Bailed Out Bank, JP Morgan, Dooming Chrysler

The WSJ confirms what we’ve all probably suspected: the creditors that are forcing Chrysler into bankruptcy are the same banks that have been surviving only with the help of the federal government. And of course, they are refusing to offer the same generosity to Chrysler.

Banks that loaned Chrysler LLC $6.8 billion are resisting government pressure to swap more than $5 billion of that for stock to slash the car maker’s debt, according to people familiar with the matter, hindering Chrysler’s effort to restructure outside of bankruptcy court.


The lenders, which include J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley, hold great influence in moving the process along. As holders of secured debt, they have the right to take control of Chrysler plants, brands and other assets, which were pledged as collateral for the loans, if the company files for bankruptcy protection.

As a result, Chrysler may be worth more to the lenders in a bankruptcy liquidation than if they agree to restructure the debt, and the government has less leverage to force the banks to make concessions.

The negotiations show how the government’s involvement in both banks and industrial companies is creating uncomfortable circumstances: The U.S. has given aid to some of the very banks that are demanding tough terms from Chrysler, also a recipient of government loans.


The Treasury Department began talking with the banks on Wednesday. The bailout money these banks took from the Troubled Asset Relief Program "hasn’t been mentioned, but everyone is aware that issue is there," said a person familiar with the talks.


The J.P. Morgan position, said these people, is that concessions by Chrysler’s creditors should be treated as they would be in a normal bankruptcy — meaning the billions of dollars of government debt and the UAW retiree health-care obligation should be wiped out before the secured lenders lose anything on their $6.8 billion.

JP Morgan has been the recipient of bailout love in many forms: direct receipt of TARP funds, the Fed’s honoring of huge loans JP Morgan made, AIG counter-party funds, and low-risk sweet-heart deals for JP Morgan to "rescue" other banksters–for a total of somewhere between $27 billion and $300 billion. And of course, JP Morgan has already been using its TARP funds for acquisitions, not loans. 

But it is unwilling to take a haircut on loans of $2.5 billion that represent a miniscule percentage of all the welfare it has gotten from the Federal government.

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Honda, Toyota, Fail More in December than Two of Three "Failed" US Carmakers

Car sales in December were–as expected–still way down as compared to last year. But as with November, there were some interesting numbers last month. Remember–these are year on year declines (which suggests the total market is down slightly less than it was in November):

Make      Decline

Chrysler   53%
Hyundai   48%
Toyota      37%
Honda      35%
Ford          32%
Nissan      31%
GM            31%
Daimler    25%
VW            14%
Subaru      7.7%

I’m still looking for Hyundai’s US numbers, and Chrysler (which I suspect really tanked) won’t announce until later in the day.

While GM and Ford still lost more sales across the year than Toyota and Honda (because they also tanked during the gas price crash of the summer), their performance against Toyota and Honda more recently demonstrates the degree to which recent sales are a credit driven issue, and not what Richard Shelby likes to claim is a failed business model. 

Moreover, there is better news for Ford in the numbers, as its market share is beginning to rise for the first time since 2001.

Ford took an optimistic view of December’s results, noting that its December market share rose to 14.6%, up 0.7 percentage point from a year ago — the first time since 1997 it had achieved a market share increase for three straight months.

"This is a strong ending to…a very challenging year," said marketing chief Jim Farley. Ford projected a fourth-quarter 15% market share for Ford, Lincoln and Mercury — beating the year-ago figure for the first time since 2001, it said.

I keep looking at these relative numbers because we’re basically looking at two questions in the auto market right now. First, who can survive in the next two years, as the market for cars remains at these contracted levels? Because of the debt the American companies have, the answer to that question is undoubtedly the Japanese car companies. But the other question is who can survive best over the next two years? The rules of the game have changed, and surviving best will be as much about managing inventories on a month to month basis as anything else. And Ford, at least, (which outperformed Toyota and Honda last month as well), looks like it is winning that game in the short term.

Particularly as more people realize that Ford is somehow "different" than GM and Chrysler (because it didn’t need a bailout), Ford has the opportunity to really turn its brand image around. Read more

George Bush Spent $4 Billion to Kill Chrysler–on Obama’s Watch

I’m convinced. George Bush just spent $4 billion (of your money) to kill Chrysler.

In his speech announcing the auto relief, Bush claimed he didn’t want to leave the auto crisis to his successor:

… there’s too great a risk that bankruptcy now would lead to a disorderly liquidation of American auto companies. My economic advisors believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry. It would worsen a weak job market and exacerbate the financial crisis. It could send our suffering economy into a deeper and longer recession. And it would leave the next President to confront the demise of a major American industry in his first days of office.

He implied he had provided enough to GM and Chrysler to give them three full months to stave off bankruptcy.

First, they will give automakers three months to put in place plans to restructure into viable companies — which we believe they are capable of doing. 

Yet he also described giving them enough money to enter bankruptcy in orderly fashion.

Second, if restructuring cannot be accomplished outside of bankruptcy, the loans will provide time for companies to make the legal and financial preparations necessary for an orderly Chapter 11 process that offers a better prospect of long-term success — and gives consumers confidence that they can continue to buy American cars.

But he didn’t give Chrysler enough to stave off bankruptcy. 

Bush gave Chrysler $4 billion, all on December 29. Just one payment. Unlike GM, Bush is not giving Chrysler a second and third chunk of money after the new year (GM will get $4 billion on December 29, $5.4 billion on January 16, and $4 billion on February 17).

That already suggests that Bush doesn’t imagine Chrysler will be around after the New Year. Furthermore, that $4 billion is $3 billion less than Chrysler said it needed to remain viable (and to pay its suppliers). 

Now, it’s possible that Bush gave those amounts anticipating that GM would eat up Chrysler. After all, Bush actually gave GM more than what it asked for. GM had asked for $4 billion in December, another $4 billion in January, and $2 billion in February (with the possibility of coming back for another $8 billion later next year). Read more

The Cerberus Mysteries Deepen

I don’t mean to alarm you. But I’m getting more and more worried about Cerberus’ role in the auto relief signed last Friday.

First, as plunger noted, Cerberus just suspended the ability of its investors to withdraw from its fund.

Cerberus Capital Management CBS.UL plans to pay 20 percent of year-end withdrawals in cash and suspend the remaining withdrawals for investors in its Cerberus Partners fund, television network CNBC said on Tuesday.


We believe it is necessary to suspend withdrawals in part so as to [sic] to unduly increase the illiquidity of the fund for remaining investors and to permit the fund to take advantage of the buying opportunities currently available in this depressed market on a limited basis,

Now, since I’m not an investor in Cerberus, this doesn’t affect me directly. But I am rather troubled that Cerberus took this move just days after the Federal government loaned $4 billion to a Cerberus subsidiary without requiring that Cerberus reveal any of its financial data publicly. Turns out, we all only had to wait a few days to get a sense of their financial status … and it’s not good.

Then, there’s the continued, seemingly universal uncertainty about Cerberus’ role in the loans to Chrysler and GM. 

Press reports are conflicted over the terms that Cerberus agreed to in return for the assistance. While the Wall Street Journal reported over the weekend that Cerberus had agreed to backstop the loan by having Chrysler’s financial services subsidiary pay the government its first $2 billion in earnings or dividends, the New York Times said that guarantee applied only if the subsidiary was sold.

It’s unclear whether Chrysler Financial is currently profitable or pays dividends, since Cerberus hasn’t publicly disclosed such information. Nor has Cerberus said whether Chrysler Financial or any of its assets are for sale. It has also not disclosed who potential buyers for the finance sub might be.

The terms of the government loan, as published on the Treasury Department’s website, specify that Cerberus could make taxpayers whole for losses of up to $2 billion on the facility. But those terms are prefaced with the phrase, “to the extent permissible under existing agreements.”

“What does that mean?” asked William Bratton, a law professor at Georgetown University, who added that the “vague” wording made it sound as if the agreement depended on waivers from Cerberus’ lenders. Read more

Does Bob Nardelli Work for Cerberus or Chrysler?

The NYT has caught onto something we’ve been discussing over the weekend: Cerberus is apparently trying to use the bridge loan as a convenient means to ditch Chrysler (pity for Cerberus it’s not in Nebraska, where it could just leave Chrysler at a hospital under that state’s safe haven law). Their story includes a detail that adds to questions I’ve been mulling about Bob Nardelli’s role in all this.

Cerberus officials lobbied the White House last week to prevent the private equity firm from being held responsible for the Chrysler loans if the automaker cannot repay them, according to people with knowledge of the talks who declined to be identified because the discussions were private.

But Chrysler executives, who are responsible for the day-to-day operations of the company, were shut out of the discussions, those people said.


A Chrysler spokeswoman, Lori McTavish, declined to comment Sunday on whether Mr. Nardelli had played a role in final loan negotiations with the White House.

I started wondering about which company Nardelli works for last night, when I read this line from Chrysler’s beg to Congress.

Mr. Nardelli receives an annual salary of $1 from Chrysler.

This appeared in a document dated December 2: a few weeks after John Tester had asked Nardelli whether he would be willing to take a $1 salary (Nardelli said he would, with no hesitation, but didn’t say he was getting just $1), but before last week’s loan on which that $1 salary was premised. Given the way that Cerberus’ and Chrysler’s interests appear to be diverging wildly, I started wondering who actually employed Nardelli. Has he always been paid $1 by Chrysler, and $11 million by Cerberus, which would make a bit of sense, since he’s basically been pursuing Cerberus’ goal of repackaging Chrysler so it can be sold off (or, alternately, left in a hospital in Nebraska).

But there is reason to believe that Nardelli is being put in the untenable position of representing Chrysler’s interests while Cerberus works to undermine his efforts. Who can forget, for example, the moment when Bob Corker told Nardelli that Cerberus was unwilling to invest any money in Chrysler. That appeared to be news to Nardelli. And, consider the way that Chrysler’s beg largely consisted of proof that bankruptcy would be the most expensive outcome for the US. Read more

Cerberus Still Seeking to Privatize Profit, Pass on Risk?


Cerberus appears to be seeking to capitalize on the woes of the auto industry to do two things: first help its Republican buddies break the UAW, and after doing so, pawn off its unwanted "investment" in Chrysler onto the same union. I’m not sure I understand all the steps in this process, yet, but here are three data points.

Cerberus Protects Client Retirees But Not Chrysler Retirees

Let’s start with Cerberus’ statement on Friday in response to the bridge loan announcement. It celebrates the bridge loan as an opportunity to wring concessions from two stakeholders: bond-holders and union labor.

In addition to this, Cerberus believes that concessions by all relevant constituencies will be required to facilitate a full restructuring and recapitalization of Chrysler. In order to achieve that goal Cerberus has advised the Treasury that it would contribute its equity in Chrysler automotive to labor and creditors as currency to facilitate the accommodations necessary to affect the restructuring. Unless Chrysler’s labor costs can achieve parity with the foreign transplants, and without the restructuring of Chrysler’s debt, Chrysler cannot be restored to long-term health and the government loan will be unlikely to be fully repaid.

As seems to be true of all Republicans talking about concessions from stake-holders, Cerberus fails to mention any concessions from dealers, a critical requirement for any successful restructuring.

But what I like best about Cerberus’ statement (as in, like not at all) is the way it excuses its unwillingness to put any Cerberus money into Chrysler by appealing to America’s retirees.

Cerberus’ investors are comprised of pension and retirement plans (including funds invested for teachers, organized labor and municipal employees), charitable and educational endowments, fund-of-funds, and individual family savings. Cerberus is, therefore, entrusted with the life savings of many retirees, teachers, municipal workers and ordinary citizens.

As I’ve suggested, one of the two ways the UAW can meet Bob Corker’s Cerberus’ demands is to agree to allow Chrysler to renege on its promises to Chrysler retirees.

In short, Cerberus is pleading that it may require UAW retirees to give up their pensions because it must protect the pensions of other retirees. For some reason, Cerberus must have thought that logically inconsistent argument would nevertheless be more persuasive than admitting it might demand UAW retirees to give up a piece of their retirement so as to protect the current earnings of John Snow and Dan Quayle.

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Chrysler Closes ALL Its Plants

chrysler-07_photos_ext_pt_09.thumbnail.jpgI guess the Cerberus figures they need to do something more to get Bush’s attention, given that he continues to dawdle on a bridge loan.

Chrysler announced today it will close all 30 of its manufacturing plants for a month starting Friday.


Tighter credit markets are keeping would-be buyers away from their showrooms, Chrysler says. Dealers are unable to close sales for buyers due to a lack of financing, and estimate that 20 to 25 percent of their volume has been lost due to the credit situation.

Chrysler claims it is nearing the minimum level of cash it needs to run the company and will have trouble paying bills after the first of the year. [my emphasis]

Merry Christmas, W Scrooge, they said. Bah Humbug!! Said Mr. Bush in return.

In other shutdown news, GM will halt construction of its Flint Volt plant.

It’s Your Local Car Dealer’s Fault that a Congressional Auto Bill Failed

The NYT, never an institution to quit when it’s behind, continues its crappy reporting on the auto crisis. In today’s installment, Micheline Maynard uncritically regurgitates GOP spin on why the auto bill failed last night, buying the GOP claim that it’s the UAW’s fault that Congress couldn’t give the auto companies a loan.

Opponents of a Congressional bailout for Detroit auto companies laid blame for its defeat Friday on the United Automobile workers union, which refused to agree to grant wage concessions in 2009 as a condition of the deal.

The entire article continues by totally misrepresenting the reason the UAW refused the GOP "deal."

Representatives for the union, which had already accepted a series of cuts in its current contract, sought instead to push any more concessions back to 2011, when the U.A.W.’s contract with Detroit auto companies expires.

Um, no. As the quotes included in the article make clear, the problem wasn’t starting concessions now. The problem was completing them by an arbitrary date within the next year. 

In a statement Thursday night, the union said it was “prepared to agree that any restructuring plan should ensure that the wages and benefits of workers at the domestic automakers should be competitive with those paid by the foreign transplants. But we also recognized that this would take time to work out and implement” using programs like buyouts and early retirement offers to bring in new workers at lower rates.

“Unfortunately, Senate Republicans insisted that this had to be accomplished by an arbitrary deadline,” the statement said.


Mr. Corker said he proposed that wages and benefits of U.A.W. members be competitive with lower rates at American plants run by foreign rivals — Toyota, Honda, Nissan and B.M.W. — during 2009, and offered the union the opportunity to pick the date next year when the changes, which would be certified by the Labor Department, could be put in place.

See?!?! A deadline–and end point, not a beginning point. (And never mind that you could get mired in the question of what "competitive" means for that entire year.)

Maynard’s big problem, though, is in ignoring the underlying point: the UAW was the only stake-holder being asked to accept such a deadline.

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Hysteria over a $15 Billion Loan, But Not $285 Billion in Takeovers?

Man, the NYT’s pathetically bad reporting on the auto bridge loan continues.

David Sanger writes a story purporting to be news that presents a loan to the auto industry–with conditions–as a crisis of capitalism of epic proportions.

But what Mr. Obama went on to describe was a long-term bailout that would be conditioned on federal oversight. It could mean that the government would mandate, or at least heavily influence, what kind of cars companies make, what mileage and environmental standards they must meet and what large investments they are permitted to make — to recreate an industry that Mr. Obama said “actually works, that actually functions.”

It all sounds perilously close to a word that no one in Mr. Obama’s camp wants to be caught uttering: nationalization.

Not since Harry Truman seized America’s steel mills in 1952 rather than allow a strike to imperil the conduct of the Korean War has Washington toyed with nationalization, or its functional equivalent, on this kind of scale. Mr. Obama may be thinking what Mr. Truman told his staff: “The president has the power to keep the country from going to hell.” (The Supreme Court thought differently and forced Mr. Truman to relinquish control.)

The fact that there is so little protest in the air now — certainly less than Mr. Truman heard — reflects the desperation of the moment. But it is a strategy fraught with risks.

The first, of course, is the one the president-elect himself highlighted. Government’s record as a corporate manager is miserable, which is why the world has been on a three-decade-long privatization kick, turning national railroads, national airlines and national defense industries into private companies.

The second risk is that if the effort fails, and the American car companies collapse or are auctioned off in pieces to foreign competitors, taxpayers may lose the billions about to be spent.

And the third risk — one barely discussed so far — is that in trying to save the nation’s carmakers, the United States is violating at least the spirit of what it has preached around the world for two decades. The United States has demanded that nations treat American companies on their soil the same way they treat their home-grown industries, a concept called “national treatment.” [my emphasis]

"Not since Truman," Sanger writes, "has Washington toyed with nationalization."

"Not since Truman," that is, so long as you ignore the very recent nationalizations of AIG, Fannie, and Freddie.

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The (Draft) Auto Bridge Loan Plan

Here’s a copy of the draft plan. It closely resembles what we’ve been hearing: the designation of an "auto czar" (AC–though it is called a President’s Designee) who will dispense funds to those auto companies that need it, with the requirement that by March 31, the companies restructure with the oversight of the AC. The AC is empowered to assist in negotiations with retirees, unions, dealers, and creditors right now, but can come back to Congress and ask for more authority if need be (presumably, in case this person had to make bankruptcy court type decisions). The taxpayers get warrants and or a piece of Cerberus in exchange for their trouble.

Note, the AC must be picked by the first of the year. In other words, George Bush, not Barack Obama, will get to choose the AC.

Here are the other interesting details:

There’s one clause which I’ve dubbed the "Nancy Pelosi clause" requiring the car companies to drop their suits against increased emissions standards in CA and other states:

(g) WITHDRAWAL FROM CERTAIN ACTIONS.—The terms of any financial assistance under this Act shall prohibit the eligible automobile manufacturer from participating in, pursuing, funding, or supporting in any way, any legal challenge (existing or contemplated) to State laws concerning greenhouse gas emission standards.

And there’s a clause which I’ve dubbed the "Atrios clause" requiring car companies to consider moving some of their SUV capacity into producing transit vehicles:

(a) IN GENERAL.—Each eligible automobile manufacturer which receives financial assistance under this Act shall conduct an analysis of potential uses of any excess production capacity (especially those of former sport utility vehicle producers) to make vehicles for sale to public transit agencies, including—

(1) the current and projected demand for bus and rail cars by American public transit agencies;

(2) the potential growth for both sales and supplies to such agencies in the short, medium, and long term;

(3) a description of existing ”Buy America” provisions, and data provided by the Federal Transit Administration regarding the use or request of waivers from such provisions; and

And there’s a provision I’ll call the "Delta/Northwest clause" which requires the car makers to get rid of their corporate planes:

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