It's clear at this point that there's little alternative to either bankruptcy, or a government-steered process that looks very like it. Detroit's sales are now falling below the "worst case scenario" the Big Three presented to Congress last fall. I suspect that Detroit knew it then, and hoped that they could rope the government into throwing good money after bad.
But I still wonder how serious the administration is about actually putting the Big Three into formal bankruptcy. It seems more likely to me that they're playing chicken with the creditors, trying to entice them into taking a known haircut right now rather than risk the wrath of a bankruptcy judge. For one thing, debtor-in-possession financing does not seem to be eagerly forthcoming:
It's not clear to me why creditors, in exchange for the priceless gift of being bullied into lending money to an industry that is radically contracting, would agree to let Uncle Sam cut in the seniority queue. Making them use their TARP funds for the purpose is little more than an accounting shell game--making frail banks lend on a bad bet just makes it more likely you'll have to pump more capital into the system. This makes me think that they are not serious about getting DIP financing; they're just trying to force other creditors to the table for the restructuring talks that have so far gone nowhere, since creditors reasonably believe that they will get a worse deal from DC than they would from a judge.The initial discussions call for private banks to provide the financing -- known as a debtor-in-possession, or DIP, loan -- with the government guaranteeing or backstopping the loan. In this scenario, some of the financing would be used to pay back the $17.4 billion the government lent GM and Chrysler late last year.
Treasury advisers are handling the effort and keeping GM and Chrysler informed of the steps through back-door channels, said the people familiar with the matter. The interplay between the government, auto makers and the markets is proving to be complicated.
Lenders are reluctant to commit funding to GM or Chrysler for several reasons -- mostly concern they won't get all their money back. Recently, the government advisers have begun aggressively courting big lenders Citigroup Inc. and J.P. Morgan Chase & Co. -- themselves government-aid recipients -- to participate in any bankruptcy financing, said people familiar with the matter.
The government advisers also are looking at ways the Treasury could "prime" other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps. Both GM and Chrysler insist they can avoid bankruptcy, warning that option could cost the government as much as $125 billion in rescue financing. Bankruptcy experts say the sum isn't likely to be that high.
Even so, the estimated total of $40 billion in DIP financing GM and Chrysler would need would be five times as large as the previous record for such financing, which is used to fund day-to-day operations while companies sort out their debt. To fill such a large hole, Treasury's advisers are trying to corral as many as 70 lenders to participate in what is now informally called the "bank steering committee."
The administration does not want to be the one giving a bottomless pool of money to the automakers. It also does not want to be the one dealing a near death-blow to the UAW. What happens to prosperous unions in bankruptcy is really not pretty--just ask an airline pilot. Contracts are tossed out, slipping pension funds get gutted (though the Big Three funds are in good shape for struggling companies), jobs are slashed. I suspect that the retirees can kiss those expensive, and yet unfunded, health care benefits good bye. The administration seems to be hoping it can avoid doing both of these things, but this doesn't seem possible--either it will prop the companies up, or it will force a radical restructuring on the companies and creditors.
The bankrupcty theater only works if you think that bankruptcy will have such a devastating impact on Detroit sales that creditors will be better off letting the government give them a substantial haircut. But the administration's political priorities mean that its primary sympathies are with the UAW, preserving as much of their wages, benefits, and jobs as possible. Doing that will take a bigger haircut from the creditors than a restructuring plan that focuses on building a viable company without regard to preserving jobs and compensation--so for the creditors, it only makes sense if you think the bankruptcy will reduce the size of the pie substantially. Or so I mote.
Of course, it may well do so. The administrative costs, the damage to the brand, and the lost sales due to uncertainty, will all put a big crimp in revenues. And bankruptcy means that the creditors have to spend a lot of their own time and money presenting evidence and negotiating.
On the other hand, I'm not sure that the restructuring outside of bankruptcy is really feasible. The auto industry had excess capacity a year ago, but in the current tight credit market, it's got a massive glut. Cars are piling up in ports, because it's so expensive to shut down and then restart a plant that global producers are still cranking them out in the dim hope that the market will somehow recover even though there's no financing available. Someone needs to shed a whole lot of plants and marques (read: jobs), and Detroit is the weakest. We could prop them up, hoping some other country will then go under and take the pressure off us--but everyone is just as nationalistic and irrational as we are about their car industry. We'd be guaranteeing many years of ugly hemorrhage with no obvious return.
Bankruptcy will rip the last bastion of Galbraith's New Industrial State thoroughly asunder, shattering union contracts, closing plants, sending Detroit's legacy marks to the scrapyard.
I think you should tone that down just a wee bit. I can easily see the American auto industry collapsing entirely but unionism growing.
Besides, without unions, what shibboleth will libertarians have to shrilly, comically blame for every problem this country has ever had, ever? It's been harder and harder for you guys to thread the needle with ever-shrinking unions and prestige of unions, while ramping up again and again the unhinged rhetoric against unions. If we really get rid of all the unions, and the country doesn't immediately flower into an Ayn-Rand fantasy utopia, where will you guys get your material?
Why is it a good idea to force the auto manufacturers into bankruptcy but not the banks?
"Why is it a good idea to force the auto manufacturers into bankruptcy but not the banks?"
Banks can fire employees and close branches as needed. Automakers have huge legal and contractual obligations when it comes to terminating union employees and ending relationships with dealers.
Why is it a good idea to force the auto manufacturers into bankruptcy but not the banks?
Banks are not allowed to reorganize in bankruptcy. Companies like the auto manufacturers, are. A bankruptcy reorganization of an auto maker can still allow an auto maker to re-emerge from the proceedings with reduced assets and liabilities, whereas a bankruptcy of a financial institution means everything must be parted out and sold immediately.
But I still wonder how serious the administration is about actually putting the Big Three into formal bankruptcy.
Hey! Easy on the "Three"!
As Megan noted, the administration's top priority is preserving union jobs, so it's trying to avoid bankruptcy. But this is essentially what's been happening in slow motion in Detroit for twenty years.
It won't work. They'll still be zombie companies, but now they'll be zombies on the taxpayer dime.
So in the near future one will be able to get a great deal on a car? Sweet!
Of course, every car that is made now without any hope of being sold, lessens the probability of any manufacturer becoming viable even after restructuring. They will have to find ways to build cars for cheaper than it costs to store them...
Has any car company ever gone into bankruptcy reorganization and come out alive? I'd like to see some examples of that before we pull the plug on the Big Three at this time.I see huge job losses in the auto industry and its suppliers under any "reorganization". Despite soothing talk by MMM and commenters, I doubt any "reorganization" will be smooth.
All libertarians of course believe that unions are teh evil and salivate at the possibility of finally breaking the arch-demonic UAW. They are strangely silent to the role of management in the Big Three's demise, of course. To libertarians, business men can do no wrong-they are examples of the Spirit of Enterprise and thus are holy, PBUT !(Praise Be Unto Them).
"To libertarians, business men can do no wrong"
Where did you ever hear anyone say that?
Bankruptcy, nationalize, whatever you want to call it.
The fact remains we are throwing good money after bad with Citi, BOA, etc. yet everyone gets worked up about the auto manufacturers. I fail to see the logic.
Mike,
Most people haven't been personally f*cked over by their bank. Your paycheck gets directed deposited into your checking account, you use the online bill pay, you use your debit card, it all mostly works. You maybe get hit with a $25 fee for something, but hey, that's lfe.
On the other hand, millions of people have been personally f*cked over by the Big Three. You buy a new Chrysler LHS and it goes through three transmissions in 60k miles and you grow to hate Chrysler.
Has any car company ever gone into bankruptcy reorganization and come out alive? I'd like to see some examples of that before we pull the plug on the Big Three at this time.
So sucking billions from the Federal Government is called being "alive?" Yeah, in the "living" dead sense of the word.
All libertarians of course believe that unions are teh evil and salivate at the possibility of finally breaking the arch-demonic UAW. They are strangely silent to the role of management in the Big Three's demise, of course.
Uh, silent in how we don't think saying "management sucks" means that the Big 3 get billions in taxpayer cash for the indefinite future?
If there is any "silence" on the issue, it's because it's a non-issue. They should go into bankruptcy. They shouldn't get endless life support from the government regardless of who's at fault. They're insolvent. It's not going to get any better any time soon, in fact it's continually getting worse. If you want to whine about how Management is what bankrupted them, well, go right ahead. Just don't tell us that means that we have to prop up the industry.
To libertarians, business men can do no wrong-they are examples of the Spirit of Enterprise and thus are holy, PBUT !(Praise Be Unto Them).
In what world is saying "Go into bankruptcy" praising the Businessfolk who run the Big 3?
@glorious
Well, they are still in biz employing people. They truly go dead and millions of people go out of work. At this time, that's not a good idea.its a hell of a lot of unemployment insurance, foreclosed homes, declining consumer demand, crowded homeless shelters, and social unrest.
I may have gone overboard a bid with the businessman comment, but lets face it, on this blog, you will find that for every one comment noting that management may have had something to do with the fall of the Big Three, you'll find 999 calling for the destruction of the UAW
@stonetools
I think you are overstating the words case scenario. If there is a need for half the cars that GM and Chrysler were making, then demand for them will continue to exist, and someone (Wether Ford, Toyota, Honda, some upstart, or a combination) will fill it, by manufacturing more cars. To do so, they will have to hire more people, either build new factories, or refurbish existing ones, give contracts to suppliers, etc. It makes sense to hire people with experience in manufacturing cars, rather than train people from scratch, so most workers will still have a job, they will simply be receiving their check from a different company. The ones that aren't will represent the excess production capacity, and be proportional to is.
It should please you, that the management that was responsible for this collapse will likely not be employed again.
And I'm of the opinion that management is ultimately responsible, if for no other reason than agreeing to UAW demands.
jmo,
Since we're now taking about getting f*cked over, let's discuss further. We have choices when it comes to cars and banks. The market (and my wallet - Honda owner here) has clearly spoken with respect to cars.
However, my hands are tied with the banks. I have two credit cards (in all fairness to the conversation...no balances outstanding) where limits were lowered and interest rates raised. This is not limited to a few banks - it is systemic.
I don't necessarily care about the rate since I pay off each month, but the limit reduction has been a detriment of my credit score. What did I do to deserve this? Absolutely nothing. Only debt is a mortgage at 15.2% DTI.
So forgive me if I continually harp on the banks. They have received and continue to receive obscene amounts of my tax dollars and have the ability to borrow for next to nothing from the Fed and lend at 20% rates. Yet, they are unable to make a profit. It clearly shows they are insolvent due to their toxic assets. Nationalize them and move on.
Well, they are still in biz employing people. They truly go dead and millions of people go out of work. At this time, that's not a good idea.its a hell of a lot of unemployment insurance, foreclosed homes, declining consumer demand, crowded homeless shelters, and social unrest.
...and taking that money out of taxpayers pockets has an opportunity cost as well. You can't take X dollars from Pete, give it to Paul and act as if you've averted a contraction in the economy. It's just a transfer payment.
Oh, right. I forgot. The Government will just "borrow it." Great, that attitude never got anyone into any trouble, now did it? It's not like we're paying for it, is it?
When the Government borrows money it's like Manna from heaven, right? When the Government borrows the 2+ trillion deficit it's on track to have this year I shouldn't get all silly and start thinking that's going to have an effect on me or the economy.
I may have gone overboard a bid with the businessman comment, but lets face it, on this blog, you will find that for every one comment noting that management may have had something to do with the fall of the Big Three, you'll find 999 calling for the destruction of the UAW
That's because of market fundamentals pro-union people like yourself want to pretend don't exist. Post after post has gone over these factors, and people like you just dismiss them and angrily denounce "anti-union bias."
Whatever, wake me up if you want to start making actual claims instead of just complaining about them.
There is actually another, much more subtle reason that the government may be trying to arrange private DIP financing -- to demonstrate that it can't. That's one of the things the automakers would have to show in order to allow a government financed DIP loan to prime the existing lenders. If the Obama administration is getting good counsel and heeding it, the best way to do this is through Chapter 11 (or a new law just for automakers that looks a lot like Ch. 11) with the government providing DIP financing that primes existing lenders.
I don't understand the point of having banks like citi and bofa lend money to the automakers. Isn't that just government money going in the front door and out the back? It smells a bit like money laundering.
Lemme get this right; there are mountains of cars being made around the globe right now that can't be sold, because the demand is so weak, and people are still debating whether UAW retirees should continue to receive health care benefits superior to the health care benefits of the typical American retiree/Medicare recipient? Despite the fact that Medicare recipients endure less health care rationing than just about any retirees anyplace on earth, and despite the fact that the UAW retiree health care benefits need to be funded by current auto sales?
Our political debates may as well be focused on leprechauns, elves, and fairies, given how disconnected from reality they are already.
Stonetools - where do you get the idea that Chrysler, or even GM, disappearing entirely is a bad idea? They're run by spineless, incompetent management who let the unions destroy their future in exchange for short-term labor peace. They deserve to die, and to take their execs golden parachutes with them. Chrysler is such a pit of suck that Daimler-Benz had to pay nearly a billion dollars to get anyone to take it off their hands. And that was when people were feeling flush and buying SUVs.
Megan,
They aren't serious at all, but unless they can get more money to funnel into the automakers, they are likely not going to be able to prevent it. If that story is even half accurate, part of the problem is that the government is trying to recover the previously wasted money as part of the DIP. Only a complete moron would loan money to automakers just so they could pay that money back.
It is far preferable to just stand back and the let the creditors force them into BK- it is the only rational path forward.
This is just a foretaste of what the nationalized banks will be like - forced to make bad loans by their new owner. I think we all agree that making crappy loans and being lousy investments are a large part of why the banks are in trouble, yes? So why would it solve the problem to make the banks repeat this bad behavior, only this time as a GSE ? There is a good reason that a lot of the banks are not lending, even those that have taken TARP money and have cleaned up their balance sheets: They are trying not to be stupid any more - that means doing more diligence, not agreeing to "covenant-lite" loans and acting as if they will own the loans and not just syndicate them to a bunch of suckers - all the stuff they did not do but should have. As a result, they are making a lot less loans. Are they maybe being too cautious? Probably, but who can blame them at this stage. I work with several of the major banks, and they are totally open for business - as long as you have an investment-grade rating.
I come down on the side that says the UAW is at least partly to blame for the mess the big 3 is in. However management is also to blame for not realizing when the UAW demands would/could spell doom for their companies, and taking difficult action when they needed to in order to stay competitive. The short sighted strategies and continually changing strategies of the big 3 haven't helped either. There are plenty of large successful American companies that have strong unions - Caterpillar, GE, 3M, Boeing, and John Deere all fit the bill, and are all successful money making corporations that are some of the largest exporters in the U.S. Plenty of large successful American companies also have no unions (or very little) in their work forces - ExxonMobil, WalMart, and Coca Cola come to mind quickly. A union cannot destroy a company unless the management lets it.
@Anthony
I'm OK with GM and Chrysler eventually disappearing. I'm not OK with the idea of them disappearing in April, dumping hundreds of thousands if not millions of unemployed workers out on the street.
I'm OK with UAW getting lower pension benefits. I' m not so happyy with them not getting ANY pension benefits which is what happens if a company goes to Chapter 7.
Again, if someone can give me examples of a big car company going to Chapter 11 and coming out the other end, fine. AS far as I know, car companies go Chapter 11, then Chapter 7, then they're gone, leaving unemployed workers and unpaid pensions behind them.
What I am getting here is let them go bankrupt, because UAW will go bust and it serves them right. that seems a little short sighted to me. Unemployed workers mean more foreclosed homes, decreased demand, rising homelessness and lots of social unrest, crime, and domestic violence. The Great Depression was not a happy time. I might add that transfer payments such as food stamps and unemployment insurance and payments for emergency room care go way up, too, for folks like Glorious who hate the very idea of transfer payments. You pay one way or the other
AS far as I know, car companies go Chapter 11, then Chapter 7, then they're gone, leaving unemployed workers and unpaid pensions behind them.
What I am getting here is let them go bankrupt, because UAW will go bust and it serves them right. that seems a little short sighted to me. Unemployed workers mean more foreclosed homes, decreased demand, rising homelessness and lots of social unrest, crime, and domestic violence. The Great Depression was not a happy time. I might add that transfer payments such as food stamps and unemployment insurance and payments for emergency room care go way up, too, for folks like Glorious who hate the very idea of transfer payments. You pay one way or the other.
We certainly do, but in the prop-em-up scenario, you may end up with zombie corporations that add no value but persist forever on those tacit guarantees, therefore are never cleaned out of the economy and replaced with something that can actually contribute toward growth. One subsidized deferrence of the inevitable, granted without a corresponding enforcement of painful terms, leads to another request for deferment which can then be justified again with the same arguments and less persuasion, because now we've got a precedent to fulfill.
Eric Gagen, there's one difference in kind between the healthy companies you cite that have heavy unionization, and the auto industry. In your list of companies, the competitors are usually in another country and in any event their labor is represented by a different union. That means that a very solid majority of the union management of the union that represents you has a stake in the continued prosperity of the company you work for.
In the auto case, this doesn't hold. The so-called Big Three are represented by the same union. Not counting the retirees, two thirds of the people who vote on the management of your union work for a competitor. What this means is that they are the ones with the monopoly position, with all that implies. Of course the management is gonna get screwed.
I am no opponent of unions per se, but I believe that unions should have the same antitrust regulation as companies, so there is equal bargaining power but no quirkily unalanced situation such as we have here.
Does anyone out there in cyberspace know of a similar industry, where a fairly concentrated small group of companies are all heavily unionized and all by the same union?
-dk
Again, if someone can give me examples of a big car company going to Chapter 11 and coming out the other end, fine. AS far as I know, car companies go Chapter 11, then Chapter 7, then they're gone
The problem with that request is I can't think of any big car companies, at least in the US, in the last few decades, that would serve as usable case studies. The last independent major was AMC (American Motors Corp), which was bought by Chrysler in 1987 - before that Renault had a major stake in them.
The only other ones I can think of are Checker (which no one would call major), which stopped making cars in 1982 but continued to run some other businesses, and Studebaker-Packard, which stopped making cars in 1966 but also continued to run some other non-automotive businesses before getting swallowed up by another non-automotive company a few years later.
You people are funny.
The dollar is heavily overvalued as is demonstrated by our huge balance of payments deficit. Imported cars are subsidized at fifty to a hundred thousand dollars each. GM, Ford, Chrysler, Magna, Delphi, etc, are some of the most profitable companies in the US after correcting for this tax.
The difference between the automotive and agricultural industries in America is that the agricultural industries (you know, farmers) own dozens of Senators and get hundreds of billions of dollars in subidies to counter the effects of the dollar being propped up by foreign countries.
When China stops propping up the dollar, the auto companies (and the farmers) are going to be rich.