Treasury Soliciting Bankruptcy Funding for GM, Chrysler

Let’s see. Citigroup has gotten $45 billion of TARP funds, and backstops on a net of roughly $250 billion of crappy loans after Ciit’s first loss and allowing for the split between Uncle Sam and Citi on the balance. And it is pretty unlikely that we have seen the end of Citi’s funding needs.

GM and Chrysler, by contrast, have borrowed (un, loans are higher in priority than TARP-y equity) $17.4 billion and are seeking an additional $21.6 billion. So the total they want is less than that already handed to Citi, well less than what AIG received.

The Treasury is threatening to put the two car manufacturers into bankruptcy, and is moving forward in exploring feasibility. This may merely be high stakes poker, but the bluff looks pretty serious.

Do we see anywhere near as rough treatment for companies that not only drove themselves off the cliff, but are taking the economy with them? Ah, but of course. Who has given more to pols in DC, Wall Street or Detroit? Case solved.

From the Wall Street Journal (hat tip reader Dwight):

Outside advisers to the U.S. Treasury have started lining up the largest bankruptcy loan ever, talking with banks and other lenders about at least $40 billion in financing for General Motors Corp. and Chrysler LLC, in case the two auto makers need it, said several people familiar with the matter.

While acknowledging the grimness of the task, administration officials involved in the auto talks said they are trying to find a way to restructure the two companies without resorting to bankruptcy proceedings. They stressed the latest efforts were “due diligence” on the part of the government advisers, and that bankruptcy financing may not be necessary.

Still, people involved in talks with senior Obama administration officials said that the administration believes that the option of Chapter 11 filings by the two auto makers needs to be seriously considered.

“Everything is on the table right now,” one person involved in the matter said, adding that President Barack Obama doesn’t want to see more massive job losses in the auto industry. His administration also doesn’t want to anger the United Auto Workers by appearing to push for bankruptcy, this person added.

Yves here. Well, I’m glad to learn about the solicitude about jobs, but it still begs the question: have we seen anything like an “Everything is on the table” investigation for the dodgy big banks? Back to the article:

The initial discussions call for private banks to provide the financing — known as a debtor-in-possession, or DIP, loan — with the government guaranteeing or backstopping the loan. In this scenario, some of the financing would be used to pay back the $17.4 billion the government lent GM and Chrysler late last year.

Lenders are reluctant to commit funding to GM or Chrysler for several reasons — mostly concern they won’t get all their money back….

The government advisers also are looking at ways the Treasury could “prime” other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps. Both GM and Chrysler insist they can avoid bankruptcy, warning that option could cost the government as much as $125 billion in rescue financing. Bankruptcy experts say the sum isn’t likely to be that high.

Even so, the estimated total of $40 billion in DIP financing GM and Chrysler would need would be five times as large as the previous record for such financing,…

Bankruptcy experts say that absent government support, lenders wouldn’t step in to aid GM and Chrysler, given the proposed size of the loan and the tightness of credit markets. Most likely, the bankruptcy loan would roll up — or pay off — the $17.4 billion the government has so far lent the two auto makers. It might also pay off some other debt, including a senior bank facility…

GM said it might need as much as $100 billion in financing from the government if it were to go through the conventional bankruptcy process. GM’s $100 billion estimate stems from the belief that it would suffer “catastrophic revenue reduction impact” in a prolonged conventional Chapter 11 process, as it would expect to sustain as much as an 80% decline in sales after a bankruptcy filing. GM would need financing not only so it could weather the storm, but also to help its suppliers and dealers survive.

Mr. Wagoner, the GM CEO, said the bankruptcy scenarios are “risky” and “costly,” and would only be pursued as a last resort. “We haven’t had extensive discussions yet with the government on DIP financing,” he said. “They asked us to put together and address the topic. We’ve done that in [GM’s viability plan], so I suspect we may enter into those discussions.”

The disparity between the government loan estimates and GM’s is basically the difference between an optimistic and a pessimistic case. One of the repeated errors of the Fed and Treasury in this crisis has been insufficient preparation for reasonable downside scenarios.

What happens, for instance, if the powers that be arrange $40 billion of DIP and the GM is closer to correct than Treasury, sales do decline, and the carmaker needs, say, $70 billion to go through Chapter 11? I would say the odds are high it goes into liquidation, as some (including yours truly) have predicted.

And for background reading, the auto rescue program has already had some big miscues.

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  1. Anonymous

    Good question Yves about why the question of rule of existing law and potential bankruptcy doesn’t apply to the financial industry.

    Too big to fail, may ass.

    Too integrated into the political system, it seems to me.

    We have had finacial deregulation for 10 years and it didn’t work as all can hopefully clearly see. It is time to reregulate the financial industry like the monopoly it is to service the populace.

    A revolt is coming if this mess isn’t cleaned up and it is way past time for an accounting.

  2. bg


    You imply that the government doesn’t care about GM because of a lack of political contributions? The feeding of AIG occured because of a consensus that another Lehman could not be tolerated. I may disagree, but that was the consensus. The decision was wildly unpopular in the electorate.

    By comparison, saving GM would by the votes of millions for a generation. The real reason for not stepping up for GM is that there is no logical stopping point. Airlines? Retailers?

    To save GM you either have to say that all business won’t be allowed to fail, or just that large businesses won’t be allowed to fail.

    In either case you have a command economy on your hands.

    Want to guess where we would be today if we had let AIG go down like lehman?

  3. Anonymous


    Good posting.

    Which country is going to be the next to go? Or is it going to be a region like Asia, EU, America, etc. ?

    Financial bubbles, check

    Housing bubbles, check

    Debt bubbles, check

    Leverage overextensions, check

    If it wasn’t that so many people are going to be hurt by the carnage it might even be amusing to watch……

  4. Timo

    Yeah, it is so much more fun to play with the world reserve currency than actually produce something of value!

    Dirty factories are so 3rd world stuff, downright disgusting. You would need to actually use your nerdy math skills, how uncool is that?!

    Americans are so much better superpeople and the rest of us just stand in awe of your excellence!

    PS. Do I sound a little bit anti-american? Oh boy, you ain’t seen nothing yet. I and about billion others are just getting warmed up…this party will last for years to come. ;)

  5. Yves Smith


    Given the massive opposition to the TARP (unprecedented level of grass roots opposition, calls and e-mails running over 95% against). do you still think what the ordinary voter wants counts?

    If you haven’t seen it yet, go watch the BBC series, The Century of the Self. You can find it on Google Video. Its big theme is the engineering of consent. Money is very useful in doing that.

    Even with the AIG emergency action, no one took seriously the idea advocated by Chris Whalen and others, of either completely voiding CDS, or of voiding those where the protection buyer does not own the underlying bond as of date certain. I have read various legal theories as to how this could be accomplished. If anyone had bothered to do that, AIG could have paid back 7/8 (or all) of its debt, pronto.

    The fact that this option hasn’t been examined says where the officialdom’s priorities are. And they aren’t you and me.

  6. bg

    “engineering of consent”

    So how does one engineer dissent? I will go watch the video. It is a fair challenge. At the end of the day these guys still need to get 51% of the votes.

  7. Anonymous

    A C7 of Chrysler, LLC. is inevitable, though if it can be put off until Q3 so as not to compound the current job losses, that would be good. But pushing GM into CH11 still remains foolhardy, to say the least.

    The real reason for not stepping up for GM is that there is no logical stopping point. Airlines? Retailers?

    Oh, please. Asserting there is no difference between bankruptcies in non-outsourcable service industries – one of which doesn’t add much value, and the other of which has seen repeated bankruptcies with little interruption to the overall system – and the bankruptcy of major manufacturing company in an industry that has an enormously high barrier to entry is just laughable.

  8. Yves Smith


    There is quite a lot of evidence on how suggestible people are, It’s pretty scary stuff. Even minor suggestions (read up on anchoring in behavioral economics) is very powerful.

    There is also lots of evidence on the effectiveness of propaganda. Can’t remember where,, but in one of the Balkan countries, on some issue, the party line (big issue, not little issue) changed 180 degrees. In two months, they had gotten the public in line with the new world view.

  9. Anonymous

    Forget manufacturing OR finance OR agriculture OR mining, etc… If the name of the game is keeping people employed regardless of the demand for the product of said labour, I recommend a late-night-pointless-comment-based economy.

    Seriously, though, if the mighty State lets Big Auto fail, I’ll be somewhat disappointed. I was looking forward to owning the three-wheeled Pelosi model that was proposed some time ago.


  10. Dave

    Quite right YS.

    I’m no fan of GM or Chrysler, and they frankly have driven themselves off the cliff (or did they fly?) but you’re quite right to draw the distinction between the “bailout at any cost” mentality being applied to the big banks, vs. the “cast to the wolves” mentality towards the big autos.

    It seems that the attitude amongst the ruling elite is something like this: We *must* preserve the white-collar financial “services” jobs at all costs, but *banish the thought* that the USA might actually attempt to safeguard any last vestige of a manufacturing base in the country! Why of course not …

    The single-minded pursuit of the “no banker left behind” policy (by both political parties) at the continued expense (and squandered opportunity) of taking genuine steps towards re-making the American manufacturing economy (i.e the small part that actually “makes stuff” and employs engineers other than of the “financial” kind) is very sad to watch.

    To think that this was the nation that put man on the moon just 40 years ago to the year … One giant leap for mankind, indeed.

  11. Anonymous

    There is the entertainment industry value of our punditry. Terms like cowboy capitalism and fatalistic fascism could be come new slogans…..

    Think of the possibilities….

  12. Anonymous

    Dave said: “To think that this was the nation that put man on the moon just 40 years ago to the year … One giant leap for mankind, indeed.”

    I was 20 at the time and fully expected to travel to at least the moon by now but the “real” world went in another direction.

    Space can be our next frontier if we want it to be.

  13. spare some change?

    The Looting continues.

    That last link of yours ( brings it all into focus. The Wall Street pigmen weren’t satisfied with using government money to fund their bonuses. They aren’t satisfied with allowing the government to pretend to bail out the auto companies (to win votes during an election) only to run them into the ground so the pigmen get their CDS payouts.

    Now they want to get priority OVER the government in bankruptcy proceedings, which are inevitable at this point.

    That wasn’t an innocent slip-up. That was deliberate looting, and thanks to the language in the TARP bill, Paulson can’t be prosecuted for it.

  14. Justin


    no fair giving away one of the best secrets of trading/investing with that documentary.

    The most important tool for my trading/investing is not rational markets, but irrational investors.

    If you know how people are persuaded about a financial system or a stock or a form of government, you can analyze where it will eventually break down in Markov models. Just look how many times the words socialist, free-market, liberal, etc., are used not as a singular definable idea, but as a way to organize thinking irrationally.

    I think Minsky is now getting a lot of publicity for his studies on financial instabilities.

  15. alex black

    Ask that question to Geithner or many of the most powerful people in Congress, and here will be the response:

    “Does GM owe any money to Goldman Sachs?”


    “Then why are we even having this conversation?”

  16. Jojo

    Easy explanation: Some industries (financial) are just more equal than others, particularly if the allocator’s of handouts happen to originate in the more equal industry.

    Welcome to the Animal Farm real world.

    I say off with their heads!

  17. fresno dan

    Yves “If you haven’t seen it yet, go watch the BBC series, The Century of the Self. You can find it on Google Video. Its big theme is the engineering of consent. Money is very useful in doing that.”
    Always been cynical – now I’m superdooper cynical! Thanks!!!
    Churchhill “Dmocracy is the worst form of government, save for all the others”
    Churchhill “The best arguement against democracy is listening to the average voter for 5 minutes” (I would amend that to 30 seconds – I don’t think the average votes can put together a coherent paragraph).

  18. Early Withdrawal

    I’ve argued since the autos came begging that a harsh response on the autos would be the single best opportunity for generating political pressure to deal with the banks justly (that is slay them). The left has been up in arms over the treatment of the auto companies (sound financial decisions matter less than the unions getting their fair share of the govt pie). IMHO the more harshly the govt deals with the autos the more the most loyal to Obama are angered by the bank bailouts. This is real politics at its finest. I’m actually surprised team Obama has not read the tea leaves on this and given the autos a freer pass.

  19. Bruce Post

    Yves, I appreciate your reference to “propaganda.” With the dissemination of more information about brain function, we now see strategies labelled “neuro-marketing.” Drew Westin’s book “The Political Brain: The Role of Emotion in Deciding the Fate of the Nation” is just one more example on psychological manipulation as a force. A book I commend to your attention is Jacques Ellul’s “Propaganda: The Formation of Men’s Attitudes,” which I am wading through right now. (I use the term wading because Ellul is not an easy or breezy read). It was first published in 1965. I have read that Ellul does not necessarily offer a solution or map out an escape route, but nonetheless, awareness alone may offer us some hope of dealing with propaganda’s pernicious, Ellul would say evil, effects.

  20. Martin

    Could I please refer the readers to and ask for their comments? I would think that the US government has just written a blank check to the entire banking industry. Standing "firmly" behind an entire industry means that any wrongdoings will be forgiven…

    PS: when publishing this comment I was asked to type the "word verification". The requested word did sum up my feelings pretty wel: PUREMESS.

  21. eh

    Yes, what’s been done so far reeks of corruption, incompetence, and cronyism. Hardly a recommendation for a government takeover — ‘nationalization’. Or whatever you want to call it.

  22. Bob Falfa

    Lenders are reluctant to commit funding to GM or Chrysler for several reasons — mostly concern they won’t get all their money back….

    I’m glad the authors cleared the issue of lender reluctance up for us.

  23. curlydan

    If GM and Chrysler go bankrupt, wouldn’t that precipitate a bankruptcy for Ford, too?

    I mean, if GM and Chyrsler get to totally re-engineer their cost structures with a bankruptcy, it seems like that would put Ford at a major cost disadvantage, almost forcing them to do the same.

    Any thoughts?

  24. BitterRenter

    Yves, its not just the donations. Don’t forget the Mr. Rubin, mentor to both Mr. Summers and Mr. Geithner, is a Director at Citi, not at a car company.

  25. DanyBoy

    Dear Mom and Dad, please send money!

    I know you just got done paying for gifts for all your friends in Congress.
    But AIG just had another little accident(that will cost $60Bill more)but they promise to be good from now on!
    Oh and GM and Chrysler have done everything you wanted. They need some.
    Oh and please, Mom and Dad, send some more money for Citi (and maybe BofA, they’ve been real good)

    And please stimulate us with a few more hundred bill and support the media and our housing industry, cause we’re not too good at making stuff ya know.

    If you really care about us we need some free health care. And please keep funding our retirement accounts! Please???

  26. Jim T

    Had the Government let AIG go down the same weekend as Lehman Brothers, JP Morgan Chase would have collapsed too. It amazes me that Jamie Dimon & JP Morgan have been allowed to tout themselves as something good, compared to Citi & B of A. Jamie & JP Morgan are just as NATIONALIZED or TAX PAYER SUPPORTED as the other two banks if not more! Besides the obvious $25 Billion of TARP they have received in plain view they also received under the table $139 Billion from the government the week Lehman went down and $30 Billion from the Bear Stearns deal too.

    PRESIDENT OBAMA "Change you can believe in" kiss my ass you fricken phony! You are doing exactly the same crap the last administration did, (F-ck the tax payer for the boys on Wall Street). We are sick of it! Let the bastards fail, they deserve it! It doesn't matter any more the game is over so stop wasting our money!

  27. cent21

    I suspect it is a case of “they’re more like us”.

    Detroit, they would say, is not competitive in a flat global economy, where workers in other countries will work for 10 cents on the dollar our workers demand.

    Whereas, the financial types have been those in the hierarchy that have been arbitraging “flat” labor. And the white collar folks in Washington relate more to those masters of the flat world than the do to those being flattened.

    I really don’t have skin in the game here, I’m closer to the white collar folks engaging in arbitrage than to the assembly line folks. One observation, though; just because Washington is playing harder with the auto industry than they are with the billionaires that got us into this mess doesn’t mean the bankrupcy option isn’t right for the auto industry. Really, at least Chrystler ought to go, and GM certainly needs restructuring in a way they won’t go near if they’re bailed out.

    As for the flat worlders; I wonder how much further this meme will go with the arbitragers going under at a record pace, bailouts notwithstanding?

  28. eh

    …as some (including yours truly) have predicted.

    So you think the Obama administration would allow the equivalent of Ch 7 for GM when the federal govt has already poured how much into AIG? I cannot see that happening. Imagine the stink that would be raised. What do those shysters at AIG actually produce??

  29. Andrew Gross

    On the matter of what's needed now to unclog inventories of existing new vehicles on-ground at dealerships and factory lots in the US set to put people back to work at US company owned factories ASAP, I propose:

    1. Offer direct federal access to funds to franchised new vehicle dealers for the purpose of accelerating loans for qualified consumers and fleet operators
    Franchised new vehicle dealerships sales actualization requirements must also be taken into account in this matter as they are an integral part of the new vehicle sales "food chain."

    2. Accelerate Special Offers for Fleet Operators to cycle their vehicles
    This would include all private as well as public fleets not as yet contemplated by the present plan to ensure fleets replace their vehicles as they would normally cycle them.

    3. Auto Manufacturer and Parts Supplier Shareholders' Guaranteed Value Plan
    The plan would contemplate developing a formula which would guarantee a certain "floor price" for qualified stock.

    4. National US Auto Industry "Super Sale"
    Designate a short, specific time period where consumers would benefit from the acquisition of a new vehicle through any number of offerings (i.e., large cash incentives, pre-paid maintenance, extended warranties, accelerated tax incentives beyond those passed in the stimulus bill, etc.) all set to, again, unclog existing inventories and get people back to work.

    Regards to all,

    Andrew Gross
    Chairman & CEO
    Automotive Consulting Services
    (An Oregon Corporation)

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