You remember your first new car – the one after the used junker that got you through the last years of college and was forever breaking down. It was the summer of 1969 and the new car was a shiny new Corvair coupe – or coupé if you want to be French about it. But it wasn’t French, although it was a Chevy and Louis Chevrolet was Swiss-French – close enough. But the thing was from General Motors and assembled at Willow Run, north of Detroit, where they used to make B-24 bombers. It was very American, and it was one of the last one of these cars made – from the final months of production – with the swoopy new body style. And everything Ralph Nader said was unsafe at any speed had been worked out. And the rear-mounted air-cooled engine hardly leaked any oil. It was fun.
But nothing last forever, particularly cars from General Motors. That became painfully obvious a few years later with the midnight blue Chevrolet Vega – assembled by the disinterested and distracted in Lordstown, Ohio. This was the GT with the turbocharger, and it looked super – and it went fast. But the aluminum block engine tended to work on disintegrating all on its own, and when something by your foot seemed odd and you looked down and you could see the road, you knew there were issues with what they call structural integrity. Rust was the issue, along with body flex. It seemed more like a neat idea for a car, not the real thing. And then, after that, the new Chevette was a really bad idea – but it was kind of cute and the first wife named it Ernie. It was earnest, but not much else. It was dark brown and finally came to seem like a turd on wheels.
And that was it for GM – no more of their products. Here is Hollywood the six-year-old Mini-Cooper does just fine – assembled in Oxford, England, by the German folks from BMW, with a supercharged engine from Brazil. Heck, everyone drives mongrel cars now – Japanese cars built in America, Chryslers built in Mexico, and the police driving their Ford Crown Victoria cruisers built in Saint Thomas, the one in Canada, across the lake from Cleveland. GM builds a lot of its SUV’s in Mississauga, one the edge of Toronto. The world has changed. And General Motors may be gone soon. The fat lady seems to be singing.
Monday, March 30, the rumors from the previous evening were confirmed. We had pumped a lot of money into GM and Chrysler to keep them afloat, and they had come up with recovery plans – but we, who had provided the funds, had looked at the plans and decided they were inadequate, and the administration had asked GM’s CEO to step down and it was time for tough love:
President Barack Obama ordered General Motors Corp and Chrysler LLC to accelerate their survival efforts and brace for possible bankruptcy, saying neither company had done enough to justify the taxpayer money they were seeking.
Obama, describing the industry as a pillar of the economy, nevertheless gave GM and Chrysler a little more time and money to wring further concessions from workers, creditors and other stakeholders.
“We cannot, we must not, and we will not let our auto industry simply vanish,” Obama said in White House remarks on Monday that were partly overshadowed by his decision to force out GM CEO Rick Wagoner.
And of course the markets tanked – the Dow down 254 or so. It just wasn’t pretty:
The Obama administration is giving GM 60 days to rework its survival plan. The new CEO of the biggest U.S. automaker said a court-supervised restructuring in bankruptcy might be necessary.
Chrysler’s operation would be funded for the next 30 days as it works to complete an alliance with Italy’s Fiat SpA, considered the No. 3 U.S. maker’s best chance of surviving.
If this doesn’t work out, it’s Chapter 11 – bankruptcy for restructuring with some disassembly – not Chapter 7 – liquidation, although that may be best for Chrysler. The Canadian government jumped in too – same deadlines, with a loan of a few billion so Chrysler could meet payroll this week.
And the guys at Fiat smiled:
Chrysler LLC has reached an agreement on a framework of a global alliance with Italian automaker Fiat SpA (FIA.MI) that has the support of the U.S. Treasury, Chrysler’s CEO Bob Nardelli said on Monday.
“We appreciate the willingness of the (autos) Task Force, along with industry and financial experts, to consult closely with us in order to achieve this significant step,” Nardelli said in a statement.
At the absurdly flawless and slick new White House website you can find the Obama administration’s new auto industry plan – with full video of the president’s address announcing all this. But if you’re an impatient sort, as we all are, the best analysis of what this all means comes from Matthew Yglesias:
The first thing to say about this is that unlike a lot of other things that have raised the cry of “socialism!” – This really sort of is socialism. You have the President of the United States firing the CEO of General Motors, and simultaneously ordering Chrysler to pursue a process of selling itself to Fiat. The administration is wisely trying to avoid an extended period of state-directed management of industrial firms producing consumer goods, but that’s certainly the situation they’re in at the moment and it’s something we ought to try to bring to an end as soon as possible.
But one of the two firms is far sicker than the other:
My understanding of the Chrysler portion of the deal is basically that if Chrysler and Fiat can’t come to terms within 30 days, then Chrysler is going to enter into a Chapter 7 liquidation process – at which point Fiat could buy whatever it wants. Consequently, Fiat is likely to be able to extract favorable terms on whatever deal they reach.
General Motors, meanwhile, is in effect being put into a debtor-in-possession bankruptcy. They haven’t technically been put in such a scenario, but the firm’s restructuring plan has been rejected and the panel is offering a 60 period in which to put together a more radical restructuring, featuring haircuts from bondholders and labor unions and dealers. This is basically what would happen in a DIP bankruptcy. The thinking is that given current conditions in the economy and the credit markets it wouldn’t be possible to arrange that through the private sector, so a bankrupt GM would need to be liquidated rather than reorganized. The government is stepping in to, instead, facilitate reorganization.
Yglesias thinks “these seem like economically reasonable courses of action” but he has his worries:
The American auto industry isn’t really going to be “saved.” General Motors is going to shrink radically, and Chrysler’s production facilities will basically become “transplant” factories of an Italian firm. In job terms, the auto industry is going to continue to shrink as a source of employment. In particular, the Chrysler-Fiat merger scenario is consistent with massive job losses in the United States since it is not obvious how many Americans Chrysler would really want to employ. If GM succeeds in getting out of a lot of its debt obligations, the resulting company isn’t going to be well-positioned to expand when the broader economy recovers since it’ll be hard to borrow on favorable terms. And the “good jobs” nature of blue collar work in the auto industry is going to further erode.
So while “this looks like an economically responsible way to avoid a cataclysmic implosion of these firms at an inopportune moment” it is bad news:
…this isn’t going to prevent the conditions facing the population of Michigan from further deteriorating. That state more-and-more looks like it’s going to be the 21st century version of the Great Depression’s Dust Bowl. The most important policy question facing us in this regard thus continues to be what can be done to help the people of the Rust Belt that doesn’t just involve indefinitely propping up shrinking firms. The first step is simply to turn around the shrinkage in the larger economy, but the question will remain even if recovery reaches the rest of the country.
What do you do with a dying industry, or one that is shrinking and becoming a minor player in a much bigger game? It is no wonder the markets dropped like a rock, although Kevin Drum isn’t that impressed:
As for the news that the stock market plunged on the news – spare me. Investors are idiots if they think this is bad news. A tougher restructuring plan is better in the long run for everyone but the auto industry’s bondholders, and I’ll bet that even most of them have either hedged their positions or else sold off their holdings at 70 cents on the dollar to speculators. Save your tears for someone else.
Daniel Gross addresses that in Paid Cadillac Prices, Got a Chevrolet – the bondholders will get hammered:
In addition to pushing out General Motors CEO Rick Wagoner, Obama also sent unwelcome tidings to other stakeholders of both GM and Chrysler. Given that Obama is being advised on these efforts by Steve Rattner, a veteran private-equity manager and investment banker, it’s not too hard to divine the unpleasant message he was delivering to Wall Street hotshots.
The Wall Street hotshots lose, big time, and the problem is structural:
At GM, the action is all about the company’s debt, not its equity. GM’s market capitalization was about $2.23 billion before trading opened today and is less than $2 billion as I write. By contrast, the company has loads of debt. (Here’s a list of outstanding bonds.) The most recent quarterly results indicate long-term debt of more than $29 billion. And since the firm’s credit ratings have been pushed deep into junk territory, that means most of the holders of this debt are hedge funds, private-equity firms, and other investment vehicles.
Gross notes that mutual funds and institutional investors like pensions or insurance companies don’t deal in junk, and GM debt is trading at “distressed levels” – they run the other way, for good reason. Gross links to this – GM bonds due in less than two years are trading at twenty cents on the dollar. You don’t want to play in that sandbox – unless you’re a master at shorting and trading by the millisecond. But the game is over:
Many of those who bought GM’s bonds did so because they hoped to 1) convert the debt into ownership in the case of bankruptcy filing or 2) see the bonds rise in value should the government step in and formally guarantee GM’s corporate debt. Obama made clear today what they suspected: No such guarantee would be forthcoming. While GM had tried to restructure, Obama noted, it hasn’t yet done enough. “I’m absolutely confident that GM can rise again, providing that it undergoes a fundamental restructuring. Have they cleaned up their balance sheets, or are they still saddled with so much debt that they can’t make future investments?”
The answers are no and a yes – the end. And what comes next is clear:
Holders of GM’s debt, like other entities to whom GM has made financial commitments – dealers, the auto unions -are going to have to cut a deal, sooner rather than later, and accept less than they think they’re entitled to.
And then there is Chrysler:
The company’s equity – its stock – is owned not by public shareholders but by the private-equity firm Cerberus, which paid $7.4 billion to buy an 80 percent stake in the company. Cerberus sold off big chunks of its equity to other professional investors, which reduces the amount of capital it has at risk. But last year it agreed to lend $2 billion to the struggling firm. According to the viability plan Chrysler submitted to Washington, the company has about $24 billion in debt outstanding.
Effectively, Obama told Chrysler that the government wouldn’t be providing much – if any – new cash and that he didn’t foresee much of a future for the company as an independent firm.
So they deal with Fiat. But that screws the hotshots even further:
The equity that Cerberus and other investors have put in was already severely impaired. After today, it’s worth even less. … Should Fiat and Chrysler cut a deal – which would dilute Cerberus’ impaired equity even further – “we will consider lending up to $6 billion to help their plan succeed,” Obama says.
If not, “and in the absence of any other viable partnership, we will not be able to justify investing additional tax dollars to keep Chrysler in business.”
In other words, big haircuts all around – for owners, bondholders, and creditors – even if Chrysler survives.
The markets loved Geithner and his odd plan to run a rigged auction of all those toxic assets that could well be worthless, or not – potential big profits and no risk at all. This is a different kettle of fish – smelly, dead fish. And bankruptcy would be disastrous for Cerberus. Wall Street has no idea what to make of Obama.
Of course the left is none too pleased either, with “a senior administration official, briefing reporters late Sunday night on the condition of anonymity in order to speak freely, said Obama will call for more sacrifice from carmakers, their investors and automotive unions.” Susie Madrak is not pleased:
Billionaire bankers (and their investors) walk away from the table with their pockets stuffed with taxpayer cash while members of the auto workers union are told they’ll have to sacrifice even more – in this case, the Obama administration wants the companies to get rid of “old liabilities” – i.e. retiree pensions. (You know, while bankers complain about having to sell the house in the Hamptons.)
No, Obama’s not talking about the insolvent banks. He’s talking about Detroit. Could he make it any more obvious that the wealthy are a protected class?
“If they’re not willing to make the changes and the restructurings that are necessary, then I’m not willing to have taxpayer money chase after bad money.”
Funny, that’s just how I feel about Citibank!
She thinks the workers matter the most here:
And what’s all this crap about bringing the cost of wages in line with Japanese auto workers – whose government provides free health care? Why are workers the only ones expected to bear that burden? That’s a right-wing meme if ever I heard one.
I’m not even arguing with the concept that deep cuts have to be made now to save the industry for later. For all I know, the union really is dragging their feet in negotiations. But how can the administration not see how it looks to the rest of the country?
Elana Schor also comments:
It’s an admittedly over-simplified question, but one that’s lingered in the background today after the Obama administration insisted on the resignation of GM CEO Rick Wagoner: Is the government insisting on stronger concessions from Detroit than it is from Wall Street, despite the latter’s receipt of a far bigger taxpayer bailout?
And she finds this from one of the two Michigan senators puzzling:
Sen. Carl Levin (D-MI) just told reporters that he believes there has been “a double standard for a long time in terms of the treatment of the financial industry, compared [with] the way the auto industry has been treated. It’s something we’ve fought against … but something we’ve got to live with and deal with.”
It seems Levin thinks it would be “a distraction” to gripe about banking CEOs’ keeping their jobs – while, she says, “boasting of managerial records nearly as dismal as Wagoner’s…”
It doesn’t seem fair.
But one reader at Talking Points Memo offers this:
As a 30+ year veteran of the auto industry let me make the difference very clear; the banks can exist without the auto industry. The same cannot be said for the reverse. The automobile business, from the manufacturers down to the consumers, relies on banks for one reason or another.
While the current economic situation has brought the oversight deficiencies in the banking industry to the forefront, the automakers have spent the better part of the last 40 years ignoring their core businesses and focusing on short term profits and muddled business plans. Anyone with a clear view of the industry knew this day was coming – it was just a matter of when. The fact that banks aren’t making loans in order to buy cars just accelerated this downfall.
And he has his anecdotes:
I was meeting a friend in the GM building in downtown Detroit about 18 months ago and was astounded to learn how few people there were actually involved in making cars and how many were involved with other GM business interests.
In Chrysler’s case, this was a weak company driven into the ground and thoroughly looted by its “merger” with Daimler-Benz. It was funny going to hotels around the Chrysler headquarters in Auburn Hills and thinking you were in Germany due to the huge number of German speaking guests. Each staying for long periods of time on the company dime and all being charged to Chrysler.
Ford has been the most proactive of the three and should be alright with minimal interruption, although any changes in the basic labor agreement with the other manufacturers will impact Ford union employees as well.
And on the right, things are just odd. See this video clip from The McLaughlin Group, March 27, 2009 – Monica Crowley Thinks Bailouts are the Government “Jackboot” on the Private Sector:
McLaughlin: Question. Are these bailouts sufficient to restore the economy I ask you Monica?
Crowley: No, because you put out a consecutive list of companies, institutions, sectors that have required some money over the last couple of months. In just about every single one of those cases there was a redundancy there. AIG coming back. The auto industry coming back. What we have poured into all of these sectors has not nearly been enough and it will not be enough. This is like spitting into the ocean. It’s not going to be enough to restore the economy and if we keep going down the path of having the government jackboot on the private sector, the private sector which will be the engine of this growth (crosstalk).
[Eleanor] Clift: The government jackboot on the private sector… uh, the private sector had its jackboots on American taxpayers for a good long while and we had companies like AIG basically operating like a hedge fund selling a little insurance on the side. And it is totally appropriate that we now try to get a handle on the new financial world that is… it’s a titanic struggle between the Treasury Department and the financial community and who’s going to run the economy.
Maybe the financial community does run the country. From the Boston Globe, see this report about how the Pension Benefit Guaranty Corporation, the agency that insures retirement funds, like those of the auto companies, decided to play in the stock market at exactly the wrong time:
Just months before the start of last year’s stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.
Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.
The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent – and all of its stock-related investments were down 23 percent – as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.
These folks are the backstop against major losses by private pension funds, to keep the parent companies from slipping into bankruptcy. A structured bankruptcy by GM or Chrysler would mean that massive liabilities would be passed on to this agency. The fellow who made the decision was a Bush appointee.
David Kurtz thinks he sees what is going on:
A finance professor who had previously advised the agency not to make the switch away from bonds compared the move to an insurance company writing policies to cover hurricane damage and then investing the premiums in beachfront property.
Bush was able to do for the Pension Benefit Guaranty Corporation what he tried and failed to do for Social Security.
Josh Marshall agrees with that – “Incompetence doesn’t cut it as an explanation.”
Marshall sees it this way:
One of the big drives behind Social Security privatization was the desire to find more money – in the case of Social Security, a lot more money – to keep the fires burning on Wall Street. Not just more fees for the people handling the money, but more money to keep pushing asset values higher. This looks like the same thing just using slightly different means.
Maybe there is much more going on here, beyond the ultimatums to GM and Chrysler, and the jackboots and all the rest. We not only have to get out of this big mess and that, then we have to decide who is running this country, and for whom.