Who's Driving the Car (Companies)?

The quick emergence of GM and Chrysler from bankruptcy has been viewed as a victory for the Obama Administration in demonstrating that the government is focused on moving the companies through their restructuring and keeping them on the road to once again being private companies. Now a majority of Members of the House, including two key Democratic leaders, are pushing legislation that could jeopardize the restructuring plans supported by the White House.

As we write this, a bipartisan group of 240 House Members and 20 Senators are supporting legislation that will allow auto dealers who have lost their franchises in the restructuring to recover them simply by requesting their reinstatement from the auto companies. The legislation was attached to the House version of the Financial Services Appropriations bill last week by a unanimous vote of 60 to 0. The legislation would require Chrysler and GM, at the request of an auto dealer, to restore the dealer franchise agreement in effect prior to each manufacturer’s bankruptcy proceeding. The bill could save around 2000 franchises according to some estimates, although that may be high, since many dealers have already closed. Some had feared the House Rules Committee would remove the language from the Financial Services Appropriations bill, but the language will remain in section 745 of the bill when the House votes on the measure tomorrow.

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California on the Cutting Edge

Occasionally, the FRW team ventures out to take the pulse of the country on key issues coming up. Based on several days talking to journalists, business leaders, and government officials in California, we bring to our readers words of caution: the fiscal meltdown in California holds no small dangers for the recovery.

When California voters on May 19th rejected the key elements of the budget deal which averted disaster earlier in the year, top officials in Sacramento were sent back to the drawing board for an approach that will stave off a budget gap of more than 15 percent. With observers of the legislature saying that tax cuts, program cuts, and layoffs are all non-starters, where lies the answer?

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In the Rumble Seat

Media outlets report this afternoon the rumblings of an impending bankruptcy for Chrysler -- with a filing as early as next week. This is not unexpected news, but some of the early discussion of the potential terms of the package are of interest for what they portend for a potential General Motors bankruptcy down the road.

It appears as if the Obama Administration is steering this plan towards a tough work-out plan for lenders to Chrysler. Reports say they may get as little as 22-cents on the dollar and a five percent equity stake.  A committee of lenders has proposed significantly more on both sides of that scale, as one might imagine. The federal government would offer financing to bridge the company through the bankruptcy process while its partnership with Fiat is finalized. Reports are that Fiat's continued interest is essential to this arrangement and that they do remain in the picture.

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Driving Toward Protest or Prosperity?

As President Obama returns from his trip to Europe and Iraq, he will be dealing with ongoing questions about the steps he took last week to address the troubles in the U.S. auto industry. Did his actions represent an overstepping? Are people tired of or reassured by government intervention in private companies? Has the administration’s treatment of Wall Street firms been more favorable than its dealings with the more “Main Street” automakers? Whatever the answers to the above questions, the administration’s latest efforts on the auto front elicited a mixture of praise, befuddlement, and opposition on Capitol Hill.

The administration’s Auto Task Force made headlines after panning the GM and Chrysler restructuring plans and forcing out GM CEO Rick Wagoner. They also gave Chrysler thirty days to pull off a shot-gun wedding with Italian carmaker Fiat, asserting that Chrysler “is not viable as a stand alone company.” The administration even entered into the car warranty business, setting up a program to reassure prospective buyers of new GM and Chrysler automobiles that their warranties will be honored regardless of the automakers’ futures.

While Speaker of the House Nancy Pelosi (D-CA) issued a statement supporting the administration, it was very generic. Even the Michigan delegation, which generally praised the warranty program, grumbled about Wagoner’s ouster, the automakers’ treatment compared to the banks, and the tight timelines with the government giving Chrysler 30 days and GM 60 days worth of working capital before facing the prospect of bankruptcy.

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Auto Bailout Part Two - The Auto Supplier Support Program

The U.S. Treasury announced today a new program that will provide $5 billion to finance auto suppliers and hopefully unfreeze credit in the auto sector. Treasury will provide the money to participating domestic auto companies, which will in turn decide “which suppliers and which receivables” to support.

In the course of reviewing GM’s and Chrysler’s viability plans and the state of the industry, the President’s Auto Task Force determined the need for immediate action “to help stabilize the auto supply base,” which employs more than 500,000 workers across the country. Declining auto sales have left many suppliers unable to access credit. The task force concluded,

“This vicious cycle of frozen credit markets, growing supplier uncertainty, and growing auto company uncertainty has the potential to unravel the industry and short-circuit restructuring efforts at companies like GM and Chrysler.”

Eligible suppliers must be U.S. based and ship to a participating auto manufacturer. GM and Chrysler have already signed up for the program. An eligible receivable is one “created with respect to goods shipped after March 19, 2009 that is made on qualifying commercial terms between a supplier and a participating auto company.” Suppliers will have to get consent from their lenders to participate in the program and will have to pay a “modest” participation fee. Suppliers will also have the option of selling their receivables into the program for “a modest discount” in order to gain liquidity. Further details are available in the attached fact sheet.

Treasury:  Auto Supplier Support Program (PDF)

Question Time

Who appointed the G7 (+1) to its perch? The finance ministers for the main protagonists in World War II (1939-1945) met in Rome over the weekend to discuss the world economic crisis. Does a meeting of this nature that excludes India and China truly have a hope of wrapping its collective mind around the problems and their possible solutions?

Is ideology standing in the way of the most elegant solution to the U.S. banking crisis? Give former President George W. Bush his due: when the dimensions of the banking crisis became apparent to him, he scrapped a "market guy" ideology and poured taxpayer money into the banks. Is the Obama Administration willing to take what for them would be a similar ideological leap? Is their unwillingness to do so behind the complex public-private partnership at the center of the Geithner proposal to deal with troubled assets? Is there a similar reason behind the relatively light-handed approach Geithner would take to pushing the banks to resume lending?

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Exploring Under the TARP

There is a new team in town, and in one of his first public acts as Treasury Secretary, Tim Geithner established a policy aimed at increasing the transparency and accountability of the Troubled Asset Relief Program (TARP). Treasury will now post all TARP contracts on the Internet. New contracts will go on Treasury’s website within five to ten business days, and the department will post existing agreements on a rolling basis. At the time of the Secretary’s announcement, Treasury had already posted the agreements of the major nine institutions that first partook in the Capital Purchase Program; the Citigroup contract under the Targeted Investment Program; the AIG deal under the Systemically Significant Failing Institutions Program; and the GM, GMAC, and Chrysler contracts under the Automotive Industry Financing Program. At the request of individual institutions, the department will redact confidential and proprietary information.

The Secretary also met today with the individuals tasked with TARP oversight – the head of the General Accounting Office, the TARP Special Inspector General at Treasury, and the TARP Congressional Oversight Panel. Geithner promised to unveil more reforms in the coming weeks.

U.S. Department of Treasury, EESA Contracts

Chrysler Financial Receives $1.5 billion TARP Loan

The U.S. Treasury today announced a $1.5 billion, five-year loan to Chrysler Financial to help fund Chrysler auto loans made on or after January 1, 2009. This is a new loan made through the TARP’s Automotive Industry Financing Program, which was established as part of the December auto bailout. News outlets reported that shortly following Treasury’s announcement, Chrysler began offering zero percent interest financing for up to 60 months on several of its vehicles.

According to Treasury, the Automotive Industry Financing Program is intended to “prevent a significant disruption of the American automotive industry that poses a systemic risk to financial market stability and will have a negative effect on the real economy of the United States.” Treasury evaluates each application on a case-by-case basis and requires participants to conform to executive compensation standards, expenditure limitations, and other corporate governance requirements deemed necessary to protect taxpayers’ interests. The terms of the Chrysler loan are attached.

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Stocking Filled with TARP

Just in time for the holidays and for their survival, General Motors and Chrysler will get $13.4 billion in short-term (three year) financing from the Troubled Asset Relief Program (TARP) as announced by President Bush this morning. Another $4 billion in loans will be available for the companies in February, if necessary. By March 31, 2009, the companies must demonstrate they are financially viable or else immediately repay the loans. Treasury Secretary Hank Paulson issued a statement asserting that, "As a result of this decision, Treasury has effectively allocated the first $350 billion from the TARP." He went on to urge Congress to release the "remainder of the TARP to support financial market stability." News outlets are reporting the automakers will sign the loan agreements later this morning. The term sheets can be downloaded here (Chrysler, General Motors).

The money comes with several conditions:

  • warrants for non-voting stock;
  • executive compensation limits;
  • no dividend distribution until TARP loans are repaid;
  • government approval required for transactions over $100 million;
  • labor agreement modifications; and
  • debt reduction by two-thirds.
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Auto Bailout Dies in Senate

For those interested in the financial services rescue and reform mission on which the US government has embarked who may have been only casually observing the auto industry rescue process, now would be a very good time to pay attention.

The failure last night of the United States Senate to pass a loan package for the "Big Three" now puts the ball squarely—and quite uncomfortably—in the court of the Bush Administration. Throughout this crisis, Democratic leaders on Capitol Hill have urged the Treasury Department to step in with TARP funds to assist the auto manufacturers. Treasury has resisted saying that was not the intent of the legislation that created TARP. They have never said, however, that the legislation does not allow it.

While it is true that the auto industry does not have the same systemic importance as the financial sector, the ripple effects of a collapse of GM, for example, would be substantial. In some ways then this is Lehman redux. Only now we have a President-elect taking office in five weeks who has said bankruptcy is unacceptable for any one of the Big Three.

If the Treasury Department does not act, that amounts to a decision by the outgoing President to allow GM to go bankrupt. That would be one of the most momentous decisions made by a President at the end of his term in memory. It will also deepen the already daunting challenges facing the new President.

We will be watching for hybrid Malibus with Michigan manufacturer plates pulling into the White House driveway. Stay tuned.

Congress Poised to Consider Auto Bailout

Congress appears poised to take up legislation to create a $14 billion credit facility for the auto companies. Whether or not it will pass is an open question as this is written. Under the draft legislation agreed to by House and Senate Democratic leaders and the White House, a "car czar" would be appointed by the President and given authority to offer "bridge financing" to the Big 3. It appears that GM and Chrysler would apply for the assistance early on, while Ford continues to say it may not need the help.

In exchange for the support, the companies would have to agree to submit long range restructuring plans to the "czar" so they could be approved by March 31, 2009—or 30 days later if an extension is granted. If their plan is not approved by the deadline their loans would be recalled immediately. Over time, if the "czar" found that adequate progress is not being made towards meeting the goals of the plan he or she could accelerate repayment of the loans. Other strings attached to the support include executive compensation limits and a prohibition on the payment of dividends so long as the loan is outstanding.

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Jobless Numbers May Work in Favor of Auto Bailout

The prospects for approval next week of a "lifeline" for the auto industry are greater today than they were a week ago. Two major factors contribute to that fact. First, the "Big 3" submitted restructuring plans that, while not met with universal approval, did pass a basic credibility test. Second, and more important, unemployment statistics released today create a greater impetus to preserve manufacturing jobs in the auto sector. According to the Bureau of Labor Statistics, the country lost 533,000 jobs last month and unemployment now stands at a 15 year high of 6.7 percent. Earlier this year, the average monthly job loss was 82,000. Not since 1974 has the United States lost so many jobs in one month.

Referring to the dismal employment news, House Financial Services Committee Chairman Barney Frank (D-MA) opened today’s hearing by saying, "Context is especially important this morning." As a supporter of assistance to the industry, Frank clearly sees today's news as strengthening the case for swift action. Top House leadership has also indicated an interest in advancing the legislation quickly if agreement can be reached between Capitol Hill and the Bush Administration.

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Stimulus and Auto Bailout Not Likely in Lame Duck

The Senate returns to work today and the House is scheduled to convene on Wednesday. In the past several days, it has become clear that neither significant economic stimulus nor aid to the auto industry is likely to be approved during this "lame duck" session of the 110th Congress. The sticking point appears to be the inability of Democratic leaders to attract sufficient Republican support for either measure.

G20 Leaders Agree on Actions to Manage Global Financial Crisis

The G20 summit on November 15 produced some worthwhile results and set the table for ongoing work in a number of areas.

Perhaps the most interesting outcomes were two that do not necessarily bear directly on the financial crisis, but which speak to underlying issues that need to be addressed going forward. First, to address mounting fears that protectionism may start to creep in to the policies of some countries, the G20 agreed that none of its members would take protectionist steps in the next 12 months. Second, the summiteers agreed to look for ways to re-capitalize the International Monetary Fund (IMF) and to give developing countries more of a role in its governance, thereby reducing the role of Europe.

The leaders agreed that transparency in the markets is important and that monetary and fiscal policy should be used "as appropriate" to stimulate economies while the governments continue to work on re-establishing financial stability.

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Congress and Treasury Leave Auto Industry in Neutral

Based on conversations with sources on Capitol Hill and administration officials, it now seems somewhat less likely the Treasury Department will expand its Capital Purchase Program (CPP) to include the insurance industry. Some life insurers may have publicly overstated their discussions with Treasury, leading to press accounts and misperceptions that the issue had been resolved.
Likewise, sources say Treasury is unlikely to assist the auto industry with funds from the $700 billion financial rescue package unless Congress makes legislative changes.

However, there is one scenario under which two leading auto makers might be able to get some Treasury assistance. GMAC LLC, which is the lending arm of General Motors, is owned 51 percent by Cerberus Capital Management and 49 percent by GM. Cerberus could become a bank holding company in order to qualify for EESA assistance. According to the Wall Street Journal, the federal rules for this would require GM to transfer much of its GMAC holdings to Cerberus so that GM would own less than 24.9 percent of the voting shares and would have no controlling interest in GMAC. Transforming into a bank holding company would enable GMAC to participate in Treasury’s Capital Purchase Program. Additionally, since Cerberus owns 80.1 percent of Chrysler, which is in merger talks with GM, the companies may be able to structure a deal in which Cerberus would exchange Chrysler shares for GMAC shares.

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Expanding the CPP?

Developments surrounding the Treasury's Capital Purchase Program (CPP) in recent days are causing the Department to take a hard look at the justifications for federal investment in industries beyond those federally regulated. Appeals from the insurance and the auto industry are both being reviewed.

It appears the insurance industry proposals are getting the strongest consideration at present, but there are clearly some cross-currents at work that are complicating the decision about whether or not to include them in the CPP. Reflecting that duality, Treasury’s assistant secretary for financial institutions, David Nason, appeared on CNBC’s "Squawk Box" this morning and indicated that there is some difficulty for Treasury to assess the capital needs of an industry that does not fall under federal regulation. He noted that while for the banking industry Treasury is relying on federal regulatory agencies, there is no such federal role in the insurance industry. On the other hand, he noted that it may be important for the stability of the financial sector to expand the CPP to cover insurance. Treasury is evaluating that question as well.

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Heavy Agenda

Events of yesterday continued to demonstrate how major elements of the current financial crisis are interrelated. First, with the world waiting to see how a new administration in Washington will approach the financial crisis, President Bush's announcement of a November 15 summit of international leaders puts the discussion of a new regulatory regime for the financial sector squarely in the middle of the U.S. presidential transition. While both Sens. John McCain and Barack Obama praised the summit, it will present the winner of the November 4 election with an interesting quandary—how to participate in and/or react to the event. It may also force the hand of the President-Elect to name his economic team before the summit takes place. Doing so will allow the administration-in-waiting to have a more organized response to the events of the summit.

Second, the impacts of the financial crisis on the U.S. auto industry may be putting additional pressure on the $700 billion rescue package enacted on October 3. As potential car buyers continue to face a credit crunch, bipartisan leaders of the Michigan congressional delegation yesterday urged the Treasury to make a portion of the funds available to back auto loans. The request came from House Energy and Commerce Committee Chair John Dingell (D-MI) and Rep. Fred Upton (R-MI). If Treasury takes up that suggestion, funds available to supply capital to community banks or purchased troubled mortgages would be reduced.

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