Earlier today, George Bush made a surprisingly candid set of remarks, signaling a desire to avoid a disorderly collapse for the large US car manufacturers, and ambivalence about Chapter 11. The stock market started downward, and the trajectory accelerated with Standard & Poors putting GE’s ratings outlook at “negative,” meaning it is at risk of losing its AAA.
The Bush Administration is in a nasty position, from a game theory standpoint. Its legacy is already badly tarnished, but it does not want to add to it by letting any of the Big Three fail. At the same time, heated Congressional opposition to a rescue means it is loath to merely kick the can down the road till Obama is sworn in, since any deal with a Democratic executive branch and solid Congressional majorities would presumably be more lenient than what could be imposed now. But the timetable is too short for the Bushies to craft the restrictions and governance that it might like to see in place.
Note that the idea of a prepackaged bankruptcy has reportedly been rejected because it would hurt Ford’s competitive position (or at least, that is the party line. The much greater risk is that they could lead to liquidation, the worst outcome, but better not admit to that, since Chapter 11 may be unavoidable). But a very lengthy look by The Deal said a pre-pack is impossible for GM, given the number of moving parts, and even with some aspects handled on a pre-pack basis, the US carmaker would not emerge from court before late 2010. The risk of loss of consumer interest is high, and a Chapter 11 could morph into a liquidation.
Last night, it was the New York Times that told us, in effect, that progress is being made, without offering much more of substance. Today, Bloomberg says that a deal may soon be at hand,, but details are pretty much non-existent:
General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled as soon as today, people familiar with the talks said.
The government could take back the money should the automakers not comply with federal restrictions as a condition of receiving the funds, said the people, who asked not to be identified because the discussions are private. The plan isn’t final and may change, the people said.
By contrast, the New York Times today sounded a darker note, saying that the Administration was looking seriously at the bankruptcy option:
….officials said the preferred solution would be to force a restructuring of the industry outside of bankruptcy court, extracting concessions that would make the companies more cost-competitive with foreign automakers.
In return, the Treasury would tap the financial rescue fund, called the Troubled Asset Relief Program, to make loans to the companies.
After a week of talks between the automakers and the Treasury Department over the terms of a possible bailout, Ms. Perino on Thursday said, “we’re very close.”…
What the White House appears to be envisaging is a package deal of concessions — and an injection of money from the TARP, the $700 billion financial bailout fund — to keep credit flowing for G.M. and Chrysler…
But for Mr. Bush, that could be difficult to negotiate. If the autoworkers’ unions conclude they are likely to get a better deal from Mr. Obama, they are likely to stall negotiations and settle for a shorter-term loan.
Yves here. It isn’t just the UAW that is holding out. Felix Salmon has said that the bondholders are recalcitrant, and the dealers are also a large potential stumbling block. Back to the Times:
G.M. declined to comment on the Bush administration’s suggestion that an “orderly bankruptcy” was under consideration. But the company was surprised by the White House statements, according to G.M. officials who asked not to be identified because the discussions with the administration were not yet final.
The automaker’s senior executives have said repeatedly that bankruptcy was not a viable solution because consumers would be reluctant to buy a vehicle from a bankrupt automaker.
In July, CNW Marketing Research said a survey it conducted showed that 80 percent of prospective car buyers would not consider purchasing a vehicle from a bankrupt company. A more recent survey found that 51 percent of the people it interviewed said they would not buy a car from G.M. even if it received a government bailout.
Update 2:15 AM: Reuters reports that the two sides are getting closer:
General Motors Corp and Chrysler LLC made significant progress late Thursday on a deal to secure emergency loans as part of a U.S. government aid package, people familiar with the talks said.
The package would demand sweeping restructuring at the troubled automakers in exchange for bridge loans to carry GM and Chrysler for several months, according to the sources.
Emergency federal loans for the two companies could be announced by the government as early as Friday
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Auto economics, Eddie Lampert, and the Microsoft Founder:
http://changealley.blogspot.com/2008/12/eddie-and-microsoft-founder.html
So let the UAW stall until Obama gets in. Their rejection of pay cuts insures failure. These jokers don’t have a clue!
I think a lot of it may ride on Paulsons personality. I am guessing what differentiated Lehmen from the others (and now GM) is the pig headedness of the negotiators. I read that Fuld like to take negotiations to the wall. Paulson was not going to be cornered then, and won’t now.
I wouldn’t be at all surprised if we ended in Chapter 11 based on game theory alone.
I think it’s time the American’s faced reality. Chrysler’s dead. GM is a zombie – the only way it can survive is to immediately dump every model and every factory that is not profitable (which, according to the earlier post here is about 3/4), even at 0.
These two were unable to survive even in a climate where people bought new cars every two years. They cannot survive when people buy almost no new cars in the first place.
Saying 80% customers would not buy a car from a bankrupt carmaker is irrelevant, when 90% of all customers will not buy a new car at all.
It’s a harsh reality, but it’s bu it’s time the US faced it.
GM and Chrysler commited suicide in the last few years, but the corpse started smelling only now.
Wave a magic fairy wand over them and declare them to be banks. Paulson calls them in and offers all three of them $25 billion. Ford protests it doesn’t need the money, but Paulson gives them no choice.
Let them fail. It’s about time that America rediscovered capitalism. There is no capitalism without creative destruction.
All these bailouts, plus too much “econoblogging” means I keep thinking of that great John Mill quote that London Banker threw out some time back:
“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”
Why, on the back of everything that has happened to-date, would we betray any further capital on “hopelessly unproductive works”?
re: dealers
I still don’t understand why they are “a large potential stumbling block”. What leverage do they have on these companies at this point? “If you file for bankruptcy, we won’t sell your cars”? They aren’t selling cars to begin with.
What am I missing?
Side note: Chrysler dealers are pulling out $60mil/day from a company fund that loans to dealers so buy cars for their lots.
Bloomberg is now reporting that (though not finalized) the loans will come from TARP and be channelled through GMAC and Chrysler Financial, and will be just enough to keep them afloat through March.
I am simply amazed that the US is going through a GDII (IMHO), and is bleeding everywhere, yet TPTB can’t stop their bickering long enough to do something constructive and put aside partisan politics.
Given that GM’s market share is something around 22% (per my recollection), those survey results aren’t that surprising or terrifying. Apparently 78% of consumers don’t like GM products anyway. 51% of consumers not wanting to buy GM doesn’t mean anything to me in that light. Are the survey’s selecting likely GM customers?
A wonderful lifestyle is now gone with the wind. My heart is with the leaders and workers in the auto industry. I sympathize that their industry has suddenly become rusty. They no longer are able to maintain high profits and wages and are now asking for the government to buy millions of their unsold cars. But wisely the reply to their plea is to disappear in an orderly way and remain only as a memory of a glory that once was. Our pride remains as we look at our aircraft industry and its innovative management. Every airport in the world has a made in America aircraft landing every few minutes. We must never let it also become gone with the wind.
I think it makes sense for the federal government to loan money to the automobile companies. If they do well, economic growth and per capita income may increase in many states.
The federal government may want to loan money to manufacturing companies that make products in our country. This may increase economic growth and per capita income. This may help our country reduce our national debt that is now more than 10 trillion dollars.
Our companies may be able to manufacture products in our country that cause less air pollution, water pollution, and land pollution than companies that make things in China.
If the federal government is serious about growing the economy and creating jobs, it should stop taxing interest from savings accounts, dividends, capital gains, and estates. People will have an easier time saving for college tuitions and retirements. Businesses will have an easier time obtaining loans and investments.
I graduated from the University of New Hampshire in 1992 with a BA Degree in Political Science and a minor in Economics.
I ran for United States Senate from New Hampshire in 2002.
My website is http://www.myspace.com/kennethstremsky