Editorial: Bailout Watch 275: Ken Elias' Final Final Plea to Congress

There’s still time left for the Senate Republicans to stop the insanity. The Detroit bailout plan is a hastily written piece of legislation that gives an open-ended commitment to government support of the domestic auto industry. One that makes a single individual responsible for “determin(ing) appropriate measures for assessing the progress of each eligible automobile manufacturer in transforming the plan submitted by such manufacturer to the Congress on December 2, 2008, into the long-term restructuring plan to be submitted.” And that same individual also will help negotiate a restructuring program “between the interested parties” and will then determine within a date certain whether the plans themselves lead to the expected outcome of financial viability. If not, this same individual can pull the plug by calling the loans and forcing a bankruptcy. If he or she does that, I hope they get Secret Service protection. And a Medal of Honor…

In truth, the car czar idea is patently ridiculous. One player-to-be-named-later will have the power to set the terms, negotiate the deal, and then make a final determination whether he’s done it right. Why not put Stalin in charge? This nonsense destroys the rights and interests of the parties to negotiate themselves-– or under the existing framework of the bankruptcy judicial process. Worse, there’s enormous political pressure to incorporate wacky concepts (from the Pelosi wing of the Democrat party) into the restructuring plans. We’re talking green cars, no jets, limits on exec compensation and other political aims that hamstring prudent allocations of capital.

Bad landing, wrong airport.

Other than CEO Rick Wagoner and the GM Board of Directors, the biggest stumbling block to GM’s root-and-branch restructuring remains the costs of terminating brands and dealers. GM’s latest plan to “rightsize” same is a lame attempt to pull the wool over the eyes of Congress (but not TTAC). It feebly states that GM will sell Saab and HUMMER (to whom? when? for what price?). It places Saturn in “strategic review.” Pontiac becomes a “niche brand” (as if it isn’t already a niche of nothing).

GM’s dancing around the issue: it needs a wholesale slaughter of brands and dealers, including the Buick/Pontiac/GMC “sales channel.” HUMMER, Saab, Saturn? Kill them all. Only GT can’t do it outside of bankruptcy; dealers would bury them in lawsuits from all 50 states’ franchise laws.

If Congress wants to rewrite the rules for its friends in Detroit, they should simply pass legislation that gives a one-time authority for any of The Big 2.8 to terminate brands and dealers with limited liability. The nuclear utility industry has an entire act devoted to limiting its liability in the event of catastrophe (the Price Anderson Act, passed in 1957 and renewed ever since). Why not do the same for Chrysler, Ford and GM? Just cap the amount of corporate liability in the event of franchise terminations during this restructuring period. Problem solved.

If GM really wants meaningful restructuring, it has to eliminate six of its eight brands. STAT. Focus on Chevrolet and Cadillac only. Yes a lot of dealers will disappear; some 3k or more. But it must be done and it can’t be done outside of bankruptcy. The dealers will never cooperate. It’s their livelihoods and personal assets at stake. Screw sacrifice they’ll say, we’ve already given enough.

Other than that…

Yesterday, we proposed a simpler solution. Give The Big 2.8 the bailout money they need to keep the doors open and lights on for 45 days or so. A finite amount of money, fully collateralized by assets. No risk to the taxpayers. Make these companies come up with their own plan, one that makes them viable enterprises: healthy balance sheets, limited debt and an opportunity to make profits and generate cash soon, not never. If they can’t do that outside of bankruptcy in this time period, then they’ll have to file no matter what. Put them under the Sword of Damocles.

But we’re going to add a caveat to this. There will be no additional government money. Any restructuring program must meet the tests of commercial lenders. Let the market determine whether they’ve gone far enough in restructuring, not Congress. And certainly not some “be all, know all” car czar. Let’s be sure to keep the politics out of this where we can. Otherwise it will be an endless circus. The commercial finance market will jump at an opportunity to finance a healthy automaker, perhaps with a “nudge” from Treasury.

We urge Congress to seek a “market-based” approach to solving the problems in Detroit. Any legislated attempt to loan money under conditions will certainly fail. It opens the door to political interference, and places the burden on a single individual to determine the merits of any restructuring. The horror! We say the market can function effectively if Congress lets it do so-– with a little piece of legislative help to limit liability. And a little bit of money just to get there.