Editorial: Bailout Watch 299: The President's Non-Plan Plan
The President’s non-plan for saving the American auto industry actually works. Believe it or not, it’s a stroke of genius for what it doesn’t do. And that’s not forcing any change on the automakers other than to come up with yet another restructuring plan subject to certain government imposed guidelines. Readers of TTAC know that it’s almost a sure bet that this next round of restructuring will fail. And that’s why it’s such a smart plan. Bravo to Bush!
The set up is simple. Without funding, GM and Chrysler would have gone bankrupt. Under a sudden bankruptcy, billions of dollars in unpaid trade payables would have become pre-petition claims, unpaid, with little hope of recovery. OK; a bankruptcy judge would have put critical suppliers to the head of the queue. But the main point: the fragility of Detroit’s supply chain would have been… tested.
Thousands of dealers would go dark too. The automakers owe them a billion bucks or so for holdback, incentives, warranty, etc., which they would never see again. While still protected by a contract, labor would have a job on paper only. So doing nothing would have created a huge mess, and likely dragged Ford down the drain as well.
The President had to do something to keep these companies from really stinking up the place. Money was the only answer. Time was short. Thankfully, Congress failed to pass its own plan. Any such bailout bill would have become an endless quagmire: a triumph of political maneuvering over common sense, economic reality, and green-party mandated product decisions. Decision time for the chief executive. Well, Treasury Secretary Hank Paulson and company.
The plan’s brilliance: it doesn’t do enough. By design. It’s just enough money to keep the lights on for a few weeks. Sixty days, tops. During that time, both GM and Chrysler must come up with a restructuring program subject to the guidelines in the loan agreements. in a nutshell, these terms force labor wages and work rules parity with transplants, debt exchanges of two-thirds, rationalization of work force, dealers, and suppliers and achievement of a positive net present value (NPV) as a result. Don’t ask what that the NPV is calculated on; I’m not sure anyone knows. Loosely translated, it means “get your shit together.”
Of course, none of this restructuring will actually happen. The tide is heading out. We’re about to see what’s hidden beneath the water’s surface. Cue the scramble among all the parties to protect their own interests-– screw the other guy. Within two hours of the announcement, the United Auto Workers (UAW) asked President elect Barack Obama to remove the “onerous terms” imposed. Just wait until the debtholders-– bolstered by armies of lawyers– get into the act. And dealership rationalization? Look it up at ain’tgonna happen.com.
The bottom line: there can be no real restructuring without bankruptcy.
When all this comes out. Obama, the Congress and the rest of America will see the problem for what it is: a black hole. There’s not now, nor will there ever be, enough public money to placate the hungry wolves. All taxpayers can do is offer GM and Chrysler another section on the bridge to bankruptcy.
GM gets more money than Chrysler, $9.4 billion more for a total of $13.4 billion. Why? ‘Cause GM has to make it. It will be one of two remaining domestic automakers remaining at the end of this process. Can’t let this behemoth run out of money sooner, only because we know that more money will come later in bankruptcy.
And for Chrysler, it only gets $4 billion, no more. And that won’t get it too far down the road. In fact, there’s no road either– this is just the beginning of the parceling of its valuable parts to others. Bankruptcy means death for the Pentastar. And to prevent Cerberus from running off with the government money by finding its way to Chrysler Finance, Paulson required the finance company to guarantee $2b of the bail out funds given to the Motor Company. Take that Mr. Feinberg!
Again, this bailout provides just enough money to keep the ships afloat for now. The false promises of management-led restructurings will never be realized. It’s a scramble for the table scraps. The President did the minimum necessary purposely. His team figured it was better to watch these companies self-implode– on someone else’s watch– than dictate the terms of the collapse. We’ll be watching.
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