A couple of you pointed out the news that Office of Special Counsel had concluded that Rachel Paulose acted improperly when she demoted the guy who busted her for mishandling classified information:

Today, the Office of Special Counsel (OSC) announced the settlement of a prohibited personnel practice complaint filed by John Marti, an Assistant United States Attorney (AUSA) in the District of Minnesota. Mr. Marti previously served as the First Assistant United States Attorney (FAUSA) to the former U.S. Attorney, Rachel K. Paulose. He alleged that in April 2007, Ms. Paulose demoted him to a staff attorney position because he had reported to officials within the Department of Justice that she had mishandled classified material. OSC’s investigation showed that Ms. Paulose retaliated against Mr. Marti for making whistleblower disclosures in violation of the Whistleblower Protection Act.

[snip]

 Based on considerable evidence of intent, animus, and motive, OSC concluded that Ms. Paulose constructively demoted Mr. Marti.

Today, OSC issued a second press release clarifying yesterday’s news:

The Office of Special Counsel (OSC) announced yesterday the settlement of a prohibited personnel practice complaint filed by John Marti, an Assistant United States Attorney (AUSA) in the District of Minnesota. Mr. Marti previously served as the First Assistant United States Attorney (FAUSA) to the former U.S. Attorney, Rachel K. Paulose. He alleged that in April 2007, Ms. Paulose demoted him to a staff attorney position because he had reported to officials within the Department of Justice that she had mishandled classified material.

In yesterday’s press release, OSC did not note that the settlement agreement reached between Mr. Marti and the U.S. Attorneys’ Office for the District of Minnesota was entered into by the Department of Justice as a no-fault agreement and was not to be construed as an admission of liability by DOJ. The settlement agreement specifically states this. [my emphasis]

Gosh, it was just a few weeks ago that we learned that Alberto Gonzales is sticking taxpayers with the bill for his defense against suits that he allowed partisan considerations to unfairly influence hiring and firing decisions.

The Justice Department has agreed to pay for a private lawyer to defend former Attorney General Alberto Gonzales against allegations that he encouraged officials to inject partisan politics into the department’s hiring and firing practices.

Now why do you suppose OSC was so quick to point out that this "evidence of intent, animus, and motive" doesn’t mean Alberto Gonzales bears any liability for the fact that a hand-picked "loyal Bushie" was using her position as US Attorney like a personal feifdom?

And now that we’re talking admissions of liability (or not), do you suppose Rachel Paulose is still burrowing in somewhere at DOJ?

Bob Corker is very busy trying to force the Big Two and a Half into bankruptcy so he can bust the UAW. He’s using all the regular methods–arguing about GM’s failed business model, arguing that they haven’t changed their business plan.

But he went over the line, earlier, when he stated that the Department of Energy had rejected all the Big Two and a Half’s applications for DOE funds to retool their factories to produce more efficient cars. Basically, he took the opportunity of the hearing to announce, publicly, that the companies weren’t going to get $3 to $7 billion they were counting on to turn around their business. He even suggested that the applications were rejected because they weren’t viable companies.

Only, he was wrong.

Funny thing is, though, the stock market didn’t wait until Sherrod Brown came in and corrected Corker–by noting that the DOE had not rejected the applications, but had simply asked for more information. And it didn’t wait until Corker himself–having been called by the guy awarding those loans–admitted that he was wrong. (Though, dead-ender that he is, Corker still tried to insinuate that they applications were rejected, rather than sent back for more clarification.)

Not long after Corker made those remarks, GM’s stock price dropped from $4.44 to $4.27. And then it dropped again, from $4.27 to $4.02. $.42 altogether, all shortly after Corker insinuated false things about government decisions in a widely and closely watched hearing.

I know that $.42 might not be much to you, Bob Corker. I know you’re working hard to bankrupt these companies.

But it really is rather bad form to take out 10% of a company’s stock price just so you can make an ideological point.

Two updates from the hold placed on the TARP Inspector General’s nomination.

First, POGO reports the hold has been lifted.

Sources tell us that the secret hold blocking Neil Barofsky’s nomination as the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has been lifted!  Stay tuned for more…

Second, during the Senate Banking hearing on the auto industry, Jon Tester just said that someone "in this body" had a hold on Barofsky’s nomination. Which supports the widely-held suspicions that Jim Bunning was the guy who put the hold on. (Note, he hasn’t shown up yet, either.)

The auto execs are before Senate Banking today–go here for the hearing.

Dodd is up, arguing that not helping the Big Two and a Half is like playing Russian Roulette with the American economy. He’s also beating up on Paulson for his irresponsibility with our TARP funds.

In my view of we’re going to insist on reforms from the auto industry, we ought to also require reforms from the finance industry.

Also note, they’ve got representatives from both the suppliers (the head of Johnson Controls) and the dealers (the President of CT’s auto dealers). The House hearing last time had such representatives, and it really made the hearings more valuable for the executives.

Shelby up. Took him 2.6 seconds to talk about labor.

Gene Dadaro, from the GAO, up. He’s talking about what past bailouts have involved. I’m curious whether he was consulted on TARP? He’s also demanding a board with real oversight. Again. Was he consulted on TARP?

Dick Shelby seems to believe he’s an expert on the auto industry. Still pressing for bankruptcy.

Dadaro states clearly that he believes Treasury has the ability to intervene. Shelby’s pushing to get Treasury to do this.

Bob Bennett has an interesting idea: you give TARP money to the auto companies’ creditors, in exchange for equity in the auto companies. That would change the cash shortage of the auto companies, while watering down stock.

Jack Reed, clarifies that we should expect concessions from suppliers and dealers as well as the UAW. Finally! Someone who notices that the Big 2.5 have contracts with more than just the UAW!

Schumer: UAW made concessions yesterday, but where are the dealers? Where are the bondholders? 

Menendez suggests requiring a dollar for dollar concession from stake-holders in any bailout. Also raising the possibility that a bailout includes prohibitions on a foreign maker buyout of Chrysler.

Evan Bayh, as the first auto state Senator up: Isn’t it true that there’s too much uncertainty to allow these companies to go bankrupt right now?

Sherrod Brown, on differences between 1979 and now: UAW already made concessions, the Big 2.5 have already restructured significantly. 

James Fleming: The ripple on effect is a tsunami on the dealers who employ people in your home states. If you do not pass this bill, the effect on your consitutents will be enormous. Consider the human side on what’s going on–go into those dealerships. It’s tough work, they’re writing the paychecks out, they do not have massive staffs. They’re making about 50,000 a year working in a dealership–that will go away.

[Halleluyah–it is high time we got dealers in here to talk about this.]

Keith Wandell: Largest supplier of automotive batteries to aftermarket and equipment manufacturer, 7th largest in world, and 3rd largest in North America. Had we not saved Plastex and bridged this to avoid liquidation, all 52 assembly plants Plastex supplies would have been affected for some period of time.

I can assure you that even though every foreign car maker that assembles cars in North America, they too are deeply concerned about the viability of the supply base in North America. 

Mark Zandi (from Moody’s): 1) Govt should provide help. Without help, they’ll be in bankruptcy. If auto makers file anytime in the next few weeks, it’ll be badly damaging to the economy.  2) $34 billion will not be sufficient. It would need between $75 billion to $125 billion, light vehicle will be 11 million in 2009. 17 million not supportable by underlying demand. 3) If plans fully executed, could result in viable industry. Have already made significant strides. Labor costs have declined during this decade. UAW concessions, further cost savings. 4) Recommend Congress provides aid, in exchange for warrants and restrictions on exec comps. Aid in two tranches. Reasonable concern that bankruptcy would preclude people from buying cars, but also need reassurances that warranties would be honored. Automakers have reasonable plan to restructure their businesses.

[This guy better be careful, or he’s going to be put in charge of the oversight board.]

Mark Zandi may have finally gotten through to Shelby that the government is going to have to pay this anyway. 

Crapo asks whether Oversight Board needs authority to impose restructuring conditions "as a Chapter 11 court could." Would having an oversight trustee affect confidence?

Wagoner: If people saw funding coming, we would have to present a plan to convince people we could execute it. 

Nardelli says everyone’s business was 20% leasing–and leasing has been all but shut down by credit crunch.

Gettelfinger says, yeah, put someone in charge of the bailout. But make sure you’re addressing health care and unfair trade.

Crikey. Senator Corker just revealed that DOE rejected all the applications for energy retooling projects. The car companies had not been informed.

Casey: "And then we heard this garbage about this $73 an hour? That’s a totally lie, a lie that was deliberately propagated."

Woohoo!!!

Nardelli: Just in the last week, 240 dealers quit, another 250 about to, because they can’t get credit.

Zandi says a bailout would be worth 1.50 in economic stimulus (with $1.80 being investment in infrastructure, $1.10 to rebates).

Dodd asks another great question: should Congress pre-empt state-level franchise laws, making it easier to reduce dealers. The dealer guy hates it, not surprisingly. 

Big Media Matt has apparently no more hung out around the auto industry than he has tasted a quality turkey. He’s struggling to understand why Ford would lobby Congress to help its competitor GM stay in business.

The key–as we’ve discussed here–is that if GM went under, it would bankrupt some suppliers. And the supply chain for automobile manufacturing in the US is so intertwined, this would create supply problems for the other manufacturers–not just Ford, but also the international manufacturers.

Here’s how the Center for Automotive Research (a wonky organization of the sort Matt likes that is cited in just about every article on the crisis) describes what would happen if all three manufacturers had a major contraction.

We assume that domestic production by international automakers in the United States would be seriously affected by a major contraction of the Detroit Three automakers for at least a period of one year due to the high likelihood of many U.S. supplier company insolvencies. In fact, we assume in our 100 percent contraction scenario that not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the U.S.) by the international producers also falls to zero. That is because we expect a major wave in supplier bankruptcies or a "supplier shock." The collapse of a domestic market for suppliers coupled with the reality that few auto suppliers serve export markets would result in manufacturing utilization rates below 50 percent, forcing suppliers to restructure or liquidate. The scale of the contraction of the Detroit Three would overwhelm any attempt by the international producers to keep their existing suppliers in business or to find alternative suppliers, here or elsewhere. U.S. consumers would be forced to rely on only imported vehicles as a source of new vehicle purchases in the first year. [my emphasis]

In other words, Big Two and a Half bankruptcies would also bankrupt suppliers that got roughly 50% of their business from the Big Two and a Half. And if the foreign manufacturers relied on any one of those suppliers, they would start running out of parts and have to idle their assembly plants.

Now, that’s the most extreme scenario, in which Ford goes under with GM and Chrysler. But as CAR points out, something similar would happen if just two of the domestic automakers had a serious contraction–precisely the scenario we’re talking about here.

We assume essentially the same first year supplier crisis for all automakers in the United States. Production would fall about 50 percent in the first and second years for the international producers.

[snip]

In all contraction scenarios, imported automotive supplies and parts prices are increased by 15 percent because of the probable disruption in the domestic supplier sector.

That is, even with just GM and Chrysler going into bankruptcy or otherwise cutting their production, you’d still have the cascade effect in which suppliers would go under, making them unable to meet commitments to Ford and the foreign manufacturers either. 

To get an idea of what this looks like, consider what happened to GM earlier this year when American Axle went on strike. GM had some time to prepare, and so had several months’ stock of the affected vehicles on hand, something which would be true of some, but not all, of the Ford, Toyota, and Honda vehicle lines in question. Yet, as the strike wore on, GM had to idle a number of plants (and sales for those vehicle lines began to fall, though that didn’t affect the supply chain). That, in turn, hurt suppliers that are heavily reliant on GM, as GM’s orders for their parts declined.  So one supplier cuts GM’s production, which in turn cuts other suppliers’ production. This was a supply disruption caused by one supplier, doing 80% of its work for GM, supplying a relatively simple product, cutting production for just two months, yet it still set off a cascade in GM and GM’s key suppliers. 

Now multiply that by fifty.

If Chrysler or (especially) GM went under, it would just take a few key suppliers to disrupt the supply chains for the other manufacturers.

And understand, we’re not talking just tires and axles and other mechanical items. Some of the parts are highly tailored, involving a year or more of development time, so it’s not as if Ford or Toyota can just go to the nearest hardware store and replace one widget with a similar one.

And, of course, it sort of goes without saying, all those suppliers employ a lot of people who would be laid off in such a circumstance. The cascade hits not just auto manufacture, but real people’s lives all over the country.

JMart reports that Dick Durbin wrote Bush in support of a pardon for George Ryan (really, Durbin?!?!?!).

Obama’s colleague and close friend Sen. Dick Durbin sent a letter to the president this week requesting that he release Ryan, who is doing a 6 1/2 year federal sentence on corruption-related charges

Crazy as it sounds, I think Durbin’s onto something. In fact, I think he should start pitching a "PatFitzPack of Pardons" for Bush.

After all, we know that Scooter Libby is bound to get a pardon in the next few weeks.  Conrad Black has already asked for a pardon; and what neocon President could resist that request? Throw George Ryan in there, and you’ve got a hat trick.

Jeebus. This gives you a sense of why GM’s in such dire straits:

GM‘s financing arm, GMAC, cannot effectively access the secondary markets today. With each passing day, it is less able to finance the sale of GM vehicles, either for dealers or for the public. One year ago, GMAC was able to provide either installment or lease financing for nearly half of GM retail sales. That number has fallen to 6% today. In addition, GMAC is no longer able to buy contracts for customers with a credit score under 700, which excludes roughly half the buying population. All of this has been especially toxic to GM sales in the past two months, with sales running about 40% behind year-ago levels. [my emphasis]

Just by way of comparison, Chrysler says that they give credit to 50% of Chrysler customers (though it doesn’t say whether it has been able to maintain those numbers), and Ford says it gives credit to 4 million consumers last year, though doesn’t say what percentage of sales its credit arm supports.

Imagine, though, that 100 customers walk in your door–and whereas last year, you would have been able to offer 50 of them credit, but can only offer 6 of them credit this year. That’s gonna cut into your business–dramatically.

Incidentally, Ford talks in much more abstract terms about how the credit crunch is affecting its business.

The present credit environment also has severely limited the ability of the automotive finance companies like Ford Motor Credit Company to access the public debt and securitization markets, and is significantly impairing our ability to support dealer and consumer financing needs. Banks and investors are exhibiting an aversion to risk and a willingness to invest in only the highest-quality financing instruments, and preferably in government instruments or government guaranteed debt. This risk aversion has expanded to a level where it is challenging to find financial counterparties to transact even simple interest rate and currency swaps, further contributing to a significant slowing of U.S. economic activity. These issues have further constrained the cash available from Ford’s normally profitable automotive finance company to support our automotive business.

I just got done listening to Diane Rehm’s show on the auto begs (it was terrible, frankly); there was a great deal of skepticism whether the auto companies would get any government help this month.

Aside from the fact that GM is asking for $4 billion for operations through the end of the month and an additional $4 billion for January, there’s another reason a bridge loan can’t wait.

According to very recent market research (conducted by CNW Marketing Research), more than 30% of consumers who considered a GM vehicle and purchased a competitive product instead cited the possibility of GM bankruptcy as the top reason for not buying a GM product. This is more than double the percentage of the next highest reason.

To highlight this point, both the Baseline and Downside Scenarios outlined in this submission assume that consumers will consider GM products and services on their merits, and without regard to concerns relating to the company’s viability. If this assumption is not true, and concerns regarding the company’s viability continue to weigh on purchase decisions (as they clearly did in November 2008), the company expects to that first-quarter 2009 cash outflows would be materially worse than even the Downside Scenario. As such, clarity and prompt action adds real value to the company and to consumers.

GM’s sales dropped 41% from last November’s numbers; Chrysler’s sales dropped 47% (the industry as a whole dropped 37%, with Ford having one of the smallest drops). In other words, all this discussion of whether or not to let GM or Chrysler go bankrupt is making it more likely that they’ll go bankrupt, because they’re not even keeping pace with the industry’s severely contracted sales numbers.

That doesn’t mean Congress will get something passed right away. But it does raise the stakes for this week’s hearings.

We interrupt the focus on the auto industry to look briefly at the subpoenas Nora Dannehy–the special prosecutor investigating the US Attorney firings–has sent out.

A prosecutor who is investigating the dismissals of nine U.S. attorneys has been meeting with defense lawyers, dispatching subpoenas and seeking information about the events, according to legal sources familiar with the case. 

[snip]

Dannehy, a longtime assistant U.S. attorney in Connecticut, in recent weeks has met with lawyers and government officials involved in the case. A grand jury in the District has issued subpoenas, the sources said. 

There are two worthwhile details here. First, the news that Kyle Sampson has taken a leave from his law firm.

D. Kyle Sampson, who served as the chief of staff to Gonzales until his March 2007 resignation, recently took a leave from his job as a partner at the law firm Hunton & Williams while the investigation proceeds. A spokeswoman for the law firm said he is on leave "pending admission to the D.C. bar." 

I can see how a swank firm wouldn’t want one of its partners indicted on its payroll.

The other, amusing, tidbit comes from George Terwilliger, Alberto Gonzales’ lawyer, making a pathetic case that the investigation–at least as it pertains to Gonzales–should end now. 

George J. Terwilliger III, an attorney for Gonzales, said that his client had engaged in no wrongdoing, "making it patently unfair and unwarranted to prolong an investigation that has no substantive justification. By the department’s own standards, this matter should be closed now as to Judge Gonzales." 

You don’t suppose he wants this to end yesterday because an Obama Administration might be less willing to shield Gonzales’ role by sustaining Bush’s executive privilege claim, do you?

I’m slowly working my way through the Begs to Congress of the Big Two and a Half. And I’m struck by the way the Chrysler beg basically argues that it’ll be cheaper for the government to give a loan now.

Chrysler doesn’t say so explicitly, but it is seeking money to carry it until such a time as some other company will buy it.

Chrysler remains focused on developing partnerships, strategic alliances or a consolidation as a fundamental element of its restructuring to expand its product portfolio, generate incremental revenue, and create additional operational synergies related to manufacturing, purchasing and distribution.

[snip]

Further partnership, restructuring and consolidation is required for the industry to be viable in the long-run.

Thus, even though it does present its reorganization plan to prove it is making necessary changes, it never really claims it–Chrysler, as a free-standing entity–will return to viability by itself (in fact, it spends a few sentences bitching about the Daimler takeover). 

So it needs to present a case for why the government should bridge it to the point where it can be purchased, rather than let it go into bankruptcy. Again, without saying so explicitly, it suggests the money it would get from the government–$6 billion from the DOE funds intended to retool for more efficient cars, and a $7 billion loan here, for a total of $13 billion–would serve the same bridging function as a Debtor-in-Possession loan that it would need for bankruptcy.

Chrysler believes that the amount of DIP financing that it would need to remain viable even during a relatively short bankruptcy (just one year) would approximate $12 to $15 billion. And, even that estimate presumes that financing remains available for the company’s dealers and customers, which cannot be counted on given current market conditions.

If financing for its dealers is unavailable from traditional sources during the Chapter 11 process (as Chrysler must assume would be the case), then Chrysler would need at least $5 billion of additional DIP financing just to support its dealers, pushing the expected total size of the year-one DIP financing need approximately $17 to $20 billion.

The enormous size of the DIP financing facility that Chrysler would require is due to many factors, including (i) the likelihood that many consumers will shun purchasing vehicles made by a manufacturer that is in chapter 11, thereby starving the company of revenue while it attempts to reorganize; (ii) the extraordinary imperiled financial state of the automotive suppliers will likely leave the Bankruptcy Court with no choice but to approve billions of dollars of payments to many of its suppliers on account of "pre-petition" claims just to keep the suppliers themselves afloat and the assembly lines moving at Chrysler; (iii) in addition, Chrysler expects that many suppliers will eliminate any trade credit during its chapter 11, thereby instantly consuming billions of additional dollars of working capital; and (iv) the incurrence by Chrysler of significant professional fees on account of the bankruptcy proceedings.

Given the current adverse credit markets, we would note [sic] expect DIP financing of such size would be provided by Chrysler’s existing lenders or by any other private source. Accordingly, the DIP would have to be provided by the U.S. Government.

It then sketches out what would happen if, instead of Chapter 11 bankruptcy, Chrysler simply liquidated, including the loss of 193,000 jobs between Chrysler itself and dealerships. It ends by arguing that a $7 billion bridge loan would be cheaper than the $17 to $20 billion it would need for bankruptcy financing or the social costs of liquidation (at this point, it doesn’t mention the $6 billion DOE money).

Management fully recognizes that this is a significant amount of money. However, the Company believes this request is the least costly alternative considering the options we face. it provides the least detrimental effect on human capital and the stimulus necessary to prevent further economic decline, if not outright economic depression.

All of which leaves me with one question. What of the $6 billion DOE loan? Given all the talk about partnerships and consolidation, shouldn’t we taxpayers get some input into what happens with such a consolidation. Shouldn’t we have some guarantee that that $6 billion doesn’t get eaten up by Dongfeng motors, at such a time as it decides to buy Chrysler? What if Chrysler doesn’t get that cash, and some innovative upstart does?