naked capitalism

Earlier today, George Bush made a surprisingly candid set of remarks, signaling a desire to avoid a disorderly collapse for the large US car manufacturers, and ambivalence about Chapter 11. The stock market started downward, and the trajectory accelerated with Standard & Poors putting GE’s ratings outlook at “negative,” meaning it is at risk of losing its AAA.

The Bush Administration is in a nasty position, from a game theory standpoint. Its legacy is already badly tarnished, but it does not want to add to it by letting any of the Big Three fail. At the same time, heated Congressional opposition to a rescue means it is loath to merely kick the can down the road till Obama is sworn in, since any deal with a Democratic executive branch and solid Congressional majorities would presumably be more lenient than what could be imposed now. But the timetable is too short for the Bushies to craft the restrictions and governance that it might like to see in place.

Note that the idea of a prepackaged bankruptcy has reportedly been rejected because it would hurt Ford’s competitive position (or at least, that is the party line. The much greater risk is that they could lead to liquidation, the worst outcome, but better not admit to that, since Chapter 11 may be unavoidable). But a very lengthy look by The Deal said a pre-pack is impossible for GM, given the number of moving parts, and even with some aspects handled on a pre-pack basis, the US carmaker would not emerge from court before late 2010. The risk of loss of consumer interest is high, and a Chapter 11 could morph into a liquidation.

Last night, it was the New York Times that told us, in effect, that progress is being made, without offering much more of substance. Today, Bloomberg says that a deal may soon be at hand,, but details are pretty much non-existent:

General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled as soon as today, people familiar with the talks said.

The government could take back the money should the automakers not comply with federal restrictions as a condition of receiving the funds, said the people, who asked not to be identified because the discussions are private. The plan isn’t final and may change, the people said.

By contrast, the New York Times today sounded a darker note, saying that the Administration was looking seriously at the bankruptcy option:

….officials said the preferred solution would be to force a restructuring of the industry outside of bankruptcy court, extracting concessions that would make the companies more cost-competitive with foreign automakers.

In return, the Treasury would tap the financial rescue fund, called the Troubled Asset Relief Program, to make loans to the companies.

After a week of talks between the automakers and the Treasury Department over the terms of a possible bailout, Ms. Perino on Thursday said, “we’re very close.”…

What the White House appears to be envisaging is a package deal of concessions — and an injection of money from the TARP, the $700 billion financial bailout fund — to keep credit flowing for G.M. and Chrysler…

But for Mr. Bush, that could be difficult to negotiate. If the autoworkers’ unions conclude they are likely to get a better deal from Mr. Obama, they are likely to stall negotiations and settle for a shorter-term loan.

Yves here. It isn’t just the UAW that is holding out. Felix Salmon has said that the bondholders are recalcitrant, and the dealers are also a large potential stumbling block. Back to the Times:

G.M. declined to comment on the Bush administration’s suggestion that an “orderly bankruptcy” was under consideration. But the company was surprised by the White House statements, according to G.M. officials who asked not to be identified because the discussions with the administration were not yet final.

The automaker’s senior executives have said repeatedly that bankruptcy was not a viable solution because consumers would be reluctant to buy a vehicle from a bankrupt automaker.

In July, CNW Marketing Research said a survey it conducted showed that 80 percent of prospective car buyers would not consider purchasing a vehicle from a bankrupt company. A more recent survey found that 51 percent of the people it interviewed said they would not buy a car from G.M. even if it received a government bailout.

Update 2:15 AM: Reuters reports that the two sides are getting closer:

General Motors Corp and Chrysler LLC made significant progress late Thursday on a deal to secure emergency loans as part of a U.S. government aid package, people familiar with the talks said.

The package would demand sweeping restructuring at the troubled automakers in exchange for bridge loans to carry GM and Chrysler for several months, according to the sources.

Emergency federal loans for the two companies could be announced by the government as early as Friday