Nikkei Sinks 5.6 Percent as U.S. Auto Bailout Fails

[micheal]

Originally Posted by FL_Prius_Driver

Why is it that when the iceberg has broken the ship in two, that we (collectively, not any individual) start pointing out the need for the ship to be able to float? The break occured many years ago and the only repair presented in the last month is to overpower the inferior management with money to cover this shortcoming.

I've just got finished watching a big chunk of $700 billion get spent in an orgy of shoveling cash to financial institutions. This was concocted by two Wall Street trained finance guys and accepted way too sheepishly by Congress. No clue as to whether it saved the day or was a total waste. As far as I can tell, the only financial firms/CEOs/Board of Directors that learned the right lesson are the ones not bailed out. All the others continue business as before, but now with bailout money to make up for their bad decisions.

There is no question that America is better served by taking active measures to save the US auto industry, but damn, it's got to be PRECEEDED with a plan that solves the root problems.

Sure, a lot of Americans do not know economics inside and out, but many recognize that what is happening is not solving the problem. Where is the plan to make better cars, or lacking that, where is the plan to restrict the US auto market to US firms?

(PS. Not a rant against anyone in particular, just a frustration in general)

I think your post has a lot of compelling points.

IMO, many people (myself included) are leary of bailouts to GM and Chrysler while suspecting that the consequences of not bailing them out could be severe.

When there doesn't appear to be a plan on how these companies are really going to survive without additional massive financial bail-outs in the future, people just don't want to jump on the idea of bailing out a company for their bad mistakes.

A Catch-22 if you will. The best thing IMO would be for GM and Chrysler to go to the public with a clear, cohesive plan on how they are going to make it. This would significantly increase the public support for their bailout (and perhaps even their cars).

[chogan2]

I think the economist Paul Krugman captured the essence of this. He was asked what the Bush administration ought to do about the car industry, and he said something to the effect of, lend them enough money to survive until January 20, then get out of the way.

My point is that you shouldn't expect anything useful from the Bush administration, given their track record. They had and have no coherent plan for the financial system bailout. (Which, it should be said, was not a gift of $700B. It has been the creation and purchase of something less than $350B in preferred stock of banks. On net, absent a reduction in the value of the US banking system, the actual cost of that part of the bailout is zero, so far.) If we require a rational, workable plan from the Bush administration before lending money to the US car industry, GM should just go ahead and declare bankruptcy now (instead of January, when it looks like they are going to run out of money).

The point of this $15B in loans is to keep GM and Chrysler alive until somebody else takes over the government. At that point, imho, they'll have to do something that looks exactly like Chapter 11 bankruptcy for GM and Chrysler, and will probably require yet more funding, but cannot be literally called bankruptcy. Only at that point, with the gun to their head, can they determine whose ox will be gored in the bankruptcy workout.

My only point is, it would be foolish to let GM fail in an uncontrolled fashion right now (ie, December or January). In all likelihood, the US budget deficit would be higher under that scenario than if we lost the $15B in loans. We'd both shut down the US car industry and increase the taxpayers' liabilities. Everybody loses. Better to gamble $15B in loans now than to guarantee that outcome by inaction.

Do I have great faith that the Obama administration will develop a plan to save the industry? No. I haven't seen anybody discuss what I see as the realities of the situation. For example, what if US auto demand stays at 10M vehicles per year or less for the next five years or so (the level required to bring US vehicles/driver back down to its historical level.) Anybody left standing at that rate? If not, one or two of the big 3 have got to go, so that the last one can survive. That's what depressions are supposed to do. Bankruptcy or merger, take your pick. But letting it crash and burn willy-nilly because this is the month GM runs out of cash -- that's not sensible.

[JSH]

Originally Posted by micheal

A Catch-22 if you will. The best thing IMO would be for GM and Chrysler to go to the public with a clear, cohesive plan on how they are going to make it. This would significantly increase the public support for their bailout (and perhaps even their cars).

The Detroit 3 have gone to the public with clear plans. The problem is that those plans didn't get any media exposure. Instead we learned that the CEO's went to Washington in corporate jets the first time and hybrid cars the second. As normal there is little substance in the information shown in the media but lots of talking head yelling at each other.

Here is Fords Plan:
http://media.ford.com/article_displa...ticle_id=29533

Ford has launched a new website:
The Ford Story: A different route - Ford on the credit crunch, recession and more fuel efficient vehicles | Ford Vehicles

Here is GM's Plan:
http://gmfactsandfiction.com/wp-cont...-viability.pdf
GM even has a video of their CFO reading and explaining the plan on their website

GM has launched a new website:
Facts About the Auto Crisis - GM Facts and Fiction

[chogan2]

Jhinton, your point is well taken. I get where Ford is coming from. They were prepared for this.

I just want to say that GM's plan is a bankruptcy reorganization. They're just not calling it that. And that they need the short-term loans to be able to carry that out.

Take a look at Table 4. As of 12/31/08, $32B in debt evaporates off their balance sheet and the equity of the company increases by that amount. Basically, somebody gives GM $32B. That's part of the plan. Half their debts other than accounts payable are forgiven by the lenders.

As far as I can tell, the sum total of their explanation is this:

"GM will immediately engage current lenders, bond holders, and its unions to satisfactorily negotiate the changes necessary to achieve this capital structure; Oversight Board involvement may be necessary to be successful."

So the plan is basically a government-run Chapter 11 bankruptcy. For which, they need the federal loans in the short term. That all makes sense to me, as long as you believe their demand forecast (12M+ vehicles per year). GM's long-term bonds are selling right now for about a dime on the dollar. It's possible that bondholders would not be all that put out with a 50% haircut on face value coupled with a higher probability of eventual repayment.

[FL_Prius_Driver]

Originally Posted by jhinton

The Detroit 3 have gone to the public with clear plans. The problem is that those plans didn't get any media exposure. Instead we learned that the CEO's went to Washington in corporate jets the first time and hybrid cars the second. As normal there is little substance in the information shown in the media but lots of talking head yelling at each other....

Even with public exposure, very few are equipped to understand the real meaning of the various finance plans. Yet everyone has direct experience with car quality issues.....and it is the buying public that will determine the fate of GM, not the finance plan.

As long as the GM plans keeps addressing cash flow issues only, instead of how GM is going to prevent losing market share, then it is not a plan that addresses the most important point.

When I go through the plans, here is what I extract:

FORD - We were smart enough to start getting our house in order so we will be OK. If the economy gets much worst faster than we are executing, we will need a loan.

GM - We need cash NOW, or bad things will happen. Our plan is to basically continue what we planned to do all along, but now accounting for the big market changes that have occurred.

I find it maddening that this GM plan continually mentions how many awards and other irrelevant self congratulations brought up. Leading the industry in reducing lost work hours is of little relevance to the many people about to be hammered by GM's leading the industry in lost jobs.

[FL_Prius_Driver]

Originally Posted by chogan2

......The point of this $15B in loans is to keep GM and Chrysler alive until somebody else takes over the government. At that point, imho, they'll have to do something that looks exactly like Chapter 11 bankruptcy for GM and Chrysler, and will probably require yet more funding, but cannot be literally called bankruptcy. Only at that point, with the gun to their head, can they determine whose ox will be gored in the bankruptcy workout....

As always, your responses are first rate.

The mind bending thing about these bailout affairs (all of them) is the larger the sum, the less thinking expended of how to make good use of it. The question that always should be asked on both sides of a bailout is:

"What is the best possible way to spend this money?"

Unfortunately, the situation gets manipulated into a situation where the only course of action is to spend it on the most worrysome debt needing payment. I can dream up options, but Congress would be well served to direct the CBO, GAO and request some of the more reasonable Washington Independent Organizations make recommendations or evaluations. For example, having an independent audit of GM's finances should be required for government loans...and then the sensibility of the plans presented could be much better evaluated.

[chogan2]

FL_prius_driver, I'll ditto all that.

I'm going to write out my plan.

The first thing to do is define the national interest here.

One aspect of that is purely economic: we need the industry to stay in business right now due to the downturn, and we'd like to have the industry thrive over the longer haul as part of a viable US economy. The first part is fairly uncontroversial, I think. Or it will be soon, as the economic situation deteriorates. The second part, you'll hear people say "let Toyota do it", but I'm of the opinion that you need a US-run segment of the industry if for no other reason than to be able to produce trucks and tanks for the next war.

So I'd work from the standpoint that we actively want a US-run segment of the auto industry now and in the future.

The second aspect of national interest is more arguable: Do we have a national interest in requiring the industry to do things that are not dictated by "the market" (by the interaction of consumers' preferences as shaped by advertising and industry's goals?). The obvious candidate there is the entire energy independence/national security/environmental area. There's a lot of precedent there. But it's tough to figure how hard you can push that in a (temporary?) era of $1.50 a gallon gasoline.

If it were up to me, I'd put a tax on gas to put a modest floor on the price (I think Ford already suggested that). Then work from there. We burn about 150 billion gallons of gas/diesel per year. A dime a gallon would fund the first $15B in loans.

But if you really wanted to change things, I'd say that by far the most effective thing you could do would be to ban SUV ads on TV, the same way they banned cigarette ads and (voluntarily) banned liquor ads for some time. Vehicles averaging less than umpty miles-per-gallon, or vehicles getting below the 25th percentile of mileage within class (so you could still advertise pickups) could no longer be advertised on TV as of such-and-such date. On paper, it wouldn't cost consumers a thing, wouldn't cost car producers a thing, and (if ad revenue was unchanged) wouldn't cost the networks a thing. Same rules for all, so not disadvantaging anybody. But I bet the car executives would know it would be the kiss of death, so they'd have no choice but to hit the MPG targets. Any strong hybrid or PHEV or EV would be excepted from the ban. No exception for the phony-baloney flex-fuel cars that'll never run on ethanol anyway. Use the power of TV for good for a change.

But if you were of a mind to impose the targets the old-fashioned way, then that gets hashed out here. I'm not sure you'd make a lot of headway with the price of gas where it is now, and given that the Congress already upped the CAFE standards. But given my preferences, I'd be OK with MPG targets and with incentives to get more miles powered by electricity. That'll be reached via political rather than technical consensus anyway.

Then the next step is obvious. At some level, the financial side of this is like any other bankruptcy. GM needs to show what it's going to do to become a viable competitor. Looks like they're moving down that path with their published plan, though its short on details. There's nothing particularly controversial there, just a lot of people are going to lose a lot of money, so there'll be a lot of squabbling. And because the government is the guarantor, then there's going to be some politics over who loses what in the workout.

So that's where your third party comes in. They'd set up the rules -- here are three scenarios for auto demand over the next 10 years, and three scenarios for the price of oil. Here's Toyota's cost for making a car. Take your accounts and show us how you reach average profitability over that period under the low-medium-high scenarios. Show who has to give up what. The third party then certifies that yes, the numbers add up, or the plan goes back to be reworked. Third party also critiques each plan to show what combinations of concessions would reach the same level of profitability.

Next step is the bargaining with mandatory arbitration. Because this is where it gets ugly. A plan that can't be implemented is less than worthless. All the interested parties sit at the table to agree to the concessions. No idea how that would work. In theory, it's no different from any other bankruptcy, but in practice, it's tough to believe that the Congress would keeps its hands off the process. Mandatory arbitration is required because this is where (e.g.) the pensioners lose some benefits, or the creditors take a loss. Any time you're in the business of breaking existing contracts, you're going to need some legal backstop to keep the lawsuits to a minimum.

Then you reshuffle the money and the contracts and see if the industry can make it. If not, the final component of the plan is for the orderly liquidation of one or more of the Big 3, at some future data, based on criteria for success or failure. In other words, you limit the Federal liability and oversight to a defined amount of money and time -- you sunset the aid, to the extent that you can. (Congress can always override the sunset provisions at a later date, so nothing's ever set in stone, but its' still worthwhile to force a re-vote if they want to continue aid down the road.)

So, bare bones, I don't think it's hard to figure this out. It's just going to take longer to get that process started than GM has right now.

But if it were up to me:
0) Congress authorizes $15B in loans right now. As part of that bill,
1) Congress defines the national interests here as having a profitable US-owned segment of the auto industry now and in the future, and having that segment lead the way in reducing the use of oil for transport. To the extent possible, the Congress would signal what technical goals it would require for the energy use portion of the national interest.
2) The DOE/DOT or the GAO would be tasked with specifying three standard scenarios for auto demand/oil price, the auto makers would they submit accounting and other documents showing who would have to give up what to reach profitability under those scenarios, and would reach whatever explicit technical targets were established in Step 1 (e.g., higher CAFE standards). Standardizing the formats as much as possible. Third party experts would certify that the numbers add up, and if not, they go back to the industry to be reworked.
3) Proceed to bargaining with mandatory arbitration as backup, ensuring that some bargain would be reached within a fixed time period.
4) The Congress then passes a second bill, the legislation authorizing the loans required to make this work. I'd fund this with a gas tax too.
5) A ban on TV ads for the lowest-mileage vehicles goes into effect (along with whatever other technical hurdles are imposed).
6) Federal oversight board reports annually to the Congress on progress.
7) Loans are repaid or companies liquidated within a decade.

Requires two acts of Congress and a bankruptcy workout.

[FL_Prius_Driver]

Originally Posted by chogan2

The first thing to do is define the national interest here.

One aspect of that is purely economic: we need the industry to stay in business right now due to the downturn, and we'd like to have the industry thrive over the longer haul as part of a viable US economy. The first part is fairly uncontroversial, I think. Or it will be soon, as the economic situation deteriorates. The second part, you'll hear people say "let Toyota do it", but I'm of the opinion that you need a US-run segment of the industry if for no other reason than to be able to produce trucks and tanks for the next war.

So I'd work from the standpoint that we actively want a US-run segment of the auto industry now and in the future.

To me another aspect is just as important. If the car industry is really well run, then the US would be a leader in improved, sustainable transportation. This will be needed badly in the future. Depending on overseas industries is just so unnecessary. As an example, Space-X has jump started the technology of 30 year old rocket designs, and is profitable!!! The conventional space vehicle manufacturers and US government were so innovation dead, that the US started depending on the Russians for space transportation. The parallels with the auto industry are amazingly similar.

Originally Posted by chogan2

The second aspect of national interest is more arguable: Do we have a national interest in requiring the industry to do things that are not dictated by "the market" (by the interaction of consumers' preferences as shaped by advertising and industry's goals?). The obvious candidate there is the entire energy independence/national security/environmental area. There's a lot of precedent there. But it's tough to figure how hard you can push that in a (temporary?) era of $1.50 a gallon gasoline.

Almost every industry has to be forced to keep standards and comply with (good) regulations. Safety is almost always seen as something that can be shortchanged for short term profits. The California approach to these issues has been astoundingly good compared to national approaches. Rather than complicated CAFE standards, or technology dictates. they require a percentage of non-polluting cars and power plants. History has shown how well this works. It resulted in the EV1 and the world's first effective solar plants. Even better, it has put more choices out to the citizen, with a very easily enforced set of legislation.

Originally Posted by chogan2

If it were up to me, I'd put a tax on gas to put a modest floor on the price (I think Ford already suggested that). Then work from there. We burn about 150 billion gallons of gas/diesel per year. A dime a gallon would fund the first $15B in loans.

The tax as a funding mechanism I would agree with as a bailout funding mechanism while the time is right.

Originally Posted by chogan2

But if you really wanted to change things, I'd say that by far the most effective thing you could do would be to ban SUV ads on TV, the same way they banned cigarette ads and (voluntarily) banned liquor ads for some time. Vehicles averaging less than umpty miles-per-gallon, or vehicles getting below the 25th percentile of mileage within class (so you could still advertise pickups) could no longer be advertised on TV as of such-and-such date. On paper, it wouldn't cost consumers a thing, wouldn't cost car producers a thing, and (if ad revenue was unchanged) wouldn't cost the networks a thing. Same rules for all, so not disadvantaging anybody. But I bet the car executives would know it would be the kiss of death, so they'd have no choice but to hit the MPG targets. Any strong hybrid or PHEV or EV would be excepted from the ban. No exception for the phony-baloney flex-fuel cars that'll never run on ethanol anyway. Use the power of TV for good for a change.

But if you were of a mind to impose the targets the old-fashioned way, then that gets hashed out here. I'm not sure you'd make a lot of headway with the price of gas where it is now, and given that the Congress already upped the CAFE standards. But given my preferences, I'd be OK with MPG targets and with incentives to get more miles powered by electricity. That'll be reached via political rather than technical consensus anyway..

I'll take a pass on that. I always ask the question, can something be achieved by providing more choice than by adding regulation. If I were to force something, it would be that a production EV and a production PHEV must be available. It's not that there are too many SUV choices, it's the dearth of non-SUV choices that bothers me. Let them advertise SUVs that weigh more than Sherman Tanks, just ensure that a viable non-polluting options is really supported. If nothing else it gives the government the option of tax incentives to EV buyers to shape the market. (Would GM's position be better off if the EV mandates we never removed?)

Originally Posted by chogan2

Then the next step is obvious. At some level, the financial side of this is like any other bankruptcy. GM needs to show what it's going to do to become a viable competitor. Looks like they're moving down that path with their published plan, though its short on details. There's nothing particularly controversial there, just a lot of people are going to lose a lot of money, so there'll be a lot of squabbling. And because the government is the guarantor, then there's going to be some politics over who loses what in the workout.

So that's where your third party comes in. They'd set up the rules -- here are three scenarios for auto demand over the next 10 years, and three scenarios for the price of oil. Here's Toyota's cost for making a car. Take your accounts and show us how you reach average profitability over that period under the low-medium-high scenarios. Show who has to give up what. The third party then certifies that yes, the numbers add up, or the plan goes back to be reworked. Third party also critiques each plan to show what combinations of concessions would reach the same level of profitability.

As long as everything is public and transparent, I can agree. I cannot say if this would operate as planned.

Originally Posted by chogan2

Next step is the bargaining with mandatory arbitration. Because this is where it gets ugly. A plan that can't be implemented is less than worthless. All the interested parties sit at the table to agree to the concessions. No idea how that would work. In theory, it's no different from any other bankruptcy, but in practice, it's tough to believe that the Congress would keeps its hands off the process. Mandatory arbitration is required because this is where (e.g.) the pensioners lose some benefits, or the creditors take a loss. Any time you're in the business of breaking existing contracts, you're going to need some legal backstop to keep the lawsuits to a minimum.

Then you reshuffle the money and the contracts and see if the industry can make it. If not, the final component of the plan is for the orderly liquidation of one or more of the Big 3, at some future data, based on criteria for success or failure. In other words, you limit the Federal liability and oversight to a defined amount of money and time -- you sunset the aid, to the extent that you can. (Congress can always override the sunset provisions at a later date, so nothing's ever set in stone, but its' still worthwhile to force a re-vote if they want to continue aid down the road.).

I can see where you have focused on this real important part, keeping the company alive while there are many vested interests that get hammered. Wow.

Originally Posted by chogan2

So, bare bones, I don't think it's hard to figure this out. It's just going to take longer to get that process started than GM has right now.

But if it were up to me:
0) Congress authorizes $15B in loans right now. As part of that bill,
1) Congress defines the national interests here as having a profitable US-owned segment of the auto industry now and in the future, and having that segment lead the way in reducing the use of oil for transport. To the extent possible, the Congress would signal what technical goals it would require for the energy use portion of the national interest.
2) The DOE/DOT or the GAO would be tasked with specifying three standard scenarios for auto demand/oil price, the auto makers would they submit accounting and other documents showing who would have to give up what to reach profitability under those scenarios, and would reach whatever explicit technical targets were established in Step 1 (e.g., higher CAFE standards). Standardizing the formats as much as possible. Third party experts would certify that the numbers add up, and if not, they go back to the industry to be reworked.
3) Proceed to bargaining with mandatory arbitration as backup, ensuring that some bargain would be reached within a fixed time period.
4) The Congress then passes a second bill, the legislation authorizing the loans required to make this work. I'd fund this with a gas tax too.
5) A ban on TV ads for the lowest-mileage vehicles goes into effect (along with whatever other technical hurdles are imposed).
6) Federal oversight board reports annually to the Congress on progress.
7) Loans are repaid or companies liquidated within a decade.

Requires two acts of Congress and a bankruptcy workout.

I will try and remember this and compare to what eventually emerges. This has helped me significantly by pointing out that keeping the auto maker(s) alive is going to be an exercise in picking out who gets their contracts broken.

[JSH]

Originally Posted by FL_Prius_Driver

I can see where you have focused on this real important part, keeping the company alive while there are many vested interests that get hammered. Wow.

The only way that GM is going to be saved is if EVERYONE gives a little.

• The management will take pay cuts and give up some control of the company to an arbiter.
• The union will allow plants to close, speed up pay cuts, start paying for more of their healthcare, and kill the jobs banks.
• The bondholders will take pennies on the dollar for their bonds. (GM debt is currently selling for about $0.10 on the dollar.)
• Dealers will loose their dealerships and won't get bought out. (GM needs to eliminate brands but won't because they can't afford to buy out the franchise owners.)
• The public will give GM bridge loans to finance the reorganization.

This can be done. It was done successfully with Chrysler more than 25 years ago. The problem is that it took 3 months to get everything organized and right now GM doesn't have 3 months.


BTW, I don't see a future for Chrysler that doesn't involve them being absorbed by another manufacturer or being broken up and sold.

[FL_Prius_Driver]

Originally Posted by jhinton

The only way that GM is going to be saved is if EVERYONE gives a little.

Actually, what became clear was the the need for everyone to give up a LOT.