob Nardelli get another big payday if he’s cut loose in a merger? The interrelationships among GMAC, Chrysler Financial, Cerberus and other entities are also a well-kept secret.
Secrecy, Secrecy, Secrecy
Why is everything so secret? What happened to the idea of open government? A few questions come to mind:
1. Exactly what is the Cerberus/GM proposal to borrow $10b from the US Treasury in order to fund a merger, the terms of which are also secret? Is it in writing? Where is a copy? What were the proposed terms that were rejected by the current US Treasury? Is another proposal in the works? How is the $10b going to be repaid by two insolvent auto manufacturers?
2. Which lobbyists represented GM and Cerberus in getting their loan application before the US Treasury? How much were the lobbyists paid? With whom did GM/Cerberus meet? Where are the notes of any meeting or other communications about the loan proposal?
3. What do we know about the financial condition of the proposed borrowers? Where is Chrysler’s current balance sheet and income statement? Surely Chrysler is insolvent on an equitable basis, and probably insolvent on a balance sheet basis. Why is basic financial information not available for public inspection and comment?
4. Where are the financial statements for the Cerberus Series Four hedge fund? US taxpayers are being asked to bailout the failed auto related investments by Cerberus Series Four, while the profitable investments in the same fund are not being shared with taxpayers.
GM is woefully insolvent and should file Chapter 11
5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its current liabilities were $70b, dwarfing its current assets of $55b. Moreover, we do not know what deals GM has made to stretch/defer repayment of its account payables.
6. Is Chrysler in any better shape than GM? Probably not, but without a current balance sheet the definitive answer is a secret.
7. Assuming Chrysler is insolvent (liabilities exceed assets), then the equity interest of Cerberus and Daimler (the 20 percent equity owner) are worthless and these entities are not even entitled to a seat at the merger negotiating table. The real economic owners of Chrysler are its creditors and employees, who are also in the dark about the proposed US treasury bailout.
Who really benefits from a GM/Cerberus/Chrysler merger?
8. The US taxpayers can’t benefit since there is no repayment plan. Not surprisingly, Cerberus and its hedge fund are back door beneficiaries, because the 51 percent Cerberus ownership interest in GMAC will increase in value if GM and GMAC survive. Chrysler is a lost cause, but with the value of the Cerberus investment in GMAC also plummeting, Cerberus is trying to prop-up GMAC by helping GM survive. Is Cerberus pledging its equity interest in GMAC to the US Treasury as security for a government loan to GM? Why not? Is GM pledging its 49 percent equity interest in GMAC to secure repayment of any loan by the US Treasury? More secrets kept from the public.
9. The self-dealing by Cerberus extends to wanting to cherry-pick the Chrysler assets and keep the auto financing arm for itself. What is the value of the Chrysler auto financing business, and why should Cerberus benefit?
10. GMAC had negative net income of $3b for the first 6 months of 2008. GM’s ownership interest in GMAC was impaired by at least $2.7b during the same six month period, meaning that Cerberus Series Four hedge fund had suffered a similar loss in value in its investment in GMAC. Why should taxpayers bailout the millionaire investors in the Cerberus hedge funds?
More secrecy and lack of disclosure
11. Does GM plan to make any payments to GMAC, payments that directly benefit Cerberus? As vehicle residual values decrease, GM is obligated to make payments to GMAC under “residual support and risk sharing” agreements. On August 6, 2008, GM paid GMAC/Cerberus $646m, money which could have been used by GM to fund its ongoing operations and its obligations to employees.
12. Should any taxpayer money be used to fund payments to GMAC/Cerberus, whether that money is used directly or indirectly? How much, if anything is Cerberus investing in new money to prop up its investment in GMAC? If it is not investing in Chrysler or GMAC we can reasonably conclude that its analysis shows that the investment is a bad one. What’s bad for Cerberus is bad for the US Treasury.
Although it appears that the Cerberus Series Four has money available to make follow-on investments, it makes no sense to throw good money after bad if you can lobby the US Treasury to make the bad investment for you. A related question is whether the Cerberus equity interests in GMAC are going to be used as collateral for the loans that will be used (albeit indirectly) to bailout GMAC. Why should equity bear none of the risk but get all of the benefit?
More non-disclosure
13. What is Cerberus ResCap Financing LLC and who has seen its financial statements or the agreements relating to the $3.5b secured loan facility? How is this secured loan impacted by the bailout of Cerberus/GM/Chrysler?
Deepening insolvency is likely
14. GM’s current insolvency and continuing losses will trigger additional liabilities, and make it doubtful that GM will be able to make payments promised to employees and former employees or perform its labor agreements. GM’s worsening financial condition also deepens its losses from its derivative contracts. How would a GM/Cerberus Chrysler merger affect these liabilities? Will any government loans be used to reduce the $30b of GM accounts payable, or, in the event of a merger, to pay down Chrysler accounts payable in some still unknown amount? Sadly, we don’t even know what Cerberus proposed as the use of funds and we have no idea how Cerberus will benefit since we have no financial information on Chrysler or Cerberus.
15. As GM and Chrysler idle plants and facilities, more employees are laid off the employee related liabilities of GM/Chrysler will increase by hundreds of millions. Since GM and Chrysler are insolvent, who will pay these increased costs? Can any of these costs be avoided in a Chapter 11 case of Chrysler or GM?
16. Should taxpayer money be used, directly or indirectly, to pay GM and Chrysler obligations that are coming due while these entities are unable to pay from their own assets. Surely not, but what is being proposed, and who will benefit if GM debt is redeemed at par by vulture investors that bought the debt at pennies on the dollar? A related question: will any Cerberus entities benefit from government funded redemptions of auto maker debt? Is it possible that Cerberus is trading in credit default swaps and actually benefiting from the difficulties of Chrysler, GM and GMAC? Yet more items of non-disclosure on a long list of secret items.
Conclusion
17. GM, GMAC and Chrysler are not credit worthy and are unable to borrow money on any basis, secured or unsecured.
What’s Good for GM/Chrysler is a Chapter 11 Filing
18. GM needs to be restructured, which means it must change the terms of its legal obligations to suppliers, bondholders and employees. The only vehicle to accomplish the needed changes is Chapter 11, which lets GM reject unfavorable contracts, renegotiate its debt obligations, defer interest and principal payments and gives it time to fix its business. Without a chapter 11 filing a government infusion of $10b cash will be gone in six months when GM uses the money in 2009 to pay bondholders and employees billions of dollars, payments which do nothing to help GM survive.
19. Chrysler, the stepchild of a distressed debt vulture fund, is also a prime candidate for Chapter 11. But Chrysler should be liquidated, not reorganized. A liquidating Chapter 11 case, expressly permitted by the Bankruptcy Code, can be used to keep Chrysler operating while its divisions are sold. With adequate Chapter 11 funding line workers can keep their jobs and benefits, and non-essential executives can be fired at minimal cost to the Chapter 11 debtor, known as the debtor-in-possession. Trade creditors will continue to ship to Chrysler because their post-petition claims will have a priority in payment. Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments. Chapter 11 will also make it clear to Daimler and Cerberus that their investment is worthless and they will not be able to use their position of control to improperly benefit.
20. Cerberus should acknowledge the financial reality and either file a Chapter 11 case for Chrysler or have a federal receiver appointed so that the value of the Chrysler assets can be maximized in an orderly sale procedure. The US government should fund the Chapter 11 case and keep Chrysler operating by giving Chrysler a debtor-in-possession loan having seniority over all other liabilities of Chrysler, thereby assuring taxpayers that the money will be repaid out of the proceeds of asset sales. The US could also give a senior secured loan to GM to help GM acquire assets from Chrysler, but this would require the cooperation of bondholders, cooperation not likely to be forthcoming. On the other hand, if GM is in Chapter 11 then the government could refinance the GM operations without fear that taxpayer money would be diverted to pay existing creditors.
84 Comments on “Editorial: Why the GM/Cerberus/Chrysler Bailout is bad for taxpayers and doomed to fail without the benefits of a Chapter 11 filing for both Chrysler and GM...”
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That is the clearest, most coherent piece of writing on the topic I have ever seen. Thank you Mr./Ms. unnamed source.
Kudos, Robert. You will not see this type of cogent commentary in the MSM. And, unfortunately, taxpayers are likely to get this type of rational thought from their elected representatives. A populist effort is needed – a la Bank Bailout 1.0 – to scuttle this ship once and for all.
Anyone know Barry O’s email address?
Impressive as only facts can be.
Any chance this can land on Obama’s desk?
I just sent the link to this article to Ms. Pelosi, since she’s the one meeting with leadership today:
http://speaker.house.gov/contact
If many of us do the same, maybe it will get read by the right eyes.
Couldn’t hurt.
Thanks, Joe. I sent my response.
I dont think anyone involved in the deal, (with the exception of the taxpayers), has any doubt that Cerberus will be the the recipient of some sort of windfall or otherwise ill-gotten gains from this deal. The events that have taken place thus far make it very apparent that Cerberus is pulling the strings.
There is no way to feel good about what is brewing in Washington right now, but chapter 7 by Chrysler, Chapter 11 by GM would no doubt result in a Ford Chapter 11. I suspect that dozens of major parts suppliers are on the brink as well. It is impossible to say how the collapse of the entire industry would play out, so for those not willing to gamble, the bailout seems the lesser of two evils.
Hopefully, HOPEFULLY, the masters of the universe in Washington are smart enough to put something together that has a chance of righting the listing ship and makes an attempt toward a long term solution.
As we dont have any details yet, I think it is too early to pan any possibility of a bailout succeeding. Chapter 11 is THE solution, but at what cost in an already fragile economy? And that is why we are looking at a bailout.
RF: Although the odds are slim, send it to the NYT as a guest editorial. Maybe with a snappier title.
**thunderous applause**
Although the following paragraph is unclear, as I’m not quite sure of the difference between “liabilities” and “total liabilities”. Can somebody better-versed in accounting elaborate?
5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its liabilities were $70b, dwarfing its current assets of $55b.
Oh, and the underlying answer is obviously: it’s going to happen because $10b is nothing compared to $700b loaned to the financial industry, and many people see the car industry as generating more jobs and being part of the “social fabric”. It may well be wrong, but Obama will face a LOT of pressure on that one, and given the amount of crap that will pile up on his desk as soon as he’ll take office, signing off $10b will probably be pretty hard to resist….if it doesn’t happen before, because Bush faces the same kind of pressure.
You know it is funny Robert that you, the one who is so adamant about full disclosure, totally let slip (or ignored) the obvious conflict of interest in having a bankruptcy attorney advocate that Chrysler and GM file for bankruptcy.
For all we know, this guy could be working for the firm at the top of the GM’s contingency list, or be on retainer for one of GM’s or Chrysler’s major creditors. In fact, a bankruptcy of such magnitude would spill over into many areas of the economy and involve claims by hundreds of businesses related an unrelated to the auto industry.
In my experience, the folks most helped by bankrutpcy are the attorneys and the accountants who handle the matter for the debtor and the creditors. (Oh My Lord do the Accountants Make a Killing!!!) A bankruptcy of such magnitude could keep half the bankruptcy attorneys in the country busy for the next few years.
I sent my response and to my elected representative.
the deal is greased, boys
you’ve got both Republicans (Cerberus) and Democrats (UAW) at the trough
Gamper
Given the poor economy and tight credit environment right now there is and will be plenty of work for the accountants and attorneys.
There are going to be plenty of Ch 7 & 11s with lots of economic value to keep them busy.
gamper, I completely agree. A bankruptcy lawyer proposes bankruptcy as the best solution, and the more the better!
What a shock.
@gamper : Uh, Robert disclosed that the author is a bankruptcy attorney. If you wish to use that information to discount the analysis then of course you are free to do so. I would, however, urge you to judge the ideas and not the person.
The fact that GM has liabilities far in excess of it’s assets is abundantly clear. That is, as a matter of fact, the definition of a bankrupt business. GM is already bankrupt, the only question is what happens next and when. Bankruptcy reorganization or liquidation are legal processes which kick in at some point to deal with existing realities. Bankruptcy is generally not a “choice”. The company OR THE CREDITORS can initiate said legal proceedings. Personally, I don’t see any way GM and Chrysler can avoid their dates with the courts. The question is when and under whose terms.
Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments
And there is the reason why they don’t want to go for Bankruptcy I’m willing to bet. A merger would make the company too big to fail right?
gamper :
I have spoken with the author of this piece, and done my Google homework on his background and bona fieds. He does not have a horse in this race. But he is unwilling to publicly declare himself in case members of his firm take exception to freelance commentary.
As other commentators have pointed out, the author’s profession does not invalidate his arguments. In fact, they inform them.
I think that we need to remember that Chapter 11 is subject to court and creditor approval of the reorganization plan.
In the current environment and in the absence of a bailout, I don’t see how GM could raise enough funds to succeed with a Chapter 11 filing. The existing secured creditors are going to be focused on getting whatever they can, rather than throwing more good money after bad. Credit is tight, and GM’s rating is too low to justify more of it.
Let’s forget the idea of a GM reorganization. At this juncture, if GM files, it’s out of business. That might be an acceptable alternative, but let’s all understand the implications of what we’re talking about here. For GM, bankruptcy is not rebirth, it’s death.
The rice is cooked for Cry-sler
Robert Farago :
November 6th, 2008 at 3:30 pm
gamper :
I have spoken with the author of this piece, and done my Google homework. He does not have a horse in this race. But he is unwilling to publicly declare himself in case members of his firm take exception to freelance commentary
All due respect Robert, but Google is not going to give you this guys client list or spell out for you who exactly is buttering his bread.
I am not saying he is wrong, but it is a fairly predictable stance given the source.
Why would GM want anything from Chrysler other than Jeep? Does Maximum Bob want his LX/LH platforms back?
I have looked over Ward’s top 10 YTD sales for the past few months and I noticed that the Caravan dropped off that list in July. It was #4 at the end of 2006 and #7 at the end of 2007. Looks like Caravan, Explorer, and Econoline have been replaced by CRV, Escape, and RAV4 on that list, with even the F-150’s numbers looking like numbers typically achieved by Camry or Accord (~400,000 units YTD – Ford’s end of year 2006 F-150 sales were 796,000).
AKM –
Agreed. Bush has nothing to lose and from his perspective it might shore up his legacy IF the bailouts (financial and auto) actually work. If it takes until after Jan. 20, Obama’s going try and take quick action to build credibility as strong economic issues, which is how he won the election, and the 2.8 are highly visible economic symbols. Either way, bailouts are going to happen.
Success though is something else, especially considering the demonstrated incompetence of the 2.8. Like the mystery man said, Ch. 11 is the only practical way to restructure the current GM business model, which is clearly broken. The bailout is just giving an addict another fix. I’m not going to say it won’t work, but it’s highly unlikely.
PCH101: “In the current environment and in the absence of a bailout, I don’t see how GM could raise enough funds to succeed with a Chapter 11 filing.”
That might be a useful point at which to inject some Federal money; throw in just enough to get the creditors to agree to a plan.
Certainly a reasonable analysis, but the most important bits are the questions he raises, none of which are being answered. Hell, nobody save for TTAC even seems to be asking them.
Somebody is going to make a shitload of money off of a bailout, and my instincts tell me that it isn’t going to be employees of Cerberus and GM, who are facing massive job losses.
Cerberus is a private business that exercises their right to keep their financial information a secret. The government (by the people, for the people, right?) should exercise their right to tell said private business to go fuck themselves.
Good catch on the possible conflict of interest, but I haven’t seen too many other accounts of how big a bag the taxpayer will be left holding, and how best to protect the taxpayer.
It is true, a bailout will happen. Once you get past that, the question is how good (ie, safe for taxpayers like you and me who have chosen NOT to give Detroit our money in the free market, and would like to not be FORCED to give it to them through taxes!) a bailout can we have.
The Wall Street bailout is a disaster – those guys and AIG are right now using the Fed’s money to put additions on their houses in the Hamptons – not a dime went to the originally intended purpose. That’s a BAD bailout.
If you really want to keep Detroit viable, you have GOT to remove the tumor of their existing labor and supplier liabilities, and their basically garbage business models (Build garbage – Sell garbage – Repeat). Cash injection is only morphine to ease the pain of a slightly prolonged death. C11 with the Feds in “possession” is the one idea I’ve heard so far that even comes close to protecting the taxpayers’ interests.
sean362880 : Success though is something else, especially considering the demonstrated incompetence of the 2.8. Like the mystery man said, Ch. 11 is the only practical way to restructure the current GM business model, which is clearly broken.
Which summarizes the point of many episodes in the GM Death Watch series: Broken system = Chapter 11.
The mystery man/woman gives more proof with a stronger and more unique knowledge base than anyone else I’ve seen on the subject.
John Horner Wrote:
@gamper : Uh, Robert disclosed that the author is a bankruptcy attorney. If you wish to use that information to discount the analysis then of course you are free to do so. I would, however, urge you to judge the ideas and not the person.
The fact that GM has liabilities far in excess of it’s assets is abundantly clear. That is, as a matter of fact, the definition of a bankrupt business. GM is already bankrupt, the only question is what happens next and when. Bankruptcy reorganization or liquidation are legal processes which kick in at some point to deal with existing realities. Bankruptcy is generally not a “choice”. The company OR THE CREDITORS can initiate said legal proceedings. Personally, I don’t see any way GM and Chrysler can avoid their dates with the courts. The question is when and under whose terms.
________________________________________________________________________
Thanks John, I did read the article and caught the part about him being a bankrupcty attorney. That is pretty much where I came up with the idea. I was surprised though that the apparent conflict of interest is simply glossed over becuase it happens to agree with the politics of this site and most of its readers. Thats all. Although, apparently this guy is legit according to Google.
I also appreciate the education on Bankruptcy, I really havent done much with the subject since taking that exam on the US Bankruptcy Code in law school. Years ago I worked as a law clerk for a firm that had a large bankruptcy practice, maybe thats why I am a little bit suspicious, I have seen the attorney fees for Chap 11 filings that were nowhere near the scale of GM.
Just attempting to point out something potentially overlooked in all the pushing and shoving of TTAC’s “best and brightest” rushing to the lineup in order to kick GM while it is down. Sometimes it is difficult to catch these things with the roar of the pom poms in the background. Just trying to help.
An exceptional piece of writing. Now we all have all of these questions. Waiting to hear answers.
In fact a great ongoing piece would be: Every question raised here put in number point form. Then this exact same format is repeated in follow up stories with the answers showing, OR, a statement that information was refused and by whom.
this just in:
“the officials will ask Pelosi to help provide $25 billion in low-interest government loans to help the Detroit 3 meet their obligations to newly created retiree health benefit funds, the source said.”
Wow they’re asking $25 bil from the govt for the UAW VEBA.
Even Pelosi may have a difficult time swallowing that one……
Gamper: So you’re arguing that b/c the writer is a bankruptcy attorney, this editorial is an attempt to prevent a bailout so that he can collect the massive fees from handling their C11?
I’m a bankruptcy attorney too. I work in Mid-Missouri, and I don’t do C11’s, so the odds of me getting any piece of GM’s legal fees is about the same as me getting hit by an asteroid. I gotta say, it seems like a pretty honest piece to me. GM & Chrysler are too deep in the shit to get out with 25 billion. And a bailout would come with the strings that they don’t fire too many people and try to preserve the status quo as much as possible. That only guarantees that we repeat the process 10 years from now even if they manage to struggle back into the black for a while.
C11 is the way to go. Once they do the dirty work there, the govt. can step in to help without having to worry about attack ads about how President Obama & Senator So & So doesn’t care about the working man because they used government money to fire 100,000 people.
This account is going to get settled one way or the other. Better now than later.
This editorial seems to be a clear summary of the current facts. If the management of GM (and to a lesser extent Chrysler) are actually interested in perpetuating the company, although in a new, healthy form, they would be pursuing a Chapter 11 filing sooner rather than later while there are still assets worth saving.
This “bailout” is analogous to pumping a blood transfusion into a dead patient to get the extra insurance claim.
That might be a useful point at which to inject some Federal money; throw in just enough to get the creditors to agree to a plan.
I believe that in the real world, this results in the government paying for the entire thing.
These days, most institutional creditors are most interested in hoarding cash. They would rather settle for a percentage of what they are owed and collect it today, than they would be in putting in more cash with the expectation of getting it back later.
A GM bankruptcy is going to require a lot of new money to recapitalize it. We’re talking tens of billions of capital, not loans.
GM can’t possibly repay those loans plus the existing loans, at least some of those loans would have to be written off later. That means that they wouldn’t really be loans, but grants.
If that’s the plan and the goal is to save jobs, we may as well take the billions and hire the workers to build bridges and roads and train tracks, so that Americans can get something out of it that we can use, instead of using our taxes to pay for Rick Wagoner’s retirement account.
Here’s my question:
How is this situation different than the banks? I disagree with any gov bailout for any reason (despite my wanting to see the US auto industry survive). Chapter 11 I think would make sense anyway. I’ve said several times a gov bailout still results in massive job losses and just delays the inevitable for GM (they just get 6 more months of pre-C11 life support).
But honestly, shouldn’t we be looking at the bank bailout the same way? It isn’t auto related, really, but stories of these banks having massive get-aways, payouts, etc doesn’t sound any different to me than Cerberus is trying to do with Chrysler and GMAC. And I have to say I’m shocked (NOT) that Cerberus would somehow try to profit at the public expense….these guys are clearly leeches.
My take on it, especially since they’re a private company, is they made an investment and took a gamble and they lost. Get over it.
Otherwise I want the government to reimburse me for all the stock gambles I’ve made and lost. How is Cerberus any different? Oh, because they’re investing billions and mine are peanuts by comparison?
Toxicroach, all I am saying and have ever said is that maybe this isnt the most objective source and that under different circumstances Robert may not run an article with such an obvious conflict. As a bankruptcy attorney, you should be the first to admit the amount of fees and work a bankruptcy on this scale would generate would be astronimical if the big 3 went down with many of their suppliers following. Thought you may not see any of the fruit personally, you also have to admit that it would be a boon to many bankruptcy attorneys on a national scale.
But honestly, shouldn’t we be looking at the bank bailout the same way?
No. If the banks collapse, the entire economic system collapses. Banks are not just businesses, they are an integral part of the economic system, along with the Treasury and the Federal Reserve.
Economists can debate what a depression is, but virtually every depression in US history was pushed over the edge by massive bank failures. The banks are being propped up because everyone with a sense of history knows how important it is to keep the major banks going and to keep credit flowing. Definitely not the same thing at all.
The logic and reason of this article is much appreciated. The fact that it analyzes the financial situation and evolution of this mess from the human interest (greed) point of view of the stakeholders involved is compelling. That POV conveys a sense of credibility to the analysis that is missing from the typical macro-economic perspective of most commentary seen about this subject.
That perspective also explains why it will pass, and why we will eat the cost, with interest, to pay for this. The human interests of the people who can grant what GM/Cerberus wants are politicians. And as we know, what goes through their heads is stuff like “jobs! jobs! jobs!” and “fundraiser! fundraiser! fundraiser!.”
Nothing useful there for actually dealing with this disaster in a constructive way economically, but GM/Cerberus have what politicians want, and vice-versa. From that perspective, this is a done deal.
Hopefully, HOPEFULLY, the masters of the universe in Washington are smart enough to put something together that has a chance of righting the listing ship and makes an attempt toward a long term solution.
As we dont have any details yet, I think it is too early to pan any possibility of a bailout succeeding. Chapter 11 is THE solution, but at what cost in an already fragile economy? And that is why we are looking at a bailout.
* * * *
Agreed. Bush has nothing to lose and from his perspective it might shore up his legacy IF the bailouts (financial and auto) actually work. If it takes until after Jan. 20, Obama’s going try and take quick action to build credibility as strong economic issues, which is how he won the election, and the 2.8 are highly visible economic symbols. Either way, bailouts are going to happen.
What makes you think George W. Bush knows the first thing about how to save an automobile company?
What makes you think Barack H. Obama knows the first thing about how to save an automobile company?
What makes you think that any elected official or bureaucrat in Washington D.C. knows the first thing about how to save an automobile company? Nancy Pelosi certainly doesn’t have a clue. Does anybody honestly believe that just because somebody is telegenic enough to win a popularity contest (i.e. an election) that they magically become endowed with godlike powers to still turbulent economic waters? This is fantasy land thinking.
If such people existed, GM’s board would certainly hire them and pay them $40K a day to do so.
Well fair enough Gamper, but I don’t see the nexus between this (which will have an effect on GM not at all) and him hoping for fees. By that standard are politicians are hopelessly conflicted and we shouldn’t listen to any of them… ok, so maybe you’re right.
@ gamper
A healthy dose of skepticism is needed, and good on you for bringing it here.
This story, as in life, has three sides: the consumer/taxpayer side, GM’s side and the truth. The truth of GM’s financial status is well laid out in this editorial.
So, what is the purpose of the bailout? Is it to stem job losses? Save GM? Bail out Cerberus? Buy time to go bankrupt when the economy can more easily absorb the loss? Make pols look like they’re doing something? Spend money we don’t have?
“Bailout” would signal a way to save something, but GM appears to be too far gone – like Ryan Leaf’s career.
So those in favor of saving GM, let’s call it what it is: charity. Or, if the taxpayers are forced to pay for it: picking the pockets of most that didn’t voluntarily buy their products.
At first I tought the Titanic would be a better graphic for this story as it is one of the most recognizable ship sinkings in modern culture. But the Titanic had survivors…
As a non-bankruptcy attorney with some basic knowledge, this looks good to me.
The reason that they are discussing “bailout” is precisely for the reasons our Anon. Esq. points out. They CAN’T refi or reorg any “normal” way, so they are trying to rewrite the rules of the game.
Just like the solons of Wall Street killed the brass Bull, the Capts of Industry who ran the largest corporate entities ever known, the D-3, don’t deserve it. They must be allowed to fail and regroup, not get one last “prop-up” at public expense. It will just make the eventual flame-out that much worse.
Sadly, those who will be hurt are the workers, union and white collar, and all the businesses which rely upon them, and are blameless in this debacle.
William:
Neither Sean nor I said that any of these politicians have a clue on how to fix the industry. We’re simply assuming they’ll sign the bailout…without a clue of their actual effects. Simply because the political pressure is so great.
indi500fan :
November 6th, 2008 at 4:24 pm
this just in:
“the officials will ask Pelosi to help provide $25 billion in low-interest government loans to help the Detroit 3 meet their obligations to newly created retiree health benefit funds, the source said.”
Wow they’re asking $25 bil from the govt for the UAW VEBA.
Even Pelosi may have a difficult time swallowing that one……
Actually, this is the best route for the Detroit 3 to go. The money goes to the workers, not the company, and it’s for health care specifically. This dovetails into Obama’s campaign promises specifically and Democratic Party’s programs in general. That is, it’s not “money for greedy billionaire CEOs”, it’s “money to pay for the health care of working (union) families”. Somebody knows which buttons to push.
Of course, this money replaces other money that the companies would otherwise have to pay, so it’s the same as a straight bailout, but it looks better to the casual observer.
It also avoids the type of questions in this editorial, because, again, it’s not going to the companies involved, it just relieves said companies of obligations.
Plus, it’s a loan, not an out-and-out grant, although a huge low-interest loan to companies that are not credit-worthy amounts to a grant-but, again, it looks better.
I’ll throw out a guesstimate that GM’s cash burn is closer to 2B per month (was 1.2B Q2)now as revenues have tanked (sales down, incentives up).
So 25B buys a year. Won’t do it Nancy. Don’t do it Nancy. Oh right, UAW contribute to her campaigns…never mind.
I have to agreed that public ignorance and politicians being what they are something expensive for the taxpayers WILL HAPPEN.
Sigh.
Bunter
There are obvious parallels to the airline industry here, which is very discouraging. In some ways, United Airlines followed a similar trajectory to GM. They signed sweetheart contracts with their unions, which threw the whole industry’s cost structure into disarray as their competitors were forced to do the same. United spent 3 years under Chapter 11 protection, ample time to restructure and get its house in order. Yet today, they are still the weak sister among the legacy domestic carriers.
I think that one of the things that a lot of folks tend to forget is that the domestic auto industry pays over 40 Billion each year in federal taxes. Yes, over 40 Billion. Plus…there’s the estimated 200+ Billion in additional federal taxes paid annually by the employees of said domestic automotive industry. Not to mention-okay I’ll mention it-the Billions paid in state and local taxes as well.
The Big 3 may be searching for a teat, but our beloved federal, state and local governments have been graciously nuzzling at the teat of the domestic auto industry for nearly 100 years in the form of taxes, licensing, permits,fees, collegiate scholarships, sponsorship of ‘the Arts’ , event sponsorships and downright corporate generosity.
The other thing that a lot of folks are forgetting is that if GM were to declare bankruptcy and all of their contracts with their thousands of suppliers and directed sources were to hit the bankruptcy courts, it would take decades just to hear all the cases-SO, you will not have your wished-for quick, swashbuckling restructuring…Nope…you’d be fighting in courts for a looooong time.
I don’t really know what the answer is, but seemingly none of the possible solutions we read of in the trade papers seems like it will get GM down to that slimmer-trimmer more aggressive company we’d all like to see them become, but not helping the domestic industry to survive and thrive is a sure-fire recipe for a much bigger disaster that will make nearly everyone WISH that a simple 50 Billion bucks could solve…
Unfortunately, it looks like this will be another blindly passed give away of tax payer money with no strings attached. What these people don’t realize is without a plan to restructure, this slow painful decline will continue.
I also think the bailout will create even more bad feelings towards GM especially when they go back to the trough a year later.
Actually, there is one alternative to Chapter 11 bankruptcy, and that would be to legislatively create an entirely new bankruptcy chapter just to fit this situation. General Motors’ position looks like the Kobayashi Maru “no win” scenario. Any Star Trek nerd can tell you the key to winning the no-win scenario is to change the rules.
@Stu Sidoti
References please! This smells similar to the “10-14% of all US workers work in the US auto industry” factoid that is bandied about but never verified. (I asked for a reference to that figure in another thread and received a deafening silence!) Got any Treasury Department studies to back up your claims?
It’s the b word they are afraid of, not the chapter.
You’d have to call it something else: “happy fun reorg plan” comes to mind, and you just cut and paste the C11 rules.