Bailout Watch 413: Feds Preparing $40b Chrysler – GM C11 DIP

The Wall Street Journal reports that “the U.S. Treasury have started lining up the largest bankruptcy loan ever, talking with banks and other lenders about at least $40 billion in financing for General Motors Corp. and Chrysler LLC, in case the two auto makers need it, said several people familiar with the matter.” Although the WJS neglects to specify the level of intimacy involved, contempt for the automakers’ viability plans may soon bring familiarity with debtor in possession (DIP) funding. People familiar with someone involved in the negotiations who’s close to someone who fought with your great uncle in Verdun reveals the heartening news that the $40 billion figure includes paying off the $17.4 billion in loans to Chrysler and GM pissed away thus far. Loaning money to someone to pay off a loan we already made to them? Why does that sound so familiar? But wait! It gets better/worse.

As the Treasury is working with Citigroup and JP Morgan Chase, we’d be loaning money to automakers to pay off loans that we already made to them, and encouraging banks to whom we’ve loaned money to provide the rest of the DIP financing (presumably using our loan money). And folks, that’s not even an issue.

The government advisers also are looking at ways the Treasury could “prime” other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps . . . .

GM said it might need as much as $100 billion in financing from the government if it were to go through the conventional bankruptcy process. GM’s $100 billion estimate stems from the belief that it would suffer “catastrophic revenue reduction impact” in a prolonged conventional Chapter 11 process, as it would expect to sustain as much as an 80% decline in sales after a bankruptcy filing. GM would need financing not only so it could weather the storm, but also to help its suppliers and dealers survive.

GM’s company line remains “You can pay us now or you can pay us a lot more later.” How compelling is that? And what’s with this weather the storm stuff? GM was sinking long before the big swells arrived. Long before.

Anyway, this is all the “stick” part of the program. It remains to be seen if the feds can use this DIPsy-doodle to extract concessions from the UAW and GM’s recalcitrant bondholders. The carrot? Your money. And LOTS of it.