Auto bailout

Yesterday, the Congressional Oversight Panel released a report which concluded: "Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount. The estimates of loss vary."  Treasury has admitted $23 b. may be subject to "much lower recoveries."  CBO recently raised its estimate of taxpayer losses from TARP investments to the auto industry to 73% or $59 b.

The COP report is particularly detailed in its recounting of the history of the auto industry bailout and its analysis of where we stand today.  It made numerous recommendations for Treasury to clarify its objectives, to increase the transparency of its actions, to order full financial disclosures from the industry, to provide a legal justification for its intervention, and to consider placing its GM and Chrysler shares in the hands of "an independent trust that would be insulated from political pressure and government interference."

By my reading, Stan did not disagree with anything I posted about Cash for Clunkers.  None of the three criticisms of the C4C program that he addressed were leveled by me.  My criticism is that it is a waste of assets, and that a waste of assets necessarily makes us poorer.  But it is worth revisiting the each of these popular criticisms in turn, to figure out which of them have merit:

1) C4C isn’t going to increase total sales of new cars; it’s just going to accelerate buying that would have occurred anyway.

Picking up on an earlier post, it appears that the holders of Chrysler's secured debt will have their day in court -- appeals court to expedite the process.  From the Wall Street Journal today:

The Second U.S. Circuit Court of Appeals in New York said it would hear an appeal by a group of Indiana pension funds challenging the sale of most of Chrysler's assets to the company's proposed partner, Fiat SpA of Italy. Oral arguments in the appeal will begin Friday, according to the court's order. Chrysler had hoped to potentially exit bankruptcy as soon as this week.

The article goes on to point out the main issue:

Senior lenders owed $6.9 billion would receive $2 billion, giving them a recovery of about 29 cents on the dollar.

Yesterday, President Obama's auto team anonymously briefed key reporters on the impending takeover of GM.  Uncle Sam will become a 70% shareholder, the UAW will become a 20% shareholder, and bondholders and other creditors will share the rest.  This is not going to come to a happy end for taxpayers for several reasons.  First, the taxpayers will not get back all of $19.4 b. they've already "invested" in GM, nor all of $30 b. in loans they're about to be saddled with.  Second, auto parts firms will soon need additional funds as well.  Third, the collateral damage to Ford and other companies making cars in the U.S. will not be small.  Finally, despite Administration assurances that they will be "reluctant owners," eager to sell, it will take a long time to extricate ourselves from this mess.

I confess, I have no idea what "absolute priority" means after reading this article in The Washington Post.  Or maybe I have no idea what "senior" or "secured" means.  Read for yourself:

Chrysler filed for Chapter 11 bankruptcy protection Thursday after a handful of lenders holding some of the company's senior secured loans declined to accept the government's offer of 33 cents on the dollar. The dissident senior lenders contend that the sale illegally rewards junior creditors at their expense, despite laws granting "absolute priority" to the senior lenders. The UAW, for instance, would get the bulk of its pension payments, the dissident lenders said.

Why is Chrysler now frequently referred to as "storied?"  Why is this bankruptcy any more "surgical" than any other bankruptcy with this much advanced negotiation?  Let's get to the heart of the government's involvement -- the non-employee creditors, via The New York Times (the key paragraph is in bold):

Last-minute efforts by the Treasury Department to win over resistant Chrysler debtholders failed Wednesday night, and the administration’s frustration was evident in President Obama’s remarks.

But a group of Chrysler’s secured lenders asserted that the administration was skirting bankruptcy laws by forcing them to take a larger loss on their debt than other stakeholders in the company. They said their proposals to restructure Chrysler had been ignored by the government.

Uncle Sam will become a 50% owner of General Motors by forgiving $10 b. of taxpayer money under the plan announced yesterday.  Billions more of taxpayer money is likely to be put at risk, and we'll see how much better the federal government can run GM than its management despite promises from unnamed federal officials that the shares will be put in trust, as if management will have some authority.

On March 30, the market tanked 3.48% when President Obama asserted more power over GM, raising the possibility GM might be nationalized.  GM shares droped 46% in two days, from a $3.62 close on March 27 to $1.94 on March 31.  Yesterday, the market reacted in the opposite fashion, pushing GM stock up 21% to a close of $2.04 versus Friday's close of $1.69.

There were two interesting pieces in The New York Times today about bankruptcy proceedings.  It was nice to see this sound advice via Andrew Ross Sorkin's Dealbook:

“If I’m a bondholder, the best forum for me is in front of a judge,” said Daniel Alpert, a founding managing director of Westwood Capital, an investment bank. “Let’s face it: the biggest problem at G.M. is still its cost basis, and that’s chiefly labor,” he added, suggesting a judge would look at the situation dispassionately.

So far, bondholders have been offered 8 cents on the dollar in cash, 16 cents on the dollar in new, unsecured debt, and a 90 percent stake in G.M. G.M.’s bonds closed Monday at 16 cents on the dollar. Hoping to apply some public pressure to the bondholders, Senator Carl Levin, Democrat of Michigan, said Monday that if G.M.’s bondholders “refuse to work out a deal, they will likely end up empty-handed.” (That is not exactly true.)

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.

In a pleasant surprise, the Obama Administration pushed back against inadequate progress by automakers in their restructuring:

President Obama announced today that his administration will withhold additional federal aid to General Motors and Chrysler unless the ailing U.S. automakers submit acceptable restructuring plans, but he vowed that the American auto industry will not be allowed to "simply vanish."

It is my preference that the automakers were in bankruptcy and doing their restructuring there already, without a direct line of credit from the US taxpayers.  It is also my hope that the Obama Administration understands the difference between having an auto industry and having these three particular companies manufacturing autos.  But today's announcement is better than what I had expected.