The Auto Bridge Plan
Here’s what Barney Frank’s Financial Services Committee is proposing to bail out the US auto manufacturers, using money from TARP.
- Short-term Operating Plan – The automaker must submit a short-term operating plan that describes the intended use of the loans, including the commitment of resources to develop a long-term restructuring plan and repayment of the loan to taxpayers with interest.
- Long-Term Restructuring Plan – By March 31, 2009, loan recipients must submit to Treasury an acceptable restructuring plan for long-term viability and international competitiveness, including meeting enhanced fuel efficiency standards and for advanced technology vehicle manufacturing,and restructuring of existing debt.
- Executive Compensation and Corporate Governance – All executive compensation restrictions from TARP apply to loan recipients for the duration of the loan plus the following additional restrictions:
- No bonuses to employees making more than $200,000 (which Treasury will adjust for inflation).
- No golden parachutes under any circumstances.
- No compensation plan that could encourage manipulation of reported earnings to enhance compensation.
- Warrants – Treasury must obtain warrants from each loan recipient (or economic equivalent in the case of a privately held firm) equal to 20 percent of the loan or such greater percentage as may be determined by Treasury in consultation with the Oversight Board.
- Dividends – Recipients may not pay any dividends for duration of the loan.
- Acceleration of Repayment for Failure to Comply – If a company receiving a loan fails to prepare an acceptable restructuring plan, the Treasury can demand accelerated repayment of the loan.
- Terms of Loans:
- Term: 7 years (or longer as may be determined by the Oversight Board).
- Interest Rate: 5% for first 5 years and 9% thereafter.
- Super Seniority: All other obligations and liabilities of a recipient will be subordinate to the loan—putting the taxpayer in the first position for repayment.
- No prepayment penalty.
I’m most interested in requirement for the March 31, 2009 long-term restructuring plan. The demands on fuel efficiency should be more precise. And the emphasis on "international" profitability–rather than "domestic" profitability is a bit of a gimmick, IMO. GM will be able to show international profitability a lot quicker than it will be able to show domestic profitability because of its ongoing legacy costs and the health care costs that it bears but some of its competitors don’t.
I’m going to go read the draft bill now–what are your thoughts on this?
Barney is not wasting anytime.
That’s the timeframe we’re talking–GM has just a few weeks after that to try to go into Chapter 11, probably, if it doesn’t get any money.
If one believes all the stuff shoveled out from Waggoner and Co. *g*
But even Rick Waggoner says that GM has between $11-16 Billion cash left in hand, and with their stated $2 Billion per month cash burn rate, I’m wondering how December 1, 2008 became the critical date.
Looks like Frank is learning from the TARP debacle. One thing I like about using TARP money is that it gets that money out of Treasury’s hands. Paulson’s doing a heckofajob, Brownie.
I’d like to see congress take a page from Brown’s book and get one or more voting board positions, chosen by Congress–Eyes and ears on the inside.
That is simply language to shut Boehner and Republicans up. He’s using Boehner’s own words.
One area that I’ve been doing a lot of thinking about has to do with the $25 Billion amount of the bailout.
If one were to do a SWAG guesstimate of how the shares of the $25 Billion were to be divvied up, it might go something like this:
1. GM – $9.5 Billion
2. Ford – $8.5 Billion
3. Chrysler – $7 Billion.
GM has stated publicly that they have an ongoing $2 Billion per month cash burn rate.
With this additional $9.5 Billion liquidity loan, GM can therefore continue to pay its bills for another 4-5 months.
This leads to the inevitable conclusion that GM (as well as evidently both Congress and the President-Elect) believes that the credit markets’ current tightness will only last a matter of another 4-5 more months and that GM will then be able to return to a more normal credit market this spring and all will be well.
I don’t know where these folks get their Kool-Aid, but can I say that they appear to have imbibed more than the legal limit?
It’s a really really important question, MD.
The entire car industry world wide is hurting. It’s not clear that’s going to change anytime soon, not least because there are a whole lot of job losses coming, and those people clearly won’t be buying new cars.
Yeah, I think a lot of these folks are wildly optimistic if they believe “let’s just make it ’til Spring and everybody will buy new cars like they’ve always done.”
More likely (or more cynically *g*), everybody playing the bailout game knows the tab is gonna be a whole lot bigger – hundreds of Billions bigger, but asking for what they really need would scare off any
suckerinvestor.Like that deadbeat brother-inlaw who “only” wants a few bucks this week so the kids can eat, but you know damn well he’ll be back next week hat in hand for the back rent, that late car payment, the wifey’s liposuction bill, the kids’ piccolo lessons, etc.
GM as Minnie the Moocher, I can hear Cab Calloway now.
MD – It is not for now till spring. By going down to the last penny, they could probably get to May or so with what they have, maybe a scunch longer if they cannibalize off something here or there. But you cannot run something like GM down quite that far before you attempt a Chapter 11; you have to be able to operate during reorganization. If they were actively contemplating a Chapter 7 liquidation, then you could run down to zero; but they will never actively contemplate that. So, if they are going to be forced into Chapter 11, they are going to go sooner than later, while they still have at least the possibility of having headroom to operate under reorganization. I doubt, for appearances sake to the BK court and trustee/master, they will admit this, but this is the way I figure it. If they are forced to BK, they will go Chapter 11, and will do so either right before or right after the first of the year.
And, to add to the above, with the “restructuring loan”, I think thy would be clear for one whole year, which hopefully would be enough time to stabilize and the economy to recover enough that their normal credit lines return somewhat. They, and their suppliers, are victims of the credit lockup; that is a big part of this too.
I can understand some of GM’s “short-sightedness” with the analogy that their structure is on fire and right now at least, all they want is for someone to come and help put the fire out.
And only after that will there be any real consideration to whether they having a future as a going concern.
But, I’m still of the opinion that there is more than a bit of sleight-of-hand deliberate minimization by Rick Waggoner and Co. as to their real desperate financial straits.
I’m am not now, and have not been for decades, at all impressed by the management of these car companies.
If there were ever text-book examples of how not to manage, these folks would have no peers.
Fat, dumb and happy is about the best one could say. And that is probably far too generous.
And lastly, I’m not against the bailout.
The consequences of the demise (in either Chap 11 or 7) of these companies would have far more profound negative consequences than that of the US taxpayers ponying up a paltry $25 Billion.
I hate the thought of giving our money to a turd like Rick Waggoner and his fellow turdlettes, but the alternative is worse.
I think you are vastly underestimating what is well underway at GM already. Seriously. Most all of the “change” and blah, blah, blah everybody is clammoring so loudly for is, to one degree or another, in process now. Quality of vehicles is way up, and is now approaching being effectively equal to the Japanese, in some cases may be exceeding. Furthermore, Chevy is on a serious corporate shift to high fuel efficiency vehicles. And then there is the Volt program. The stuff is there, you are terribly underestimating the degree to which this is the case. GM can easily be a very viable entity, and I do not believe they would be here if not for the financial collapse. It was going to be thin while the reformation was in process, no question, but the death screw is the financial system meltdown that occurred before their evolution could gestate fully.
Well brother bmaz, you and I will just have to agree to partly disagree. *g*
I’ve got way too much personal experience with the upper reaches of management at very large old line organizations.
I know that far too often the ranks of upper management at these places are stuffed full of glad-handing, good ol’ boys whose only interest is getting more of their snout in the trough.
I’ve seen it over and over again at insurance companies, banks, telcos, you name it.
Promotion to upper management is based more on who you know, back-stabbing your lesser (of course) rivals, “don’t ever rock the boat”, and “the boss is always right”.
Take GM as an example.
What total lack of comprehension in their upper management would be so blind as to wait until the very last minute of this years skyrocketing gas prices to realize that Tahoes, Suburbans and all of their SUV ilk were going to tank?
Who with any sense at all, much less foresight, would continue blithely manufacturing the world’s worst gas guzzlers until the very last minute after gas prices had doubled and reached this year’s peak?
Who with any sense at all would have built these things in the first place?
And who with any straight face would attempt to sell, and buy, their own bullshit that they were only building what American’s wanted?
Both you and I are of an age where we remember the gas lines of the 1970s, and so are those very same folks who sit atop the management pyramid of these car companies. Our generation!
30, almost 40 years ago, the writing was already on the wall!
How is it that these folks, the apparent “best and brightest” of American industry, as “evidenced” by their elevation to the pinnacle of power at these “vaunted” organizations /snark, how is it that these executives of excellence could fail to see/remember/understand something that was known as obvious and without doubt by lowly peons like you and I?
Caretaking pigs of greed, self-indulgence and self-entitlement!
Don’t get me wrong! There are a lot of good and talented folks in these companies. Yes, the engineering wizards who fought against the tide to product the Volt technology, and many others.
It’s just that it seems a typical common denominator of ascension to upper management in American corporate circles, is that you turn in your brain and replace it with a bigger snout.
Jumping down now from the soapbox to say, where in the world did these teams come from who are playing on Monday Night?
Back to back returns for touchdowns? Did the special teams get replaced with soccer players? Is tackling no longer allowed?
I’m inclined to agree with you, but the problem is picking out which of the top guys are the worst, because you need some continuity in this business.
I don’t see an alternative here, do you? Marcy has been pounding this stuff – we’re talking Chapter 7, not 11, and how many million out of work in the downstream suppliers? Most of whom will be collecting unemployment?
I like the plan above – I’d say we need at least a year before things like healthcare reform and an ease in the credit crunch start having an effect on the bottom line…
I haven’t studied the plan very closely yet, but I agree with this other stuff. We need TIME to pull out of this nosedive.
Does this make you wonder if the timing of the ‘crisis’ had to do with the state of these car companies?
I usually just look at issues in a secular way. But, in this case consider the politics: is someone actively trying to take down the car companies for fun & profit and political advantage? If so, then ask which side the car company CEOs are on. If you don’t feel certain they’re good guys, then giving them money is giving crooks money. It’s unwise. Who has credit default swaps or is ’short’ to ‘insure’ against their failure?
If they’re trying then what are the chances they can get their companies through this? Is it greater than 50%?
What’s the smallest down-payment you can make on this, so that if they fail we’ll have shown we care about auto workers, but also showed frugality? Schedule a payment plan or line of credit if you will and don’t hand it all out unless they can prove their plans require a huge upfront payment. If they have cash on hand then make them use their monies.
Even more, use our money as just a backstop while they use their money first. That way whatever we’ve loaned can be recouped completely.
Don’t trust AND tie your camel.
Bridge loan to nowhere, eh?
No, it is a bridge to everywhere for domestic manufacturing. You want to kill what remaining hard manufacturing is left in this country, go ahead and kill GM. That is what we are talking about here.
Sure. Let’s pay for 4 months. Then let’s pay for another 4 months. And then another 4 months.
The bill reads nicely, but please be honest. That’s all you’ll get for your 25 billion. Four months. There’s no sign that anything will really change, so the slide will continue.
I’m sorry for being consistent. There’s no such thing as a bank to big to (be allowed to) fail. And the same goes for manufacturing. I believe that my ancestors were amoebas. I believe that GM is one, too.
Failure is only for us little people, doncha know? *g*
And full speed ahead at that! *g*
The financial statements of GM are here. GM has $15.8bn in cash and marketable securities on a consolidated basis. They describe plans to reduce the burn rate.
The way I’m reading it, that amounts to saying:
“We are no longer going to spend money we don’t have and that nobody will lend us.” *g*
Hello–I just got here, but I wanted to comment on this statement. I can’t remember which website I was at last night but it showed that the automakers WOULD BE PROFITABLE THIS QUARTER, if, we had universal healthcare. I will go back and look for the entry, however, a bridge loan may pacify GM until Obama can get his health plan going. Also, the automakers mess may help PUSH THROUGH sometype of legislation on health care to help bail out businesses and get credit going again.
Ted Kennedy said he’d introduce health care legislation early in the new year. If we can get that going quickly we might take some pressure off the car companies. But, it has to focus on cost reduction as well as being capable of taking on Detroit’s workers (and there are a lot of them).
That Cash burn rate isn’t right… they used more like $4 billion in October. Plus, the minimum amount of cash they need to operate is 10-12 billion. They’ve got 11 right now. They’ll be out of business in the next 30 days without some sort of TARP or pre-packed bankruptcy.
Interesting – wonder if this proposed loan violates WTO regulations since it is being offered solely to domestic companies.
Interesting. I don’t think so, but do you have a cite for the provision; I would like to look at what you are pondering.
Absent fraud, theft and conspiracy to commit either or both, all benefits to trade-related enterprises and concerns under the bail-out that also fall under one of the five specific agreements arrived at under the WTO structure would be governed by the procedures in the particular agreement.
Gawd, does that look as dry as I think? And I swear I didn’t cut and paste it; it’s the way it works.
Thankfully, none of the five specific agreements covers either “financing products” or industrial produce.
Strange, right? Not so strange when you consider who always wins the negotiation rounds. So why do poor agrarian based countries even bother? Several reasons: first, those countries only have food and human services to compete on the global stage anyway. Second, the conclusion of an agreement is always accompanied by the taking down of some trade barriers, and lots of similar looking stuff surges through with it, possibly even to gain a foothold for future agreements, or at least to establish some “trade facts” to allow for claims or to advance positions in the seemingly [and actually, and intentionally so] interminable dispute resolution procedures. We all should have gone into as international trade relations techies – lots of travel, top drawer food, no end to the work BY DESIGN!
On the other hand, there is practically nothing about the bailout scheme that doesn’t offend the “ceilings” principle. The ceilings principle is aimed at preventing a member country from screwing around with the fundamentals of its economic system just to get around some commitment it made under one of the agreements or more generally to the WTO out of ‘buyer’s remorse’ if you will, or deception, or to take advantage of an unforeseen circumstance.
Technically one could contrive a case for this, and frankly without a great deal of draftingdifficulty thanks to the degree of transparency in administration hypocrisy on the one hand, and whistleblowers, a free press, and the ADHD rampant in so many sharped eyed watchdog/DFH blogging types [the owner of this blog being an outstanding example of that last bunch].
But no one is going to do so, or even want to. Firstly, the entire idea of global stability derives from things like Pax Americana, Bretton Woods, the US dollar, the IMF, the UN, the World Bank. It’s no myth that the US is the ‘most important’ country – in fact, it’s institutionalized. How in hell do you think we get away with acting like such bloodthirsty bores? It’s no just the frickin’ firepower; nor is it just that and the frickin’ hope; the whole thing is designed that way.
And if it wasn’t, then the “special economic circumstances” exceptions clause would arise, and all would be blessed.
No WTO worries here – basically because without the US, there’s no WTO anyway.
Yep, that is basically what I figured, and i had never heard of any language strong enough to get around the “cause we said so” aspect. Which is a real high bar on something like this. It is not like we gave up our sovereignty to the European Union or something akin to what the “Celtic Tiger” is now facing.
sorry for the late reply – been preparing for my 1st and last divorce trial – I was hoping someone with more knowledge of WTO would oblige, so I researched as best I could. The proposed structure of the auto bailout would likely be classified as “government lending to uncreditworthy companies,” which is not banned under the current version of the WTO, but was on a list of five industrial subsidies proposed by the U.S. at the Doha round in Switzerland last year to be banned under a revised WTO agreement. See, http://www.twnside.org.sg/title2/wto……60716.htm. The counter argument by developing nations is that these very same government subsidies were used by past U.S. governments to develop this country’s own industrial superiority. Of course, I hate to put credence or credit to any breath or action taken by any person in the Bush administration, but classic economics would identify the proposed bailout loans as distorting of free trade.
Auto bridge? Is that like the auto train my in-laws in Potomoc take down to Florida every winter?
MadDog – I think you are off. If it is to be 25 billion divvied up now, GM gets a much bigger share. In the first place, they need it worse. Secondly, they are, I think (EW probably has the figure) still 50% or more of the aggregate total of the Big 2.5 auto production.
Yes, but even still, if GM were to get $12.5 Billion or even $15 Billion, with a burn rate of $2 Billion per month, we aren’t talking more “Deliverance” than another couple of months.
What I find amusing (partly because I adore the movies of Denis Arcand) is how, in the days, months, and years leading up to Sept 4th, 476, the Roman Senate voted for several “subvenio” packages, including one to help chariot makers switch over to wheels that made less noise (maybe allowing for the greater enjoyment of violin music).
Thanks for this update EW.
Ross Eisenbrey of the economic Policy Institute has written a few views on the economy and the auto industry. I’ll link to something soon.
In the meantime. Thank you to all who visited my Oxdown. It was a small goal to post one before the 6th anniversary of my 39th birthday…Which is tomorrow.
Thank you EW and Jane for encouraging me to post…
The big issue first and foremost is the reality of the limitations of the public safety net should the three tank now.
Here is my favorite Ross Eisenbrey quote:
Happy 33rd!!!
Ah! Finally middle age hits. Happy Birthday.
Hey, hey…I like your math!
Exactly.
Thanks…Yep, it hits while I run around after three (one 5 years) totally forgetting my age reality!
My 30 was for Loo Hoo…Reply is not working for me …
I put this comment up on an earlier Scarecrow thread:
If they cannot agree on a bailout plan then then better get together to federally assist the states that will be most affected and come up with a back-up plan to the currently “much hit” public safety net for each of the hardest hit states.
Whole towns will die and schools will not have enough money to stay open because of a dying tax base.
Yup!
Or: “Will the last employee leaving shut the lights off in Michigan, Illinois, Ohio, Indiana, Kentucky, and Missouri?”
Exactly.
Boehner now owns the spiral…
BTW
should read “then they better get together.”
You know someone should structure a federal saftey net legislation package for Michigan, Ohio, Indiana, Kentucky and Missouri and then place it side-by-side with the bailout out initiative and make Congress pick.
I know I could win the bet as to which legislation would receive enough votes.
Listen, I agree completely about the more historical criticism. But I still maintain you are giving short shrift to the things that have been initiated. Are they all where you can see them open and notoriously? No. But there is a lot that is there. And as to the quotes immediately above, here is the reason. Because those are (were is more apt) the lines that they made huge profit margins on and they needed that to fuel the rehabilitation/restructuring that is underway. The future was not in those behemoths. So they were riding them while they fixed the part of the company that was the future.
I am not a fan of Rick Waggoner, hang him in effigy for all I care; but he is not the one who has caused the institutional problems for the most part; however, he was not quick enough to take the corrective action. Should have been quicker on the draw and more ahead of the curve instead of behind it. Fully admit that. Whatever. It is what it is.
But it is not nearly the hopeless entity that you and many others are stating it to be. It just is not. Am I being overly rosy? Maybe. But I think I am a lot closer than the bleak denouncers.
I’m more on your side in this scuffle bmaz, but I see Maddog’s point. One the one hand there’s more than enough technical knowledge, expertise and talent in the B2pt5, but on the other, management is bloated with stoopid at every level and almost every turn. What resolves the point for me is that stoopids are mostly trendfollowers and Yes critters, so a lot of them will leave, or be turned out, or just have to be told Do it or it’s the soup line. It’s the top rung in the leadership that has to be trashed, because the dynamics of the industry have particularly rewarded Waggoner types for a number of years and those types aren’t capable of leading change.
But the encouraging thing is that, nasty as the short term implications are, especially for those who haven’t got any more than the short term available to measure change, its the pressures of the quarterly earnings numbers, the annual report and meeting, the share value, the earnings ratio, and from all the interdependent businesses, right down to dealerships, that, IMO, have been a lot more responsible for the entrenchment of the Yes critters, and innovative, daring business leaders have had a lot of other more attractive places to go to innovate and do their daring – like Wall Street.
But…also the web, information technologies, green tech, neuro stuff and, I’m pretty sure from now on, increasingly government.
Now, where my crystal ball goes opaque is not how the entrenched antedeluvians get dumped, but how the necessary new leadership gets empowered. It’s not like they can hold elections and do debates and run negative campaigns and go on SNL – that would never work because it would be too much like a beauty contest, right?
Sure would be fun to watch though…and just about as important.
I don’t doubt you’re right. I’m wondering about the Republican plan to eliminate unions and the Wall Street speculators who might want to take down GM. Do they present additional obstacles to Dem plans to shore up car companies? Is it an insurmountable obstacles with Bush/Paulson still around?
MarkH – If you venture back, I don’t disagree with any of this recent series of remarks you left here. I’ll be honest, I neither understand CDSs and derivatives well enough, nor know enough about the ones behind GM right now (and yes, there are a bunch it looks like) to be able to say anything intelligent on that front. Man, wish I had this technology. It is a concern. So, for what it is worth, my comments, posts, whatever, that have been made over the last few days are all based solely on the traditional car business and engineering factors as I know them. This stuff I know fairly well historically, and I feel comfortable saying what I have. The other stuff I will leave for better voices.
That playcalling by Buffalo at the end of the game was Schottenheimer-esque. Three straight runs into the line, setting up a 50yd FG. What’s the % of misses from that distance?
EW,
I just realized, international competitiveness may also be code for “exceed Honda, Toyota, Subaru…”
The they more than “meet enhanced fuel efficiency standards.”
It’s a possible tiered policy angle to push alternative, advanced technology vehicles.
Should be, “Then they more than meet…
Boy, would ever be fun to watch O’Reilly and Hannity and the Wingosphere have to deal with the auto industry being rescued and then forced to change itself into something relevant and self-sustaining by a black lawyer from Chitown with an Arab middle name and fat gay 4 eyed Jew from Massachusetts with a lisp.
I’d like to see some regulatory stuff in there too.
It sounds counterproductive, but if GM is to establish a market for fuel-efficient cars — let’s not talk about the Volt for the moment — it needs to be able to get new platforms into the market fast. I think the way to do that is to use Euro certification for platforms that have been tested there as a kind of letter of recommendation to accelerate the approval process.
The US auto market is a huge anomaly, and there’s no reason for that to be the case. Ford has decided to end that: it’s one line that might have a few regional variations, but just as Honda sells basically the same Civic to Japan, N. America and Europe, it’s time for Detroit to start selling the cars that it makes for Foreign to Americans.
I agree, except we do need the steering wheel on the left side. It’s p.c.
Wait a minute…the auto companies have to tell us what they plan to do with bail out money? Why don’t the banks and brokerage houses have to detail their plans for the billions they are receiving? I’m just saying…if it’s good for the cooked gooses of the auto giants, it should be good for the cooked ganders of the financial giants!
No matter how reasonable/good the plan will be, I just don’t think it will fly. Republicans are aching for any victory and their constituents are done being generous with bailout money. And especially now that it might aid UAW in deep blue land. If it happens now, I think the cost of Detroit bailout will be Colombian trade. The on again, off again quid pro quo “leaked” from the Obama/Bush meeting plus today’s NY Times editorial is looking like some are seeing it as a reasonable intersection of interests. EW, you got after me a week ago for suggesting this may be the deal (and that it would not be such a bad one given the alternatives), so I wonder if you feel any differently now….
A silly thought.
Barney Smith got his way on Nov. 4th, surely Barney Frank will get his.
BTW, there is a serious virus warning on FDL re: Hallmark. and it is snopes cked.
Okay, I have the article. I don’t know if anyone will read this post. But here it is:
Powerline Proves Universal Health Care Makes GM and Chrysler Profitable
By: Ian Welsh Monday November 17, 2008 3:30 pm 59
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digg it
pre tax profits per car
The chart to the left shows the losses and profits per car of some major car companies. John over at Powerline uses it to argue that there should be no bailout, because the Big 3 are so unprofitable it’s just pointless. Let’s do some simple math. Take a look at GM’s loss per car, about $700. What is GM’s cost per car for health care? $1,500. What happens if you add $1,500? A profit. Of $800/car.
What the chart proves is that American car companies (except for Ford) are only not profitable, at this point, because of health care costs. The simplest thing to do to help the US economy (by not losing millions of jobs and one of the few remaining export industries) is to just pass universal health care, taking those costs off them, and in the meantime give them bridging funds to get them by until that’s done. Foreign car companies have far fewer health care costs, so all universal health care does is even out the playing field. Even Ford, with health care costs off, would be very close to profitability.
My thanks to the folks at Powerline for making the case for universal healthcare and for helping the auto industry so clearly.
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Thanks ew.
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