Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over

Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over

President Obama spoke about loans to the auto industry at 11 AM this morning in the Grand Foyer of the White House.

In the first three parts of this series, we (1) covered some background, (2) analyzed the President’s options, and (3) learned about the loans President Bush authorized in December, which laid the groundwork for President Obama’s decision.

An Associated Press headline reads, “GM, Chrysler Get Ultimatum from Obama on Turnaround.” I think this is a misread. It appears to me that Chrysler got an ultimatum, and GM got a do-over.

Here’s my analysis of the different messages to Chrysler and General Motors contained in the President’s remarks and in the fact sheet released by the White House. I’m trying to weed out the political and communications signals the White House might want the press and various constituencies to think they heard, from the definitive and binding statements made today by the President and by his Administration. As an example, while the President’s words and the documents tip their hats to more fuel efficient vehicles, I see no specific new hard fuel efficiency requirements for either Chrysler or GM. This is in contrast to the clear language that Chrysler will get more funds after April 30th only if it has merged with Fiat or someone else.

In 6+ years working for President Bush I wrote and edited hundreds of White House fact sheets, and worked with the speechwriters and fact-checkers on a similar number of Presidential speeches. We meant exactly what we said in those speeches and documents. Here is my attempt to boil down the text of the President’s remarks and the White House fact sheet into their essential, definitive, and binding statements.

Message to Chrysler:

  • You are not viable as a standalone company.
  • We do not think that you can become viable as a standalone company. “[W]e have determined … that Chrysler needs a partner to remain viable.”
  • We will subsidize you through April 30th, so you have time to try to merge with Fiat. (How much?)
  • We’ll consider subsidizing the merger with Fiat by up to $6 billion of taxpayer funds, as long as we get paid back first.
  • If that does not work and you can’t find another merger, you’re on your own.
  • We will not subsidize you as a standalone company beyond April 30th.
  • Your “best chance at success may well require utilizing the bankruptcy code in a quick and surgical way.”
  • We will guarantee your warrantees for all new cars you sell.

Then there is a more detailed and quite specific set of terms. “Fiat, Chyrsler and all of Chrysler’s stakeholders must clearly understand that for this deal to succed, significant hurdles must be cleared…”

  1. Chrysler must, at a minimum “extinguish the vast majority of [their] oustanding secured debt and all of its unsecured debt and equity…”
  2. Chrysler, Fiat, and the UAW need to reach an agreement that entails greater concessions than those outlined in the existing loan agreements.”
  3. “Chrysler and Fiat need to demonstrate with a greater degree of detail an operating plan that is truly viable, that can generate meaningful positive cash flow in a normal business environment and that can demonstrate credibly that taxpayer loas will be repaid on a timely basis.”
  4. You’ll get no more than $6 billion, and that only after you’ve restructured.
  5. You have to make sure you can finance cars purchased by your dealers and customers.
  6. You need to have a credible plan. “Given the magnitude of the concessions needed, the most effective way for Chrysler to emerge from this restructuring with a fresh start may be by using an expedited bankruptcy process as a tool to extinguish existing liabilities.”

Message to General Motors:

  • The plan you submitted does not propose a credible path to viability.
  • There is a potential plan that will make you viable as a standalone company.
  • We will “provide [you] with working capital for 60 days to develop a more restructuring plan and a credible strategy to implement such a plan.” (How much?)
  • We will guarantee your warrantees for all new cars you sell.
  • Your CEO, Rick Wagoner, has to resign. A majority of the board has to go as well.
  • Your “best chance at success may well require utilizing the bankruptcy code in a quick and surgical way.”
  • We (the U.S. government) will be involved in your restructuring. “The Administration team, consisting of Treasury officials as well as private sector auto industry and restructuring experts retained by the Administration, will work closely with the company.”

The clearest contrast I can provide is in these two sentences from the President’s remarks:

But if [Chrysler] and [its] stakeholders are unable to reach such an agreement, 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 [after April 30].

What we are interested in is giving GM an opportunity to finally make those much-needed changes that will let them emerge from this crisis a stronger and more competitive company.

Let’s put this in the context of the options I laid out in part two of this series. Remember that option 1 is to continue loaning GM or Chrysler taxpayer funds even if they are not yet viable, while option 2 is to provide taxpayer funds only after a firm has entered a Chapter 11 restructuring (aka “debtor-in-possession financing,” or “DIP financing”).

  • On Chrysler, the President chose option 1, while making a hard commitment to a variant of option 2 after April 30th. He has locked himself into this strategy, even if it means that Chrysler fails and liquidates.
  • On General Motors, the President has chosen option 1, and explicitly threatened option 2 after 60 days, but has left himself room to wiggle out of option 2 if he thinks that it might lead to GM’s liquidation.

If you disagree with my interpretation, I’d like to hear a different view. Please provide specific textual references to the President’s remarks or the White House documents. I would like to rely on primary sources rather than the press filter.

I hope to post some more on the additional exposure to taxpayers, as well as provide more of my own analysis. Check back later tonight if you’re interested.

If you’re new to this series, here are the three prior posts:

  1. Auto loans: a deadline looms
  2. Auto loans, part 2: the President’s options
  3. Auto loans, part 3: the Bush approach

9 responses

  1. Hi Mr. Hennessey,

    I would like to know how I could learn to parse words like you did to recognize the various misleading, trivial and non trivial signalling. Thank you for your time and patience, I enjoy this blog.

  2. In this "surgical" bankruptcy under consideration, what are the implications for the pensions of the auto workers? It appears that the pensons are a big problem for liabilities. In a bankruptcy court and restructuring, firms have been able to shed those liabilities. However, when the bankruptcy is controlled by the federal government instead of a court, there is the urge to bail out the workers. There is also the case of American Airlines, which got special treatment from Congress. At the same time, if there is no direct bailout, what are the implications for the Pension Benefit Guaranty Corp.? It is like the GSEs, too exposed to systemic risk and having no official backing of the Treasury in spite of being set up by Congress. So there is the possibility if the PBGC fails it will need a bailout of hundreds of billions of dollars. Remember many municipalities may go bankrupt too as their pension liabilities are so high. What are your ideas about what to do about the auto pensions, the PBGC, and future bailouts of workers and retired persons instead of executives?

  3. What info / insight do you have regarding the incoming Obama administration's influence on the decisions of Pres. Bush in December? It would seem that Pres. Bush did Pres. Obama a huge favor when he commited taxpayer funds to this project (obviously favors to Pres. Obama were not Pres. Bush's main concern). It does not seem likely that Pres. Obama will ever acknowledge an assist from Pres. Bush.

  4. I would be interested in your thoughts regarding the Administration's proposal to fund the retirees' plans.

    Proceeds from the sales of cast-off brands (Saturn, HUMMER) would seem to be worth only a tiny fraction of what the UAW continues to demand.

    That the unions were not named by Obama as having any role in the current situation suggests to me that the taxpayers will be funding nearly all of the (current) burden.

  5. But now, in a little-noticed move, the House Financial Services Committee, led by chairman Barney Frank, has approved a measure that would, in some key ways, go beyond the most draconian features of the original AIG bill. The new legislation, the "Pay for Performance Act of 2009," would impose government controls on the pay of all employees — not just top executives — of companies that have received a capital investment from the U.S. government. It would, like the tax measure, be retroactive, changing the terms of compensation agreements already in place. And it would give Treasury Secretary Timothy Geithner extraordinary power to determine the pay of thousands of employees of American companies.

    This ought to make lots of friends in the UAW as "Turbo-Tax" Timmy sets their pay.

  6. 1. Why was Wagoner unwilling or unable to develop a plan?

    2. What is the Obama plan?

    3. Does GM have the Obama plan?

    4. Who is responsible for developing the Obama plan?

  7. I supported Tarp I and I understood at the time why President Bush decided to provide financial help to auto companies. However, even as a strong Bush supporter I was troubled at the time. I saw it as a slippery slope in contrast to Tarp I. I am not sure Bush gave enough consideration to the far left views of his successor which are becoming more apparent. I see no constitutional authority to fire the head of GM, the board of Directors or to offer warranties to buyers of new cars. I am deeply troubled about what is happening. It is clear that chapter 11 bankrupcy is neccessary the sooner the better.

  8. Pingback: KeithHennessey.com ยป Welcome, Instapundit, Wall Street Journal, Greg Mankiw, and National Review readers!

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