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

Ken Elias
by Ken Elias
editorial bailout watch 295 all the president s plans

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.

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2 of 33 comments
  • 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.

  • KOKing I'm in an emissions check only state, and I'd trade that away for a safety check all day.
  • Bd2 The hybrid powertrain in the Sportage and Tucson are the ones to get.H/K should discontinue the base NA 2.5L powertrain and just build more of the hybrid.In the future, maybe offer a 2nd, more powerful hybrid (the hybrid 2.5) which will first arrive with the next Telluride/Palisade.Kia also needs to redo the front fascia for the Sportage's refresh.
  • The Oracle I say let the clunkers stay on the roads.
  • Jpolicke Twenty-three grand for a basket case? And it has '66 wheel covers and gas cap so who knows what else isn't original?
  • Scott Can't be a real 1965 Stang as all of those are nothing but a pile of rust that MIGHT be car shaped by now.