For those of you who have been following this blog, you know where I stand on the proposed aid package for US automakers (see Preventing Moral Hazard in the Auto Industry for background). I am not opposed to aid for GM and Ford, provided that aid come with strict terms:

1. A moratorium on acquisitions (whether with Chrysler, or otherwise)
2. A rationalization of operations – a reduction in the number of brands/models coupled with plant closures
3. A renegotiation of employment terms with the UAW to make the US automakers more competitive with global competitors
4. Strong incentives to build more fuel-efficient automobiles

Although I support some form of aid for GM and Ford, I have been staunchly opposed to providing any aid to Chrysler given its current ownership structure (see A Benevolent Cerberus or Is the End Nigh for Chrysler).

Rather than re-hash my ideas, for this post I thought I’d put forth some recent arguments that have been made on either side of the debate and let you decide.

ARGUMENTS FOR THE BAILOUT:

A short, GM-produced video being distributed by Weber Shandwick, GM’s PR firm (it arrived in my inbox from them on Sunday).

ARGUMENTS AGAINST THE BAILOUT:

Mike Shedlock (Mish) details his opposition to the bailout in a letter penned to his representatives, and published on his blog (see Second Push to Stop Auto Bailout). Although his comments were specific to GM, you can apply similar reasoning to Chrysler and Ford. Mish writes:

GM CEO Wagoner and other auto executives are now pleading for more cash.

Wagoner stated “We’ve moved aggressively in recent years to position GM for long-term success, and we were well on the road to turning our North American business around before the economic crisis.”

The reality is that Wagoner is in fantasy land.

• GM continued to build massive numbers of SUVs and trucks long after consumers turned their backs on them.
• GM continued to pay a dividend long after it was prudent to do so.
• GM had a golden opportunity to sell all of GMAC and failed to do so.
• GM got involved in subprime mortgages with Ditech at the worst possible time.
• On April 2, 2008 GM sales analyst Mike DiGiovanni, speaking to reporters and analysts on a conference call, said he saw “early signs” that the U.S. market was steadying. That shows you just how far in fantasy land GM is.
• GM is a company that makes mistake after mistake after mistake.

GM cannot build cars that people want at a price people can afford. That is the bottom line.

From GM’s latest 10-Q

Short-term borrowings and current portion of long-term debt.
September 2008: $7.21 Billion
September 2007: $5.26 Billion

In one year’s time, short term borrowing and interest on long term debt has gone up by $2 billion per quarter, $8 billion per year!

If Congress loans GM money, interest on its debt will rise yet again.

GM has $36 billion in long term debt and has a negative net worth of $60 billion.

Is $25 Billion The Beginning Or The End?

One look at the above numbers answers the question “Is a $25 billion bailout the end, or just the beginning?”

Stop The Madness!

Consumers are tapped out. They are not going to buy autos no matter how much money Congress throws at the sector.

World Will Not End If GM Goes Bankrupt

The very best thing that can happen to GM and Ford is they go bankrupt. The sooner the better. Congress will then see that the world will not end. Both companies will reorganize. Both companies will keep making cars.

Bankruptcy is the best option for the Auto industry. If the union disagrees, let it pledge its pension money as collateral, and let Wagoner pledge his personal wealth as collateral for a loan.

SOME MIDDLE-GROUND:

Finally, I suggest reading an interesting, and thought-provoking, alternative proposed by Andrew Ross Sorkin of the New York Times (see US Should Guide GM in a Chapter 11). Andrew writes:

“The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan,” Mr. Cervone [spokesman for GM] said this weekend to The Detroit Free Press.

To him, G.M. is merely in a temporary bind. If the government — that is, taxpayers — were just willing to spot G.M. some cash to get it over this little rough patch, everything would be just fine.

Mr. Cervone’s comment reflects what’s wrong with the mind-set in Detroit.

G.M is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized.

But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington. It makes a lot of sense.

Here’s how it could work:

First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.

So, first, the government would force G.M into a prepackaged bankruptcy now — even before policy makers may think it needs to be.

…the government should come in with what’s known as debtor-in-possession financing to help the company through the bankruptcy process. Ideally, the government would be a “seed investor” and others would join it….The goal should not be to keep these companies from filing Chapter 11, but from filing for Chapter 7 — which would mean liquidation.

With the debt market virtually closed, this is the time the government can come in and try to help. But to jump in front of the train now, without the requisite changes made to the industry first — which we all know can’t be done without Chapter 11 — would be foolish.

I agree with many of those who oppose a bailout on the type of restructuring that needs to take place to right the ships of GM, Ford, and Chrysler. However, for me, the debate hinges on whether Chapter 11 is a viable path for the automakers to restructure. I am inclined to believe that it is not a viable path because it would be difficult to raise DIP financing (critical for any reorganization) from private sources in the current credit environment. Therefore, the government would be forced to become the DIP financier of last resort to avoid Chapter 7 liquidation.

Andrew Ross Sorkin suggests that the government do just that. And maybe he’s onto something.

Given all sides of the argument, I have sided with those who advocate for some kind of government aid – whether it come before or after bankruptcy. But either way, in order to work, that aid MUST come with strict provisions, and at a cost to shareholders, debtholders, and management.

What say ye?

This entry was posted on Wednesday, November 19th, 2008 at 6:17 pm and is filed under Bankruptcies, Corporate Strategy, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.