There had been rumors that Treasury would unveil a rescue plan for the Big Three on Wednesday. The day came and went with no announcement.
Tonight we learn, via the Wall Street Journal, that Cerberus has revived merger talks for Chrysler with GM. The possibility of a deal would seem to complicate vastly an attempt to craft a rescue package (if Paulson & Co. was close to a deal for each of the Detroit automakers, the spanner-in-the-works of a pending transaction would force the powers that be to rethink how what the offered for GM and Chrysler separately would change if they were combined. It introduces an element of delay for two companies that have said they need a cash infusion in very short order.
That in turn suggests either that the discussions with the Treasury are not going well (at least from the GM/Cerberus point of view) and/or they are going too slowly relative to the urgency of their financial needs, and they are being forced to consider desperate measures. (Note that the New York Times has a “parties are deep in discussions” article up, saying that the government hopes to announce a deal by Christmas and indicating that Treasury is doing extensive due diligence on the companies’ books and plans to come up with something more comprehensive than giving a lifeline just big enough to tide them over to the Obama administration. No wonder the carmakers are nervous).
Another element that is distressing is that the media is increasingly taking up the theme that a Chapter 11 filing is the only way to restructure existing arrangements (too many focus on the UAW, when the bloated dealer networks are a bigger issue). But as The Deal pointed out in a lengthy discussion of what a Chapter 11 for GM would look like, a prepack is impossible given the number of involved parties. Worse, the process was likely to extend till late 2010. Consumer surveys have found that as many as 80% of prospective car buyers would be leery of purchasing a car from a manufacturer in Chapter 11. Short of Pinto-like exploding fuel tanks, a protracted process that is regularly in the papers is the worst sort of PR the carmakers could have.
Nevertheless, popular opinion seems to be moving to BK as the only way to get out of existing arrangements. The parallels to Lehman are scary. Outcomes are being driven by sentiment, not by analysis. Treasury and the Fed knew Lehman was on the ropes, yet made no serious effort to understand the possible impact of a Lehman failure. They should have been all over Lehman after its near-death experience when Bear went under, but instead sat on their hands.
With Lehman, the big unknown that should have been investigated was the true state of its balance sheet. With the Big Three, the wild card is how consumers would react. No matter how great theoretical advantages of Chapter 11 are, if a large proportion of customers abandon the company due to worries about its future, there is nothing to save. The Chapter 11 will morph into a liquidation as expected cashflows during the Chapter 11 process fall vastly short of anticipated levels. Assessing likely consumer reaction is far easier and less fraught than subjecting Lehman to serious examination would have been (there was a real risk that it could have fed concerns about the firm and accelerated its demise).
But as with Lehman, the public is developing bailout fatigue, and the carmaker’s failings seem more obvious than those of the financial industry, and therefore less deserving of forbearance.
AIG’s loans so far come to $1.4 million per employee, and many of whom are stationed overseas. But their requests for more cash and better terms got speedy approval, while the auto industry, on whom far more jobs depend, may be dealt a deadly blow due to the failure to due a basic investigation of likely consequences.
From the Wall Street Journal:
General Motors Corp. and Chrysler LLC have reopened merger talks, as Chrysler owner Cerberus Capital Management LP has signaled its willingness to give away part of its ownership in the auto maker, say people familiar with the discussions.
With cash running low at both companies, Cerberus took the initiative to restart discussions that sputtered just weeks ago. At that time, both GM and Chrysler viewed a business combination as impractical and as a distraction from their mounting liquidity problems.
Yves here. The fact that Cerberus may signal Washington backlash against bailing out a hedge fund with ample financial resources (although no doubt its funds have limits on what percentage of fund assets can be invested in any single transaction). Indeed, in the Congressional hearings on the rescue, Chrysler CEO Bob Nardelli revealed that the Treasury had not responded to its TARP request.
But for GM to agree to talk, as opposed to rebuff the approach, says they are worried that the government might not come back with a workable deal soon enough. Or perhaps more simply, that they have had so little in the way of substantive discussions (which they would expect if things were progressing) that they are starting to panic, particularly given this comment in the New York Times story:
In recent days, however, administration officials and company executives have sequestered themselves, offering only the slightest hints of what they are discussing, as market analysts speculate about how long G.M. and Chrysler can survive without a government lifeline.
Back to the Journal:
The renewal of the talks could be a way for Cerberus to show Washington — which is weighing a $14 billion rescue package for the auto industry — that it wants to cooperate in restructuring the industry, say people familiar with the buyout firm’s thinking. And it could offer the firm a way to protect its stakes in two distressed auto-finance companies, GMAC LLC and Chrysler Financial, which are crucial to the survival of the Detroit auto makers….
Yves here. Please. Cerberus already offered to give up all the upside in Chrysler in return for a rescue. This has the smell that it impasse is that the Treasury wants Cerberus to cough up more dough in connection with any deal, and Cerberus is scrambling to find any other option. Back to the story, which sets forth the impasse:
Earlier this month, Congress pressed Cerberus to inject fresh capital into Chrysler as part of any rescue plan. So far, the firm has rejected the idea, saying shareholders of rivals GM and Ford Motor Co. aren’t being asked to contribute more capital, and that its investment charter prohibits such a move.
One way in which Cerberus might make concessions, however, could be to give away some of its principals’ stakes in Chrysler as part of a broader restructuring. That could mean giving a future government auto czar discretion to distribute Cerberus’ stake to the United Auto Workers union or even to GM.
Cerberus’s equity in Chrysler has already been valued at zero by Daimler AG, which still owns 19.9% of the auto maker. But Cerberus hopes lawmakers would view such a move as a contribution to the restructuring of the troubled industry, says a person familiar with its thinking….
Layered on top of these complex discussions is the fate of GM’s former finance unit, GMAC, in which Cerberus holds a majority stake. It also controls Chrysler’s Chrysler Financial unit. Part of Cerberus’s strategy, say people briefed on the matter, is to protect its majority investments in these two units.
So we have tough guy negotiators (Cerberus is notoriously, even by private equity standards, greedy and hard headed) possibly holding up the rescue by refusing to offer concessions and muddying the waters by reopening talks with GM (although it does take two to tango).
A final tidbit:
One developing problem in the auto makers’ pursuit of government rescue funds is the state of Chrysler’s collateral. Unlike GM, which has assets it can pledge or use as collateral for a federal loan, Cerberus is believed to have pledged all of Chrysler’s assets in the summer of 2007 as security for $10 billion in bank debt.
GM, by contrast, could pledge its substantial operations in Europe, China and elsewhere, along with trademarks. An analysis by J.P. Morgan Chase & Co. this summer estimated those assets could raise $6 billion to $9 billion for the company. That could make the government feel more secure in lending money to the auto maker.