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Bailout Plan Gives Government Warrants in Exchange for Loans; Passage
DECEMBER 9, 2008
WASHINGTON -- Congress and the White House inched toward agreement on legislation that would throw a financial lifeline to the Big Three auto makers, giving the government a substantial ownership stake in the industry and a central role in its restructuring.
Under the terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government's $700 billion rescue of the financial industry.
Assuming congressional Democrats and the White House come to agreement on the plan, the car industry would be the latest to submit to strict government scrutiny in return for a bailout, joining most prominently the banking sector.
The auto industry would undergo a restructuring process akin to bankruptcy reorganization, only with fewer rigors and with the government, not a judge, in control, and with many associated political complications.
The program would be overseen by an official, tapped by President George W. Bush, whom congressional aides and lawmakers describe as an "auto czar." This person would act as a kind of trustee with authority to bring together labor, management, creditors and parts suppliers to negotiate a restructuring plan. He or she also would be able to review any transaction or contract valued at more than $25 million.
"We call this the barbershop," said House Speaker Nancy Pelosi, a California Democrat. "Everybody's getting a haircut here, in terms of the conditions of the bill," she said, noting the likely impact on labor, bondholders, shareholders, car dealers, suppliers and executives. "The management itself has to take a big haircut on all of this."
Senior congressional Democrats and top Bush aides wrestled late Monday with final details of the package, which the White House would prefer were even tougher on the car makers. General Motors Corp., Ford Motor Co. and Chrysler LLC have asked for a total of $34 billion to weather the downturn in the economy and steep slump in vehicle sales. GM and Chrysler say they need a cash infusion before the end of December to avoid shutting down.
The White House has been pressing for a compromise package but gave a chilly reception to the latest overture by Democrats. White House officials suggested the package isn't rigorous enough, people familiar with the matter said, and would open the door for companies that aren't financially viable to receive long-term financing.
"We'll continue to work with members on both sides of the aisle to achieve legislation that protects the good-faith investment by taxpayers," said White House spokeswoman Dana Perino.
The latest version of the bill would extend to the companies billions of dollars in short-term financing. These bridge loans are expected to total about $15 billion, enough to carry the auto makers through next March.
Any deal would have to be ratified by Congress. Support there remains tepid and opposition remains high, especially among Republicans in the Senate, who can block the bill through a filibuster.
A handful of Republican senators have said they are willing to help the industry, but it isn't clear how many will swing behind legislation this week. Senate Minority Leader Mitch McConnell (R., Ky.) said the rescue must be financed out of existing funds and include strong taxpayer protections. Mr. McConnell stopped short of endorsing the bill Monday, but did note the auto industry is "an important source of jobs throughout America, including my own state of Kentucky."
Democratic leaders have hopes of pushing a bill through Congress this week, with the Senate likely moving first. "Congress is trying to save Detroit," said Senate Majority Leader Harry Reid (D., Nev.). "If senators are willing to work together...we can pass legislation."
In a statement, GM noted the "extraordinary action" that both the auto makers and Congress will be taking. "As part of our plan, we will abide by the conditions proposed in the bill and will continue our restructuring with great urgency," the company said, urging passage of the bill.
Chrysler said it looks "forward to working with Congress and this administration, and the next administration, and to completing our restructuring in an orderly fashion."
The congressional plan appears to be aiming for many of the benefits of restructuring in bankruptcy court, without an actual bankruptcy filing. But the financing offered the companies is only enough for a few months. In bankruptcy, companies typically line up so-called debtor-in-possession financing that is enough to last them most or all the way through the process.
"I think Congress is trying to go halfway," said Evan Flaschen, bankruptcy attorney with the Connecticut firm Bracewell & Giuliani LLP. "Now you wonder if there will be a second half to this with more money."
As in bankruptcy court, the legislation tries to establish a process under which the auto makers would negotiate with creditors. The companies would be expected to modify contracts with bondholders and unions. The threat looming under the proposed program would be an actual bankruptcy filing -- which the trustee could prompt by withdrawing the loans -- something auto makers have argued could lead to their liquidation as buyers flee.
One danger for auto makers is exposing the industry to congressional meddling as it attempts to build a new business model. The legislation, among other things, would bar the companies from participating in legal challenges to state laws designed to impose limits on greenhouse-gas emissions. The White House opposes that provision, congressional aides said.
If the car companies don't make satisfactory progress toward fixing their long-term problems by the end of March, the auto czar could submit to Congress a plan "and request legislative implementation," according to the draft bill.
The short-term loans would be financed out of an existing $25 billion program created to help the industry meet fuel-economy standards. Under the terms of the bill, the loans would mature in seven years. For the first five years the companies would pay a 5% interest rate; after that, a 9% rate would be levied, the bill says.
The bill doesn't specify what would happen to a company's existing management. GM Chief Executive Rick Wagoner has come under pressure from top lawmakers to step down. He was defended Monday vigorously by GM Vice Chairman Bob Lutz, who said in an interview that Mr. Wagoner has "total support of the board of directors" and shrugged off criticism from lawmakers.
"To blame the American automobile executives for this frankly is ridiculous," Mr. Lutz said, suggesting an unforseen downturn in the economy and housing market are the culprits. "How were we supposed to forecast this when the government doesn't forecast it and the financial institutions couldn't?"
In a sign of how messy the reorganization could become, the United Auto Workers union is seeking to attach strings to any concessions it makes for the Big Three. Marc McQuillen, president of UAW Local 2404 in Charlotte, N.C., said the union is looking for an equity stake in GM and likely a seat on the company's board. UAW officials in Detroit couldn't be reached for comment.
A coalition of about 30 mayors from Michigan, Ohio, Kentucky, Indiana and other auto-producing states were scheduled to meet Monday night in Washington to discuss strategy for several meetings with lawmakers and legislative aides Tuesday. "Every community that has a plant lives under the sword," said Lordstown, Ohio, Mayor Michael Chaffee. He said a plant closure in his town would "be the death knell for this area."
The Detroit bailout bill. While we digest it, here’s what we know so far… Automotive News [sub] says that yes indeed, there will be a car czar. Appointed by President Bush. The Freep is more specific. “Under the bill, automakers would have to submit a restructuring plan by March 31 to what’s being called a ‘financial viability advisor,’ who would have the power to set negotiations among the company, unions and creditors. If the advisor deems the company isn’t making progress, the loans could be called back.” In other words, he or she could throw The Big 2.8 into bankruptcy, without passing go, without collecting $34b (just some of it). Well, fair enough. But from there, things get seriously gnarly…
“The industry superintendent [euphemism three] would create his or her own plan for a government-mandated overhaul if the Detroit 3 failed to create acceptable proposal before April.”
WTF? So if Ford, Chrysler and GM can’t get their **** together, the feds take over? Can they do that? Not yet. But soon…
“As with the first rescue plan, automakers would have to pledge stock to the government equal to 20% of the loan value in return for the money, and the loans would be senior to all of the company’s other debts.”
So for a 20 percent stake in a company with negative net worth, Uncle Sam gets to call ALL the shots as and when they want? And how does that square with the Ford family’s special class of voting stock? Dunno.
That last bit– re: creditor cram-down– represents a HUGE departure from existing financial regulations. For the first time, the U.S. government will be able to come into a [theoretically] solvent company (invited or not) and force legal creditors to the back in the queue. Call it nationalization via the front door. Faustian doesn’t even begin to cover it.
And if you need proof that this bill will create D2.8 reform in name only, The Wall Street Journal [sub] says “Despite calls for the ouster of auto executives, the heads of the three U.S. auto companies would not lose their jobs as part the package under discussion, a senior congressional aide said Monday.”
Still, GM CEO Rick Wagoner and his teams’ golden parachutes are headed for dumpster. Allegedly. “Additionally, no bonuses could be paid to the top 25 senior employees, and no golden parachutes would be extended to departing senior employees.” Fine print please…
It gets worse…
One of the key strings: Detroit has to drop its lawsuit against California’s emissions regulations. How does it help Chrysler, Ford and GM make enough money to repay your pay money? Obviously, it doesn’t. Obviously, it COSTS them money; otherwise they wouldn’t have been fighting the regs (duh).
Even before the checks cashed, the politicians are molding the D2.8’s corporate policies in accordance with political correctness, not profit. As we’ve pointed out, this is just the beginning of some extremely bad decision-making.
The overreaction pendulum has swung. The government screwed up the 700 billion financial "bailout" without putting together the proper oversight and controls to accomplish what was wanted and so now they are overreacting as usual and will place onerous requirements on the loans to auto companies to compensate including the US government taking an ownership position.
They might as well just go ahead an nationalize the car companies and consolidate all 3 into one company named USAuto and be done with it. (Has a patriotic appeal don't you think). If they do this, then all of the workers would be civil service employees and that would end the jobs concern issue.
The auto companies are going to continue to exist for a long time no matter what. This will occur for 2 reasons. (1). Once the government takes an ownership position, they will always argue that they have to protect the investment of the taxpayers and so will continue to pump money into the companies in effect throwing good money after bad. (2). The same arguments that are being made today will be made in 6 months or a year or 5 years about how we can't let the industry fail because of all of the jobs and the cost if we don't don't something blah, blah, blah... so the government will keep providing money.
Of course, the government will also insist that it knows what consumers want and will direct the companies to manufacture those types of vehicles. Currently, the "green" movement has a lot of influence so there will be a big push to build hybrids and electrics because the government has decided that that's what we all want AND need. Of course, it later may be discovered that the hybrid and electric batteries screw up the landfills and the environment and there will be a big push for natural gas or hydrogen cars etc... All of this will amost guarantee that the companies won't be profitable under government direction unless of course the government subsidizes the purchase of these vehicles and imposes tariffs and taxes on companies that won't go along. Of course, the government will provide those subsidies and tariffs so it will still be happy days.
Of course, we can always hope that the next president will be a former Nascar driver and his administration will direct the car companies to build 500hp stick shift rear drive v8's.
If we (the government) are going to help the US auto companies, it ought to be a 1-year loan with the understanding that THERE WOULD BE NO MORE. If they make it great, if not you had your chance and the government just writes it off as a bad debt.
WASHINGTON: When President-elect Barack Obama talked on Sunday about realigning the American automobile industry he was quick to offer a caution, lest he sound more like the incoming leader of France, or perhaps Japan.
"We don't want government to run companies," Obama told Tom Brokaw on "Meet the Press." "Generally, government historically hasn't done that very well."
But what Obama went on to describe was a long-term government bailout that would be conditioned on government oversight. It could mean that the government would mandate, or at least heavily influence, what kind of cars companies make, what mileage and environmental standards they must meet and what large investments they are permitted to make — to recreate an industry that Obama said "actually works, that actually functions."
It all sounds perilously close to a word that no one in Obama's camp wants to be caught uttering: nationalization.
Not since Harry Truman seized America's steel mills in 1952 rather than allow a strike to imperil the conduct of the Korean War has Washington toyed with nationalization, or its functional equivalent, on this kind of scale. Obama may be thinking what Truman told his staff: "The president has the power to keep the country from going to hell." (The Supreme Court thought differently and forced Truman to relinquish control.)
The fact that there is so little protest in the air now — certainly less than Truman heard — reflects the desperation of the moment. But it is a strategy fraught with risks.
The first, of course, is the one the president-elect himself highlighted. Government's record as a corporate manager is miserable, which is why the world has been on a three-decade-long privatization kick, turning national railroads, national airlines and national defense industries into private companies.
The second risk is that if the effort fails, and the American car companies collapse or are auctioned off in pieces to foreign competitors, taxpayers may lose the billions about to be spent.
And the third risk — one barely discussed so far — is that in trying to save the nation's carmakers, the United States is violating at least the spirit of what it has preached around the world for two decades. The United States has demanded that nations treat American companies on their soil the same way they treat their home-grown industries, a concept called "national treatment."
Yet so far, there is no talk of offering aid to Toyota, Honda, BMW or the other foreign automakers that have built factories on American soil, employed American workers and managed to make a profit doing so.
"If Japan was doing this, we'd be threatening billions of dollars in retaliation," said Jeffrey Garten, a professor at the Yale School of Management, who as under secretary of commerce in the 1990s was one of many government officials who tried in vain to get Detroit prepared for a world of international competition. "In fact, when they did something a lot more subtle, we threatened exactly that," referring to calls for import restrictions.
Garten said he was stunned by the scope of the intervention that Washington was now considering. "I don't know that we've seen anything like this since the government told the automakers what kind of tanks to make during World War II," he said. "And that was just for the duration of the war — this could be for much, much longer."
It is hard to measure just what kind of chances Obama may be taking with this plan, in part because so many parts of it are still in motion.
In the short term, Democrats are floating the idea of linking $15 billion in immediate loans to the designation of a "car czar" who, in doling out the money, could require or veto big transactions or investments — essentially a one-man board of directors. The White House indicates that President George W. Bush, who has spent his entire presidency proclaiming that the government's role is to create an environment that spurs free enterprise and minimizes government regulation, would very likely sign the rescue plan.
The first $15 billion and the car czar who oversees it, however, are only the beginning. "After that, we're in uncharted water," said Malcolm Salter, a professor emeritus at Harvard Business School who has studied the auto industry for two decades and, until a few years ago, was an adviser to General Motors and Ford. "Think about this: Who in the federal government would have the tremendous insight needed to fix this industry?"
Depending on how the longer-term revamping of the industry proceeds, Washington could become a major shareholder in the Big Three, it could provide loans, or, in one course that Obama seemed to hint at on Sunday, it could organize what amounts to a "structured bankruptcy." In that case, the government would convene the creditors, the unions, the shareholders and the company's management, and apportion a share of the hit to each of them. If that "consensus building" sounds a lot like the role of the Japanese Ministry of International Trade and Industry in the 1970s and the 1980s, well, it is.
To promote the Japanese car industry on the way up, the trade ministry nudged companies toward consolidation, and even tried to mandate which parts of the market each could go into. (Soichiro Honda, the founder of the company, rebelled when bureaucrats told him he was supposed to limit himself to making motorcycles.) By the 1980s, Congress was denouncing this as "industrial policy," and arguing that it put American makers at a competitive disadvantage — and polluted free enterprise.
Now, it is Congress doing exactly that, but this time as emergency surgery. Other nations will doubtless complain, or begin doing the same for their own companies. "We're at this moment in history, in which the Chinese are touting that their system is better than ours" with their mix of capitalism and state control, said Garten, who has long experience in Asia. "And our response, it looks like, is to begin replicating what they've been doing."
Roberts: One more question, Bob, certainly, as a condition of this bridge loan, the government is going to appoint a car czar to oversee what you do with it. They will talk about what kind of models you should build, fuel efficiency you should get. There will be a government approval of any vehicles you make. Who would you like to see as the car czar?
Lutz: Wait a minute. We don't know if it will be a czar or overseer. I doubt whether this person would dictate the product policy.
Roberts: Certainly an idea they are talking about. Who would you be comfortable with as car czar?
Lutz: I wouldn't even -- other than myself? Unfortunately I'm not available because I'm still gainfully employed.
If Lutz thinks that the government is not going to get into his britches, he'd better have a quick chat with Nancy Pelosi and her firiends. They have every intention of telling him what to build.
Goodbye V8 for sure if the gubberment has a car czar calling the shots on products.
Among the concessions being made will be the dropping of an emissions standards type lawsuit against CA and I think a request that ALL vehicles being sold in the U.S. now meet the stricter CA emissions laws.
Buy those V8s now while ya still can.
Originally Posted by 99 Black Bird T/A
I wonder if we'll see a G8 GXP or a new Camaro...
The Camaro, definitely. The G8 GXP, maybe, it too might just make it in under the wire.
But after that we will likely see a plethora of 4 cylinders and V6s from here on out, even in trucks.
And even though I'm a hardcore power/performance guy at heart, if it ultimately saves the U.S. auto industry then I'm ALL for it.
Of course that's real easy for me to say because I've already got my two great running 11 second GM cars. I do feel bad for the young enthusiasts coming up now that may never know what a fast, new V8 car feels like.
i dont think they will stop making v8s all together, the only thing that would accomplish is being abscent from that part of the industry, as Gm has been experiencing with the hiatus of the camaro, i believe maybe that they will stop making as many but get rid of them all together i doubt it.....ill be damned if the goverment or anybody tells me what i have to drive.......i wont really mind i have another 4 generations of camaros i still have to buy and restore anyway, that will keep me busy for the next 20 years
Watch out. There may be a new begger at the "bailout" trough. GM probably won't operate very well without GMAC. I can see it all now. GMAC requests a 15 billion bailout loan so that they can qualify as a bank holding company so that they can get more bailout money from the 700 billion in bailout money that was set up for the financial industry. I just want to know "where's the line". I want to get in it.
GMAC at the brink 12/9/2008
NEW YORK (CNNMoney.com) -- GMAC Financial Services, the finance unit tied to automaker General Motors, said Wednesday it is coming up well short in its efforts to raise the capital it needs to become a bank holding company, a move the unit is counting on to gain access to needed funds from the Treasury Department and Federal Reserve.
The unit, which is 49% owned by General Motors and 51% owned by private equity firm Cerberus Capital Management, had applied to become a bank holding company last month but warned Wednesday that it may have to pull the application.
The looming failure is another blow to embattled automaker GM (GM, Fortune 500).
GMAC needs to raise $30 billion from investors holding its notes to meet the Fed's capital requirements but the firm said Wednesday it was struggling to get those investors to agree to exchange their bonds for new notes and preferred stock.
So far the offer, which has been extended through 5 p.m. ET Friday, has raised only about $8.3 billion in new capital. The company had $9 billion in capital on hand at the end of the third quarter.
GMAC had been hoping to become a bank holding company since that status would allow the firm to tap into the Troubled Asset Relief Program, the $700 billion in bailout funds set up for Wall Street firms and banks in October, as well as the Fed's discount window, the method that the central bank uses to loan money to directly to banks and other finance firms.
While new funds for GMAC would not have been used to offset losses at the automaker as it seeks a federal bailout and struggles to avoid bankruptcy, it was crucial to the finance unit's ability to again start making car loans to potential GM customers.
GMAC's car loan and mortgage loan businesses, key sources of revenue in the past, have essentially ground to a halt in recent months.
Further problems for GMAC would be a crippling blow to GM's network of nearly 6,500 dealers, most of which get the financing they need to operate and buy vehicle inventory from the automaker. And GMAC's statement indicated it faces additional, though unspecified problems, due to the failure of its efforts to raise capital.
House GOP proposes auto-industry-funded insurance program
December 10, 2008
THE House GOP leadership Wednesday released an alternative plan to the Democrats' proposed $15 billion in loans to the auto makers. The plan is reminiscent of an loan-insurance-themed proposal that House Republicans pushed hard during the financial bailout debate. The plan would be industry funded.
During the financial debate, critics argued that the banks didn't have the capital to fund the insurance plan. It's likely that automakers would also claim they don't have the cash to fund the insurance program. Indeed, GM has said it might not have enough cash to continue operating for more than a few weeks.
"Rather than a taxpayer-funded government bailout that replaces private investment,," explains a leadership memo, "the House GOP plan proposes that the government provide insurance, funded by the participants with a modest FDIC-like fee, which would cover up to 50 percent of the losses of new investment in the case of default, helping to unlock immediate private investment."
GOP Leaders Propose American Automotive Reorganization and Recovery Plan
Boehner: GOP Plan “Protects taxpayers and helps working families by allowing the auto companies to become competitive again, without nationalizing an industry in need of real reform – not another taxpayer bailout.”
WASHINGTON, DC – House Republican Leader John Boehner (R-OH) and his House GOP leadership colleagues today introduced an American Automotive Reorganization and Recovery Plan as an alternative to legislation scheduled for a vote today by House Democratic leaders to provide $15 billion of taxpayer funds to the “Big Three” automakers with inadequate assurances that American taxpayers will be reimbursed. Boehner issued the following statement on his opposition to the Democrats’ legislation and the Republican alternative:
“Washington must address the challenges facing the auto industry and our entire economy not through endless taxpayer-funded bailouts that prolong workers’ pain and put taxpayers’ money at risk, but by fixing problems and removing barriers that make it harder for families to prosper. The House Republican American Automotive Reorganization and Recovery Plan protects taxpayers and helps working families by allowing the auto companies to become competitive again without nationalizing an industry that needs real reform, not another taxpayer bailout.
“Let’s be clear: our nation – and my home state of Ohio – needs a healthy auto industry that produces cars Americans want to buy and provides good-paying jobs. But during these difficult economic days, stressed-out families and taxpayers cannot afford to part with another dollar of their hard-earned money without strict assurances that they will recover these funds in short order. The Democrats’ proposal does not provide adequate assurances to ask them to take this substantial risk. Instead of laying the groundwork for the long-term viability of the auto industry, I’m concerned that this proposal asks taxpayers to further subsidize a business model that is failing to meet the needs of American workers and consumers.”
NOTE: House Republican leaders today introduced the American Automotive Reorganization and Recovery Plan to protect taxpayers and help auto workers and their families by allowing the auto companies to become competitive again. Rather than a taxpayer-funded government bailout that replaces private investment, the House GOP plan proposes that the government provide insurance, funded by the participants with a modest FDIC-like fee, which would cover up to 50 percent of the losses of new investment in the case of default, helping to unlock immediate private investment A full summary of the plan follows and is available here:
The American Automotive Reorganization and Recovery Plan
Working families throughout our country are struggling to pay their bills and facing economic anxieties not seen in America for generations. Employers are finding themselves torn between staying in business and laying off people over the holidays. Nowhere are these challenges more acute than in states that are heavily dependent on auto manufacturing. It is essential that Washington address these challenges not through taxpayer-funded bailouts that prolong working families’ pain and put taxpayers’ money at risk, but by fixing problems and removing barriers that make it harder for working families to prosper.
Washington has failed this basic test with respect to the American auto industry. Republicans want to make certain that in its response to the resulting crisis, Washington does not fail American taxpayers as well. A responsible plan should do two things: it should protect taxpayers, and it should help auto workers and their families by allowing the Big Three to become competitive again. The Democrats’ plan does neither. Congress should not be stampeded into rubber-stamping a plan that guarantees failure at the taxpayers' expense.
The Democratic Bailout proposal has three fundamental flaws:
• The only thing crazier than trusting the same management and union officials who got the Big Three into this mess to get them out is trusting a bunch of Washington politicians and bureaucrats – the very same people who ran up a $455 billion deficit last year. American auto workers and their families deserve better.
• If no private investors believe the Big Three restructuring plans are realistic enough to support with their own money, why should we put up taxpayer money? American taxpayers deserve better.
• The Big Three restructuring plan and the Democratic proposal lack accountability. There is no guarantee that once they get taxpayer money the restructuring they promise will occur. Once the taxpayers prop them up once, there will be a big incentive to keep bailing them out – keeping the industry dependent on government aid, lashing it to the majority’s political agenda, and further denying American auto workers the security of a viable industry that is back on its feet and ready to compete. American auto workers and their families deserve better.
What We Should Be Doing: The American Automotive Reorganization and Recovery Plan
On December 2, the Big Three presented to Congress their plans for restructuring. While the plans included laudable goals, too few details were provided as to how the companies will actually achieve the restructuring and the savings they have promised. In some instances new agreements to achieve the savings would not be entered into for months or perhaps years.
The Big Three must lock in the restructuring they have promised in a matter of weeks, not months or years. Congress should instead establish firm benchmarks and a tight timeline for restructuring. Such benchmarks will include for example requiring that by March 31, 2009 each company should reach agreement whereby:
• The companies’ creditors agree to a framework to reduce each company’s indebtedness by at least 1/3.
• The UAW holds to concessions already made and further:
• Concedes the elimination of Supplemental Unemployment Benefits;
• Concedes elimination of the Jobs Bank Program;
• Agrees to either reduce company retiree health care obligations or otherwise convert a portion of such obligations into equity; and
• Agrees to reduce wages and benefits to the levels paid by non-Big Three manufacturers.
A Process for Reaching Expedited Agreement, Instead of Nationalizing America’s Auto Companies
Because of the many legal and contractual hurdles to restructuring, the companies are urged to accomplish their restructuring through the use of a pre-packaged bankruptcy or another mechanism to bring all stakeholders to the table for an agreed-upon determination of their future. It is important that these stakeholders reach reasonable compromises amongst themselves. Creating a government bureaucracy or a “car czar” to arbitrarily pass judgment on the thousands of details involved with a restructuring is akin to nationalizing the auto companies.
Interim Financing: Insurance, Rather than a Taxpayer-Funded Bailout
The Big Three may need some form of interim financing as they finalize their restructuring. In normal economic times, if their restructuring plan is considered viable, such financing should be available in the private market. Because of the current credit crisis, limited assistance may be appropriate in the form of insurance, rather than a taxpayer-funded government bailout that replaces private investment. We propose that the government provide insurance, funded by the participants with a modest FDIC-like fee, which would cover up to 50% of the losses of new investment in the case of default, helping to unlock immediate private investment (not unlike debtor in possession financing). Such insurance would expire on March 31, 2009. This proposal ensures that taxpayers are protected and provides a powerful incentive for the Big Three to quickly implement their restructuring plans.
Auto rescue bill in peril, opposed by GOP senators
WASHINGTON – Emergency aid for the nation's imperiled auto industry was thrown into jeopardy Wednesday, opposed by Republicans who were revolting against a hard-fought deal between Democrats and the Bush White House to speed $14 billion to ailing carmakers.
The House was on track to vote on the bailout Wednesday night, and Democrats held out hope that it could be enacted by week's end. But a growing number of GOP senators declared they would not go along.
The White House, though not formally endorsing an agreement with congressional Democrats, dispatched administration officials to Capitol Hill to make a case for the rescue package. During a contentious, closed-door luncheon with Senate Republicans, White House Chief of Staff Josh Bolten got an earful of criticism from the rank-and-file, some of whom have already announced plans to block the measure.
"They got a good dose," said opponent Tom Coburn, R-Okla., as he emerged from the session.
Even auto state Republicans who have pushed hard for a bailout said the measure needed work. Sen. Kit Bond, R-Mo., said he wanted to see changes. And Sen. George V. Voinovich, R-Ohio, said the bill didn't have the necessary Republican votes to pass Congress.
The Republicans' revolt came as the House began procedural votes on the package.
It would provide money within days to cash-starved General Motors Corp. and Chrysler LLC, while Ford Motor Co. — which has said it has enough liquidity to stay afloat — would be eligible for federal aid as well.
The plan would create a government "car czar," to be named by President George W. Bush to dole out the loans, with the power to force the carmakers into bankruptcy next spring if they didn't cut quick deals with labor unions, creditors and others to restructure their businesses and become viable.
Opposition from congressional Republicans reflected the tricky task of enacting yet another federal rescue in a bailout-weary Congress, with Bush's influence on the wane.
"People realize that this bill is an incredibly weak bill, (and) is the product of an administration that wants to kick the can down the road and let somebody else deal with it," said Sen. Bob Corker, R-Tenn.
The scene so far has been somewhat reminiscent of the tense atmosphere of early October on Capitol Hill, when lawmakers argued, cajoled, threatened and lobbied one another, ultimately passing a $700 billion bailout plan that Bush signed into law for Wall Street financial firms.
Debate on the bailout unfolded as a congressional panel reviewing the financial rescue questioned the Bush administration's spending of those funds and challenged its reluctance to use the money to reduce foreclosures. The House was set to add language to the auto aid bill to require that banks that are bailed out by the government report quarterly on how much they have increased or decreased lending.
With Republicans balking and some absent from the emergency, postelection debate, mustering the 60 votes needed to advance the auto rescue measure in the Senate was proving tricky.
Sen. Mitch McConnell, the GOP leader, said Wednesday afternoon that his side had only recently gotten a copy of the measure. He said, "Everybody is still kind of poring through it, trying to figure out exactly what it does. But everybody understands the significance of the issue and the enormity of the problem."
Opposition wasn't limited to Republicans.
Democratic Sen. Max Baucus of Montana announced he was against the measure because of a provision to bail out transit agencies. The bus and rail systems could be on the hook for billions of dollars in payments because exotic deals they entered into with investors — which have since been declared unlawful tax shelters — have gone sour.
At the White House, Deputy Chief of Staff Joel Kaplan told reporters at a late-morning briefing that the administration had yet to read the fine print of its "conceptual agreement" with congressional Democrats.
However, he indicated clear support, saying Bush would personally lobby Republicans.
House Republicans swiftly voiced their opposition and called for a plan that would instead provide government insurance to subsidize new private investment in the Big Three automakers, demand major labor givebacks and debt restructuring at the companies, and encourage them to declare bankruptcy.
Rep. John A. Boehner, R-Ohio, the minority leader, said the legislation "asks taxpayers to further subsidize a business model that is failing to meet the needs of American workers and consumers."
Under the bill being considered Wednesday, the carmakers would have to submit blueprints on March 31 to the industry overseer showing how they would restructure to ensure their survival, although they could be given until the end of May to negotiate with the government on a final agreement.
The carmakers initially asked Congress for $25 billion, then returned two weeks later to plead for as much as $34 billion. But with the White House refusing to dole out new spending for the Big Three, congressional Democrats agreed to use an existing program that was to help carmakers retool their factories to make more fuel-efficient cars.
That fund yielded only $15 billion in emergency loans, and when negotiators agreed to leave some money in the environmental program, the amount fell to $14 billion.
A breakthrough came when Democrats agreed to scrap language — which the White House had called a "poison pill" — that would have forced the carmakers to drop lawsuits challenging tough emissions limits in California and other states.
There was still heartburn among Republicans, however, over language that would force the automakers to abide by those states' limits. Democrats insisted on it as a kind of consolation prize for environmentalists, who already were livid at the raid of the fuel-efficiency program.
Kaplan said the Bush administration would work with President-elect Barack Obama's team on choosing the so-called "car czar," acknowledging that Bush's tenure ends soon and the automakers' woes will continue well into 2009.
Obama defended the auto bailout as necessary given the threat a potential Big Three collapse could pose to an already battered economy.
"As messy as it may be, I think there's a sense of, 'Let's stabilize the patient,'" he said in an interview published in Wednesday's Chicago Tribune and Los Angeles Times.
The car czar would have say-so over any major business decisions by the automakers while they were taking advantage of federal aid, with veto power over any transaction of $100 million or more. The companies — including the private equity firm Cerberus, which owns a majority stake in Chrysler — would have to open their books to the government overseer.
And if Chrysler defaulted on its loan, Cerberus would be responsible for reimbursing the government.
Also included in the bill is an unrelated pay raise for federal judges.
White House plans to use bank bailout funds to aid automakers
Senator Bob Corker, whose alternate bailout proposal was ultimately rejected, speaking on Capitol Hill on Friday.
By David M. Herszenhorn and Micheline Maynard
Published: December 12, 2008
WASHINGTON: Following the collapse on Thursday evening of efforts to rescue U.S. automakers with congressional legislation, the Bush administration shifted positions on Friday and said that it would dip into the money set aside for the $700 billion financial bailout to keep General Motors and Chrysler from going bankrupt.
"Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms," Dana Perino, President George W. Bush's spokeswoman, said in a carefully nuanced statement released minutes before the financial markets opened in New York.
"However, given the current weakened state of the U.S. economy, we will consider other options if necessary - including use of the TARP program - to prevent a collapse of troubled automakers."
The Treasury Department promptly indicated that it would provide short-term relief to the automakers. "Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," said a Treasury spokeswoman, Brookly McLaughlin.
TARP is the Troubled Assets Relief Program, the official name of the Treasury's financial rescue program, originally intended to assist banks.
Referring to the carmakers, the White House statement said, "A precipitous collapse of this industry would have a severe impact on our economy. It would be irresponsible to further weaken and destabilize our economy at this time."
The statement indicated that Bush was prepared to capitulate on his objection to using the bank bailout funds to stave off imminent bankruptcy filings at General Motors and Chrysler and possibly Ford in the future.
In its statement, the White House appeared resigned to using the Treasury program for Detroit as well as the banking industry, though it warned that the car companies and unions had to make "meaningful concessions" to make the companies viable. At the moment, the Treasury has committed about $335 billion of the first $350 billion that Congress has authorized.
Two of the Big Three, General Motors and Chrysler, have said they are so short of cash that they may not be able to survive through this month without aid. The third, Ford Motor, is also struggling with weak sales.
After Senate Republicans balked at supporting a $14 billion auto rescue plan approved by the House on Wednesday, negotiators worked late into Thursday evening to broker a deal. But they deadlocked over Republican demands for steep cuts in pay and benefits by the United Automobile Workers union in 2009.
The failure in Congress to provide a financial lifeline for GM and Chrysler was a bruising defeat for Bush in the waning weeks of his term, and for President-elect Barack Obama, who on Thursday had urged Congress to act to avoid a further loss of jobs in an already deeply debilitated economy.
"It's over with," the Senate majority leader, Harry Reid, said on the Senate floor, after it was clear that a deal could not be reached. "This is going to be a very, very bad Christmas for a lot of people as a result of what takes place here tonight."
After the Senate talks broke down, Republican opponents of the congressional bailout traded accusations with the United Automobile Workers union over who was responsible for the defeat of the legislation that would have provided temporary financing until the automakers restructured.
Senator Bob Corker, a Republican from Tennessee, suggested the fault lay with the UAW's president, Ron Gettelfinger, whose union would not agree to the Republican demands that workers accept wage concessions early next year as part of a deal.
But at a news conference Friday morning in Detroit, Gettelfinger said the union feared that it was "being set up" by Corker, who Gettelfinger said was asking for concessions that were not sought from other participants in the talks.
"We could not accept the effort by the Senate G.O.P. caucus to single out workers and retirees," he said, rather than spreading the pain among "all stakeholders."
The union had agreed that it needed to bring wages and benefits at the domestic automakers into line with those of the U.S. operations of Japanese competitors, but it said that any such changes "would take time to work out and implement."
In Washington on Thursday evening, the Republican leader in the Senate, Senator Mitch McConnell, sought to explain why his members had scuttled the deal.
"We have had before us this whole question of the viability of the American automobile manufacturers," he said. "None of us want to see them go down, but very few of us had anything to do with the dilemma that they have created for themselves."
McConnell added: "The administration negotiated in good faith with the Democratic majority a proposal that was simply unacceptable to the vast majority of our side because we thought it frankly wouldn't work."
Moments later, the Senate fell short of the 60 votes need to bring up the auto rescue plan for consideration. The Senate voted 52 to 35, with 10 Republicans joining 40 Democrats and 2 independents in favor.
Immediately after the vote, the Bush administration was under pressure to act on its own to prop up GM and Chrysler, an idea that administration officials have resisted for weeks.
Despite the finger pointing on all sides, the usual zest for political jousting seemed absent given the grim economic outlook.
"Senate Republicans' refusal to support the bipartisan legislation passed by the House and negotiated in good faith with the White House, the Senate and the automakers is irresponsible, especially at a time of economic hardship," House Speaker Nancy Pelosi, a Democrat from California, said in a statement.
Senator George Voinovich, Republican of Ohio, and a supporter of the auto rescue efforts, said, "I think it might be time for the president to step in."
GM and Chrysler issued statements expressing disappointment with the failure in Congress.
GM said, "We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis."
Chrysler said it would "continue to pursue a workable solution to help ensure the future viability of the company."
Ford, which is in better financial shape than its competitors, had said it would not seek the emergency short-term loans for the government but urged Congress to help its competitors because the fates of the Big Three were so closely linked.
Mark Madden, a General Motors Corvette assembly plant worker, hangs a door on a Corvette Friday, Dec. 12, 2008 at the Bowling Green, Ky., facility. Madden put a sign up at his work station when talks about helping the ailing auto industry began to fail. (AP Photo/Joe Imel, Daily News)
Tom Krisher and Kimberly S. Johnson, AP Auto Writers
Friday December 12, 2008, 6:52 pm EST
DETROIT (AP) -- Festering animosity between the United Auto Workers and Southern senators who torpedoed the auto industry bailout bill erupted into full-fledged name calling Friday as union officials accused the lawmakers of trying to break the union on behalf of foreign automakers.
The vitriol had been near the surface for weeks as senators from states that house the transplant automakers' factories criticized the Detroit Three for management miscues and bloated UAW labor costs that lawmakers said make them uncompetitive.
But the UAW stopped biting its tongue after Republicans sank a House-passed bill Thursday night that would have loaned $14 billion to cash-poor General Motors Corp. and Chrysler LLC to keep them out of bankruptcy protection. The Bush administration later stepped in and said it was ready to make money available to the automakers, likely from the $700 billion Wall Street bailout program.
Still, autoworkers remain angry with the senators who tried to negotiate wage and benefit concessions from the union, then scuttled the House-passed bill that would have granted the loans and set up a "car czar" to oversee the nearly insolvent companies and get concessions from the union and creditors. Their top targets were Senate Minority Leader Mitch McConnell, R-Ky.; Sen. Bob Corker, R-Tenn., who led negotiations on a compromise; and Sen. Richard Shelby, R-Ala., who has been a vocal critic of the loans.
Kentucky, Tennessee and Alabama all house auto assembly plants from foreign automakers, and union officials contend the senators want to drive UAW wages down so there would be no reason for workers at the foreign plants to join the union.
"They thought perhaps they could have a twofer here maybe: Pierce the heart of organized labor while representing the foreign brands," UAW President Ron Gettelfinger said at a Friday morning news conference in Detroit.
Republicans in several Western states -- where unions are often shunned -- joined the Southerners in opposition.
But lawmakers and their spokesmen said the criticism is off base. Jonathan Graffeo, Shelby's spokesman on the Senate Banking Committee, said the senator has consistently opposed taxpayer-funded bailouts.
"He opposed the Chrysler bailout in 1979 when there were no foreign auto manufacturers in Alabama, and he opposed the recent $700 billion bailout of the banking industry," Graffeo said.
"Bailouts generally don't work, and this is a huge proposed bailout, and I fear it's just the down payment on more to come next year," Shelby said on the Senate floor Thursday night. "These companies are either already failed or failing, and that's a shame. These aren't the General Motors, Ford and Chrysler I knew."
Corker said the alternative he tried to develop would have provided federal money in exchange for restructuring the companies' debt and making the UAW more competitive in wages with workers at U.S. plants of Japanese competitors.
"Our members wanted to know that the UAW was willing to be competitive," Corker said.
"I basically pleaded with them to give me some language by some date certain that they were competitive with these other companies," Corker said. "That's where it broke down."
Hourly wages for UAW workers at GM factories already are about equal to those paid by Toyota Motor Corp. at its older U.S. factories, according to the companies. GM says the average UAW laborer makes $29.78 per hour, while Toyota -- generally viewed as the main competitor of the Detroit Three -- says it pays about $30 per hour. But the unionized factories have far higher benefit costs.
The union, GM and Chrysler have contended that the companies have restructured and the UAW has granted concessions that would make them competitive in 2010, but the economy went south this year and forced them into trouble. A third Detroit automaker, Ford Motor Co., asked for loans in case of emergency but says it has enough cash to make it through 2009.
Union officials also accused the senators of retaliating for the UAW's overwhelming support of Democratic candidates in federal races. The union gave $1.9 million to Democrats but only $11,500 to Republicans in the 2008 election cycle.
Many Democrats support the Employee Free Choice Act, which would take away employers' rights to demand a secret ballot on whether workers will join a union. Instead, workers could form unions by getting a majority of employees to sign a card in support of it.
"There's a lot at stake. If Republicans think now they can tarnish labor, it's going to be difficult to pass the Employee Free Choice Act," said Gary Chaison, professor of labor relations at Clark University in Worcester, Mass. "The unions are going to say that a strong labor movement is good for America. One of the things Republicans are trying to show now is that a strong labor movement isn't good for America."
Other union officials joined Gettelfinger to form a chorus of anger and frustration with the senators.
"What this is is the Southern conservative senators trying to destroy the United Auto Workers, trying to destroy unions," said Mike O'Rourke, president of a UAW local at a GM factory in Spring Hill, Tenn., Corker's home state. "It's a sad day in America when the senators turn their back on Main Street."
In an effort to help the auto companies get federal aid, the UAW last week offered to delay company payments into a union-run trust fund that will take over retiree health care costs starting in 2010. It also agreed to end the controversial "jobs bank" program in which laid-off workers get most of their pay and benefits after unemployment pay runs out.
Most Southern U.S. auto plants run by Toyota, Honda Motor Co., Nissan Motor Co., BMW AG, Daimler AG and other manufacturers are nonunion. The UAW has tried numerous times without success to organize workers at the foreign-owned factories.
Spokesmen for Toyota and Nissan declined comment, but Honda spokesman Ed Miller said in a statement the company did not lobby against the bill.
"Honda has been encouraging initiatives that would maintain the short- and long-term viability of the U.S. auto industry, including the hundreds of the shared supplier companies in the United States," he said.
As the Detroit Three have declined and ceded market share to the foreign nameplates, the UAW's membership has plummeted 69 percent, from a peak 1.5 million in 1979 to 465,000 at the end of 2007.
Associated Press Writer Ken Thomas in Washington and AP Business Writer Ellen Simon in New York contributed to this report.
Earlier this month, in their search for bailout bucks for Detroit, Congress caved to the President’s insistence that legislators leave the $700b Troubled Asset Relief Program (TARP) alone. Last week, Congress failed to activate Plan B: hijacking the $25b funds they’d already allocated to the Department of Energy for “retooling” loans. At the eleventh hour, President Bush said, “Oh, alright then. Let’s talk TARP.” And so Plan C: the President of The United State will outline his plan to put up to $15b in play from the TARP monies. It’s a stunning about-face, whose details will be revealed on Monday. Those are the broad strokes. Before suggesting the presidential approach to Detroit’s debacle, let’s zoom in…
Congress’ bailout bill blew-up in the Senate, not the House, which gladly offered-up your money for a faulty plan. The Senate Republicans were not happy creating a powerless “car czar” to oversee the public purse. Senator Dick Shelby was right– the toothless bill would have become an endless payout to Detroit. Senator Corker offered the United Auto Workers (UAW) a deal to make it work. UAW Boss Ron Gettelfinger passed on “parity” with the transplants, as Corker demanded in his alternative legislation. Big Ron said they’d talk about it at their next contract round, in 2011.
And there you have it: proof positive that the UAW isn’t about to make a wholesale change in how they do business. If left in the care of an enfeebled car czar, they’d go along to get along, and nothing more. And now the UAW is banking on money from the TARP as a “holdover”– so they can maintain the status quo until a Democratic President and Congress can… maintain the status quo.
And this is just the union side of the equation. For some reason, GM CEO and Chairman of the Board Rick Wagoner is still in charge of the failed American automaker. Congress has bought Wagoner’s umpteenth “turnaround plan” without question. This despite the fact that its worst case scenario is too optimistic by half and there is nothing within it– nothing– that promises a necessary product and brand-related renaissance. As long as Wagoner’s administration remains, the possibility of GM making profits is– indeed remains– minimal.
So now the ball’s in President Bush’s court. Short of letting the free market exact its final determination (an inevitable reckoning), it’s time for a tough deal. In fact, President Bush has the opportunity now to craft the deal that needs to get done, recognizing the fact that GM and Chrysler are already bankrupt.
First, the President must demand that each company puts up collateral equal or greater to the loan amount advanced. Since no commercial lender will provide funds, and the government is using our money, we want protection. Especially as $15b represents a lifeline to future funding requests, not a solution to GM and Chrysler’s fundamental problems.
This caveat would force Chrysler’s collapse. This company has no collateral of value; existing lenders already have tied that up. Either Cerberus puts something else up of value, or it doesn’t. And that means lights out for the Pentastar. That’s a good thing for taxpayers; there’s no future for Chrysler on its own. Period. And ChryCo’s cratering will help GM and Ford survive.
Second, the President must demand that the UAW immediately end the JOBS Bank (not just suspend it). The JOBS Bank language effectively forces GM (and the rest of Detroit) to pay off workers with huge termination packages to leave their jobs when plants are closed. It’s the so-called “Attrition Program” agreed to by the UAW. I’m not against providing some money when jobs are lost, but GM needs to restructure now (again). It can’t afford big payouts to let labor go.
Third, the President must insist that GM begin negotiations to restructure its balance sheet. The Commander-in-Chief can force GM to provide a go-forward balance sheet and viable operating plan– by not advancing the total funds GM needs to survive until March. He can set January 15th, a week before President Obama takes office, as a deadline.
Basically, we’re asking GM’s highly paid bankruptcy advisory team to write the Plan of Reorganization (“POR”) today (without negotiation with creditors). This POR would illustrate – in a public document – exactly how GM can become a viable company. It would let outsiders comment on its validity and believability. It will tell all the parties where they will come out in the end. And it sets the stage for President Obama and Congress to make the final decision whether it’s better for GM to go through bankruptcy or not.
Lastly, the President should place all the usual terms and conditions about executive compensation, prohibitions on golden parachutes, no mergers/acquisitions and tough GAO oversight with weekly reporting.
I hope that President Bush doesn’t punt on his responsibilities with our money. Kicking the problem down the line to the next administration is an easy solution, but not the right one. The President needs to step up and start the end of the madness. He should set the stage for a real and meaningful program for a long overdue restructuring of GM. Chrysler is already dead, so why continue the charade? Ford, well that is for later…