The President of the United States has made an executive decision: have the United States Treasury provide $17.4 billion dollars to select automakers – to allow them to avoid declaring bankruptcy.

Unlike a Chapter 7 bankruptcy which is primarily a liquidation of a debtor’s assets in satisfaction of the creditor’s claims, a Chapter 11 bankruptcy is a court-supervised opportunity for a company reorganization and restructuring. Under Chapter 11, the bankruptcy trustee and the courts have the power to set aside any existing contracts such as the onerous United Auto Workers’ (UAW) union agreements which have hobbled the automakers for years.

In fact, this bailout is, in reality, a joint bailout of the automakers and their unions. Unions which are, coincidently I am sure, are owed billions of dollars in scheduled payments.

Why not Chapter 11?

First, the time frame to prepare for a pre-packaged Chapter 11 bankruptcy may result in the automaker’s running out of money prior to the bankruptcy filing – which means any sufficiently large creditor could petition the court for an involuntary bankruptcy finding.

Second, a bankruptcy would force the automakers and the politicians to openly confront the problems with the politically potent union.

And third, the bankruptcy would expose the practice of manipulating the numbers by shipping product to dealers and booking the sales, dealing with the major contingent liability of warranty service and other manufacturer-dealer relationships that may remain buried in the details too numerous to mention.

It is my personal opinion that this White House ploy is simply another political attempt at expediency – providing support on terms which, in effect, simply kick the can down the road – right into the Obama Administration. A democrat Administration which is more beholden to the unions than they are to the companies which are being saddled with onerous union payments and inflexible operating procedures.

 From the Wall Street Journal …

“The White House announced a $17.4 billion rescue package for the troubled Detroit auto makers that allows them to avoid bankruptcy and leaves many of the big decisions for the incoming Obama administration.”

While this is characterized as a “rescue package,” it is only an interim step which will lead to further problems in the near future.

“Speaking from the White House, President George W. Bush said the administration decided against forcing a bankruptcy to compel cost-cutting, in order to avoid the risk that consumers would desert one or more of the companies and touch off an industry collapse, deepening the current economic downturn.”

There is no doubt that the current business model of the automakers is broken. Going beyond the obvious inefficiencies and union payment problems, one must also consider the individual state’s franchise agreements that protect auto dealers – many of whom are politically powerful, especially the large multi-store dealerships.

Nobody doubts the potential threat posed by Internet shopping which would significantly reduce the consumer’s cost of an automobile. By selecting and purchasing a vehicle over the Internet, automakers are able to eliminate a great deal of the cost and trouble of dealing with “dealerships.” What might happen to the large dealerships is easy to project: they would significantly contract into a relatively few showcase operations where the profits may come more from repairs than car sales and deliveries.

“The deal would extend $13.4 billion in loans to General Motors Corp. and Chrysler LLC in December and January, with another $4 billion likely available in February. It also would provide the government with non-voting warrants, although the exact amount was unclear immediately. Ford Motor Co. has said it doesn't need short-term assistance.”

Stupid is as stupid does …

One of the greatest differences between the Congressional effort to legislate a rescue package and the White House attempt is the Treasury’s requirement that the automakers need not show viability up front and will simply provide the funds and then call the loans after March, 2009 if they cannot prove financial viable. By then the money will have been spent and simply added to the amount of money owed to creditors under a future bankruptcy.

“The deal is contingent on the companies' showing that they are financially viable by March 31. If they aren't, the loans will be called and all funds must be returned, officials said.”

The automakers have not been viable for the past few years, so why should anyone think they can turn on a dime and become viable within a mere three or four months. I do not believe that these funds will be repaid and will simply become part of a larger bailout or the American public will become just another creditor in a long line of creditors.

“The deal generally tracks key provisions of the bailout legislation that nearly passed Congress earlier this month. But it is relatively lenient in allowing the companies to show their viability, which it defines as having a positive net present value -- a way of gauging the companies' worth, taking into account all their future obligations.”

“It sets targets for the companies to hit in determining their financial health, such as reducing debt and current cash payments for future health care obligations. But according to a White House fact sheet, the targets ‘would be non-binding in the sense that negotiations can deviate from the quantitative targets...providing that the [company] reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.’"

Nowhere does the bailout provisions treat divisions of the automaker which may be engaged in other activities involving financing loans, real estate and other non-manufacturing activities. There is likewise no consideration of the proftable overseas operations of the automakers which may be vehicles (pun intended) for currency manipulation and bookkeeping stunts.

Congressional intent?

When Congress provided the original $700 bailout bill (even loaded with democrat pork) it was with the proviso that most of the provided funds provided under TARP (Troubled Assets Relief Program). Already the intent of Congress has been breached by Treasury Secretary Henry Paulson who has decided how the funds are to be used. There is little or no program oversight or reporting as mandated by Congress.

The use of TARP funds to provide funds to the automakers is a clear violation of Congressional intent and merely highlights the willingness of the White House to sacrifice sound economic policy for the political expediency of moving the problem to the Obama Administration.

Watch my left hand ...

What makes this particular situation somewhat unsavory is that this is not the extent of the government's involvement with the automakers. The government has already guaranteed the availability of $25 billion in funding from the Department of Energy for assistance in developing more energy efficient vehicles. This effort does not consider the ongoing puchases of vehicles for the United States government or Department of Defense R&D contracts. In the case of GM, not much is being made of GMAC (General Motors Acceptance Corporation) which is involved in home and auto loan financing -- with 49% of the firm being owned by GM. GMAC is trying deperately trying to qualify as a bank for the sole purposes of further participating in government bailout funds. So to think that this effort is the sum of all of the government's involvement in the affairs of automakers is naive.

And what makes this entire matter odious, especially to my way of thinking, is that the private equity company Cerberus Capital Management owns the other 51 percent of Detroit-based GMAC as well as owning at least 80% of Chrysler. While Cerberus has reportedly said that they wouldn't take undue advantage of the situation to profit from the bailout, it should be taken with a grain of salt. Cerberus is a politically-connected firm headed by such people as former Treasury Secretary John Snow and former Vice President Dan Quayle.

According to OpenSecrets.org, the firm has engaged in serious lobbying activities.

Total Lobbying Expenditures: $5,701,193
   Subtotal for Subsidiary Chrysler LLC: $4,671,193
   Subtotal for Parent Cerberus Capital Management: $1,030,000

While we appreciate any organization's right to freely lobby public officials, due to the nature of the bailout, I would certainly be interested in knowing which officials were approached and the nature of the support provided to these individuals. Cerberus is one of the most secretive companies in the nation and they do not welcome transparency when it comes to their operations. Considering that the United States taxpayer is going to potentially salvage the investment of Cerberus in Chrysler and GMAC, more transparency, instead of less, should be required.

More information on the “facility” than you may want …

For those who are interested in seeing the outline of this bailout attempt, the Treasury Department is providing a fact sheet on their website which may be accessed here.

Looking Presidential … for now …

“This is a difficult situation that involves fundamental questions about the proper role of government. On the one hand, government has a responsibility not to undermine the private enterprise system. On the other hand, government has a responsibility to safeguard the broader health and stability of our economy.”

“Addressing the challenges in the auto industry requires us to balance these two responsibilities. If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers. Under ordinary economic circumstances, I would say this is the price that failed companies must pay -- and I would not favor intervening to prevent the automakers from going out of business.”

“But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed. Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws -- and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court. But given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time.”

“American consumers understand why: If you hear that a car company is suddenly going into bankruptcy, you worry that parts and servicing will not be available, and you question the value of your warranty. And with consumers hesitant to buy new cars from struggling automakers, it would be more difficult for auto companies to recover.”

“Additionally, the financial crisis brought the auto companies to the brink of bankruptcy much faster than they could have anticipated -- and they have not made the legal and financial preparations necessary to carry out an orderly bankruptcy proceeding that could lead to a successful restructuring.”

“The convergence of these factors means there's too great a risk that bankruptcy now would lead to a disorderly liquidation of American auto companies. My economic advisors believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry. It would worsen a weak job market and exacerbate the financial crisis. It could send our suffering economy into a deeper and longer recession. And it would leave the next President to confront the demise of a major American industry in his first days of office. “ <More of the President’s statement>

Translation …

The automakers will not declare bankruptcy on my watch. I can continue to claim that I was part of the solution. And I have effectively made it the Obama Administration’s problem. It’s now a democrat issue. Blame them for any adverse outcome and credit me with initiating the recovery if things turn out well.

The triumph of style over substances, or should we say, the triumph of politics over good economic policy.

What can YOU do?

We are living in an era where the special interests have bought the government and they no longer seem to need the citizenry except as a source of contributions and votes during an election cycle. They are counting on the fact that America seems to be persuaded more by celebrity and media manipulation than an examination of the past performance of the politicos. They are relying on an America with a collective amnesia of being screwed by masking the event with a data rape drug. Yes, “data” not date … they bury us in so much distracting data that one cannot often see the forest for the trees.

You need to become a more informed voter. You need to become adept enough to convince your relatives, friends, co-workers and others to move beyond the superficial into considering the amount of damage being done to our nation by the current crop of politicians and their special interests sponsors.

But above all, protect yourself from the downturn. (We will be having more on this in later blog posts).

-- steve

Quote of the day: “Self-serving politicians are the norm, the trick is to convince them the wants and needs of the citizens are in their best interests.” -- steve

A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

Auto Makers to Get $17.4 Billion - WSJ.com