Auto Bailout: Tough Love
President Obama gave GM and Chrysler tough love this morning. He rejected their plans, which he concluded wouldn't insure their long-run viability. Despite some hefty concessions by labor, management, and bondholders, he demanded more concessions in an effort to protect taxpayers and to provide a future for the auto workers that remain. Over the weekend, he forced out GM CEO Rick Wagoner, cut Chrysler loose unless it can get Fiat to take it over within 30 days, and gave GM 60 days to come up with a better plan.
The good news is that this saved the taxpayers a lot of money, at least for now.
The bad news is that such heavy handed intervention scared the markets into believing the government will run GM and a lot of banks after all. The S&P 500 dropped 3.48%.
President Obama said the B word.
"I know that when people hear the word "bankruptcy" it can be unsettling, so let me explain exactly what I mean. What I'm talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so that they can get back on their feet and onto a path to success; a tool that we can use, even as workers staying on the job building cars that are being sold."
"What I'm not talking about is a process where a company is simply broken up, sold off, and no longer exists. We're not talking about that. And what I'm not talking about is a company that's stuck in court for years, unable to get out."
What Mr. Obama meant was, he will need a bankruptcy court to force bondholders into accepting 8 cents on the dollar in cash, 16 cents in unsecured debt, and 90% of GM's equity, which won't be worth much for a long time. Some journalists have described this as a quick rinse cycle.
The main reason many had thought bankruptcy couldn't be used was that no new car buyer would accept a warranty from a company about to enter bankruptcy. Mr. Obama solved that by declaring the government would back the warranties on all GM cars (and Chrysler too if Fiat takes them over).
The next criticism Mr. Obama faced was why didn't he hammer failing banks and AIG as hard as he did GM and Chrysler. The short answer is he lacked the legal authority, and he lacked the time to impose such conditions when the immediate demise of these financial institutions threatened terrible damage to the economy.
On behalf of the taxpayers, I'm applaud President Obama's tough love.
On behalf of the markets, I hope President Obama will get out of the auto business as soon as possible.
GIving them more bailout
GIving them more bailout money would be "getting into the auto business". Not giving them money is "getting out of the auto business".
Markets go up and down. Big deal.
There are a lot of jobs at stake. More jobs in the parts suppliers and support industries than GM and Chrysler combined. Protecting people during the turbulent "creative destruction" and easing the transition has to be the primary goal for protecting the economy. Markets and wealthy asset owners can take care of themselves.
Good GM/Bad GM
"President Obama gave GM and Chrysler tough love this morning."
Well, we'll see.
As Nixonista John Mitchell told people in his day, "Watch what we do, not what we say".
Firing Wagoner and saying demanding things while giving them more money and more time to come up with a new plan that will give them more money and more time ... not so tough.
Keeping Wagoner and dropping them into Chapter 11 right now with the govt guaranteeing the financing would be tough love.
BTW, the WSJ reports that the "good bank/bad bank" model that the govt hasn't had will to actually force on any bank yet is its plan for GM...
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The [plan] would in essence split both companies into their "good" and "bad" components. The government would like to see the "good" GM to be a standalone company, according to an administration official. The "good" Chrysler would be sold to Fiat SpA, assuming that deal is completed, this person said....
GM looks increasingly like it will be forced into filing for bankruptcy protection, sometime in mid-to-late May, in a plan where the automaker breaks into two companies, the surviving entity a "new GM" that maintains key brands such as Chevy and Cadillac and some international units, say several people familiar with the situation.
Stakes in this new GM could be given to creditors and UAW members. It is also possible the new company could be sold whole or in parts to investors.
Under this plan, the "good" GM would not be expected to hold the tens of billions of dollars in retiree and health care obligations that hurt the auto maker in recent decades. Instead, those obligations would be transferred to an "old GM," made up of less-desirable brands like Hummer and Saturn, and underperforming plants and other assets. This part of GM would likely sit in bankruptcy much longer while a buyer is sought for the parts or it is wound down. Proceeds from the sale of old GM would go to pay claims to various creditors, including GM retirees.
"That is the plan, to the extent it comports with the bankruptcy laws," said one person familiar with the matter...