Guest Post from Lune: The Automakers Take Their Turn at the Trough

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.

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  1. artichoke

    From that brief summary, it sounds like a big success for the UAW. They don’t have to budge on pensions and healthcare at this time, only wages which (for new hires) are probably in the required range already. And they have almost 4 months during which the Car Czar is welcome to try to succeed where nobody else has ever been able to succeed: getting further concessions.

    Taxpayers without pensions and healthcare will be angry about this.

    But they should be (and maybe are) just as angry about the money banks have taken out of the economy.

  2. Anonymous

    isn’t John Snow a Cerberus man (officially)? I know he at least does spokesman work: he was on BNN (Canada’s Bloomberg) for the Helldog today. I didn’t watch.)

  3. eh

    At this point, it appears that the White House and Congressional Democrats are nearing agreement.

    I guess this is another example of what’s known as ‘bipartisanship’, i.e. mutual ‘cover your ass’ politics. The Republicans are stupid to go along with it because it’s more than clear that huge additional sums will be needed to get these companies to the point where they can be ‘viable’, i.e. stop losing market share. If that’s even possible at this point. I’m sure all the other Americans who are losing their jobs now would like for the government to borrow money from the Chinese and Arabs and give it to their companies too.

    so is the Senator from Alabama going to filibuster this still?

    Wait and see. McCain could have done a lot to better his chances if he’d interrupted his campaign and returned to Washington to filibuster the original TARP bailout. But he was too stupid to see that.

  4. Anonymous

    Taxpayers without pensions and healthcare will be angry about this.

    Why ? We can only be happy when everyone is as low as the lowest paid worker ?

    This is just a game to beat on unions and distract from the 1 trillion going out the other door. 25 billion is a no brainer to keep the engineering, know-how, and design jobs here. This is silliness given the total amount of money we are talking about.

  5. Anonymous

    It’s not about lowering everyone to the same wage it’s about protecting those who need protection the most. Auto workers and companies have earned significant incomes over the years and it is partly their fault if they didn’t save for the storm. On the other side of the coin millions of people who don’t get severance or have the ability to save are suddenly out of work or being given only a few hours a week (the most undiscussed issue is the record breaking amount of underemployment occurring right now in this country).

    If we protect these jobs, then shouldn’t we have a duty to protect the millions of other jobs that have been lost and the millions more that are going to be lost? You can bet the airlines, the steel workers, and other companies will be lining up for handouts in 2009 on the premise of saving jobs.

  6. Ex-banker

    Returning to the topic…

    I don’t quite understand how the bondholders, especially of senior secured debt, are going to fare from this arrangement. To my understanding, GM would be in violation of its covenants, (if it’s not already) and as such, its debt, theoretically at least, will immediately come due. This is precisely one of the reasons why pre-pack ch. 11 exists, so people can line up super-senior DIP debt to ensure solvency while they restructure without worrying about violating covenants. To make things even messier, you have constitutional issues if you consider the takings clause to include residual claimant priority rights.

    Regarding Cerberus, typically in PE investments each portfolio company is invested severally, so there’s no requirement that they recapitalise the company from the general funds. Now, given the Chrysler agreement was anything but plain vanilla, i’d need to do a bit of reading, but typically they can liquidate and walk away. I would be intrigued to see what terms it rests at, because I could envision a scenario where the economics of the deal don’t make sense, and Cerberus gives the “Thanks, but no thanks. See you in Chapter 7/11” response.

  7. patrick neid

    Further evidence that government stupidty knows no bounds.

    I said months ago that by the time we get to plans E,F,G etc the fun would start. Well here are!

  8. Anonymous

    There is considerable resistance to bailing out a private company with private owners who should ostensibly be on the hook for their failings.

    WTF? There is no logic in the differentiation between public and private here. Also, we seem to subsidize private agribusiness withou any differentiation.

  9. Anonymous

    This is just a game to beat on unions


    There were plenty of union employees that lost their pensions in the airline bankruptcies. If anything, this is a game to ensure the UAW isn’t beat on.

  10. Anonymous

    The question is does the appointment of a Car Czar represent a credit event causing CDS defaults to be triggered, which will do some significant damage to US Banks and financial institutions.

  11. Keenan

    Yves and all:

    I am of two minds in this matter.
    Jeffrey Tucker presents a thoughtful analogy in arguing his anti bailout position in his essay The End of the US piano industry

    Yet, since making real tradable goods is essential to restoring our nation’s economic survival, I would ask Mr Tucker to suggest what he perceives to be the competitive advantages of the US and which industries might capitalize on them.

  12. Keenan

    In my previous post, in the last paragraph please strike the word “restoring” and replace it with “ensuring”.

  13. Lune

    Couple of clarifications. I apologize I didn’t make these clearer in the original article:

    1) Not being a party to the discussions going on, my gut feeling is still that the UAW will take a heavy blow (for better or for worse). It’s just that since that’s a very contentious issue right now, the Congress hasn’t yet reached consensus on this issue, and may eventually punt to the “car czar” to make these difficult decisions itself, so that Congress doesn’t have to take responsibility for them.

    In the past, Congress has stood idly by while airlines forced major concessions from their unions, but the difference this time is that the democrats are in power and the unions are their support base, and because we didn’t just get finished giving a trillion dollars to Wall St. Regardless of the merits of forcing UAW to make concessions, the optics of the issue, cutting healthcare and pensions for auto workers while AIG executives are still getting million dollar bonuses, is very, very bad.

    2) The relevant difference between public companies and private in this matter is threefold:

    Firstly, in public companies, once you buy a share, you aren’t required to put up any more capital. You may lose the entire value of your investment, but you won’t be asked to put up more. In PE deals, there are typically ongoing capital calls structured into the investor contracts. How much money Cereberus’ investors are contractually obligated to provide over the next several years, and how much to Chrysler specifically vs Cereberus in general, I don’t know, but deciding how much more money Cereberus should put into Chrysler is a valid topic of discussion.

    Secondly, shareholders in public companies have very little control over how companies are run. PE firms owning companies, OTOH, have a lot of say in how the companies are run. It’s the difference between shareholders and the board of directors in determining responsibility for the company being in its current mess. IMHO, PE firms have more responsibility when they drive their companies into the ground than shareholders of a public company, even though both are nominally “owners” of a company. Should this mean that Cereberus should take a bigger hit than GM/Ford shareholders? IMHO, yes.

    Lastly, Chrysler being a private company complicates the matter of the govt taking partial ownership and benefiting from any recovery. GM/Ford can issue stock warrants to the govt that allow it to have some benefit from the upside of any recovery. How do you do this with Chrysler? Assuming you’re able to structure a deal where the govt gets a certain percentage of the company, when the market recovers, the govt will eventually wish to sell its stake in these companies. How does it do this in a company that isn’t currently publicly traded?

    Anyway, those are some of the issues that Congress will have to face (or not; given the amount of incompetence it has shown so far in these matters…) as the details of the plan are finalized.

  14. Tortoise


    Nothing separates the smart from the foolish than their appreciation of the concept “matter of degree”. Think of that before getting overly excited about “giving” 15 billion to the domestic automakers. Let me explain.

    Assume 2 million jobs are affected with an average of 60 thousand dollars per year. They yield roughly 20 billion per year in social security taxes and more than 50 billion in federal and state taxes per year. So, for the government to RETURN 15 billion would be practically NOTHING.

    I understand that in the long term these people may get other jobs (though God knows where) but in the short term and under the present conditions there will be a huge problem if we do not help. If you want to stick to principles, focus on AIG etc.

  15. Anonymous


    Typically in a PE agreement, each fund can not invest more than a set percentage of funds into any one company. Typically this number is 5%, which may or may not be a meaningful cap depending on how large the fund was that Cerberus acquired chrysler in. Supposedly they have already placed an additional $2 bb into the company over the last couple months, but only Cerberus and their LPs know for sure how much they can invest.

  16. Anonymous

    The article in today’s NYTimes is is unfortunately representative of the distortions the UAW is able to get MSM to print.
    Just for a starter he has a example in a box on P.1. He chooses to use Ford as an example .Though they seem not now to take the bailout. Why not GM? (Does GM haave lower legacy costs? And maybe higher total costs)
    Then in the best Westmoreland tradition he invents a world where Ford will have 20% new hires. What year would that be?
    I do believe in older times this was called yellow journalism.

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