Editorial: Bailout Watch 295: All The President's Plans

Ken Elias
by Ken Elias

I am going to go out on a limb…sort of…and state the following: GM will go into bankruptcy within the next 60 days, and Chrysler will be liquidated. Dollars to donuts that will be the President’s plan… although in a highly disguised form. The public may see it as a rescue, but it’s really just the beginning of a long and painful readjustment coming for Detroit. So how did I reach this conclusion? Follow the breadcrumbs. Given the time necessary to craft the President’s bailout plan – likely to be presented by this Friday – this tells me that it’s going to be much more than just a loan with a few strings. Methinks it will have three key points:

• Immediate cash assistance to GM and Chrysler with adequate taxpayer protections;

• Requirement to prepare a pre-packaged bankruptcy immediately; and

• Assurance from the Government that it will provide guarantees to commercial lenders for the future DIP financing. And warranty guarantees for new car buyers.

Moody’s released a document this week outlining three possible scenarios for Detroit. Its most favored scenario, to which it ascribed a 70% probability, was “Pre Packaged Bankruptcy with Government Assistance.” Now how the heck could Moody’s possibly know that this was the most likely scenario? Oh wait, Mark Zandi, their on-board economist, did testify at the second automaker Congressional hearings that it would take $75 to $125 billion to restructure these companies without a bankruptcy.

The scary thing is that he’s right, and Secretary Paulson knows it and believes it. Hmmm, maybe the good Secretary did leak his thoughts to Moody’s so they could float this “pre-pack plan” out into the financial ether?

Second, during a live interview on CNBC on Tuesday afternoon, Hank “the Hammer” Paulson supported this conclusions. In his interview, Secretary Paulson outlined four elements in crafting the loan program:

• Temporary bridge loan only;

• Protect the taxpayer money advanced in a loan;

• Make the automakers show a path to viability immediately by demonstrating shared sacrifice by all stakeholders; and

• Avoid a disorderly failure of the companies.

This means that any funds advanced will be of short duration only – for the next 30 to 60 days – to enable GM and Chrysler to come up with a negotiated plan. And there’s no way Obama will reverse this. It’s becoming more obvious every day that only a bankruptcy filing can restructure these two companies. Congress and the new President will have little incentive – never mind the ability – to change the inevitable outcome. But wait, there’s more!

There will be a requirement for each company to fully collateralize any loans with assets that would remain outside a bankruptcy filing. For GM, this would be some blanket collateralization of its unencumbered ownership stakes in its foreign entities. (GM’s Mexican operations have already been pledged for its secured bank line of credit.) Chrysler’s lenders have a blanket encumbrance on the entire company. Either Cerberus will have to offer another asset or cash as collateral or Chrysler goes away into the night.

And we’re going to get a “car czar” empowered by Treasury to manage the loan grants and upcoming bankruptcy proceedings. Look for Mitt Romney to become the “face of the government” upon the stakeholders– and he’s already written in the New York Times that bankruptcy is the only road to salvation.

The upshot of all of this: meltdown in Detroit. Ford has to pray that the liquidation of Chrysler goes smoothly, and that the shrinking of GM takes some time too. This will give their suppliers time to adjust to a new reality.

In the meantime, there will be great deals on GM and Chrysler products. Even with the plant shutdowns for January, there’s still a ton of iron sitting on dealer lots. And when the bankruptcy gets filed, the fire sale begins. Americans love a bargain, and new vehicles, even from a bankrupt automaker, can be sold at a price. But it’s also going to be the end for thousands of dealers.

So on Friday, the government will offer approximately $6b – $8b to GM, and a lesser amount to Chrysler, maybe only $4b – $6b. Collateralized. GM can do it. Chrysler can’t. There’s a gun to the head of the dog – put up something of equal value or don’t – you make the call Mr. Feinberg. In the end, it’s still going to be bankruptcy for both, with GM coming out the other side with Chevrolet and Cadillac, and Chrysler being parted out. Watch this space.

Ken Elias
Ken Elias

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  • Mel23 Mel23 on Dec 18, 2008

    It's so reassuring knowing that Bush doesn't want to leave a mess for Obama. The climate about to boil, oceans rising, desert creeping up from the South (very dry in KY this year), two wars, worldwide economic freefall courtesy US deregulation, $350B pissed away via TARP with no accountability, and Bush is worried about leaving a mess for Obama and having a viable auto industry. This has to be the sleaziest bastard ever to occupy the WH, Nixon included. No such thing as orderly BR in this economy. This is a very dangerous attempt to bust the UAW pure and simple. Even with intentions and ability far exceeding those possessed by the Bush crew, this would be a very iffy process to get through without wiping out the domestics AND the suppliers AND the dealers AND tons of small town local newspapers. The best hope is for one or more of the parties to tell him to stuff it and see if he has the guts to blow it up. His preferred approach will certainly do that. Either way he'll fly home with the customary smirk.

  • Tesla deathwatcher Tesla deathwatcher on Dec 19, 2008

    Are you saying Mitt Romney would be the "car czar"? He would be a great choice. In my mind, he's a very skilled businessman but a poor politician.

  • 3SpeedAutomatic At this time, GM had a "Me Too" attitude towards engine development:[list][*]the Euro luxury brands have diesels, so can we via an Olds V8[/*][*]variable value timing, welcome to the brave new world of Cadillac V8-6-4[/*][*]an aluminum block V8 engine via the HT4100, the go-go 80's[/*][*]double overhead cams, 4 valves per cylinder, no sweat, just like the Asian brands via NorthStar. [/*][/list]When you mindset is iron block and cast iron heads, life if easy. However, each time, GM failed to understand the nuances; intricate differences; and technical difficulty in each new engine program. Each time, GM came away with egg on its face and its reputation in ruin.If you look today, the engines in most Cadillacs are the same as in many Chevrolets. 🚗🚗🚗
  • 3-On-The-Tree I don’t think Toyotas going down.
  • ToolGuy Random thoughts (bulleted list because it should work on this page):• Carlos Tavares is a very smart individual.• I get the sense that the western hemisphere portion of Stellantis was even more messed up than he originally believed (I have no data), which is why the plan (old plan, original plan) has taken longer than expected (longer than I expected).• All the OEMs who have taken a serious look at what is happening with EVs in China have had to take a step back and reassess (oversimplification: they were thinking mostly business-as-usual with some tweaks here and there, and now realize they have bigger issues, much bigger, really big).• You (dear TTAC reader) aren't ready to hear this yet, but the EV thing is a tsunami (the thing has already done the thing, just hasn't reached you yet). I hesitate to even tell you, but it is the truth.
  • ToolGuy ¶ I have kicked around doing an engine rebuild at some point (I never have on an automobile); right now my interest level in that is pretty low, say 2/5.¶ It could be interesting to do an engine swap at some point (also haven't done that), call that 2/5 as well.¶ Building a kit car would be interesting but a big commitment, let's say 1/5 realistically.¶ Frame-up restoration, very little interest, 1/5.¶ I have repainted a vehicle (down to bare metal) and that was interesting/engaging (didn't have the right facilities, but made it work, sort of lol).¶ Taking a vehicle which I like where the ICE has given out and converting it to EV sounds engaging and appealing. Would not do it anytime soon, maybe 3 to 5 years out. Current interest level 4/5.¶ Building my own car (from scratch) would have some significant hurdles. Unless I started my own car company, which might involve other hurdles. 😉
  • Rover Sig "Value" is what people perceive as its worth. What is the worth or value of an EV somebody creates out of a used car? People value different things, but for a vehicle, people generally ascribe worth in terms of reliability, maintainability, safety, appearance and style, utility (payload, range, etc.), convenience, operating cost, projected life, support network, etc. "Value for money" means how much worth would people think it had compared to competing vehicles on the market, in other words, would it be a good deal to buy one, compared to other vehicles one could get? Consider what price you would have to ask for it, including the parts and labor you put into it, because that would affect the “for the money” part of the “value for money” calculation. An indicator of whether people think an EV-built-in-a-used-car would provide "value for money" is the current level of demand for used cars turned into EVs. Are there a lot of people looking for these on the market? Or would building one just be a hobby? Repairing an existing EV, bringing it back into spec, might create better value for the money. Although demand for EVs is reportedly down recently.