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A Real Bailout for Auto Makers

November 29, 2008

Detroit's only hope may be to let ailing auto makers file for prepackaged bankruptcy. And, a blast from the Motor City's past.

IS A BANKRUPTCY THE BEST OPTION FOR GENERAL MOTORS, Chrysler and Ford ? While their CEOs insist otherwise and the risks would be high, a growing chorus of outsiders says yes. "It's the only real option that would allow GM to take the steps necessary for its long-term survival," asserts John Casesa, managing partner of New York's Casesa Strategic Advisors.

Unless the companies solve their problems, they're hurtling toward an ignominious fate: liquidation.

Although hundreds of billions of dollars in taxpayer funds have been poured into Wall Street firms in recent months, and just last week the Treasury invested $20 billion to keep Citigroup afloat, Congress is wary of helping the car makers. Unlike the banks, Detroit has a problem that isn't just a short-term liquidity squeeze. Rather, it is a business model whose flaws have been made starkly evident by the terrible industrywide sales slump, the weak economy and the credit squeeze.

"We're in probably the worst economic situation that the industry has ever been in," Ford CEO Alan Mulally told Congress last month. "Our sales for the industry, for the first nine months, are down nearly 45%. And the actual sales for October are the lowest for the industry in over 25 years." And November's probably weren't much better. Unless sales suddenly recover, General Motors (ticker: GM) could run out of money by year's end. Chrysler and Ford (F) can hang on longer, but they, too, will exhaust their existing cash reserves, probably by mid-summer and next fall, respectively. To survive until the end of 2009, GM would need $100 billion, unless sales sharply revived.

WITH THAT THREAT IN THE AIR, Congress gave the Detroit Three about 10 days to prove their case for immediate aid, and come up with road maps for survival. "Unless they show us a plan," House Speaker Nancy Pelosi said recently, "we cannot show them the money." The companies' responses are due Tuesday. If they don't sway Congress, GM could be forced into bankruptcy quicker than you can say President Obama.

"In the circumstances," says Casesa, "the best the auto makers can hope as a Christmas present this year is that Congress approves a much smaller-than-requested aid package, enough to kick the can into the Obama administration's court."

The recovery plan certainly will look and sound good. It will be full of plant closings, layoffs, glitzy promises that new cars like the plug-in hybrid Volt will make a difference -- and, we suspect, a few executive pay cuts and corporate-jet sales. But if Congress plays Scrooge, what really would happen?

Continued Here:A Real Bailout for Auto Makers -

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23,851 Posts
Discussion Starter #3
Big Three become the Medium Two

December 02, 2008

The Big Three Should Become the Medium Two

Update: The Senate Banking Committee has rescheduled its next auto industry hearing to Thursday, Dec. 4 starting at 10 am. The next day, the House Financial Services Committee will start hearing testimony at 9:30 am.

Today's the day the Big Three return to Congress to make another pitch for a $25 billion bailout. They'll be armed with detailed plans outlining how they'd use the money to turn themselves around, but you've gotta wonder if anything they suggest is too little, too late.

There is no doubt the auto industry is facing a seismic change and the Detroit automakers must become drastically different companies if they are to survive. There's some evidence Detroit finally realizes that. General Motors is talking about shutting down factories and killing brands. Ford is looking at ditching Volvo and cutting executive pay. And Chrysler, well, no one's really sure what Chrysler is thinking, but The New York Times says the company may tell lawmakers only a merger will ensure its survival.

None of this may be enough to convince Congress to pony up, and it almost certainly isn't enough to save Detroit. The industry needs a top-to-bottom overhaul, and bankruptcy may be the only thing to bring it. CEOs for the Big Three say it would spell their doom, but a growing chorus of lawmakers and financial experts say Chapter 11 should be a part of any government handout.

And that means the Big Three become the Medium Two.

It would be difficult to overstate the depth of the crisis Detroit faces. GM is burning through $52,000 every minute, according to the Associated Press, and without an infusion could be broke by month's end. Ford and Chrysler may not last beyond next fall without help. Barron's says GM needs upward of $100 billion to make it through next year. No one's asking for that much, but Congress has been reluctant to offer anything at all. Given Detroit's track record -- yeah, guys, hybrids will never catch on -- who can blame it?

GM is the one most likely to face bankruptcy, but as Barron's notes, as goes GM, so goes Detroit. "There is a near certainty that if GM goes bankrupt, Ford and Chrysler would have to follow suit," John Casesa, managing partner of Casea Strategic Advisors, told the magazine. "Neither could hope to function normally if GM suddenly managed to cut its cost base dramatically."

There's Bankruptcy, and then there's bankruptcy. What we're talking about here is Chapter 11, which protects companies from creditors while they sorts out debts, renegotiate contracts and restructure their business. Chapter 11 helped turn many airlines into leaner, more efficient businesses.

A negotiated or "pre-packaged" bankruptcy -- in which the terms are worked out before the filing -- would provide greater latitude to revise labor contracts, trim dealer networks, eliminate brands and take other drastic steps. Steven Pearlstein of the Washington Post says it could be wrapped up in a matter of weeks or months, minimizing the risk consumers would be frightened away from American cars. Some sort of government assistance would be needed even under a prepackaged bankruptcy, and the Associated Press says a growing number of lawmakers are inclined to play along.

So what would happen under a pre-pack?

Any top managers left standing would see big pay cuts. The United Auto Workers would see its gold-plated benefits package radically revised. GM would close as many as half its plants and unload as many as four brands (likely candidates include Saab, Pontiac, Hummer and Saturn). In addition to unloading Volvo, Ford would kiss Mercury goodbye. Chrysler would dump everything but Jeep and its minivans, and the whole shebang would probably become part of GM or Ford. GM's already tried a shotgun wedding, so perhaps Ford would have better luck. It could benefit more from Chrysler's budding EV program and may be in a better position to broker a deal given its (relatively) stronger financial position.

This whole mess may well land up in President-Elect Obama's lap when he takes office in January, and he's suggested bankruptcy may not be the answer. If it isn't, something very much like it ought to be, says Robert Reich, the Clinton Administration labor secretary now serving on Obama's board of economic advisers.

"In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under Chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts," he wrote in his blog. Such a move, coupled with a bailout, would allow Detroit to shift production to more fuel efficient cars while keeping most of its workforce intact, he says.

It's time for Detroit to realize Chapter 11 is its best chance for survival, and for lawmakers to make it a part of any bailout.

LINK: The Big Three Should Become the Medium Two | Autopia from
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