By on November 6, 2008

[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.

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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...”


  • avatar
    John Horner

    That is the clearest, most coherent piece of writing on the topic I have ever seen. Thank you Mr./Ms. unnamed source.

  • avatar
    Albnyc

    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.

  • avatar
    John R

    Anyone know Barry O’s email address?

  • avatar
    jkross22

    Impressive as only facts can be.

    Any chance this can land on Obama’s desk?

  • avatar
    Joe Chiaramonte

    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.

  • avatar
    jolo

    Thanks, Joe. I sent my response.

  • avatar
    gamper

    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.

  • avatar
    vitek

    RF: Although the odds are slim, send it to the NYT as a guest editorial. Maybe with a snappier title.

  • avatar
    AKM

    **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.

  • avatar
    gamper

    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.

  • avatar
    jaje

    I sent my response and to my elected representative.

  • avatar
    indi500fan

    the deal is greased, boys

    you’ve got both Republicans (Cerberus) and Democrats (UAW) at the trough

  • avatar
    RedStapler

    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.

  • avatar
    gforce2002

    gamper, I completely agree. A bankruptcy lawyer proposes bankruptcy as the best solution, and the more the better!

    What a shock.

  • avatar
    John Horner

    @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.

  • avatar
    turbobeetle

    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?

  • avatar

    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.

  • avatar
    Pch101

    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.

  • avatar
    GS650G

    The rice is cooked for Cry-sler

  • avatar
    gamper

    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.

  • avatar
    metric_tool

    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).

  • avatar
    sean362880

    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.

  • avatar
    KixStart

    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.

  • avatar
    dean

    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.

  • avatar
    RetardedSparks

    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.

  • avatar

    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.

  • avatar
    gamper

    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.

  • avatar
    dougjp

    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.

  • avatar
    indi500fan

    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……

  • avatar
    toxicroach

    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.

  • avatar
    heiferdust

    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.

  • avatar
    Pch101

    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.

  • avatar
    Jerome10

    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?

  • avatar
    gamper

    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.

  • avatar
    Pch101

    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.

  • avatar
    CarnotCycle

    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.

  • avatar
    William C Montgomery

    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.

  • avatar
    toxicroach

    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.

  • avatar
    jkross22

    @ 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.

  • avatar
    1998S90

    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…

  • avatar

    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.

  • avatar
    AKM

    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.

  • avatar
    Geotpf

    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.

  • avatar
    Bunter1

    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

  • avatar
    Verbal

    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.

  • avatar
    Stu Sidoti

    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…

  • avatar
    ERJR

    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.

  • avatar
    Conslaw

    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.

  • avatar
    Morea

    @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?

  • avatar
    toxicroach

    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.

  • avatar

    Great piece.

    Clearly, an ordinary government loan to bail out GM and Cerberus is inappropriate.
    Why would the government throw good money after bad?

    A much more comprehensive plan is needed that would look a lot like chapter 11.

    Here are some elements:
    1. The management needs to be replaced.
    2. A credible turnaround plan needs to be presented. This will need to include restructurings and UAW concessions.
    3. Current equity, preferred equity and debt holders of GM, GMAC and Chrysler need to participate in the pain. They all need to be severely diluted in return for a government injection of new capital.

  • avatar
    Stu Sidoti

    Quote: ” Morea :
    November 6th, 2008 at 6:12 pm

    @Stu Sidoti

    References please!…Got any Treasury Department studies to back up your claims?”

    Fair question…I got those numbers from a televised Congressional meeting, mostly from Senator’s Dingell and Stabenow’s testimony.

    Are they real numbers? Maybe…Maybe not, but even if they’re wrong, they ain’t wrong by much!!

    If the Big 3 go down, you’ll have hundreds of decimated communities around North America with a whole lot less federal tax revenue and whole lot more people on unemployment and welfare.

  • avatar
    CliffG

    Gamper: I notice that while commenting on the author you have not attempted to answer any of the questions raised. If you have a problem with the article, address the issues and not the author. Alas, what this article really does to me is give me a pain in the rear, specifically my wallet. The problem with the government bailout has always been that the intermediaries will do very well for themselves regardless of the ending. But with the expensive lobbyists fighting on behalf of the managements and the Rep.s arguing for “Jobs, jobs, jobs”, the bailout will occur. Chrysler and GM will merge, not because it is a good idea, but precisely because it is an indefensible terrible idea. But, the “victims”, the auto workers, are easily portrayed, and, after all, it will only cost a few pennies a day from each taxpayer to keep that whole catastrophe going for quite some time.

  • avatar
    Dimwit

    Thanks for posting this Robert!

    Now… how do we get cogent answers to those questions. Who do we ask, and can we trust them?

  • avatar
    ihatetrees

    Stu Sidoti :
    If the Big 3 go down, you’ll have hundreds of decimated communities around North America with a whole lot less federal tax revenue and whole lot more people on unemployment and welfare.

    In the short term, yes. However, you ignore the ample excess capacity in Transplantland. For every Janesville plant that dies, a San Antonio plant thrives.

    Of course, that’s hard to accept politically. Even harder when the San Antonio plant doesn’t pay into the Pelosi protection fundunion dues.

  • avatar
    HarveyBirdman

    Wow, GREAT editorial. I’ve been waiting for a bankruptcy attorney to show up and put a microscope on Detroit. I just wish there were some realistic way to get answers to the questions posed. I’m a stay-at-home dad/licensed attorney and I was going to offer to file some FOIAs under the direction of another of the B&B with some experience in the arena, but something tells me this info won’t get coughed up so easily by the feds.

    By the way, Mr. Montgomery, you’re not alone in doubting Congress’ financial prowess. In this WSJ editorial, the former CEO of American Express makes a similar point.

  • avatar
    Landcrusher

    Given the current political disposition of the courts, and the likely suspects to hear the case, I say anyone using knowledge of the written law to determine what might happen is misguided.

    Some unprincipled member of the bar will simply use his position as judge to do whatever the hell he thinks ought to happen, and damn the legislature if they don’t agree. Or, he may have principles, but fear thuggery if he doesn’t do something to save GM.

  • avatar
    Stu Sidoti

    Quote: “ihatetrees :
    In the short term, yes. However, you ignore the ample excess capacity in Transplantland. For every Janesville plant that dies, a San Antonio plant thrives.

    Of course, that’s hard to accept politically. Even harder when the San Antonio plant doesn’t pay into the Pelosi protection fundunion dues.”

    What kind of George Orwellian Animal Farm version of America are you suggesting here? Do you feel that the Americans working in San Antonio are ‘more special’ than the Americans working in Janesville?!?!? What the heck is wrong with employing as many Americans as possible? While I don’t love the bailout terms, I can be pretty damned certain that 50Billion loaned now will save the US Treasury Trillions later that you and I will pay for rest assured.

    As for excess capacity…how are those vaunted Transplant sales doing right now? Let’s see the numbers for October 2008:

    Toyota: Down 23% (world-quarterly profit down 69%)
    Honda: Down 24% (world-quarterly profit down 41%)
    Hyundai:Down 33%
    Nissan: Down 34%

    Wow…with numbers like that it makes one want to do the ol’ Merv Griffin ” Oooooooh!!!”…Not exactly setting the sales charts on fire there huh? Why? because the economy stinks and if the Big 3 go down you will have a world-wide Depression on your hands. Chrysler may be primarily a regional NA company but GM and Ford certainly are global entities and their demise would be…global.

    Right now, if the dollar continues to get stronger and the Yen and Euro values continue to shrink, you can kiss your Transplants goodbye…IF the Dollar reaches a tipping point, it will no longer make financial sense to build cars here for the Transplants so so much for the excess capacity-they simply will move their plants elsewhere-Mexico anyone?!?!?

    Also to consider-One other thing that many seem to overlook…the Transplants use many of the same suppliers as the Big 3 such as Federal Mogul, Delphi, Bosch, JCI, Magna etc. so if the Big 3 go down or even simply declare bankruptcy, this will force most of the suppliers into bankruptcy and if the supplier world declares bankruptcy, it might be quite awhile until the Transplants or any other carmakers see any parts to build vehicles with.

    By the way, the San Antonio Toyota plant I assume you are referring to is on shutdown for three months….Excess capacity? I guess you could call it that.

    http://www.dallasnews.com/sharedcontent/dws/bus/stories/071108dnbustoyota.bcd2bc.html

  • avatar
    Landcrusher

    Stu,

    “Why? because the economy stinks…”

    Here is an alternate “why” that you might consider: Due to costs and restrictions related to their UAW contracts, some players in the market drove prices down and flooded the market with more cars than demanded. The result is that during the first economic downturn, sales plummet because few people “need” a new car.

    Sure, the economy is part of the problem, but it’s not the main driver here.

  • avatar
    Your old pal Bob

    What fun we’ll have in a few years driving our Dodges and Jeeps to the Orphan Car Show in Ypsilanti!

    Here’s a thought experiment: why can’t the next Alfred P. Sloan or, hell, Walter P. Chrysler-styled entrepreneur buy the pieces of Chrysler they think they can remake into a successful concern? Dissolve the thing and let the market decide which bits should go on. Race nuts bought Aston Martin so why can’t the same thing happen here?

    Signed,
    Pollyanna

  • avatar
    Ashy Larry

    @AKM: 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.

    I think the author meant total liabilities versus current liabilities. Current liabilities are, roughly speaking, things due n the next year. Long term liabilities are things due after a year. There are a few other elements, too.

    Total liabilities = current liabilities + long term liabilities (plus a few other things).

    If your current assets are less than your current liabilities, you have negative working capital. Not unusual in business. But if your total assets are less than your total liabilities, you are insolvent under one of the familiar tests of insolvency.

  • avatar
    50merc

    The Wall Street Journal should be ashamed that this kind of excellent analysis didn’t first appear there.

    You know, like some of us have been saying for a long time on TTAC, an insolvent company that isn’t making a profit and has no realistic plan for doing so, is bound to collapse eventually. GM has been wearing invisible clothes for quite a while; you’d think more people would have noticed.

  • avatar
    James2

    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.

    Yeah, but Rick Wagoner is no James T. Kirk!

  • avatar
    Martin Schwoerer

    This is just great — a fantastic document that once against shows that TTAC is the incorruptible voice in the auto world.

    One question however. Over here in Germany, a company’s CEO or MD makes himself personally liable if he does not declare bankruptcy as soon as his company is insolvent. The term for this is bankruptcy fraud. No such thing on the books in the U.S.?

  • avatar
    ra_pro

    One thing that puzzles me about this editorial is that the author raises a lot of questions that seem to imply that the answers are needed before any final judgment or decision is to be made about the whole situation of GM and Chrysler. Yet without any answers to these questions the final judgment is rendered. What was the point or raising these questions in the first place then?

    My take on this whole mess is that the most important thing now is the overall impact of whatever is done on the economy. As I said in another thread. This is an unprecedented situation that a whole (domestic) industry, one of the biggest, is facing an imminent collapse in a large industrial economy. This would be bad enough on its own but in this economic climate the effects though unpredictable shouldn’t be underestimated. I think the only reasonably clear thing at the moment is that the industry cannot be allowed to collapse, at least not immediately and all at once. The overall objective should be to try and make the industry survive but in a viable form for the long term even if at a significant cost to the taxpayer. Beyond this I have no specific cure for Detroit. There is a new administration waiting to take over and many new members of congress. Hopefully they can manage the process to some kind of resolution for the good of the America which might not necessarily be the same as that which is good for Detroit and is almost certainly not the same as that which is good for Cerberus.

  • avatar
    mitchim

    Pch101
    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.

    I have seen lots of this attitude. Your buy out on your GMAC loan may be lower than you think. It can be a very good time or a very bad time to owe auto lenders.

  • avatar
    Morea

    @William C. Montgomery

    You slip quite blithely between ‘politcians’ and ‘bureacrats’. These are beasts of very different natures. Are you even sure exactly who your ire is directed toward? Or is it just “those people in Washington”? When you paint with such broad strokes your arguments take on a somewhat hysterical feel.

    (RF: if you consider this a flame of one of your writers you may remove it.)

  • avatar
    Public D

    The bankruptcy attorneys have been in Detroit for quite some time now:

    See Delphi:

    http://www.makingsteel.com/delphicase.html

    See Dana:

    http://open.salon.com/content.php?cid=38619

    I don’t know who the average worker or taxpayer is supposed to trust.

  • avatar
    BYE BYE BIG 3

    Where do people get the idea that when the big 3 go under , it will affect the economy ? GM Ford and Chrysler contribute about 1% to the economy. So it will hardly make a difference when there is no more domestic auto industry. Only Michigan will feel the pinch, but the rest of the US will be ok. At the the most about a 100,000 people will temporarily out of work…they can get jobs at Wal Mart and Mc Donalds and places similar.

    If the minimum wage was lowered to, …say $1.10 per hour, we have a chance to be somewhat competitive with the Chinese economy and win some of the jobs back from China. Oh,yeah…this includes no bennifts….it hurts the corporate prifit margine.

    To answer the question…”Can the US economy thrive with out the Big 3 ?”…the answer is yes…in the long term. Companies come and go and jobs come and go and other industries crop up….so as long as the American worker is willing to work for $1.10 per hour, there will be jobs a-plenty, perhaps the Chinese will set up many of their company shops here…..Now that sounds like positive news in a Doom & Gloom time in our country’s history.

  • avatar
    heiferdust

    I wonder if I send Pelosi the bank routing number for my 401K I can get a billion or two myself.

    Could use it after all the market losses!

  • avatar
    50merc

    ra pro: “a whole (domestic) industry, one of the biggest, is facing an imminent collapse in a large industrial economy. This would be bad enough on its own but in this economic climate the effects though unpredictable shouldn’t be underestimated.”

    Yes. Despite the shrinkage in market share and customer respect, GM, Ford and to a lesser extent Chrysler are still psychologically huge. That is, they occupy major mind-space as symbols of the economy and the nation’s industrial prowess. There’s some truth in the idea that what’s good for GM is good for America (and vice-versa, which was the main point Engine Charlie was trying to make). A shutdown of a major American automaker will be a big, big story. And a shock to many, because the media has neglected the story of Detroit’s fall. The situation just ahead will be somewhat similar to that FDR saw as he waited the months between election and inauguration. (BTW, Roosevelt campaigned as a balanced-budget fiscal conservative. So much for political promises.) It will take all of President-elect Obama’s rhetorical skills to soothe America’s economic nerves. So I take no glee in watching the D3 circling the drain; it’s a sad (though also enfuriating) affair.

  • avatar
    Landcrusher

    “I don’t know who the average worker or taxpayer is supposed to trust.”

    No one. Not the union, not management, not the government. We are all on our own. If you trust someone, and you get burned, blame ONLY yourself. Take them to court if you want, but don’t blame society, or Washington, or “rich” people, or CEO’s or any other group.

    There are no guarantees, we are all taking risks everyday, and there IS NO SAFE CHOICE.

    Personally, that means that I value stock options, government entitlements, and pensions at almost nothing. I used to think my 401k was mine, but then I read about Argentina. I guess the 401k is at risk too.

  • avatar
    netrun

    @gamper: You’re right. This article is a pile of contrived BS. And while we’re talking, you know, buddy to buddy, any chance you’d like to buy my house in Detroit?

    @Stu Sidoti: Firms that lose money don’t pay income tax. In fact, they can use losses to reduce income tax owed in past or future years they make a profit. So the Domestic 3 haven’t been paying taxes for a while now and won’t for a long while yet. And with 5000+ dealers going broke this year, there are a lot fewer companies paying into the system. So no, there is no payback for the taxpayer.

  • avatar
    Stu Sidoti

    Quote: “@Stu Sidoti: Firms that lose money don’t pay income tax. In fact, they can use losses to reduce income tax owed in past or future years they make a profit. So the Domestic 3 haven’t been paying taxes for a while now and won’t for a long while yet. And with 5000+ dealers going broke this year, there are a lot fewer companies paying into the system. So no, there is no payback for the taxpayer.”

    True…the Big 3 may not pay a lot of taxes overall due to recent losses but perhaps you’re forgetting about the thousands of up-to-now profitable Tier 1,2,3 Suppliers, Mom and Pop Shops, raw materials suppliers and all the associated businesses who do pay taxes and would be flat-out of business if the Big 3 went under.

  • avatar
    Pch101

    perhaps you’re forgetting about the thousands of up-to-now profitable Tier 1,2,3 Suppliers, Mom and Pop Shops, raw materials suppliers and all the associated businesses who do pay taxes and would be flat-out of business if the Big 3 went under.

    Are you referring to the same suppliers who continually take it in the shorts from Detroit’s penny pinching bullying tactics?

    Suppliers have much better, more profitable relationships with their transplant clients than with the Big 2.8 companies. As the transplants pick up the slack, the suppliers who serve them will be better off, thanks to the increase in sales to their better customers.

  • avatar
    netrun

    @Stu Sidoti: I work at one of those supposedly “profitable” suppliers. We’ve claimed losses for the past 5 years. Most Detroit 3 suppliers have as well. And we’re one of the better suppliers, because we’re still here.

    It’s because of the state and federal tax breaks that any of these companies have had money to invest in anything and keep going. Thing is, that can only continue if there is hope of things improving. That is now gone.

    So regardless of how much money is dumped into GM, there will be thousands of lay-offs and closures because the reasons to close up shop have become insurmountable. And mom&pop places closed up long ago. They couldn’t afford stuff like ISO 9000 along with yearly price cuts demanded by the Detroit 3.

    Yeah, really, it’s that bad. And when you can’t sell your house and there aren’t any other jobs available good luck getting out of the quicksand onto firmer ground.

    The only people left paying any decent amount of income tax are on the GM BOD and the GM mgmt. So I guess in a way you are right – without this gov’t money coming in the Feds would lose out on some taxes.

  • avatar
    Public D

    There seems to exist an prevailing stereotype and bias against manufacturing (versus, say, social networking businesses) that paints it as ‘old, worthless, a drag, grandpa.’ While much of that is understandable – and true – given the Big Three’s lumbering idiocy on nearly all fronts for the last, oh, 35 years, it shouldn’t blind us to the fact that manufacturing and transportation should and could be as critical in today’s and tomorrow’s world as they were in their heyday.

    We need green cars. We need green buses, railroads, dams, planes, factories, wind turbines, buildings, etc. We also need jobs that pay a living wage. Health care. The ability to send our kids to college, and the ability to retire. It seems almost completely forgotten, or for many young people never learned, that the automotive industry rivals, or even surpasses, the tech industry in how it fundamentally changed this country, how we live, how we see ourselves, and how we interact with each other. It also spawned countless new industries. Ever hear of fast food? What made that possible? What do you suppose refined crude oil is used for?

    How many Americans over the last 100 years have earned a living doing road construction and vehicle maintenance? Ever tried taking a covered wagon from LA to Vegas? Could there even be a Vegas without a Detroit? Half of the Fortune 500’s Top Ten Revenue Earners for 2007 were either Oil or Automotive companies (Two to Tango) – with GM at #3, Ford #7. We can make criticisms of their management decisions until the Dow comes home, but to suggest that GM as a company, or Auto as an industry, is not been good for America reeks of a kind arrogance that seems to come with all the expectations the digital and information revolution rightly foreshadows.

    But that doesn’t obliterate the fundamental value of manufacturing and transportation. Ask anyone who’s ever needed a taxi, ambulance, squad car, or hearse. We should stop fantasizing about the magical Knowledge Economy that craps droplets of gold and wisdom from the ether, and start making the actual, reality-based, actual value-creating economy work for people and the planet.

    Casting entire industries to the scrap heap of history, when their clear necessity in the world of tomorrow would be a serious mistake.

  • avatar
    EL Finance

    One large flaw to this argument is the idea that a CH11 bankruptcy of General Motors is reasonable a possibility. For everyone advocating for a GM bankruptcy I think it is important to realize that the most likely outcome of a GM filing would be a CH7 liquidation with massive disruption to all of GM’s suppliers and stakeholders.

    Why is a CH11 unlikely?

    1) GM has substantial operating cash needs ($11-14 billion according to the company). While filing would partially mitigate the cash burn (as they would no longer have to pay interest or principal on maturing debt) it would also create substantial additional cash costs (expensive lawyers and advisors such as the individual who posted this editorial) and very large one time costs (GM would likely have to pay a number of its suppliers cash on delivery, with $27B of accounts payable at 9/30 this would be a $10-20B cash outflow). This excludes any business impact of a bankruptcy (CNW has reported that >80% of customers would not buy a vehicle from a bankrupt manufacturer).

    2) In a normal credit environment this cash outflow would be met with a DIP (Debtor in Possession) loan. However, as any bankruptcy lawyer knows availability of a DIP loan of that size is next to impossible in any case, and would be especially difficult at GM as GM has already encumbered most of its valuable assets (besides equity in foreign subs and GMAC). If GM is unable to raise $3B of secured debt against that collateral what chance is there that they could raise $10-20B

    The current credit environmeny has made a CH11 reorganization of GM operationally infeasable, so the real question is whether the US Economy is better off providing liquidity or encouraging a liquidation.

  • avatar
    SpinNB

    Wow, I expected much more from this piece, given the introduction and the bankruptcy attorney / City connection. Maybe I just expect too damn much; I do know I would give the author a wider berth if I didn’t know they were an attorney.

    I stopped reading the piece by the time I got to #5 on the list. Why, because it reads like some ultra-lefty undergrad’s screed – complaining about secrecy and vulture capitalism over and over.

    Cereberus is a hedge fund – why the heck does it owe anyone a duty to disclose anything? Sure, if it is looking for a Fed handout, perhaps more disclosure is needed, but that’s the job of the government – if we don’t like the job they are doing, then throw the bums out. It’s business should not be required to be an open book – if you think so, then do you want open documents for the financial bail outs? How about SBA loan holders? How about student loan holders? How about all the other taxpayer backed obligations?

    This disclosure screaming is unrealistic from a business standpoint and therefore when you harp on it your thesis gets undercut.

    And calling these guys vultures and stuff.. Warren Buffett, one of the few well liked billionaires (him and Oprah, that’s the list), is a vulture capitalists too, but no one cares. He makes money by sitting on cash and buying things when folks are bleeding. See his recent investment in GE. Cereberus and their hedge fund ilk does the same – there is no moral difference.

    But it is easy to complain about these evil hedge funds. Whatever that means.

    I stopped reading at #5 because you’re going on and on about GM’s insolvency. Yes, this may true and all fine and good if you view it in the narrow definition of bankruptcy. But you’re missing the other half of the equation.

    As you should know, bankruptcy filings don’t happen because people (or companies) are insolvent, they happen because folks have no cash flow, or a mis-match of cash flows.

    Just like a home owner (or a car owner) who is upside down on their loan, the car isn’t repo’ed and the house isn’t foreclosed because of the technical insolvency, that happens when you are cash flow short and miss payments.

    It matters, but not as much as you make it out, that GM is insolvent. The big news today in their 3Q filing is the cash burn rate – they are running out of cash and therefore are on the precipice.

    A loan to GM may make sense on a pure economic perspective – perhaps they just need to ride out the current cash flow bumpiness and will have better prospects in the future. Certainly their product mix is getting better.

    Add to this the public policy angle – i.e. the total number of ppl that would instantly hit the unemployment rolls if GM sinks.

    Lastly, to those who commented that GM does not pay tax because it does not make money. Apparently, these commentators never heard of, or had to pay, payroll taxes, sales taxes, property taxes, gasoline taxes, etc. etc.

    Corporate income tax is but one component of taxes that a company contributes to the tax base.

    Edited to say: Public D, nice thoughts.

  • avatar
    br549

    No one is more disgusted than I at the prospect of that secret cabal, otherwise known as Cerberus Capital Management, receiving direct injections of serious taxpayer funds. But I’m curious as to how it would differ greatly from farm subsidies. Many “farmers” who receive millions of federal dollars under this program are, in reality, “CEOs” of major agribusinesses. They are under no obligation to disclose their books to anyone. If (and I’m open to any constructive disagreement) this is a valid comparison, then haven’t we established a precedent for this kind of gov’t payout to private industry many years ago?

  • avatar
    William C Montgomery

    Morea: You slip quite blithely between ‘politcians’ and ‘bureacrats’. These are beasts of very different natures. Are you even sure exactly who your ire is directed toward? Or is it just “those people in Washington”? When you paint with such broad strokes your arguments take on a somewhat hysterical feel.

    Not a flame. This is a good question. Actually I was very specific to include both politicians and bureaucrats. In my original post I clearly explained why I think this about politicians, but throwing bureaucrats into the mix was no blithe slip.

    As incompetently as I believe many of Big 3 executives have acted in recent decades, I think it is folly to believe that the winner of a fancy beauty pageant (i.e. a politician) or an unaccountable career governmental bureaucrat, untempered by the desperate realities of working ones way through the ruthless private business world, could do better.

  • avatar
    Landcrusher

    BR549,

    You have a good point. There are two points that make Cerberus different. Acccounting transparency is the biggie. I would suspect that they would have to open up the books to the government before getting any funds. If not, heads will roll.

    The second part is one that I think is what may keep them from getting our money without making serious changes. Hedge funds and private equity companies hide not only behind a veil of secrecy, but also exclusivity. By requiring net worth tests to their investors, they supposedly keep people from taking risks they should not take. However, the real thing they do is keep the opportunities and information about them within a certain class of people. Most of us like to think that this sort of thing is unamerican. It stinks of classism and cronyism, and would likely bring these guys down if it persisted. I don’t think it will. I think you are going to see a democratization of the hedge fund business and I also think it will lead to a lot of people paying high fees for low or even negative returns. In the meantime, the game will simply move to a new location and start up again because our legislators and bureaucrats are too busy playing games to get the rules right.

  • avatar
    SALLY

    Fred Barnes and Mort Kondracke displayed their total lack of knowledge of the auto industry in their insistence that GM, Ford and Chrysler should be allowed to go bankrupt.

    After the first oil shock of 1973-74 Congress mandated that the auto makers build small cars to meet CAFE requirements. Congress therefore, mandated the supply side of auto production, but ignore the demand side. For the last 35 years, auto makers have been selling every small car at a loss to meet CAFE standards while the American public has demanded large cars, SUVs, minivans and trucks.

    If Conngess had the spine to slowly increase the price of a gallon of gas with federal taxes and driven the price of gas to European levels (or Japan), the American public would have made the transition to small cars, voluntarily, and the the Big 3 would be healthy today.

    Add to the above, the cost of Federal bumper standards (front and rear), emission standards, seat belt standards, air bag standards, fuel tank standards, crash standards, headlight intensity standards, (whew, get the point??), and you appreciate fact that the Feds have been in the business for 35 years and OWES the Big 3 assistance during a crisis that was initiated by Wall Street, not the auto makers.

    Gerry B., Naples, FL.

  • avatar
    RG

    when the people talk anbout bankrupsy for the nbig three auto makers never had a company they worked for file for reorganize bankrupsy . the only ones that make out are the ceo’s and exec. the workers loose out ,401k’s ,retirement , wages , health care ,and jobs . I know i worked for DELPHI .. my plant went from over 3,000 workers to about 800 . washington made sure their retirement was covered with bailouts . middle class workers are fair game for lawmakers . let them live on $1,600 a month without knowing if your retirement will be stopped along with healthcare . i think people who have nothing more than sit around allday and tell other people where to invest tax money on earmarks that won’t get paid back need to get a job and destroy their backs , hands , arms , legs, and feet on a production line for almost minumum wages for a while .thats what bankrupsy reorganization does to workers . remember the big three auto makers Is National Security not asia , mexico, or china , give the big three the same tax cuts and incentives they give the japan transplants

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