GM: One Step Closer to Nationalization

This post first appeared on Minyanville.


The great modern American nationalization experiment is underway: General Motors (GM), once the largest automaker in the world, has become a sort of Frankenstein's monster for the US government.

Bloomberg reports the Obama Administration is stepping up pressure on management, unions and creditors to make further concessions, and is considering taking a sizable equity position in the once-proud Detroit firm. The move, which would swap out some of the outstanding $13.4 billion in government loans for stock in a new, slimmed-down, cleaned-up version of GM, is the latest in a series of steps toward outright nationalization.

Analysts say the swap would diminish the rights of creditors, to whom the company offered around 90% ownership in a recent restructuring plan - a plan rejected by government officials. Under the Obama Administration's preferred tact of temporary state ownership, employees owed pension benefits would end up faring better than bondholders.

The government aims to take an ownership interest in GM, then quickly use the cover of bankruptcy courts to hack off the 'bad' parts of the firm. With a fresh start, free of legacy obligations and under performing divisions, Washington says it would quickly divest of it's stake and let the restructuring process continue.

We've by now become almost numb to government-led bailouts of failed companies, most notably American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE). The details are almost an afterthought, as the complexity of each scenario renders casual analysis almost a waste of time. The GM situation, however, could be a blueprint for future intrusion of the federal government into private enterprise.

Secured lenders, as is the government in the case of GM, often prefer a bankruptcy filing when companies get into trouble since it can enable the quickest repayment of their loans in full. Unsecured creditors and equity owners are left holding the bag.

The Bush Administration before him and now Obama have set a precedent: Emergency, secured loans are a likely precursor to state ownership. Notably, the huge bailouts of Citigroup (C) and Bank of America (BAC) were executed through portfolio guarantees and capital injections, not secured loans to the company itself. Not yet, anyway.

Despite efforts on the part of officials to play down the government's role in running GM, or AIG, or Citigroup, or Bank of America, we have entered an economic reality where business success, rather than relying on vision, strategy and good practices, is becoming increasingly reliant on political acumen.

By adding layers of red tape and palm-greasing to our already politicized economy, we move closer and closer to an economic system directed not by the collective will of the many, but rather one controlled by an ever-shrinking group of power brokers and political puppeteers.

This, despite loud proclamations of an impending return to economic vibrancy, is not a welcome development.

The Great SUV Baillout?

This post first appeared on Minyanville.

The double standard continues.

There seems to be no limit to the amount of money the federal government is willing to spend to prop up our broken financial system. But when it comes to putting money in the pockets of average Americans, or support policies that will foster energy independence, Washington cries broke.

The Wall Street Journal reports that Congress is throwing weight behind a so-called "cash for clunkers" program, whereby owners of SUVs and trucks can receive a kickback for scrapping their gas-guzzlers in favor of more energy-efficient vehicles. The catch: The handout is likely to be capped at far less than the clunkers' trade-in value.

To be sure, the program is a step in the right direction. The fewer Escalades (GM) and old Suburbans clogging up our freeways and spitting out carbon dioxide, the better. Not to mention, cars aren't exactly flying off the lot at American dealships - a few new purchases wouldn't hurt the forturnes of GM, Chrysler and Ford (F).

But the initiative would be a lot more effective if it made economic sense. In an environment where making the mortgage payment, putting food on the table, and paying the bills on time are the top financial priorities, eating a few grand to save the trees is barely on the radar.

Sure, a policy that paid full trade-in value for pollution-spewing trucks wouldn't be cheap - but neither is dumping hundreds of billions of dollars into insolvent banks. And it might actually do some good. I mean, insuring more than $300 billion of Citigroup's (C) bloated balance sheet is nice - but my credit line still got cut.

There's clear lesson here: If you want to get on the government dole in a meaningful way, make sure to come as close as possible to bankrupting the entire country. Anything less just won't cut it.

Take GM, whose former CEO Rick Wagoner was fired by the Obama Administration for poor strategic decisions and a turnaround plan that wasn't up to snuff. Meanwhile, Bank of America (BAC) CEO Ken Lewis ran his firm into the ground so thoroughly that he would have taken the entire financial system down with him - had Washington not stepped in with over $200 billion in bailout money and federal guarantees.

The government doesn't seem to have a problem overpaying for toxic financial assets -- in fact, it's encouraging pension funds to do just that -- but when it comes to handing over taxpayer money to, well, taxpayers... The well suddenly runs dry.

GM Runs Out of Road?

This post first appeared on Minyanville.

Taking money from the US government isn't just risky; it can cost you your job.

Just ask Rick Wagoner, the now former Chief Executive Officer of General Motors (GM). After accepting billions in aid from the Treasury Department -- but failing to produce an acceptable restructuring plan -- Wagoner was forced out of the beleaguered automaker over the weekend.

The Wall Street Journal reports that, in addition to removing Wagoner, the Obama administration’s auto-industry team floated the notion that bankruptcy may be the best option for Chrysler and GM. Although the government said it doesn’t have plans to oust Chrysler CEO Robert Nardelli, it did suggest that it's growing tired of propping up the struggling company.

The shakeup at GM didn’t end with Wagoner: A large part of the board of directors was also asked to leave, and Chief Operating Officer Frederick “Fritz” Henderson was named Chief Executive. He, along with a new-and-improved board and management team, will receive a 60-day credit lifeline by which to devise a more rigorous turnaround plan.

After the AIG (AIG) bonus debacle, financial firms are scrambling to return TARP money, lest they be subject to similar scrutiny (or similar witch-hunts). Goldman Sachs (GS), JPMorgan Chase (JPM) and others have suggested they’re working on plans to repay billions in government aid.

Whether its bonuses at AIG, corporate jets at Citigroup (C), or executive-suite redecoration at Merrill Lynch (BAC), the federal government is taking a rather more active role in any company that's required federal money in order to stay afloat.

The US government now controls some of the biggest companies in the world. And if this weekend's actions are any indication, it plans to fully wield that power.



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Bush Bails Out Detroit

This post first appeared on Minyanville.

The holidays just got a bit brighter for Detroit.

This morning, President Bush authorized up to $17.4 billion in loans to rescue General Motors (GM) and Chrysler from imminent collapse. The 2 troubled automakers had asserted they'd run out of money by year's end without government assistance.

According to Bloomberg, the bailout money, which will come from the Troubled Asset Relief Program, or TARP, will provide a 3-month window for the 2 firms to devise a restructuring plan to ensure their long-term viability. At the end of March 2009, the loans are callable if the government doesn't feel its demands have been met, forcing GM and Chrysler to immediately pay the money back.

Ford (F), which said it didn't need an emergency loan, wasn't included in the proposal.

In exchange for the cash, the government will receive warrants on non-voting stock, in addition to the right to block transactions of $100 million or more. Both companies must limit executive pay, give lawmakers access to their financial records, and are barred from issuing dividends until the debt is repaid. Debt must be slashed by two-thirds.

Detroit's powerful union lobby, the United Auto Workers, accepted concessions on retirement contributions and payouts for downtime.

Bush, in saving the US auto industry at a time when the economy can ill-afford further job losses, told CNN "I have abandoned free-market principles to save the free-market system."

Rumors swirled in recent weeks about the possibility of an "orderly bankruptcy," after Congress failed to agree on terms for a bailout. The President said this morning that allowing the carmakers to collapse, given the ongoing financial turmoil and recession, would "not be a responsible course of action."

Evaluating the relative success of the industry's turnaround plans will largely be left up to the incoming Obama administration. The Wall Street Journal reports metrics for determining the firms' financial viability are "relatively lenient." And though the agreement doesn't specifically refer to a so-called "car czar," it does say the government must put someone in charge of ensuring the terms of the bailout are being met.

After months of pleading for money, GM CEO Rick Wagoner and Chrysler boss Robert Nardelli can finally return to Detroit with their pockets bulging. Payrolls can be met, vendors paid, and the books closed in January without a visit to bankruptcy court.

However, for 2 firms that seem inordinately adept at losing money -- and lots of it -- one would be hard-pressed to find too many people surprised if, before March, Wagoner and Nardelli are back on Capitol Hill explaining why they deserve a second chance.

Car Czar, Treasury Could Force Automaker Bankruptcy

This post first appeared on Minyanville.

As 2008, a year most market participants would just as soon forget, draws to a close, the endgame approaches in the fight to save Detroit.

After Senate Republicans blocked a $14 billion rescue package for General Motors (GM) and Chrysler last week, the ball landed squarely in the court of the Bush Administration. Both GM and Chrysler have warned they'll be insolvent by the end of the year without government assistance.

Bloomberg reports the Treasury Department is considering a plan giving the yet-to-be-named “car czar” or the Treasury Secretary power to force GM or Chrysler into bankruptcy if either firm can't survive on its own. Officials said the troubled automakers would be required to submit turnaround plans by March 31st, but would not release further details of the plan.

Moody's Investor Services wrote in a note that a rescue would most likely include a so-called "prepackaged bankruptcy," which would remove certain roadblocks to restructuring the companies.

In a letter urging President Bush to withhold assistance, South Carolina Governor Mark Sanford asserted that using TARP money to rescue the auto industry would open the floodgates to other troubled industries. Sanford, a Republican, said “We are at a tipping point in moving from a market-based economy to a politically-based economy.”

Meanwhile, Ford (F) supports plans to rescue its beleaguered competitors, saying any failure of a major auto maker would have ripple effects throughout the industry.

The White House promised to keep tabs on any taxpayer money it decided to dole out, saying “There will be rigorous oversight to make sure that these companies are doing what they promised to do, and we want to make sure that everyone is making the concessions that they’re going to have to commit to make.”

The Treasury Department, however, doesn’t have a stellar track record on transparency and accountability. Earlier this month, the Government Accountability Office found critical oversight, transparency and regulation problems and recommended the Treasury hire additional personnel to manage TARP. All the Treasury appears to excel at is spending money.

As dire as the situation has become, it's hard to find many that truly believe Washington will allow the automakers to fail. Whether the money comes from TARP, the Federal Reserve or some yet-to-be-announced slush fund, conventional wisdom would be in for a very rude awakening if Detroit is hung out to dry.

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.