Editorial: Bailout Watch 381: Congressional Bailout Report: What They Knew Before They Loaned the Money

TTAC proofreader and Editor Jeff Puthuff has been helping me chase down the Chrysler–Cerberus story, trying to identify the automaker’s secret co-investors. In the midst of that pursuit, Jeff has unearthed this heretofore unreported document: “ U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring” Dec. 3. 2008 (Prepared for Members and Committees of Congress).” The Congressional Research Service (CRS) drafted the report for elected representatives contemplating whether or not to loan Chrysler and GM money to prevent their bankruptcy. The U.S. Senate and House of Representatives eventually failed to create a bill to fund the loans (though not for lack of trying). Then-president Bush stepped in at the eleventh hour and provided $17.4b worth of federal loans, by stretching the provisions of the Troubled Asset Relief Program (TARP). There are some startling—and not so startling—insights.

Widely quoted Center for Automotive (CAR) Research Study Debunked, Rejected

A general criticism of this analysis is that it assumes that the suppliers and all other automakers, aside from the the initially failed company or companies, would see their output drop to zero, and that they would be merely passive observers of an industry collapse. There are many examples in recent years of bankrupt or financially distressed suppliers being supported by their OEM customers, or by other suppliers that acquire parts of the business to gain new contracts or to be able to continue servicing their own contracts from a failed subassembly producer…

While CAR posits, for the sake of analysis, that, in the first year, no auto manufacturing in the United States could survive a major Detroit 3 bankruptcy, in actuality, such an extreme outcome is unlikely. Immediate and radical restructurings among suppliers is a more likely outcome, and other brands would continue to produce.

U.S. Auto Manufacturing Employment Declining Generally, Anyway

Automotive manufacturing employment has also fallen as a share of total employment in manufacturing. While total manufacturing employment has fallen by more than three million jobs since September 2001, employment in motor vehicle manufacturing dropped at an even faster rate, with its share of total manufacturing employment falling from 7.4% to 6.4%. During this period, total automotive sector employment, including services fell from 5.1 million to 4.6 million, while total U.S. employment grew by six million. As a result, automotive employment, including both manufacturing and services, as a share of total U.S. employment, fell from 3.9% to 3.3%.

GM – Chrysler Shotgun Marriage Still An Option

GM’s plan to acquire Chrysler and merge the two companies, which was widely reported in October 2008, was similarly withdrawn when the companies could not find sufficient funds, including proposed federal financial support, for the deal. The plan could still be resurrected as part of a general plan of government financial assistance for the Detroit 3.

Chrysler / GM Chapter 11 Could Increase Consumer Confidence

One might question whether the recent urgent requests for financial assistance do not diminish consumer confidence at least as much as would a bankruptcy filing designed to reorganize the company and lead to financial viability . . . filing under Chapter 11 could boost consumer confidence in the troubled automakers.

Feds Could Back Vehicle Warranties

If Congress finds that concern about warranty coverage is an issue that would doom a reorganization, it could be possible to provide for alternative warranty coverage. This might be funded with premiums paid by automakers, similar to premiums paid by financial institutions to the Federal Deposit Insurance Corporation (FDIC).

Loan Default Risk

However, direct loans from the federal government commit government money more immediately than would loan guarantees. Several have questioned the advisability of extending such loans, fearing that the troubled automakers may be unable to repay them even if the loan terms are very favorable.

Loans Could Leave Federal Government SOL

Under current bankruptcy law, the loans, if unsecured, would enjoy no priority status under 11 U.S.C. § 507. This means that the government potentially could “stand in line” with the other non-priority unsecured creditors and ultimately might receive only a few pennies for each dollar of outstanding loan balance. In the worst case, there might be no funds to divide between these creditors.

Chrysler Pension Plan Funding Unknown

As a privately-held company, Chrysler is not subject to the same SEC reporting requirements as are GM and Ford. Current information about pension plans was not available at the time this CRS report was written.

Loans Less Onerous Than Previous ChryCo Guarantees

By comparison to the broadly defined elements of these plans, the Chrysler loan guarantee legislation of 1980 was far more prescriptive in exchange for a loan guarantee that was worth far less than the $25 billion requested by the Detroit 3 in 2008, even allowing for inflation.

Clearly, the U.S. Congress had enough information to know that providing GM and Chrysler with federal loans was an extremely risky not to say stupid idea. As did President Bush. By making these loans, the president pushed “the Detroit problem” down the line to president-elect Obama.

The bottom line: adding more fuel to Chrysler and GM’s pyre is just as boneheaded now as it was then.