As we noted Saturday morning, the $15B Detroit bailout is moving ahead. The preliminary deal looks to be a a loan, plus supervision and an equity stake. And I’m not sure, but Ford is making noise as if they are opting out of part of the deal:

The U.S. government may end up holding stakes in General Motors Corp., Ford Motor Co. and Chrysler LLC if Congress and the White House reach agreement on a financial bailout for the automakers.

Under the proposed rescue, details of which are still being discussed, the Treasury would get warrants for stock equivalent to 20 percent of any government loans. With GM seeking as much as $10 billion and valued at $3 billion, the state may become the biggest shareholder. The legislation isn’t clear on what kind of holding the government would take, leaving it the option of preferred, common, voting or non-voting shares.

The Ford Motor Company announced Monday evening that it would not seek short-term federal aid, denying that it faced the same “near-term liquidity issue” as G.M. and Chrysler.

I still believe a prepackaged bankruptcy, with the government providing debtor-in-possession financing and guaranteeing the warranties of the makers is a better solution.

Here are the details of the current proposal:

Auto Industry Financing and Restructuring Board –  Presidential appointee “Car Czar”

Bridge Financing – Funds previously appropriated for Section 136 of the Energy Independence and Security Act (EISA).

• Assessment of Restructuring Progress – Evaluate progress of each Auto Manufacturer in 45 days.

Negotiated Long-Term Restructuring Plans: Restructuring plan for long-term viability by 3/31/09

Warrants: Each Auto Manufacturer receiving a loan will provide warrants equal to 20% of the loan.

Executive Compensation: TARP restrictions apply.

Dividends: Not permitted during duration of assistance (Why can Banks pay divvies? WTF is that about?).

• Super Seniority:  Subordinates all other auto obligations.

Oversight – GAO, Special IG, and TARP provisions apply; full acccess to all auto records by GAO

Terms and Conditions of Loans: 7 years, 5% for first 5 years, 9% thereafter, No prepayment penalty.

Withdrawal from Lawsuits: Loan recipients cannot in any legal challenge State laws concerning greenhouse gas emission standards.


>

Sources:
U.S. Rescue May Give Government Stakes in GM, Ford and Chrysler
John Hughes and Nicholas Johnston
Bloomberg, December 9, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=aj8WycWPOfEw&

Summary of the Auto Rescue Bill
Corey Boles
Auto Industry Tracker, December 8, 2008, 4:22 pm

http://blogs.wsj.com/autoshow/2008/12/08/summary-of-the-auto-rescue-bill/

Deal to Rescue American Automakers Is Moving Ahead
DAVID M. HERSZENHORN
NYT, December 8, 2008

http://www.nytimes.com/2008/12/09/business/09auto.html

U.S. Could Take Stakes in Big 3
Greg Hitt
WSJ, DECEMBER 9, 2008, 3:53 A.M. ET

http://online.wsj.com/article/SB122875608562688401.html

See also:
Car Dealers Brace for Closings, or for a Fight, as Detroit Seeks Help

http://www.nytimes.com/2008/12/09/business/09dealers.html

G.M., Under Pressure, Turns to Robert Lutz

http://www.nytimes.com/2008/12/09/business/09manage.html

Electric-Car Makers Struggle

http://online.wsj.com/article/SB122849893450683261.html

Category: Bailouts

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Detroit Bailout; Ford Opts Out?”

  1. jb01411 says:

    I concur wholeheartedly, pre-pack. The only addition is that they should set up some facility for the suppliers with trade credit to GM and Chrysler, to firewall the damage. The Car Czar? Will he be as effective as the Drug Czar or Education Czar?

    And doesn’t anyone have a problem bailing out Cerberus?

  2. Bruce in Tn says:

    I have a problem bailing out Chryler or GM. The “debt to GDP ratio” for GM is enormous. If they are wildly successful, they might get their debt paid off in the new millenium…

  3. CNBC Sucks says:

    Bruce, I have a problem bailing out ANYBODY.

    Here is what I think of Ford opting out of the deal: Good! Maybe that will lower the bailout package by a few billion. The way I see it, $15 billion is the smallest amount of extortion money the Democratic Party has to pay to maintain the appearance that they are trying to save UAW jobs. As I have said before (http://www.ritholtz.com/blog/2008/11/why-a-reorg-is-better-for-gm-than-a-bailout/), Michigan and Ohio are key electoral states for the Democrats, so all of this is political calculus. I think some of you underestimate the intelligence and guile of our politicians (both left and right, I must add); I don’t think anyone seriously expects these awful companies to survive in their present forms, bailout or no bailout.

    I also wanted to respond to skardin on the prior thread, http://www.ritholtz.com/blog/2008/12/bailout-open-thread/, since this thread is fresher and will get more eyeballs henceforth. He said, “I’m gonna get heat for this, NeoCon’s idea of solving problems is to start wars around the globe. Democrats’ idea is to throw more money at problems they don’t understand”. I don’t entirely disagree, but I actually felt compelled to defend the NEOCONS (yes, the neocons) on this one: If the US did not have such a huge military-industrial complex, where would our economy be?

    Wake me up when the US starts making world-class stuff that doesn’t fire missiles.

  4. annie_moose says:

    I’m curious just how much Japanese car makers receive from their governments in direct subsidies. Add the sweet heart deals the southern states throw to the automakers for locating there. Example here from Business Week.

    snip

    Did former Toyota executive James Press rat out his old company? Or was he just pointing out how smart the Japanese were to back gas-electric hybrid technology, which has been a boon to the company’s fortunes and image, especially in the U.S.

    Chrysler LLC vice chairman James Press said Wednesday that he was not intending to speak negatively about Toyota, his former employer, when he told BusinessWeek that the Japanese automaker benefited from government investment in its gas-electric hybrid technology.

    Press was responding to a statement made by Toyota, where the Chrysler executive worked for 37 years and served as a board member before leaving last year, denying Press’s assertion made in an interview with BusinessWeek on March 20 that the Japanese government had subsidized “100% of the research and development costs” of the automaker’s gas-electric hybrid system that was launched in the 1997 Prius and now powers all of Toyota’s hybrid vehicles.

  5. Withdrawal from Lawsuits: Loan recipients cannot challenge State laws concerning greenhouse gas emission standards.

    That’s funny.

    I’m liking this bail-out thing more and more.

    Can we now bail out the coal companies?

  6. constantnormal says:

    If a “pre-packaged bankruptcy” is acceptable for the auto companies, why not Citibank?

  7. CNBC Sucks says:

    Hey Dougie, good to see another familiar name from the TypePad glory days (October and earlier). You joke about coal companies, but did you know Evergreen Solar wants some of that bailout money?

    http://www.associatedcontent.com/article/1241863/how_obama_should_handle_bailouts_for.html

    Ritholtz, have you paid attention to this? If you don’t mention ESLR in Bailout Nation, then your book would be incomplete and should not be made for sale.

    h/t my new virtual girlfriend, Moe Tkacik, http://moetkacik.tumblr.com/

  8. Steeliekid says:

    What really bothers me about any bailout of the autos is the reasoning that they economic impact of them failing would be massive. That may be so, but what makes these autoworkers a “special” class to be protected when there are massive layoffs in other industries across the country? Is the autoworkers welfare “senior” everyone else? Why?

  9. jb01411 says:

    constantnormal, why Citi and not GM?

    There is a significant difference between banks and industrial companies. As deposit taking entities, banks occupy a special place in the free market system. If Citi goes bankrupt, the FDIC is on the hook to insure its deposits up to a preset limit. Furthermore, a bank as large as Citi has tens of thousands of counter parties to trades, investment accounts, loans, etc… So if it were to fail, it could literally freeze the financial system, hence the moniker “too big to fail”. Theoretically, because of a bank’s special status, it is subject to regulation by the Fed which is to prevent excessive risk taking. Obviously, the Greenspan fed was completely asleep at the switch and thereby exposed the financial system to the ensuing calamity.

    While GM and Chrysler are large companies with many employees and suppliers, they do not occupy the same position in the economic system and are therefore subject to less regulation. Your grandmother does not loose her savings account when GM goes down. While I grant that a GM or Chrysler bankruptcy will be painful, throwing good money after bad does not solve the problem.

    Basically, the auto companies had an truck/SUV strategy with no strategy for cars. I do not think that the automakers have made profits in their car product lines in over a decade. So when high fuel prices pushed people away from trucks and SUVs, failure was the inevitable result. The product strategy failure has been exacerbated by a cost structure that is completely uneconomic. Principally, over-capacity, overly generous salaries and benefits and legacy employee costs.

    Ford and GM both have very profitable overseas operations where they have a more rational cost structure. However in the US, their completely dysfunctional relationship with the UAW has prevented them from rationalizing their business. The past 5 years in particular, they have been discounting heavily to boost demand to absorb their excess capacity (zero financing, employee discounts, etc). The problem is that when you pull forward demand, there comes a day of reckoning. Now car sales are averaging 12m cars/year and they have production capacity in excess of 17m cars/year.

    To solve this mess, they are going to have to reduce their excess capacity significantly. That will mean closing plants and firing workers. Annulling contracts is usual and normal in bankruptcy. This would allow renegotiation of the union contracts, closing factories and dealerships.

    Does anyone really believe that the Congressional solution will close plants and fire workers? The UAW was a significant contributor the recent Democratic political gains.

    If the car makers do not address their fundamental problems, they will at best struggle along at worst require another bailout or bankruptcy.

  10. wally says:

    Given that we are probably looking at a year – and probably more – of ultra low car sales, what good does a loan, under any terms at all, do for them? It postpones the real issues into the Obama presidency, of course, but a Dem-controlled Congress ought to be smarter than that (though their performance during Pirate Paulson’s stampede brings that into question).

  11. craig k says:

    I don’t see anything in the bailout about removing the boards of directors and top level management, seems like the bozos who created and oversaw the demise of these companies should be shown the door.

  12. CNBC — thanks. cheers to you as well.

    Aside from the humorous aspects of a “you cannot sue the states” clause (talk about a poison pill), I am very intrigued by the practical value and utility of such a clause. As a taxpayer, if I thought there was a way to use a Big 3 bail-out to foster the next generation of intelligent, efficient transportation in the U.S., I would greatly favor the investment, since it would be an actual investment in the sense that my kids would accrue value from it.

    I’d like to see another clause: “Loan recipients, by accepting these funds, agree to not lobby any public official or member of Congress to change any aspect of this agreement unless it can be proven such a change would materially benefit the taxpayer/lessor.”

  13. Brendan says:

    @CNBC – I think you give the Neocons too much credit – I think we could have found a better way to invest that money than in the military industrial complex and still be at least as good off as we are now and have been for the last half dozen or so years. Time will tell if the new administration can actually pull this off, but it’s hard to imagine that our economy would be doing worse now if we instead invested that money to become the leader in biotechnology, green technology, or some other product that we could have patented, be producing and selling to the rest of the world right now. Sure the military does advance some technologies that work their way to the private sector; but a vast majority of that money has gone toward spent assets like troops, fuel, ammunition, etc. We’d have been far better off building/tooling factories to build green tech and/or building world class biotech research facilities and/or [insert your favorite tech]. I also can’t see how sending labor and money to the middle east that produces no dividends is building more wealth in the US than leaving troops here to work on civil projects at home and leaving reserve troops at their jobs. This is a bit like saying it’s better to invest in an expensive dinner because the waiter will get a tip than to invest in your business that might be able to hire a new employee: it’s a bit short sighted.

    On another note, Ford (probably) opting out was exactly why I thought the government needed to take a stake in the companies and force the issue on stockholders. I just had this suspicion that Ford were extending the hand at this time just because they could, not because they really needed to. This seems to confirm my suspicion.

  14. constantnormal says:

    @ jb01411 –

    OK, so let’s assume that Citi (and BAC, and AIG) really is “too big to fail”

    Is not the best course of action to bust them up into smaller entities, that CAN be allowed to fail if they are too weak to live? By plumping them up with taxpayer-backed debt (well-Fed, as it were), are we not merely escalating this problem to a new, and even less tractable level?

    Yes, yes, they are humongously complex entities (by design, part of the opacity anti-transparency philosophy), but that only tells me that we need to begin deconstructing them sooner, rather than later, as it’s gonna take a while.

    All I see our continued propping up of failed institutions is to guarantee than the eventual inevitable failure will be bigger still, and I don’t think anyone wants that.

    I am not arguing that the auto companies deserve these bailouts, I’m arguing against the wholesale bailouts-for-all mentality that pervades the Fed Chairman and Treasury Secretary’s minds. We CANNOT save every falling sparrow/condor, we had better be thinking seriously about saving the nation, and that may well entail having to survive the collapse of a Citibank or AIG.

    But I also don’t believe that you understand the chain of dependencies in the auto business, or how widespread the splashback will be when they fail. I think it is entirely possible the granny will lose her savings account, or at least have the FDIC cutting her a check for it, as entire towns (and possibly one entire state) collapse economically when over half their economic base implodes.

    Understand, that I am not lobbying for a GM bailout, the pre-packaged bankruptcy seems the best option to me, I just want to apply that to the financial institutions as well, for THEY ARE NO DIFFERENT in the impact on the larger economy.

    And bankruptcy does not mean that business screeches to a halt (it is already halted, so that doesn’t matter), GM has been building cars using parts supplied by Delphi, all the while that it has been operating under bankruptcy. (several years now).

    IMHO, the most expedient thing that should have been done upon nationalizing Freddie and Fannie was to convene a group to begin planning their deconstruction, into a dozen or more smaller regional entities that would be IPO’d back to the public at some specified point in time (2012?). But instead, Freddie & Fannie are being used to bludgeon those few mortgage lenders who managed their business in a sane manner into the ground, with ultra-cheap taxpayer-subsidized rates. This is nuts, and no good will come of it.

    If we don’t start doing something to scale back our economic infrastructure to match our shrunken economy, we are going to wind up with an economy like a fallen souffle, with everything collapsing at one — probably when it becomes apparent that the US dollar has nothing more to give and it dies.

    I would like to avoid that outcome, even if it means sacrificing a lot of behemoth companies and enduring untold chaos in the process.

    WE MUST ARRIVE AT A MEANS OF DOWNSIZING THE CORPORATIONS TO MATCH THE DOWNSIZED ECONOMY. And bailouts are NOT the answer.

  15. gee, to borrow from “Chuck Ponzi”, whocoodanode?

    Western nations including the United States have gradually implemented virtually all of Marx’s 10 key steps toward creating a dictatorship. What are some examples can you find? Americans would be wise to study the “Ten Planks” and demand that the President and Congress abolish all laws, regulations and agencies which govern these (and all other) unconstitutional seizures of power. Communism was never intended to free man, but to enslave him; indeed the Communist Manifesto promised a “dictatorship of the proletariat” and history proved it always ended up slaughtering millions of the proletariat.

    Karl Marx’s “10 Planks” to seize power and destroy freedom:

    Abolition of Property in Land and Application of all Rents of Land to Public Purpose.

    A Heavy Progressive or Graduated Income Tax.

    Abolition of All Rights of Inheritance.

    Confiscation of the Property of All Emigrants and Rebels.

    Centralization of Credit in the Hands of the State, by Means of a National Bank with State Capital and an Exclusive Monopoly.

    Centralization of the Means of Communication and Transport in the Hands of the State.

    Extension of Factories and Instruments of Production Owned by the State, the Bringing Into Cultivation of Waste Lands, and the Improvement of the Soil Generally in Accordance with a Common Plan.

    Equal Liability of All to Labor. Establishment of Industrial Armies, Especially for Agriculture.

    Combination of Agriculture with Manufacturing Industries; Gradual Abolition of the Distinction Between Town and Country by a More Equable Distribution of the Population over the Country.

    Free Education for All Children in Public Schools. Abolition of Children’s Factory Labor in it’s Present Form. Combination of Education with Industrial Production.

  16. Patrick Neid says:

    I think the Ford family still controls the company through their class B stock. If they opt out completely that could be an interesting spread trade, GM vs Ford. Pick your side!

  17. jonpublic says:

    The ironic part here is that Ford ran out of money first and was able to raise financing before the credit crunch. That’s why they are in better shape. If you read closely they were asking for a $9 billion line of credit that they would only tap if one of their competitors went bankrupt, disrupting the supplier network.

    @annie_moose
    Its not just their government, its our government too. Whenever any of the japanese open a plant in the southern states, they get hundreds of millions in tax credits. Like in the neighborhood of $200,000 – $275,000 per worker per plant. Our government needs to realize that we are competing on a global stage now, and that they need to give our companies as many advantages as possible in order to compete.

    Take for instance the chinese. Why is their auto industry ramping up so quickly? Its because if you are Ford and want to sell cars in China, you need to take a chinese partner, which owns 51% of the production facilities. Once they absorb your knowledge, they spin off and compete with the very company that brought them up to speed.

  18. CNBC Sucks says:

    Brendan – well done. Note that I sometimes write things just to balance out my other outrageous comments, as well as elicit arguments such as yours that I want to have made at minimal cost of mental energy to me. It is all part of a highly intricate search engine calculus and the genius that is CNBC Sucks.

  19. jb01411 says:

    constantnormal,

    I agree with you that bailouts are not the answer. I am fully in favor of a prepack for the auto companies with a US DIP financing, a warranty guarantee for car buyers and some sort of financing package for the suppliers who have 28B in trade finance extended to GM. I think that a prepack bankruptcy is a much better forum to negotiate the necessary restructuring than the halls of congress.

    In re the banks. The AIG intervention is much less defensible than the Citi. One interesting question that I have is if the SIVs were off-balance sheet because they were not “backed” by Citi, why did the Fed not insist that Citi allow them to fail? Taking those assets onto the Citi balance sheet only further hurt the capital position of the bank. Didn’t the Board have a fiduciary duty to the shareholders to prevent the management from bringing those obligations on balance sheet.

    I agree that as a quid pro quo of the government intervention into Citi, should be its dismantling. Citi has very valuable operations outside of the US (Latam and the middle east come to mind). These should be sold to shore up the capital base. The old Banamex alone is probably worth several billion. AIG should also be dismantled. The government should probably wait for the markets to stabilize to start the auctions, but given the complexities involved, it will probably take several months to a year to separate the assets.

  20. hardaway says:

    I can’t understand why we are bailing out the automakers when bankruptcy has existed for exactly this purpose. I recommended it in my own blog weeks ago, yet everyone seems to have ignored it, thinking consumers will not buy cars from bankrupt companies. That’s crap. Just excuses. Eventually there will be a structured bankruptcy, you’ll see. Only our taxpayer money will have gone down the toilet first.

    As a taxpayer, I am equally angry at having my hard earned tax money go to support the war on terror and having it go to bail out companies that should be restructured through bankruptcy to meet changing markets. Or go away.

  21. mudpuppy says:

    I said it before and I’ll say it again: The US is the only country in the world that would let its auto indutry go bankraupt. That doesn’t make us special, it makes us stupid. Face it folks, we do not live in a free market economy. All the talk about letting the market decide the winners and losers is bs. The government is the cause of the auto makers demise starting with the Wagner act in 1935.
    If you think foreign countries don’t prop up their auto industries you’ve got you head in the sand.
    Follow the growth of the Japanese auto industry. Closed markets, government support, currency manipulation, theft of technology, etc. Look at Korea. Bush makes a trade pact with them. They can ship all the cars they can produce into the US, but the US can’t ship into Korea. Free trade? Hah!
    China is next.. They are in the process of stealing automakers technology right now. I guess that’s what free traders call free trade. In fifteen years when we go to war with China maybe they’ll build our tanks for us.

  22. CredibilityDefaultSwap says:

    “Understand, that I am not lobbying for a GM bailout, the pre-packaged bankruptcy seems the best option to me, I just want to apply that to the financial institutions as well, for THEY ARE NO DIFFERENT in the impact on the larger economy.”

    And who’s going to pay all the CDS contracts that will be have to paid when a big bank goes for chapter 11? Oops?

  23. Simon says:

    He’s a metaphor, The Carmakers are like your aged and ailing granny. In their youth they were the greatest in the world they spawned, if thats the right word, many many children and established a highly competitive and innovative society, their children had children and the society grew and prospered. Now they are in the twilight of their days but they deserve recognition for what they have achieved and to be well tended and nursed and comfortable in their twilight hours.

    One of the tenants of civilized society is care for the young and old. Unfortunately our society is held hostage by the banking Marfia. They have persuaded us that either we keep them alive or we all die.

  24. GRV305 says:

    Car Czar – will this be the guy who -really- knows how to fix the auto companies? Where is he?

    And with the drop in gas prices maybe people will buy SUVs again and pull them out of the hole.

  25. ZackAttack says:

    Of course, this is just a Robber Baron fantasy. I have no clue about how the different share classes would affect your ability to do this…

    I was thinking about this with GM’s market cap down around 1.6b last week, how it was like a cheap option on 4% of US GDP.

    So, what if you were a hedgie with access to 10:1 leverage. You shorted $800m of SSO or even the triple, went long 50.1% of GM and told Congress to go pound sand, you didn’t want any bailout money, you were going to file for Ch. 7. Piss on the writers and buyers of the swaps.

    Probably puts the S&P down a couple hundred at least. Cover your short. Offer to sell Congress your GM stake for $5b instead.

  26. Sota says:

    Obama should say: auto industry is the BLACKHOLE (or asshole) of America!

  27. flipspiceland says:

    The problems of the auto industry, finance, insurance, and all the other dependencies on these industries are too complicated for human beings to solve them. The human beans that are ‘creating’ these supposed solutions are like mad scientists experimenting with a variety of chemicals in a lab.

    And the results will be as botched. You can’ t imagine the destruction, annihiliation and permanent damage reasonable, highly intelligent , the smartest and most persuasive men and women we have can do.

    Better to let the market determine everything. Go through the pain and get it over with. We will anyway, and delaying it is likely to be fatal, rather than temporarily debilitating. This is a much needed therapy that the world needs to go through to get back on the road to progress.

    Oh. And out of these ashes should come one mantra: NO MASSIVE companies or organizations. Didn’t anyhone learn anything about cloning and how one tine bacterium can wipe out a whole species?

  28. Greg0658 says:

    flipspiceland says “let the market determine everything. Go through the pain and get it over with”

    I have but one life – I toiled for this society – am 50 yo and am not ready to die – this system used me and imo because of the labor population growth the world over, no longer needs me like before

    so I wish we had a system in place to know more about you – something tells me your talking your book (and your book alone)

    and if we are not carefull the paper pushers will teach the kids how to get ahead – and starvation will not be far behind