Posted on 12/04/2008 12:46:12 AM PST by Thorin
In a very complicated and nontransparent way, we end up with, or already have, a state run industry. I started thinking that when I observed how the government via the faa is able to make rules that force airlines to buy new planes. It's not as bad as it sounds because the economy is pretty much job one of the government. With no economy you can't even finance simple law enforcement and a military.
Well what the heck, why not have fascism in the auto industry. We already have it in our banking industry.
I'm sure you are aware that as a govt takes over an industry innovation disappears and is replaced with bureaucracy. IIRC, the Yugo was a state sponsored car business.
I am still waiting to see if you have a response to my post no. 24? I am trying to see how a bailout will assist them in the long run?
The legacy costs were addressed in the most recent contract, which created a VEBA getting retiree health care costs off the books by 2010. That contract also created a two tier wage structure. Both of these steps will substantially eliminate the labor cost differential with the Japanese, and the UAW has indicated it is willing to offer more concessions. Indeed, by the end of 2010, the labor costs for current employees of the Big Three will actually be lower than for the Japanese: http://www.tnr.com/story_print.html?id=1026e955-541c-4aa6-bcf2-56dfc3323682
There is no guarantee loans to the Big Three will succeed, but it is well worth trying. Not only will taxpayers pay huge amounts of money if they fail, and large swaths of the industrial Midwest will be devastated, failure of the Big Three will also cripple American engineering and research. The Big Three spend more on R & D each year than do pharmaceuticals, employing some 65,000 in R & D in Michigan alone. This will vanish if the Big Three collapse, creating further disincentives for Americans to pursue technical careers. Since we don’t protect our manufacturers from foreign competition, and we import foreigners to drive down wage rates for engineers under the H1 B visa program, why would intelligent Americans capable of being engineers pursue that career path? I’lll tell you what you call a country that assembles items designed by others for sale only in that country: a Third World country.
Allowing an interest deduction sounds nice, but on average, the US consumer is in hock to aggregate levels over 100% of their annual salary. They need to pay down debt, or else there is simply going to be a bigger collapse down the road.
When I see these people on these various finance/debt shows where people are in trouble, I’m gob-smacked that a two-income household has a) student loans, b) a mortgage, c) two new(er) cars, d) $30K to $80K in consumer debt... all on a combined income of maybe $160K.
Oh, and both people have bachelor or masters degrees.
There simply isn’t any way around it - in either housing or any other consumption: the US consumer is tapped out, in hock up to their eyeballs. One of the reasons why 50% of the “loan workouts” for people who have gotten into default on their mortgages are right back in default is that people are in debt to levels they simply cannot sustain, period. We already saw what happened to the “stimulus” money returned with taxes in July - people put it into savings. There was nowhere near the level of “stimulus” seen, but there was a sudden surge in personal savings. That was one of the early indicators we were in a recession for me - seeing that the expected pass-through into consumer spending didn’t occur when we gave people a boost in cash in hand.
But, I am not advocating for GM to go under. Indeed, I think the government can provide cash for financing through a Chapter 11 plan. Government can also act to insure warranties through the plan.
To give GM money without a restructuring of their cost structure merely insures they will be in the same trouble next year.
As for Chrysler, if it wasn't purchased twice in the past 15 years it would have gone under long ago.
If that starts to carry weight, THEN I would support taxpayer monies being used to backstop their obligations.
I keep coming back to this essential fact, hammering the table in fact: there is NO WAY to restructure their obligations quickly enough (and I don’t mean just the labor costs) to stop the bleeding. These guys are bleeding from their carotid arteries; a bailout is like hanging a bag of plasma on them while the wound is open.
We need to get the CEO’s to admit and address their monstrous fixed costs need to be hacked and slashed. But I see in the bailout plans no substantive admission of this. I see in GM’s bailout plan that they’re quietly claiming that they’re wanting to achieve 22% market share, while in their last 10-K they were targeting 20% market share. WTF?
Get into Chap11 ASAP, backstop the big obligations, get out the chainsaw and call in someone from Texas to run the chainsaw, hockey mask and all.
Honestly, I think that more than 50% of their dealerships need to go.
A government backed Chapter 11 makes so much sense, one must wonder why it isn’t the first order of business. Of course, if the real purpose of the bailout is not to save the automobile companies, then it makes perfect sense. I suspect this bailout is proposed for no other purpose than to provide a soft landing for unions and managers.
Watch C-Span now. I’ve been watching it all morning. They are going to do a loan bailout. Sounds like it will come in two steps, some cash up front, then the rest later, probably March or so. Must have to restructure with oversight. All parties, dealers, bondholders, unions, management, etc. all have to participate in working out a restructuring in order to save the car companies. So a board or an individual would need to be reported to by all parties.
The UAW President is now bringing up the elephant in the room, unfair trade practices. Brings up S. Korea as an example, they can sell to us lots of cars, we can only sell a small amount of ours to them. Also talking about health care concerns. Automotive retailers want to be at table also. Suppliers will line up also. They just want a healthy industry so they don’t get taken down too. The Moody guy says this is a good idea to follow through on, although he doubts the amount being asked, $34 billion, will not be enough in the long term. Otherwise if no gov’t loan, GM will go under next month (December) if no help. Down to wire. Says time is of the essence. GM could be lost by end of the month (Dec) if nothing done. Sen. Bob Corker says nothing like a crisis to focus the mind. Some consensus on approach seems to be in the works now.
Moody guy says if went into Chapter 11, the Big 3 would be stuck in it forever; too many things to work out. Would be better if done outside of bankruptcy court, but with oversight to any agreements and restructuring being proferred by the Big 3. Corker seems to agree with Moody guy. Ok, now you’ve got an idea of what is going on. Tune in to C-Span for further info.
First, many of the bailouts to WallSt are not money without strings. The “TARP” program quit buying bad paper pretty quickly and the new idea became giving money in return for a senior preferred stock. That’s not “giving” - that’s “buying a piece of the bank.” The Fed has been swapping paper with many of these fools on WallSt - ie, the banks give over some piece of illiquid debt paper and get US Treasuries in return. So it isn’t quite like giving money out like free samples at Costco or something.
Bankruptcy is a tool, an escape hatch if you will. If a company goes into Chap 11 soon enough, while they still have some cash left, they can restructure their obligations and get to a point where they’re cash flow even. The only way the Big Three can shed enough of their fixed costs is to hack and slash at their obligations.
The “bailout plans” that the Big Three submitted contain such stunning gems as this, from the GM plan:
“GM will immediately engage current lenders, bond holders, and its unions to satisfactorily negotiate the changes necessary to achieve this capital structure; Oversight Board involvement may be necessary to be successful. As indicated, GM‘s Plan is to preserve the status of existing trade creditors to avoid collateral damage rippling through the supply chain. Similarly, GM‘s plan would honor terms and provisions of all outstanding warranty obligations to both consumers and dealers, in the U.S. and globally. “
OK, lemme translate that for you: they’re going to honor their obligations with their suppliers and their warranty costs.
People who hold GM bonds, especially the unsecured “SmartNotes” bonds, are screwed. The holders of the three forms of preferred stock are screwed. That’s a lot of people’s retiredment accounts, screwed.
How are they going to “negotiate” with their bond holders without going into bankruptcy? Well, that’s a very good question. But the plan (URL below, please see p. 11) shows that they’re setting up for 10’s of billions of haircuts to bond holders.
http://www.house.gov/apps/list/press/financialsvcs_dem/gm.pdf
Well, they can’t DO that to a bondholder outside of bankruptcy. The ink on the bond agreement says that they’re liable to repay 100 cents on the dollar - that’s their obligation. If they can’t or won’t do that, I can take them to court and drag them into bankruptcy the hard way.
GM has so much paper out there, you can bet that a big bondholder or bunch of bond holders WILL drag GM into court if GM tries to cram-down a haircut on bond holders without a bankruptcy filing.
If the auto companies cannot restructure with the huge clout a Chapter 11 bankruptcy gives them, how are they going to do it informally? Outside of the bankruptcy court there is no legal authority to force dealers, bondholders, unions or anyone else to make even a small concession.
The hearings are a dog-n-pony show. This is all kabuki theatre.
You do know that the Big Three submitted two versions of their bailout plans, right? One for public consumption and one that is being held non-public by the Congress?
Of course they need more money than $34 billion. Anyone who can read a 10-K can tell you that GM ALONE needs more than $70B right now to become solvent again. Never mind Ford and Chrysler - they’re billions more.
They’re peddling lies. Right now, I’d put their lies up there in the category of “all time greatest lies...”
1. “Of course I’ll respect you in the morning.”
2. “The check is in the mail.”
3. “We need only $34 billion...”
Bingo. GM is very likely facing an involuntary bankruptcy if they try to shaft bondholders.
That’s why I really get really PO’ed when I hear GM’s CEO claim that “bankruptcy is not an option.”
I’ve got news for him: As soon as some creditor with a material-sized debt from GM gets pissed enough, they’re going to hire a lawyer and take GM into court. And the court can force a bankruptcy down upon GM and there is nothing GM can do to stop it.
There are three forms of bankruptcy:
1. Voluntary bankruptcy. The company realizes they have reached insolvency, or that they’re about to with 100% certainty, so they go into BK court and get into Chap11 ASAP to restructure their obligations while they’re still viable.
2. Creditor bankruptcy. The creditors to the company are approached by the company, asking to take a haircut or re-structure the loans/credit. The creditors refuse to accept the offer. Whammo, they’re in Chap11, at least.
3. Involuntary bankruptcy. The creditors, fearing they will never be paid and the company is trying to weasel out of payment, file a court pleading to force the company into bankruptcy. If the court agrees, then the company is forced into bankruptcy - and the court decides whether it is Chap11 or Chap7. The court decides whether the company continues operations or is broken up and sold off. The court decides everything in the case of involuntary BK.
GM WILL go into bankruptcy. You can bet your hangie-down parts on that. The only issue is a) when, and b) who makes the filing?
Sure they can, if the bondholder agrees. And the bondholder might well agree, if he thinks the alternative would be worse, as it would be if GM goes bankrupt.
I also agree that industry is important to a nation, and locking in know-how necessary.
My problem is not that. You've answered point 2, but what about 1 (muted demand for vehicles) and 3 (cash bleed). I know the bailout is supposed to stem 3, but the draft released yesterday would only help GM (let's look at it since it, and Chrysler, are in the most dire situation) bridge to most of 2009. What happens after that, particularly since automobile demand will not have recovered for over 2 years - optimistically. A company needs to boost revenues, and cut costs, to make profits. What if the cost cuts are not as fast as they could be, and revenue generation is not only slow but a downright negative?
I can easily see Ford surviving (unless collapse of others pulls it down), but GM and Chrysler face real issues.
“If the bondholder agrees...”
You’re right. But... why would the bondholder agree? Because GM is able to convince them that if the bondholder sacrifices today, they’ll be made whole AND MORE in the future.
GM can’t promise that. GM isn’t in a position to make credible promises to anyone. If you go out and start at about 2002 and stack up their 10-K’s in a BK court, you’re going to win, hands-down, that GM’s promises and projections of cash flow, etc are complete and utter bullcrap and lies.
I see recently that SmartNotes have taken a 70% haircut. Their preferreds (GMA, GKM, etc) are selling for about $4.38 today.
To get investor buy-in, they have to be able to promise (with achievable targets) that they’re going to turn those things around. I don’t see how they can do that, given that they’re telling lies in open session of Congress as to what the true state of their business is. First they come in for $25 billion. Now it is $34B. People who can read a balance sheet know it is far more than that for just GM.
“You do know that the Big Three submitted two versions of their bailout plans, right? One for public consumption and one that is being held non-public by the Congress?”
Yes of course I and anyone else paying attention to this on TV or on-line does too because the auto companies told Congress they would be doing this, as some of the info is proprietary and they don’t want it out there for public consumption. The Senate agreed with this and told them to submit the two reports. No conspiracy here, although I’m sure you’d like to think there is one. And be the way, they are not outright saying they only need $34 billion. They hope that is so. That is why they want gov’t oversight, be it a board or an individual, to bounce ideas off of and to get the green lite or red lite for their restructuring plans. Don’t know what else they can do.
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