naked capitalism

After months of negotiations, Congress appears close to a deal on the bailout of the Big Three. While the final bill has not yet been formally introduced and made available for public inspection, major elements are emerging. Roll Call (subscription required), the New York Times, and Bloomberg are reporting the following details:

1. Size of package: $15 billion. This is about what GM and Chrysler testified they would need to continue operations through March, 2009. Ford appears to be in better shape and may not even require any federal bailout money.

2. The bailout will be structured as senior debt that would be first in line to be repaid should the companies still go bankrupt.

3. Appointment of a “car czar”. This would be a person appointed by the President who would have veto powers over all major decisions (i.e. those involving more than $100 million) taken by the companies’ boards. The goal would be to force the companies to make changes to ensure their long-term viability. From the Times:

A senior administration official said that bill would set a firm deadline of March 31 for the car czar to certify that the automakers and their stakeholders, including creditors, labor unions and dealers, had agreed to carry out a long-term viability plan and that the bill would set out “a hard economic definition of what it means to be a viable firm.”

The official said that if there were no such agreement, the auto czar would be required to demand repayment of the administration [sic] rather than giving the czar discretion to call in the loan, which Democrats had initially proposed. The bill would also allow the auto czar to impose a viability plan, which could force a company into bankruptcy.

4. The Times also mentions stock warrants, but the specifics are as yet unclear.

5. The money will come from a previous $25 billion appropriated to the Energy Department that was to be disbursed for the development of more fuel efficient cars. This was the primary sticking point, with the Democrats wanting to reserve that money for its original purpose and appropriate new funds for any bailout, while the White House wanted to use the already reserved $25 billion while stripping much of the language requiring using the money to improve fuel efficiency and environmental standards. The Democrats caved on this demand and Speaker Pelosi finally agreed to use the already appropriated amounts. There’s less to this than meets the eye, however, as there are already plans among the Democrats to renew the Energy Dept’s program under Obama’s public works stimulus package once he comes into power.

There are also several sticking points.

1. The extent of environmental standards the automakers will be forced to follow. This includes language that the Democrats have put in place that bar the automakers from filing suit against states that pass emissions restrictions more stringent than the national standard. However, Roll Call notes that “The lawsuit language has been important to environmental groups and Pelosi, but Frank noted that even if the language remains in the bill, it would not mean an end to the lawsuits because other parties are also suing.” So it’s not clear what the ultimate effect of this language will be, if it indeed remains in the compromise bill.

2. One topic that the Dems and Republicans seem to be dancing around is exactly what concessions will be extracted from the Unions. Sen. Corker (R-TN) has proposed that the wages at the Big Three should be reduced to the level found at American factories of foreign auto companies such as Nissan.

3. What happens to the current CEOs? According to Roll Call: “One issue that has been a hot button, politically — whether to force chief executive officers to resign before their companies get aid — was punted by Frank. He said that would be left to the federal loan overseers to decide.”

4. How to deal with Chrysler. GM and Ford are public companies. Chrysler is not. It is 80% owned by Cereberus and 20% by Daimler. There is considerable resistance to bailing out a private company with private owners who should ostensibly be on the hook for their failings. My understanding of most private equity deals is that the original participants are usually still on the hook for further rounds of capital infusions. Anyone with details about PE deals in general and Cereberus in particular who might be able to shed some light on exactly how this will affect Cereberus’ investors? A previous article in the NY Times explored this issue:

Until recently Cerberus was rarely mentioned in Congress or by Chrysler in connection with efforts to stabilize the auto industry. But some lawmakers have begun voicing concern that bailing out Chrysler would amount to bailing out Cerberus. On Friday, Representative Maxine Waters, a California Democrat, pointed to Cerberus’s riches. “It seems to me that Cerberus is doing pretty well,” she said.

However, thanks to Cereberus’ tremendous lobbying effort, which, per the Times, has included former Treasury Secretary John Snow, former VP Dan Quayle, former LA Senator John Breaux, and assorted former high-level government staff, it appears that Chrysler will get its loan with some provisions to ensure that Cereberus is on the hook if those loans aren’t paid back.

At this point, it appears that the White House and Congressional Democrats are nearing agreement. The major roadblock is Senate Republicans who have indicated that they might filibuster the bill. While the Dems have the votes needed in the House, it is unclear at this time whether they have the 60 in the Senate needed to overcome a filibuster. Negotiations are continuing…

It seems likely that Congress will introduce the bill within the next day or two, and likely vote on it before the end of the week.

Oh yes, and in honor of the public money they will soon be getting, the CEOs have also offered to sell their fleet of private planes, their modest contribution to the spirit of sacrifice that all of us taxpayers are being asked to endure in these tough, tough times. No word yet on whether they’ll forgo first class commercial flying and join the rest of us commoners in steerage/economy though…

Addendum from Yves: Lune’s speculation in 4. is correct. The PE firm is responsible for its i portfolio companies. If a company is on the ropes, it has to decide whether to put it into Chapter 11, liquidate it, or see if more money and a salvage operation might enable it to pull through. Indeed, one of the reasons ventured for endowments taking very large discounts to get out of PE funds is that they anticipate Chrysler-esque “throwing good money after bad” capital calls for companies in trouble or unable to refinance maturing debt.