The Auto Bridge Plan

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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 Read more →
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The Auto Bailout: Who Is In Favor of What

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In this post, I described the three different proposed funds for the auto industry. Now, I’d like to lay out which politicians are advocating what. I’ll update this as we go forward.

Pro-Bailout

Carl Levin (and Jennifer Granholm and the rest of the MI delegation, both Democrat and Republican): Particularly given John Dingell’s current focus on retaining his Chairmanship, Levin has taken the lead on championing a bailout for the auto industry. Levin has said he would be willing to discuss hard conditions on the industry–and already advocates more oversight than the financial bailout–though he has not committed to all the oversight some would like.

Barney Frank: Frank will submit the counter-part to Levin’s bailout proposal today. He advocates even stronger conditions than Levin and than the conditions place on the finance bailout.

Nancy Pelosi, Barack Obama: Both the Speaker and the President-elect first floated a unique bailout but now (presumably realizing a unique bailout won’t get done), want money from TARP. Both have advocated significant oversight and conditions on any bailout. Both are trying to prevent the $25 retooling fund be turned into a bridge loan, because they want to make sure the retooling happens as well.  

George Voinovich: Unlike John Boehner, Voinovich is putting his constituents ahead of ideology. Given that he is up for re-election in 2010, he may be thinking of how the populist Sherrod Brown trounced Mike DeWine in 2006.

Middle Ground

George Bush: Bush supports a bailout, but would like to use the $25 billion that was supposed to be used for retooling factories to produce more efficient cars rather than tapping into TARP or providing new funds.

Mitch McConnell: Like Bush, McConnell would be willing to consider supporting a repurposing of the $25 billion targeted for energy efficiency, but not new funds. McConnell is in a fairly tough place on these issues. While I’m sure he’d love to bust the UAW, he’s got a bunch of auto plants in his state–with a remarkable mix of both Japanese and American manufacturers. Significantly, two key Ford plants in KY will be idling for 5 months over the holidays.

Kit Bond: Bond, who like Voinovich is up for re-election in a swing state in 2010, wants to save the jobs of Missourians, but wants to look tough at the same time.

Anti-Bailout

Richard Shelby: Shelby is the lead opponent of any kind of bailout and will, if pushed, demand a series of totally unrealistic conditions to try to thwart any kind of bailout. Partly, Shelby holds this position because as a good Republican he’d love to bust the UAW. More importantly, though (and something that the media appears either uninterested or unaware of), his stance, if successful, would give the major foreign manufacturers in his state a big competitive advantage. Read more →

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We Are All Flint, MI Now

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Flint, by afk

Flint, by afk

I was talking with mr. emptywheel about what one of the bad–but by no means worst–case scenarios in a GM bankruptcy would be. This scenario is just one of several that might happen–by no means guaranteed, and Congress would fight the scenario at every stage, though with increasingly less leverage. But it is a scenario that follows a great deal of logic about possible outcomes. It is this scenario, though, that explains why both Toyota (I’ve seen reported–looking for the link) and many in Congress want to bailout GM before it gets to bankruptcy.

Here’s the short version: more details below.

  1. GM files for Chapter 7 bankruptcy
  2. GM’s Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)
  3. GM/SAIC starts importing Chinese-made Buicks and Chevys, undercutting Toyota’s cost advantages
  4. GM/SAIC owns the Volt technology, requiring US firms to lease it if they wanted to use it

GM Files for Chapter 7 Bankruptcy

As Jonathan Cohn points out, an imminent GM bankruptcy is more likely to be a Chapter 7–total liquidation bankruptcy–rather than a Chapter 11 bankruptcy. That’s for the same reason why GM is begging for cash right now in the first place: no one is lending.

In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can’t build cars without parts, and it can’t get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That’s why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. 

So if GM goes bankrupt in January, as may happen, it may well have to sell itself off (unless the government guarantees the same kind of financing that it is refusing now). And I believe one company is one of the most likely–and indeed sensible–buyers: Shanghai Automotive Industry Corporation, or SAIC, the Chinese company with which GM partners to do business in that country.

GM’s Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)

SAIC is, in my opinion, by far the most sophisticated of China’s automobile companies. Read more →

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What the AP Left Out about the UAW

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The AP has an article reporting that Ron Gettelfinger, head of the UAW, says the union will not make any more concessions to keep the Big Three in business. I guess the editor cut a big chunk–because the article obviously falls short of explaining why the UAW is taking this stand. Here’s what the AP left in:

”The focus has to be on the economy as a whole as opposed to a UAW contract,” Gettelfinger told reporters on a conference call, noting the labor costs now make up 8 percent to 10 percent of the cost of a vehicle.

”We have made dramatic, dramatic changes and the UAW was applauded for that,” he said.

Instead, Gettelfinger blamed the problems the auto industry is suffering from on things beyond its control — the housing slump, the credit crunch that has made financing a vehicle tough and the 1.2 million jobs that have been lost in the past year.

”We’re here not because of what the auto industry has done,” he said. ”We’re here because of what has happened to the economy.”

And here’s what the AP didn’t report (I’m sure it was just an oversight, really).

In its contract last year, the UAW made painful concessions, adopting a two-tier wage structure, such that new employees make just $12 to $15 an hour. The move is projected to bring the American manufacturers in line with their Japanese rivals’ non-union labor costs in the near future.

In addition, the union has taken responsibility for providing retiree healthcare, thereby eliminating one of the last remaining competitive disadvantages for the American manufacturers’ unionized workforce as compared to their Japanese rivals.

With these agreements, the UAW has managed to save jobs, while still providing the superior labor force that leads most segments (big PDF, see page 10-11) in terms of the most efficient plants measured in hours per vehicle.

The UAW’s workers have made deep concessions to ensure American-owned auto industry remains competitive with its foreign competitors. Now that the American-owned manufacturers have eliminated some of the structural disadvantages that gave foreign competitors a market advantage, it would be a terrible waste for its country not to do what’s necessary to sustain American manufacturing though this tough financial period.

There. Now it tells a more complete story.

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“I Told You So”

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More of this please.

First, we must confront head-on the pervasive misunderstanding of what constitutes a "free market." For long stretches of the past 30 years, too many Americans fell prey to the ideology that a free market requires nearly complete deregulation of banks and other financial institutions and a government with a hands-off approach to enforcement. "We can regulate ourselves," the mantra went.

Those of us who raised red flags about this were scoffed at for failing to understand or even believe in "the market." During my tenure as New York state attorney general, my colleagues and I sought to require investment banking analysts to provide their clients with unbiased recommendations, devoid of undisclosed and structural conflicts. But powerful voices with heavily vested interests accused us of meddling in the market.

When my office, along with the Department of Justice, warned that some of American International Group’s reinsurance transactions were little more than efforts to create the false impression of extra capital on the company’s balance sheet, we were jeered at for attacking one of the nation’s great insurance companies, which surely knew how to balance risk and reward.

And when the attorneys general of all 50 states sought to investigate subprime lending, believing that some lending practices might be toxic, we were blocked by a coalition of the major banks and the Bush administration, which invoked a rarely used statute to preempt the states’ ability to probe. The administration claimed that it had the situation under control and that our inquiry was unnecessary.

Eliot Spitzer is one of the people best suited to help clean up the mess on Wall Street. After all, he was screaming about where all the bodies were buried back when everyone was in denial, up until the time Michael Garcia took him out for a high-priced hooker.

Here’s what he recommends:

One of the great advantages U.S. capital markets have enjoyed over the decades has been the view — held worldwide — that there was an underlying integrity to the representations market participants made, because the regulatory framework in which they were made was believed to provide genuine oversight. But as we all know, the laws requiring such integrity are meaningless without a government dedicated to enforcing them.

Second, our corporate governance system has failed. We need to reexamine each of the links in its chain. Read more →

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Reid to McConnell: Don’t Be a Scrooge! Pass Auto Stimulus

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There has been a lot of reporting that an auto bailout is unlikely. While I think that’s probably true, I also wonder whether Chris Dodd’s claim that the votes aren’t there is based exclusively on discussions with Richard Shelby.

Dodd was listening, and in televised remarks later he appeared to dash any hopes of action until the new Obama administration is in place and Democrats have more Senate votes next years.

“Right now, I don’t think there are the votes…Dodd said. “You’ve heard Senator Shelby publicly speak out about his opposition to doing anything in the automotive area. So I want to be careful about bringing up a proposition that might fail in light of the fact the authority exists and under an Obama Administration there seems to be a greater willingness to deal with the issue.”

As I’ve pointed out, Shelby would love for the Big Three to fail so Japanese and Korean and German manufacturers can continue to make big gas guzzlers in his state, only without any competition from domestic manufacturers.

That said, Harry Reid has noticed something I did too: like Shelby, Mitch McConnell’s got some Japanese manufacturers in his state (though those factories produce more of the efficient cars in Kentucky–like the Camry–that every one thinks of Japanese manufacturers making). In addition, McConnell’s state is also home to some Ford and GM plants, including some key Ford truck plants. Those Ford plants, incidentally, are going to be idling through the entire Christmas season.

The United Auto Workers union says Ford’s Louisville Assembly Plant will be idled for five weeks beginning the first of next month.

Also, The Courier-Journal reports that UAW Local 862 says the Kentucky Truck Plant will apparently shut down in mid-December until early February.

I would imagine, with thousands of his constituents out of work, Mitch McConnell is going to be hesitant to take a strong stand against bailing out those constituents.

Which is probably what Harry Reid is thinking, as he plans to push for unemployment and an auto bailout in the lame duck session.

Unless I hear from you to the contrary, I plan to press forward with two provisions of that package – an extension of unemployment benefits, which passed the House by a bipartisan vote of 368-28 and legislation to protect the millions of workers at risk from the possible collapse of our domestic auto industry. Read more →

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How’s that Bankruptcy Bill Working Out for You, Chase?

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A lot of people are (justifiably) beating up on the auto industry for lobbying to have CAFE standards eased so they could continue to produce gas-guzzling behemoths that used to be but are no longer profitable.

But while we’re beating up short-sighted corporations, we ought not forget the credit industry–who demanded changes to bankruptcy laws that are now having adverse effects on the industry.

Federal bank regulators have rejected a request by banks and consumer advocates for a program to let lenders forgive huge portions of credit card debt.

The Office of the Comptroller of the Currency rejected the request for a special program that would allow as much as 40 percent of credit card debt to be forgiven for consumers who don’t qualify for existing repayment plans.

[snip]

The Financial Services Roundtable, which represents more than 100 large banks, brokerage firms and insurance companies, will "continue to look for ways to help consumers in these extraordinary times," said the group’s senior vice president, Scott Talbott.

Travis Plunkett, legislative director of Consumer Federation, said that with the number of deeply indebted consumers growing dramatically, "we still hope to work with bank regulators or Congress to create an alternative" to bankruptcy for them.

Gosh. If you hadn’t gotten greedy and just kept the old bankruptcy process in place, it would have been a lot easier to get partial payment on credit cards in lieu of nothing. 

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The Ideological Battle Over the Auto Overhaul Heats Up

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I wanted to draw your attention to two statements about an auto bailout to show where this is going to go ideologically. First, Richard Shelby:

The financial straits that the Big Three find themselves is not the product of our current economic downturn, but instead is the legacy of the uncompetitive structure of its manufacturing and labor force. The financial situation facing the Big Three is not a national problem, but their problem. I do not support the use of U.S taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers in such a way that allows them to continue and compound their ongoing mistakes. [my emphasis]

Note his emphasis on "competitive" structures of doing business–and paying labor.

What Shelby doesn’t mention, of course, is that Alabama is a right to work state. Shelby also doesn’t mention that Alabama is home to Honda, Toyota, Hyundai, and Mercedes plants. Shelby also doesn’t reveal that many of the cars those manufacturers make in Alabama, without unions, are precisely the kind of behemoths critics attack Detroit for making–only these have foreign nameplates: M-Class SUV, GL-Class SUV (a new model), Pilot SUV, Santa Fe SUV, plus engines for Tacoma and Tundra pick-ups and Sequoia SUVs.

In other words, Shelby isn’t opposed to car companies that are stupidly committing and recommitting to SUVs. Rather, he’s just opposed to car companies that make SUVs with union labor.

Meanwhile, here’s Jennifer Granholm’s spin supporting a bailout.

Beyond the massive job loss, beyond the potential collapse of an entire economic sector, Congress and the Bush administration need to provide immediate assistance to the auto industry because America’s energy independence is a critical national need. And the U.S. auto industry is the sector to lead the way to that energy independence.

How? The car you drive will be the storage unit for your energy needs. Your home, your car, your appliances can all be powered through the advanced battery that will sit inside your plug-in electric vehicle. Today, most batteries come from Asia, and much of the oil comes from the Middle East. It is a national-security, energy-security imperative to produce advanced batteries and next-generation biofuels here at home.

[snip]

Supporting the automotive industry through the current crisis and steering a clear transition to a low-carbon future will create millions of middle-class jobs that are vital to a strong economy while reinvigorating American technological superiority.

Read more →

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Bush to Declare “Economic Mission Accomplished” to G20

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I’m as flabbergasted by this as Americablog’s Chris is: George Bush is going to lecture the G20 today about how lovely free trade is.

President George W. Bush today will urge leaders of the world’s biggest industrial and developing economies not to abandon principles of free-market capitalism as they seek a way out of an international financial crisis, calling it the "best system” for delivering growth. 

Even better, the Dim Son is going to lecture his counterparts about the history of the financial crisis.

He will also review how the crisis began and how markets are more interconnected than in the past. 

Haven’t you heard, George? The victors get to write the history, and the US is probably not going to be the victor this time around. 

In fact, this sounds like it will be an attempt to pre-empt a lot of the blame other leaders are ready to heap on Bush for the economic meltdown.

Leaders including Australian Prime Minister Kevin Rudd and French President Nicolas Sarkozy have used the crisis to demand greater government control of markets and to attack the U.S. for failing to rein in investors and speculators. 

[snip]

Officials overseas have heaped blame on the U.S. and the notion of unfettered markets promoted by Bush for sparking the crisis. German Chancellor Angela Merkel last month attacked "greed, speculation and mismanagement” and criticized the U.S. for ignoring her call of last year for stronger market regulation. Rudd said "the root of this malaise” lay in the "twin evils” of greed and fear that went unchecked because of “obscene” failures in oversight. 

While defending capitalism as the "most efficient system ever created,” Sarkozy has described as "over” the view that "everything could be solved by deregulation, free competition and the market.” 

And finally, do you find it at all amusing that the President who refuses to tell us which companies have gotten bailed out and has not yet appointed an Inspector General to oversee the bailout is going to lecture his counter-parts about transparency and regulation?

Bush will outline why markets should be subjected to greater transparency and appropriate regulation, while urging international financial leaders to strengthen cooperation, the White House said. 

Which brings me to this whole "we have one president at a time" thing–the mantra that Obama keeps repeating. Read more →

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A New Obama-Rahm Leak Policy?

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Maybe it’s the addition of beltway leaker extraordinaire, Rahm Emanuel, to the team, but it appears that the Obama team may have adopted a new policy on leaks, departing from their eerily disciplined no-leak approach during the campaign.

Note this passage in NYT’s coverage of Obama’s request that Bush support a bailout for the auto industry.

The struggling auto industry was thrust into the middle of a political standoff between the White House and Democrats on Monday as President-elect Barack Obama urged President Bush in a meeting at the White House to support immediate emergency aid.

Mr. Bush indicated at the meeting that he might support some aid and a broader economic stimulus package if Mr. Obama and Congressional Democrats dropped their opposition to a free-trade agreement with Colombia, a measure for which Mr. Bush has long fought, people familiar with the discussion said. [my emphasis]

Here’s how the WaPo reported the same detail.

Bush, speaking privately to Obama during their first Oval Office meeting, repeated his administration’s stand that he might support quick action on those bills if Democratic leaders drop their opposition to a Colombia trade agreement that Bush supports, according to people familiar with the discussions.  [my emphasis]

And here’s how Bush’s team reported Bush’s ire about these leaks to Drudge.

Just hours after President Bush and President-elect Obama met in the Oval Office of the White House, details of their confidential conversation began leaking out to the press, igniting anger from the president, sources claim.

"Senator Obama would be wise to keep close counsel," a top Bush source warned. 

[snip]

Bush advisers view the leaks as an effort to undermine the president’s remaining days in office.

"Senator Obama may not be familiar with a long-standing tradition of presidents holding their private conversations, private," a senior adviser explained to the DRUDGE REPORT. [my emphasis]

Seeing as how this obviously organized leak may well have come from the latest addition to the previously leak-proof Obama team–Rahm Emanuel–the Bushies aren’t really in a position to lecture about what past Presidents have done. Rahm’s been there, and was leaking in the Clinton days as well, I’m sure. (One other candidate to be the leaker is another Clinton veteran, John Podesta, though my money’s on Rahm.)

So my question has more to do with the efficacy of the leak. Read more →

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