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Dan Quayle and Cerberus Holding American Economy Hostage

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(Graphic by twolf)

Chris Dodd has signaled that he will let Dan Quayle’s Cerberus hold GM–and the American economy– hostage to get out of its crappy gambling bets.

Senate Banking Committee Chairman Chris Dodd said General Motors Corp. Chief Executive Richard Wagoner should be replaced as a condition of federal aid and Chrysler LLC may have to merge to survive.

[snip]

“Chrysler, is, I think, basically gone, probably ought to be merged,” Dodd said. Ford Motor Co. is the healthiest domestic automaker, he said.

Chris Dodd is right: Chrysler undoubtedly has to merge to survive. That’s partly because it does not have the global reach of GM and Ford. Because GM and Ford have significant sales in China and India and other quickly growing markets (which have been netting much higher profits), they can offset lower profits or even losses here in the States. But Chrysler doesn’t have that, so it can’t become profitable–across all its operations–as quickly as GM or Ford can. 

Chrysler also doesn’t have the product development pipeline its domestic competitors do. Ford has had increasing success of late offering either new US models on Mazda or Volvo chassis (like the Fusion, which competes well in quality and safety with the Accord and Camry), or bringing successful European models to the US (Focus in the past, and Fiesta and Mondeo in the near future). GM has the new Malibu (which is also gaining market share in the sedan segment), with the Cruze and Volt in the works (as well as any Opel models it decides to bring to the US, though the threats to shut down Saturn don’t bode well on that front). Chrysler’s got nothing equivalent. 

But understand: GM acquiring Chrysler–which is the most discussed option–offers little benefit to GM. Sure, the merged company would get to sell either the Renaissance Center in downtown Detroit or Chrysler’s fairly new digs up north; you could find efficiencies in headquarter structure (if you were a healthy company to begin with). But everyone agrees that two of GM’s most urgent problems are that it has too many brands and too many dealerships. And you want to fix that by making it take on 3,300 more dealers and three more brands? This is Congress’ idea of a really smart restructuring?

Making a Chrysler bailout contingent on GM’s acquisition of it is two things. First, a refusal to do the most logical thing with it, nationalization. Read more →

Senate Auto Hearing: “Russian Roulette with the Economy”

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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. Read more →

Chrysler: DIPs versus Begs

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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; Read more →