We appear to be at an impasse, Senate Republicans are unhappy with the provisions of the auto industry rescue bill that passed the House last night. While they are signalling that they would back legislation with a stronger role for the “car czar” and some also want a bondholder and UAW pension cram-down, the House has recessed and Speaker Nancy Pelosi has said she will not reconvene the House to consider a different version of the plan.
So will the Senate blink? The press reports suggest not (and I suspect that the Senate is showing a bit of TARP backlash, that having been sold a bill of goods once, they are in no mood to sign a second blank check. Many believe, correctly, that the $14 billion rescue is a first installment and the program could become an AIG-like sinkhole).
The assumption is that Paulson would step into the breach with TARP funds. However, the Administration has been silent, instead voicing support for the House bill and presumably hoping that matters will sort themselves out.
From Bloomberg:
The Bush administration’s $14 billion automaker bailout plan and other alternatives lack the votes to pass the Senate, as lawmakers seek to beat a deadline to keep General Motors Corp. and Chrysler LLC from collapsing.
GM and Chrysler are in a race against the clock as they need federal aid to keep from running out of cash early next year. Pressure is mounting on GM as a small number of partsmakers ask for payments in advance…
“It’s going to be really hard for anything to get to 60” votes needed to overcome delaying tactics, said South Dakota Republican John Thune.
Senate Majority Leader Harry Reid said he’s working on an agreement that would let the Senate consider Democratic legislation approved yesterday by the House, as well as a slightly different version by Senate Democrats and a Republican alternative…
“This proposal isn’t nearly tough enough,” Senate Republican Leader Mitch McConnell, a Kentucky Republican, said on the Senate floor. “We simply cannot ask the American taxpayer to subsidize failure.”
Senator Bob Corker, a Tennessee Republican, is offering an alternative that would require bondholders to take 30 cents on the dollar and would set wages similar to foreign companies such as Volkswagen AG. It also would give the United Auto Workers union half of the $23 billion it’s owed for health care as GM stock instead, and eliminate a program in which UAW workers are paid not to work if there’s no work for them…
The House and Senate Democratic plans have a few differences. The House plan has language that may force automakers to comply with state emissions laws and an amendment that would require financial institutions that receive bank- rescue funds to report any change in lending….
GM has said it needs $4 billion this month, the same amount in January and a total of $10 billion to keep going through March 31…
Job losses would total 2.5 million to 3.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 report from the Center for Automotive Research, which does studies for government agencies and companies.
Federal, state and local governments would lose $108.1 billion in taxes over three years in the event of a 50 percent reduction in U.S. automaker operations, representing the failure of one or more domestic automakers, the Ann Arbor, Michigan-based group said.
“We should not go home and do nothing,” Republican Senator David Vitter of Louisiana said today in a Bloomberg Television interview. “We should do the right thing, which is to put the plan together with taxpayer help, but that demands a restructuring plan now,” said Vitter, who had threatened to use procedural methods to halt a vote.
Deputy White House Chief of Staff Joel Kaplan said today the Bush administration is “going to try like heck to get the votes” from rebellious Senate Republicans. Kaplan said he would be on the phone lobbying this morning.
Pelosi said on Bloomberg Television, “You never say never, but the fact is, I think it’s important for the Senate to know that this is a strong bipartisan bill.”
From the New York Times:
The prospects of a $14 billion government rescue of the American auto industry seemed to vaporize Thursday morning as the Senate Republican leader, Mitch McConnell of Kentucky, spoke out forcefully against the bill, effectively dooming its chances despite the urgings of the White House…..
Democrats have indicated that the vote on the auto rescue plan was almost certainly the last major action by the House in this Congress, and they have suggested that if Senate Republicans balk, the Bush administration may have no choice but to find alternative ways to prevent G.M. and Chrysler from financial collapse.
The Senate majority leader, Harry Reid of Nevada, challenged Republican senators earlier Thursday to propose an alternative to the measure approved by the House and to allow swift votes on the competing plans. Mr. McConnell answered that challenge a short while later, saying the Republicans would oppose the White House plan….
Because of the procedural hurdles, Mr. Reid could not force a vote on the auto measures on Thursday. If the Republicans refuse to allow immediate votes, he has laid the groundwork for a vote Friday morning that would end the discussion if Republicans refused to support the bill.
Mr. Reid in his floor speech told Republicans to put forward a plan, if they thought they could do better.
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The Republicans are doing something right for a change. Damn! That’s saying something. Now to stop backstopping goldman sachs…that would be monumental.
Stop bailing out bad companies. Let em go bankrupt and restructure. We have an excess supply of cars.
Why do the Republicans hate Americans?
I think this behavior if tantamount to being a sworn enemy of the welfare of the American people.
Already the dollar is dropping.
The Republican notion that free market ideological purity is the most important thing for the American economy – from this bunch of cronies, charlatans, and Christianist clowns – is both tragic and a farce. At the same moment. I heard one of these thugs on the radio last night that he would never bailout the industry unless the union were destroyed. God save us.
Yeah! Let the bad companies fail! It won’t be a big deal. No other industries get propped up, it’s just the automakers who get a free ride.
And if tens of millions of US families are plunged into bankruptcy due, don’t worry, within a decade or so other car companies will come in and rehire them.
All US autoworkers have to do is tolerate unemployment for a few years until they get rescued by the free market. Not a big deal at all!
This spoof ad presents the idiocy of bailing out the Big Three in wonderfully simple terms:
http://www.economistblog.com/2008/12/10/the-bailout-coming-this-january/
The problem is of course that you guys are also right about all the nasty knock-on effects if Detroit goes under, but the alternative is even worse. These companies ought to fail. No company should be able to flaunt common sense and market forces for so long, and still survive.
It seems to me that Corker doesn’t know anything about distressed debt or bankruptcy, why would you take 30 cent par bonds for 100 cent par bonds without any other consideration? You wouldn’t, there is no motivation for that, especially if that is about what you might recover in a bankruptcy. They need to offer 50 cent on the dollar bonds at current coupon with 60 cents worth of non-cummulative preferred at a higher coupon, they just don’t pay the dividend for a few years and they cut their debt load in half.
Good post. I wrote on the same topic today as well.
Mike Haltman
The Political and Financial Markets Commentator
http://politicsandfinance.blogspot.com
It appears the Republicans are slowly waking up to what they helped create in passing the TARP bill. That, once you pay the Danegeld, how do you get rid of the Dane?
First it was AIG, then it was the banks, then it was yet more banks, now it’s the car industry, with more companies lining up behind THEM.
When does it end? Does it end? While the (R’s) motive may be suspect (busting the unions) in doing this, I think they see the danger approaching if yet another bailout bill is passed.
@ Aiden-
Try paying attention. GM bonds are already in the teens. They should get 110c of paper because why?
If they get 30c as proposed by Corker they should jump at it, if they had any sense which they don’t (see GMAC restructuring for details).
As for Anonymous- rest assured there will be plenty of bankers put out on the street this year and next. However at the end of the process the banking system will have been downsized to something that should make a profit.
The entire premise of the Michigan bailout is to prevent these car companies from cutting down to a size that would be profitable. You make that explicit by pointing out that auto employees should have guaranteed employment because banks got cheap financing.
Well sorry, banks getting cheap financing (which they actually are able to pay back) is not the same as Michigan automakers getting loans which they cannot pay back, purely for the purpose of keeping workers around to do nothing.
Never seen an unemployed count of 1 million before. Looks like we will soon now.
P.S. re: that last post, that was PER MONTH.
Let the equity holders get wiped out and let the bondholders take a beating. THEN the government can provide financing to give time for the companies to downsize in an orderly way that minimizes the disruption of the inevitable adjustments workers and their families will have to make. There’s no getting around that – eventually other jobs have to be found for these guys. Better to start that process now than to prop up the companies for the sole purpose of providing continuing income to the workers. It would be cheaper to just make direct payments to the workers.
The money saved by not having to pay interest on debt can go toward unemployment benefits, retraining, and relocation assistance for the workers that are no longer needed in the auto industry. Once the companies are reorganized appropriately, there will eventually be an opportunity to sell the equity to private owners or take the companies public again, with the government receiving the proceeds, hopefully (but not necessarily) enough to recoup what was put into the financing.
A rescue package that lets equity survive and makes bondholders whole is out of the question. You cannot keep making bondholders whole while you hope for the economy to delever. You cannot rescue equity if you want equity markets to function properly and if you do not want an unending stream of public companies showing up asking for handouts.
Basically you need bankruptcy with the government providing the DIP financing and easing the transition for the workers.
1) On this subject I recommend thetruthaboutcars.com, with which I am not in any way affiliated. They’ve been chronicling the slow failure of the unionized auto industry for 3-4 years or more. Dig back into the GM Death Watch and Chrysler Suicide Watch archives to see how good these guys are.
2) My own view is that that this industry has spent the last 30 years trying unsuccessfully to reconcile the unreconcilable: CAFE and the UAW. Simply, it is impossible to profitably build small cars in UAW factories. And the law mandating CAFE does not allow companies to count non-US-built small cars toward their corporate fuel average. Everything else–the cheap small-car interiors (to keep unit losses down and the reliance on SUVs and trucks (to subsidize money-losing Vegas, Neons and Cobalts) followed from that. Now we are at the end.
3) Congress’s stated demands will only make things worse. If a Cobalt has to give up $3,600 per unit (including rebates, etc.) to sell vs. the Civic (as a recent Eyes on the Road column in the WSJ calculated), how well is a $40K, 40-mile range-Volt going to do? Even if it comes, the bailout is the Green Death.
@ John:
There is no reason for a bondholder to accept 30 cent paper that is the same as the paper that they have, they would just be giving up 70% of their claim, now if the 30 cents that corker is talking about was in cash, it would be a different story. The problem with the GMAC deal is that they are not offering enough of a coupon on the preferred or cash payment to offset the huge risk of default.
Congressman Dennis Kucinich (D-OH), who has been a vocal proponent for aid for domestic automakers, today made the following speech during debate on H.R. 7321, the Auto Industry Financing and Restructuring Act:
“I rise in support of the rule and the underlying bill. The underlying proposition is this: Should the United States have an auto manufacturing industry? That is really what we’re deciding here. Because if this rule and/or bill goes down, we are faced with an untenable condition which will lead to the collapse of our automotive making capacity and, according to some economic policy analysts, the elimination of over 3.3 million jobs across the economy; jobs that are affected directly and indirectly by the automotive industry.
“I think it is important to step back and look at the context of this. Are we intending to stay a great nation, a world power, or are suddenly we retreating from the world stage? Because an America without an automobile industry is also going to be an America without a steel industry. We are already seeing our aerospace and our shipping industry affected.
“It is time for us to have a national economic policy, which says that the maintenance of automotive, aerospace, steel and shipping is vital to our national security. Not just our economy, but our security. Sixty-seven years ago, when the U.S. was attacked it was those industries which enabled us to be able to defend ourselves. Now I am a person who stands for peace, but I also believe in preparedness. To me it is unthinkable that the U.S., which was able to mobilize its productive capacity, would suddenly throw it away.
“We have to remember that our ability to make things is vital to being a great nation, and we have to remember that this is a moment that we should be able to rise to this occasion. It is a tragedy that we have to debate something that is a proposition about whether or not we remain a strong nation. You know we’re actually talking only about 2% of the amount of money that was given for the Wall Street bailout, which I spoke against and voted against. This is an altogether different proposition. We cannot totally reject industrial capitalism and remain a great nation. There are a lot of questions about finance capitalism which the $700 billion bailout brought out, but we have to have the ability to make things. And we can’t ask the autoworkers to work for nothing.
“We have to have the ability to make things. We also have to have the ability to see automotive in the scheme of a broader industrial policy. Let’s remember who we are as a nation. With all of our troubles, trials and tribulations, this is still the greatest nation in the world. What keeps us there? Our ability to make things. To make cars, to make steel, to make planes, to create ships- that’s what help makes America great. Let’s not give that up. Let’s not let this moment pass and decide this is just a trivial matter of just $14-15 billion. This is a question of who we are as a nation. Let’s be strong. Let’s vote for this bill.”
Toyota, Honda and VW all manufacture very profitably in North America, apart from periodic Ivy League investment banker induced depressions. They manufacture in the same market with indigenous workers and most of the same suppliers.
But they lack some overhead present in the US Big Three:
1. The “low hanging fruit” of the utterly, totally, irredeemiably failed Ivy League executive class.
2. UAW.
3. Capital structures concocted by fellow low hanging fruit alumni in lower Manhattan.
Any “bailout” that fails to decisively, ruthlessly gut out 1-3 is preprogrammed to fail.
Herbert Hoover is so proud of Mitch McConnell.
> Herbert Hoover is so proud of Mitch McConnell.
What is that supposed to mean? Herbert Hoover went on a government spending spree. Take a look at the government purchases figures from 1929 – 1931.
Parts of Ford Motor Company understand very well how to manufacture small cars with hyper-efficiency…
http://info.detnews.com/video/index.cfm?id=1189
…outside the UAW’s reach.
They’ll pass it. If they don’t there is going to be a big explosion in the CDS market. I’d love to see that though.
What is that supposed to mean?
Don’t get too hard on him. He sounds like an Ivy League grad mindlessly sheep bleating the slogans programmed into him at his Maoist indoctrination sessions. Here’s a very good essay on the real Herbert Hoover, the true father of the “New Deal”.
http://www.acting-man.com/2008/12/hoovers-heirs-at-work.html
And for the record, I am not “Acting Man”, who claims to be a hedge fund trader.
You can certainly quibble over details (like offering bondholders more than market value while workers get only market value) but Corker’s proposal is broadly what all of us in contact with reality think is needed. GM can’t carry its obligations and must go through some kind of bankruptcy procedure to survive.
This advocacy of bankruptcy is more than a bit naive. A car is a very big commitment, particularly in our brave new world of less financing. Ask your buddies. Would they buy a car from a company that had filed for bankruptcy? You’ll be surprised how negative the reaction is.
No buyers, no GM. Not hard to understand.
Plus the idea you can take out GM and still have an US auto industry is also wrongheaded. GM is a very big customer to a lot of auto parts suppliers. In bankruptcy, they are unsecured creditors, and get nada until the Ch. 11 is final. A lot of them die in this process. The foreign transplants need them too, so they shutter.
Just like finance, more integrated than you think, thanks to these extended supplier nets , and if one big player goes, they all eventually go.
Bailing out the auto industry does not make sense…..NONE of these bailouts make sense….we are only delaying the inevitable…..the economy is contracting rapidly! The days of consuming MORE than we produce are QUICKLY coming to an end. The more that is bailed out, the more sudden and painful the contraction is going to be. All of our excesses need to be allowed to unwind. Is it going to be painful? Of course it is. Lots of jobs are going to be lost….but this is going to happen no matter what.
I would buy a car from a company that is reorganizing under bankruptcy protection, with stable DIP financing, before I would buy from a company that did not clearly have a future at all.
Look we all know these companies are bust and need a lot of help to survive. Nobody is being fooled any more. We need to see that there is a sustainable future for them. The way to get there is Ch. 11 reorganization, so that the costs can really be rationalized.
Furthermore, if there is a requirement that GM cannot build normal large cars, I am unlikely to buy from them, because I like to buy large vehicles. A way to make their future even tougher is to cripple them by not allowing them to build what the market wants, while Toyota, Honda etc. have more freedom.
They build good cars now. People are learning that. I love my 2006 Chrysler, and the only reason I won’t buy another soon is that I plan to keep this one a long time. But the financial situation needs to be stabilized, and really stabilized.
For all you supporting a GM bankruptcy, I can only say two words.
Dow 5000.
Remember it isn’t just what americans think of GM, it’s what the world thinks of GM.
Gawd the blowhards here, who love to stick it to the unions as the country goes down.
Don’t you see you’re knocking holes in the ship – that you also sail in?
Anyway, the notion that the UAW has uncompetitive wages is nothing more than one of those Republican farts that passes for insight.
Fact is, auto workers in the industrialized world (all countries much friendlier to the unions than the US of A, you ditto heads!) make more than the UAW.
The difference is not the UAW.
The difference is that the employers in this country pay for benefits, pensions and health care. In other industrialized countries, the govt picks up the tab. It makes it much easier for manufacturing to be competitive in those countries.
Maybe those hordes of unemployed UAW folks will take to the streets and drag the lot of youse out of your cozy kitchens, and into the rough & tough world that you obviously could stand to use a thing or two about. At the point of a pitchfork, I hope not.