Senator Corker's Corker - Automaker bailout

[REWahoo]

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Originally Posted by FinanceDude Maybe govt is the only folks who can offer such promises.........

"Offer" - no. "Keep" - maybe.

[ziggy29]

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Originally Posted by FinanceDude the big difference is that the so-called "sweet deals" at GM were to be funded by the private sector, unlike the "sweet deals" that are funded by goverment. Maybe govt is the only folks who can offer such promises.........

Especially since GM can't raise taxes or force people to buy their products.

[FinanceDude]

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Originally Posted by ziggy29 Especially since GM can't raise taxes or force people to buy their products.

true............

[ERD50]

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Originally Posted by ERD50 Oh boy, don't get better, make the other guy as bad as you. I feel better now.

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Originally Posted by youbet Hmmmmm... I was trying to NOT make good - bad value judgements in regard to pay and benefits, so let's not go there other than to say that having the UAW successfully organize the foreign owned car manufacturers operating here would go a long way towards making the D3 long term viable.... especially if the foreign companies were required to share in the legacy expenses. Let's not get this thread moved to the soapbox......

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Originally Posted by ziggy29 Thank you.

Well, it wasn't intended as a 'soapy' comment, but as a money comment. Sorry if it came across that way. A fuller explanation:

What I am realizing more and more is that unsustainable practices are, well... unsustainable. They lead to problems down the road. Without painting the UAW as good/bad (trying to avoid the soap tainting), I will stand by my comment from a money viewpoint. Clearly, the UAW has used its power to bring compensation above what the free market offers. And these are the types of things that I see as unsustainable. The current situation is evidence of that, no?

So yes, we could level the playing field by artificially (unsustainable, IMO) bringing the other plants UP to the UAW level, rather than the other way around. But that means higher costs for US made cars for all US buyers. What unintended consequence will that bring? Fewer cars sold., and more imports seems obvious. That means fewer US jobs. Which could then be retaliated with tariffs on imports, which has further consequences in a global market. Those are all money issues.

IMO, if we are going to be evaluating and trying to understand the options here, we ought to understand the long term impact of those options. From what I see, any plan that includes bringing other free-market wages up to UAW levels will just have us back here discussing what went wrong down the road. Allowing the D3 to restructure under bankruptcy just might result in a leaner, meaner industry and *increase* value-added manufacturing jobs in the US. Yes, those jobs may be at a somewhat lower wage, but there may be more of them, in the long run.

-ERD50

[ChrisC]

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Originally Posted by ERD50 Allowing the D3 to restructure under bankruptcy just might result in a leaner, meaner industry and *increase* value-added manufacturing jobs in the US. Yes, those jobs may be at a somewhat lower wage, but there may be more of them, in the long run. -ERD50

The crux of the matter, as I see it, is that restructuring under Chapter 11 cannot occur because of the product itself and the spending habits of the American public. This isn't an airline, where there are specific routes/services that can easily survive and thrive in a restructuring, or a large scale retailer, which can easily shed brand and product lines, or even a large scale manufacturing operation, which cas easily re-tool and retrofit itself. GM, Chrysler, or Ford are giant behemoths and they are more akin to Daewoo or Bethelhem Steel, entities that could not reorganize itself out of bankruptcy. They have bloated legacy costs, and are in a catch-22 situation: the most expedient way to get rid of retiree legacy costs, bloated wages, and generous pension plans is to have these items disaffirmed and pared down in bankruptcy, but bankruptcy itself might kill the company's products. It's like performing a surgical technique to get rid of an ailment when the technique will also stop the patient's heart beating!

I think the GM retiree who posted in this thread is right that the public is clueless as to the exact ramifications of a bankruptcy filing and the ensuing liquidation of a major player like GM. But once they get the clue, I bet there will be phobia and a further erosion of consumer confidence which will prolong the recession.

[Ronstar]

The govt is going to bailout the big 3. The big 3 is going to use these $ to keep their workers making cars. The gov'ts purpose after all was to save the big 3 workers jobs.

But the American (or world) public is not buying their cars, and the bailout will not help car sales. As soon (or before) the current bailout money runs out, the big 3 will be back for more money, because they are not making enough from sales to cover expenses.

Then what? Cant the gov't see that this won't work?

[ERD50]

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Originally Posted by ChrisC .... They have bloated legacy costs, and are in a catch-22 situation: the most expedient way to get rid of retiree legacy costs, bloated wages, and generous pension plans is to have these items disaffirmed and pared down in bankruptcy, but bankruptcy itself might kill the company's products. It's like performing a surgical technique to get rid of an ailment when the technique will also stop the patient's heart beating!

Sure, it not easy or pretty, but what is the alternative?

I agree with Ronstar's post just above. If we pump money in and they fail anyhow, we're back in the same boat.

People are afraid to buy from the D3 TODAY, because of uncertainty surrounding warranty support. There could be steps taken in a bankruptcy restructure that would help to assure product support - maybe that is something that the govt needs to back with dollars.

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I think the GM retiree who posted in this thread is right that the public is clueless as to the exact ramifications of a bankruptcy filing and the ensuing liquidation of a major player like GM. But once they get the clue, I bet there will be phobia and a further erosion of consumer confidence which will prolong the recession.

I have two problems with that analysis:

One, it assumes a 'static model'. The real world is more dynamic - many of those jobs will be backfilled by demand for cars in general. The American car buying public will still be buying cars. So it is not so black and white that every job associated with the D3 just goes 'poof'. A bankruptcy restructure might be the best way to preserve the most jobs.

Two, as Ronstar's post says - if the bailout money just prolongs things rather than fix them, we will just be facing all these same issues down the road, probably in a very short while.

So while bankruptcy sure looks ugly, I fail to see how the alternatives are better.

-ERD50

[barbarus]

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Originally Posted by haha Sen. Corker: Loan conditions must fix automakers' problems | The Detroit News | detnews.com Senator Bob Corker is holding up the auto bailout because he has his own plan. Here is a quote from his article today, describing one aspect of his plan. "Our role should be swift and simple and centered around two areas where we can force immediate and transformative change: addressing the unworkable capital and labor structures that cripple these companies. I cannot support the proposed loan package as written by Democrat lawmakers and the White House because it doesn't tackle these critical issues. To that end, I have put forth several measures that need to occur for any government-backed loan to be successful: • One, give existing bondholders 30 cents on the dollar to help reduce their overall debt load. Etc." My question- how can this be legal? Doesn't it turn the founding priciple of bankruptcy law on its head? Senior ogligations are to be paid in full before junior obligations get anything. I know that this is often negotiated down, but Corker is proposing that equity remain in the stock, while the bondholders be forced to accept 1/3 face. True, 1/3 of face would be a step up from the present, but a midstream rule change that in my opinion would permanently ruin the faith in formal rules that any financial system has to have. In addition, I own some auto bonds and this would piss me off personally , as I took considerable risk and would barely break even under his proposal. I really don't like the trend US has taken over the past 9 months. I'd rather it all crashed under the rules if that indeed would happen, and we sort out what we could. I may move to Nevada and go with sports betting. So far at least they don't move the goal-line because the losing team feels bad. To hell with Washington.Ha

It's a little late to be calling for "legal" now, haha.
We tin-foil hat wearers could have used your help a while ago.

[barbarus]

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Originally Posted by Ronstar The govt is going to bailout the big 3. The big 3 is going to use these $ to keep their workers making cars. The gov'ts purpose after all was to save the big 3 workers jobs. But the American (or world) public is not buying their cars, and the bailout will not help car sales. As soon (or before) the current bailout money runs out, the big 3 will be back for more money, because they are not making enough from sales to cover expenses. Then what?

Then the government will give them more of our money.

[Midpack]

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Originally Posted by JOHNNIE36 I don't think people have a clue as to the impact of the loss of the auto industry as we know it. It's been said there are six people working in the U.S. for every one in the auto industry; steel, rubber, glass, electrical and wire, carpet, fabric, nuts, bolts and screws, etc. Just read an article in the Tampa Tribune where they are against the bailout. They don't realize that the auto business could drive them out of business. No jobs, no money, no travel, no tourism, no ads in their paper for motels, hotels, lodging and meals. No ads for airfares or cruises. The general public just has no idea.

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Originally Posted by ChrisC I think the GM retiree who posted in this thread is right that the public is clueless as to the exact ramifications of a bankruptcy filing and the ensuing liquidation of a major player like GM. But once they get the clue, I bet there will be phobia and a further erosion of consumer confidence which will prolong the recession.

With all due respect, before you say 'we don't have a clue' and "the general public just has no idea," are you sure?

I have heard the 'as goes GM, so goes the country' but I think that was coined about 40-50 years ago when GM had 50% market share, the D3 (actually more than 3) had almost 100% of the domestic market, and the US was overwhelmingly a manufacturing economy - none of those are remotely true anymore. Just Google the phrase for updated views.

I have heard the '1 in 6/7/10 jobs in the US is tied to the D3' most of my life. Might have been true 40-50 years ago, who knows, but still? No question suppliers, dealers and the towns with large factories will be impacted, but I'd challenge you to show the ratio is still that high if it ever was. Far as I can tell there are about 150 million jobs in the US. You are saying 25 million people are employed directly or indirectly by the automakers, I find that hard to believe. GM and Ford employ 252K and 246K worldwide (verifiable), I don't know how many in the US. I'm told dealers employ the most between manufacturers, suppliers and deales. There are supposedly 6,500 GM dealers (verifiable), say 50 employees (estimate I heard) at each, that's 325K - double it to (generously) account for Ford & Chrysler and you have 750K. It's very hard to find exact numbers, the above is simply my best estimate. Say there are as many supplier employees as D3 workers - altogether that's 1.7 million employees. Where are the other 23 million? Maybe we should verify what the UAW and Michigan politicians want you to believe instead of assuming it's a fact before deciding your views on a bailout.

When Lehman failed they were larger than GM is today, but they were allowed to fail. The $130B market cap of Toyota today is far, far larger than than $2B GM, $7B Ford & $0.5B Chrysler (estimated since they are private) put together. BMW's $14B market cap is bigger than the D3 today at least!

And finally, I still don't get why the liquidation bankruptcy of one, say GM, leads inevitably to the failure of all three - that's unprecedented in industry as far as I know (give me an example if you have even one - not including industries that have failed because their product became obsolete). Prospective GM buyers would then buy something else, some a Chrysler or a Ford in some cases, so their revenues and financial health would improve. GM plants would close, GM dealers would close and some suppliers with a heavy reliance on GM would close, but Ford & Chrysler and their dealers, suppliers and towns would benefit to some extent (yes, some of the business would go to foreign carmakers, but not all). Some displaced GM employees might even find work at Ford or Chrysler. Who knows, if GM's volume was split between Chrysler and Ford, they might even get into the black without massive restructuring - short term as least.

It's not that the rest of us don't care about the auto industry or auto workers. But you can't ask the rest of us to subsidize them for wages and benefits that the rest of us lost long ago or never had, especially after decades of poor quality (yes, I know they're better now but it may be too late) and inferior products. And I never realized it until this year, but I'll say it directly, the Jobs Bank is an outrage - that has not helped the automakers cause. Everyone could see this problem coming, it's been written about forever, just Google and read. The economic downturn didn't cause it, it highlighted what everyone has known, but failed to act on for decades. You can blame management, the UAW, politicians and short sighted consumers - all will have to take the medicine to avoid collapse.

End of rant.

[ziggy29]

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Originally Posted by Midpack It's not that the rest of us don't care about the auto industry or auto workers. But you can't ask the rest of us to subsidize them for wages and benefits that the rest of us lost long ago or never had...

Nailed it.

When a rising tide is lifting all boats, it's easier to be genuinely happy for what others have and what has been promised to them, as your own fortunes look better even as you don't get the same guarantees.

But then the tide goes out....

And as much as I try not to be jealous or envious or resentful, times like these remind you how much concepts like job security and guaranteed retirement benefits are absolutely golden. And when those who don't have that deal are likely going to be required to pay more to "rescue" that deal for others -- even as they watch their own retirement hopes crash and burn and their own jobs increasingly called into question -- a little bit of creeping resentment and disgust is tough to avoid.

This is part of the moral hazard of the bailout mentality -- as more and more groups get theirs, the resentment among people whose interests are being propped up goes away -- but as some people remain "un-bailed out," their share of the cost rises even as they say, with increasing anger, "where's MY rescue?" Who's going to give my employer a bunch of money to keep my job safe? Who's going to rescue my 401K and IRA and prop up my retirement?

I hate that I feel that way -- I'd rather just be happy for others -- but the bailout mentality which will ultimately cost me many thousands of dollars to prop up "everyone else" makes that increasingly difficult. I'm not proud of those emotions -- it's not a healthy burden on the soul -- but I thnk it's largely human nature.

[Gone4Good]

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Originally Posted by haha • One, give existing bondholders 30 cents on the dollar to help reduce their overall debt load. Etc." My question- how can this be legal? Doesn't it turn the founding priciple of bankruptcy law on its head? Senior ogligations are to be paid in full before junior obligations get anything. I know that this is often negotiated down, but Corker is proposing that equity remain in the stock, while the bondholders be forced to accept 1/3 face.

My understanding is that this would have been done via a debt for equity swap, similar to what would happen in bankruptcy. Existing shareholders would be essentially wiped out.

And I also don't think the idea was to impose this via a Congressional decree, but rather to say that these conditions must be met by a date certain in 2009 or the "bridge loan" comes due. This all seems perfectly legal to me.

[frayne]

From a Local Chattanooga TV Station Website;

Tennessee's junior senator played a key role in this week's battle for an auto bailout. Republican Senator Bob Corker vocally opposed the house plan and negotiated until the last minute trying to work out a deal.
He's getting both praise and criticism from folks on the streets of Chattanooga.
Senator Bob Corker, (R) TN, "This has been quite a volatile period.
With just two years under his belt, Tennessee Senator Bob Corker finds himself right in the middle of all the action...
Sen. Corker, "Harry Reid has literally beeped in twice saying he needs to see me immediately."
Even getting urgent summons from Senate Majority Leader Harry Reid.
Corker's spot on the U-S Senate Banking, Housing and Urban Affairs Committee put him in a prime position to influence the Auto Bailout bill.
He strongly opposed the House version of the bill, offering an alternative in the Senate.
Valentina Jones, "I'm very disappointed."
He's getting some heat with its failure.
Jones, "He's a rich man what do he care. He doesn't have to worry about putting a meal on the table for his kids, we do so I'm very disappointed, again to say the least."Jackson Andrews, "I thought Bob Corker had an excellent plan."
But others stand strongly in the hometown Senator's corner.
Jackson Andrews, "I was sorry to see it didn't get passed. He's really set the ground work for what I hope is going to be a compromise solution that can be if it doesn't happen in this administration can happen in the next administration."
Criticism also comes from Detroit, the home of the auto industry...calling Corker and other Southern republicans hypocrites for supporting Volkswagen while opposing a bail out for american carmakers.
Corker counters that he gave tremendous incentives twice to the GM plant in Springhill.
Sen. Corker, "It's a really hollow statement but the Detroit Free Press has certainly worn me out about this over the past week and I probably will not travel through Detroit anytime soon."
Senator Corker is scheduled to be on CBS's Face the Nation with Bob Schiefer Sunday at 10:30 right here on WDEF News 12. to discuss the failure of the auto bail out bill.

[HFWR]

I'd like to point out, again, that statements like "no one wants their cars" are [moderator edit - language]...

Auto Sales - Markets Data Center - WSJ.com

Note that D3 vehicles hold the numbers 1, 2, 7, 8, 11, 12, 13, 15, 18, and 20 in the top 20.

Having said that, I absolutely support getting their cost structures down as a requirement for any "bailout".

[Midpack]

I thought Corker said they could have had an agreement if the UAW would only agree to 'a date certain' vs 'everything is on the table and we'll look at it.' I think all parties including the UAW need to face some hard choices including real deadlines. Corker supposedly had specifics in his proposal for management, bondholders and all interested parties including the UAW.

If the UAW is not the problem, all they have to do is propose an actual deadline, and then Corker has the ball. What am I missing?

[Midpack]

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Originally Posted by HFWR I'd like to point out, again, that statements like "no one wants their cars" are [moderator edit - language]... Auto Sales - Markets Data Center - WSJ.com Note that D3 vehicles hold the numbers 1, 2, 7, 8, 11, 12, 13, 15, 18, and 20 in the top 20. Having said that, I absolutely support getting their cost structures down as a requirement for any "bailout".

That's been posted here before, and nobody seriously meant no one. But GM once had 50% market share, Ford and Chrysler have also had massive declines over the decades, so they have lost tens if not hundreds of millions of customers over the decades - so there are millions of someones that don't want their cars. By their own admission, the D3 are now not selling enough units to sustain themselves with current cost structure. A revised cost structure based on current volumes, will ultimately fail if they continue to lose market share/unit volume. So demand is a part of the question and there's reason for concern given the decades long trend...

[Gone4Good]

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Originally Posted by Midpack When Lehman failed they were larger than GM is today, but they were allowed to fail.

There is a pretty solid consensus that allowing Lehman to fail was a mistake. It is because of the near disastrous results of the Lehman experiment that policy makers and economists are a bit gun shy about letting GM go. In normal times, GM would not be too big to fail. Neither would Lehman or Bear have been. But these are not normal times.

I'm on the fence on this one, but I think I'd take a chance on bankruptcy. I'm not convinced that GM poses systemic risk (but I was wrong on Lehman). Meanwhile, I am convinced that the inevitable government meddling following any auto-maker bailout will be far worse. We've already seen Congress try to mandate the types of cars the companies will make. Just wait until they want to close a plant or sever a dealer relationship in the district of a powerful Congressman. Either way we go will be an unmitigated disaster.

As crazy as it sounds, I'd almost prefer to give the automakers money with NO Congressional oversight. $30MM bucks for GM with standard HY covenants (i.e. no dividends to shareholders, etc.) and an absolute prohibition on future public money. "Here's your bridge loan and your last chance. Either make it work, or file for bankruptcy." I guarantee the outcome from that relationship will be far superior to an open ended commitment and a "Car Czar".

[haha]

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Originally Posted by HFWR I'd like to point out, again, that statements like "no one wants their cars" are [moderator edit - language]... Auto Sales - Markets Data Center - WSJ.com Note that D3 vehicles hold the numbers 1, 2, 7, 8, 11, 12, 13, 15, 18, and 20 in the top 20. Having said that, I absolutely support getting their cost structures down as a requirement for any "bailout".

I agree. Parked in my garage at this apartment in a building inhabited mostly be young people there are two Jettas, my Subaru, one Honda CRV, one Taurus, one Jeep, one Monte Carlo, one small Chevy I don't its name, and one Toyota. So almost half are US makers. Only my Subaru is actually manufactured in Japan.

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Originally Posted by . . . Yrs to Go My understanding is that this would have been done via a debt for equity swap, similar to what would happen in bankruptcy. Existing shareholders would be essentially wiped out. And I also don't think the idea was to impose this via a Congressional decree, but rather to say that these conditions must be met by a date certain in 2009 or the "bridge loan" comes due. This all seems perfectly legal to me.

Well, maybe you could explain how it conforms to law. Why ever buy a senior security, if on a whim the company can do a debt for equity swap?

You have debt when the company succeeds, equity when it fails.

Great buy!

Ha

[Midpack]

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Originally Posted by . . . Yrs to Go There is a pretty solid consensus that allowing Lehman to fail was a mistake. It is because of the near disastrous results of the Lehman experiment that policy makers and economists are a bit gun shy about letting GM go. In normal times, GM would not be too big to fail. Neither would Lehman or Bear have been. But these are not normal times.

I was simply trying to add some perspective, people seem to think GM is the biggest company in the US and too big to fail. GM is miniscule compared to Citi for example. There were few questions in the mainstream population about letting Lehman fail, evidently not so with the D3. Lehman may have been a mistake, but we're going to survive that mistake don't you think? The numbers seem to suggest that the D3 are nowhere near as important as bailout proponents would have us believe. As far as I can tell, 'as goes GM, so goes the Country' and '1 in 6 people are directly or indirectly employed/affected by the auto industry' are overblown, tired old rhetoric that's simply no longer true and way out of date. Without these assumptions, is the bailout case as strong? Yet, you hear bailout supporters (especially the UAW and Democrats) reuse these 40-50 year old "facts" without any supporting evidence - and it works on the many in the mainstream.

1. I would love to see hard numbers on the $75/hour for autoworkers. How much is active employees wages & benefits, how much retiree benefits and other costs like Jobs Banks.
2. I would love to see the real employment numbers for domestic auto makers, suppliers and dealers and whoever else would be directly affected.

If someone has them, help us out, I've been trying to find facts with little success. I think this is a critical issue, one that we need to decide correctly, but the facts are hard to find. My opinion is based on less factual information than I'd like.

[Gone4Good]

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Originally Posted by haha Well, maybe you could explain how it conforms to law. Why ever buy a senior security, if on a whim the company can do a debt for equity swap? You have debt when the company succeeds, equity when it fails. Great buy! Ha

It happens countless times in every economic downturn. But don't mistake me, this is not something that is compelled on bondholders, but rather coerced from them.

In the case where a bondholder has a claim for which a company is unable to make good, the bondholder has few remedies. One is to accelerate his claim and force a bankruptcy. Sometimes this is in the bondholders best interest. Sometimes it is not. When it is not, the bondholder is often offered to exchange his bonds for something else (more security in exchange for a lower coupon or longer maturity, equity in exchange for a lower principal balance, etc.). The bondholder need not accept this offer, but the alternative of bankruptcy may be seen as worse.

In fact, GMAC is currently trying to do something similar right now:

GMAC bond exchange flop threatens bank bid - Yahoo! News

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GMAC is looking to swap $38 billion of outstanding debt for a smaller amount of new debt, as well as preferred shares and cash, in an effort to reduce its debt load and raise the capital it needs to qualify as a bank.

Before you say "I'd prefer to take my chances in bankruptcy" know that there is usually a good deal of the "prisoner's dilemma" game that goes on in this type of liability management. Typically bond indentures only require 50% of the holders to consent to a change in terms. Companies can offer security, or cash, or other inducements for those that consent, while leaving those who don't with a more junior position in a company with less cash. So while bondholder's as a group may be better off rejecting the terms of the exchange, individual bondholders who consent could be better off than they would be otherwise.

Welcome to the world of distressed bond investing . . . it's not for either the faint of heart or those without good legal representation.

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In the case of GM, the Government bridge loan would require debt be reduced to 30 cents on the dollar, or the bridge loan would come due (forcing bankruptcy). How GM arranged this would still need to be determined, but Corker said he was in touch with institutional bondholders (and presumably liability management bankers) and must have thought it could get done.