White House Bails Out Auto Bailout

This post first appeared on Minyanville.

Bailouts are now being bailed out.

After the Senate failed to agree on terms for the rescue of General Motors (GM) and Chrysler, Detroit asked the Bush Administration to jump in and play savior. Over the weekend, White House officials pored over the 2 automakers' books, trying to figure out how much cash the Treasury Department would need to cough up to keep them alive.

According to the Wall Street Journal, estimates for the total amount vary from $10 billion to as much as $40 billion, but no one can seem to agree on how best to spend the money - any of it. GM, Chrysler and Ford (F) have been asking for money for months, to no avail. Ford, for it’s part, claims it doesn’t need an emergency loan - but still likes to remind lawmakers just how bad things would get if GM or Chrysler were to fail.

Since the $25 billion allocated earlier in the year for renewable energy investments appears too politically costly to touch, the money has to come from somewhere. While Congress, the United Auto Workers, and the Big 3’s top brass slog it out on Capitol Hill over the terms of a potential bailout, bean counters are scurrying around Washington scrounging up the cash. That's a tall order, since all but a paltry $15 or so billion is left of the first tranche of the $700 billion financial system bailout.

If Treasury wants to tap TARP, it needs to ask Congress to release the rest of the money. And if there were ever a day to keep the television locked on C-SPAN, this will be it. Watching irate senators and appalled members of the House rail at Treasury Department officials and their smug Federal Reserve cohorts who've been begging for more money like spoiled teenagers asking for bigger allowances would be better than even the best reality TV.

Access to the money, however, would require plans for a host of prickly topics, such foreclosure prevention and federal aid to struggling municipalities. The immediacy of the problem -- GM and Chrysler both say they won’t make 2009 without a cash infusion -- eliminates the possibility of designing programs to effectively use the rest of the bailout money.

The Fed, up to this point, has been reluctant to get involved. Chairman Ben Bernanke claims car-makers are outside his realm, and that the Fed doesn’t want to overstep its bounds. Such a claim borders on the absurd, since Bernanke’s stated vision is to protect the economy by any means necessary. His supposed fear of politicizing the "apolitical" Fed is akin to closing the barn door a few months after the horses left.

In previous government-sponsored bailouts, such as AIG (AIG) and Citigroup (C), taxpayers received warrants for ownership of the companies the government deemed worthy of propping up. Now that state-owned companies are bleeding into the broader economy, the Great American Socialist Experiment can finally begin in earnest.

Auto Bailout Still Has to Get Past Senate

This post first appeared on Minyanville.

Here we go again.

It all sounds eerily familiar: Old, white guys getting harangued on Capitol Hill as they beg for billions to save their dying industries. The House of Representatives, in its infinite benevolence, offers up a rescue package at the 11th hour. Sure, there are strings attached and it's a far cry from what the old white guys asked for, but hey, this is Washington.

Last night, House Democrats hammered out a $15 billion rescue for the General Motors (GM) and Chrysler, allowing the struggling automakers to draw on emergency loans to avoid imminent collapse. Their fate now rests in the hands of the Senate, where the financial system bailout met stiff resistence just months ago. Act II is playing out just as you'd expect, with Senate Republicans vowing to block the House's bill.

The rationale, again, for handing out billions of dollars in taxpayer money is to ostensibly save the American economy from sort of alternative too terrifying to imagine. As John Dingell, a Democrat from Michigan told Bloomberg, "Without this bridge, we're going to fall into the biggest calamity this country has known since the Great Depression. A terrible disaster looms."

The money is meant to keep the 2 firms alive (apparently Ford (F) isn't sick enough to be bailed out, yet) until restructuring plans can be drawn up and approved by the soon-to-be-appointed "Car Czar," who will oversee an overhaul of the 2 firms.

Taxpayers could receive stock warrants for as much as 20% of the amount of the loan, which in the case of GM means Joe Taxpayer will own almost the entire company. Still, the bill could die in the Senate as House Speaker Nancy Pelosi claims her brethren won't come back to the negotiating table if the Senate passes a materially different bill.

What a mess.

Proponents claim allowing the automakers to go bankrupt is foolish, risking millions of American jobs while they've provided a workable alternative.

Opponents to the bailout on the other hand, contend the rescue simply delays an inevitable bankruptcy filing and complete restructuring.

One contentious issue (of many) is whether or not consumers would buy cars from a bankrupt automaker. As I wrote last month, if American Airlines (AMR) and United (UAUA) could fly planes through Chapter 11, Detroit can certainly make cars during bankruptcy.

And a marked difference between the environment in which this bailout is being debated versus the one for the financial system, is the election. Now that representatives know their fate and no longer have to pander for votes, they're much more likely to play political hardball.

This doesn't bode well for Detroit.

Chrysler Debt Stalls Out

This post first appeared on Minyanville.

If you think it’s hard to find a car loan these days, try borrowing $30 billion to finance a whole fleet.

Chrysler Financial, the finance unit of privately-held Chrysler LLC, spent the last month in intense negotiations to renew short-term debt such as that used for leases, retail car loans and loans to dealerships.

According to The Wall Street Journal, the company only managed to scrounge up $24 billion - just 80% of the $30 billion it wanted. And the money it did find was expensive: The debt cost Chrysler 1.10% to 2.25% more than the London interbank offered rate (or Libor), as compared to a spread of just 0.30% to 0.50% last year.

Chrysler will likely be forced to pass the additional expense on to customers, making cheap car loans increasingly hard to find.

JPMorgan Chase (JPM), Citigroup (C) and Royal Bank of Scotland worked on behalf of Chysler to renegotiate the loans, but in the end 2 major dissenters wouldn't budge: Bank of America (BAC) and Credit Agricole failed to renew a combined $3 billion in commitments.

Bank of America is already up to its eyeballs in lousy car debt, since it helped lead the refinancing effort for GMAC, finance arm of embattled General Motors (GM).

The financing struggle illustrates not only the lingering effects of the credit crunch, but the extent to which certain big industrial companies are, in Toddo's words, “financials in drag.” Included in this list are fellow automaker Ford (F) and massive conglomerate General Electric (GE).

With cheap credit flowing through the financial system, management found it expedient to squeeze income out of balance sheets with aggressive money management. Whether it was tapping the now-collapsed auction-rate securities market or relying on sketchy consumer debt as a profit center (GMAC for GM and WMC Mortgage, a subprime lender, for GE), these so-called industrial behemoths relied heavily on their finance arms for profits.

For carmakers, sales have long depended on cheap and easy financing for would-be buyers. Now those loans are more expensive and harder to come by; revenues are sagging and losses are mounting.

These firms will have to find new ways to turn a profit, or figure out how to do it for less. Of course, that's something their customers are already being forced to do.