Auto Bailout Hearings: Live Blog Two

Posted by: David Kiley on December 4, 2008

Moody analyst Mark Zandi is killing the automakers. Her says that $34 billion wonl;t be enough and that it will take more like $75 billion to $125 billion because of how low industry sales will stay, buyers won’t come back to the Big Three brands because of bad publicity, etc.
He also is casting a lot of doubt on their ability to deliver on their plans and promises.
He suggests lending them $34 billion in exchange for stock warrants, and to give the money in two tranches. He is advising against a Chap. 11. If after the first tranche, the benchmarks aren’t met, then he says cut off the money.
Zandi’s testimony is confusing and I’sm sure is going to be the subject of much of the afternoon. He is basically saying it will never be enough, but give it to them anyway?

Zandi: Captive financing arms of the automakers are a drain. He says to facilitate them to bank holding companies. That would be a significant help in loosening credit. The captive finance companies of the automakers have basically stopped leasing cars. That has been 20% of sales in some years. Chrysler said it lost 20% of sales overnight.
The automakers have applied for industrial bank status with the Federal Reserve so they could access Fed money for the purpose of making car loans. The Fed has not responded yet.

Senator Dodd is asking if government money is going to facilitate a merger or acquisition of the company.

1:09 PM: Dodd is asking if SUV plants can be converted to build mini buses and other new kinds of urban transportation vehicles that are in demand. Dodd says that in some cases cities that are buying these vehicles are buying foreign vehicles. GM still builds a commercial van. Chrysler sells a Dodge Sprinter that is a twin of a Mercedes van. This seems to bee an area where the three companies could easily form a joint-venture business.

Dodd says many people think that a new management should be installed. Wagoner made the point that he has no golden parachute and serves at the pleasure of the board.

Shelby says there are too few details about how the companies will return to profitability. He wants a three year pro-former plan. In truth, that is in the filings from Chrysler, GM and Ford pretty much done that. Shelby seems to have only read the summaries.

1:24 PM:Moody’s Zandi: Bankruptcy at this point in time would be cataclysmic for the economy right now. You need to help them right now. They have done some goods things…they deserve the opportunity to execute [the rest of their plan.]. Bankruptcy financing, Zandi notes, is not available to these companies. They will go into liquidation if they are allowed to go Chapter 11.

Shelby: “If they got the $34b, how long will it be before they are back?” Zandi says the Fall. Shelby: “$34 billion is just the beginning?” Zandi: “That’s the high probability."

Shelby is a master at seizing on the cherries that back up his own position that the automakers would be allowed to go into liquidation.
But I have never heard him articulate why he thinks the impact on the national economy is just fine with him.

1:43PM Sen. Jack Reed (D-RI) asked Moody's Zandi if the costs to the government of allowing these companies to go Chapter 11 would exceed his worst case scenario of the companies needing $125 billion. Zandi: "It's measurably worse...not even in the same universe." This exchange is going to be problematic for Shelby. At least it should be.

1:58PM UAW President Ron Gettelfinger: By the end of December we could lose General Motors as a corporation.

Senator Schumer: Suggests that Congress pass a bill with enough money to keep the companies alive, and then appoint a car czar answerable to the President. The czar or "trustee" would bring all the stakeholders together--bond holders, UAW, management and dealers--in order to extract sacrifices. The payback plan and structure of ongoing help would revolve around the broad based sacrifices.

2:20PMSenator Bob Corker (R-Tenn.) is perhaps the best prepared questioner of the day. He basically says that there is nothing to discuss unless GM bond holders take a 66% haircut, and the UAW agrees to take $10.5 billion in future healthcare (VEBA) payments in stock rather than cash. UAW President Gettelfinger said he did not have the authority to agree to that today and started reading a letter from a UAW surviving widow who depends on her payments from GM to survive.

Corker also admonished Chrysler LLC owner Cerberus Capital LLC for not putting more of its money into Chrysler, and accused Chrysler of just using the plight of GM and Ford to "ride along" to get government money in order to pull of a sale or merger.

2:35 PM The hearing was interupted by a group of protesters who appeared to have leaked into the room from the hallways outside the hearing room. I encountered them last month. They have a right to be heard and to question the process, but they make fools of themselves by yelling at everybody.

Reader Comments

John Settlemyer

December 5, 2008 12:37 AM

The current crisis in domestic manufacturing industries affects all main street Americans. Our Auto industries are of particular concern. The thought that Congress will contemplate the failure of our domestic auto industry, while bailing out speculators on Wall Street appeals me.

I am not saying to just give my tax dollars to GM, Ford and Chrysler, I am saying that America should invest capital in all these troubled companies then we the tax payers will get a return when they comeback. I do not believe that Wall Street banks will all collapse, so rather than a welfare gift, we the tax payers should be buying their stock now and selling it when it returns to historical norms. The same strategy will work with the automakers. Each of these companies wants a hand out with as few strings as possible, but direct investments is a hand up and will allows us to have a say in how these companies use our money and the direction in which they move.

At today’s prices each billion dollars invested in GM will buy about 359 million shares. Each billion invested in Ford will purchase about 787 million shares. Once we own a substantial share in these companies we can have a say in their policies by placing directors on the board. When these companies return to profitability, the government can sell the stock that we tax payers bought low and make a profit. This is Capitalism at its best.

During the past 15 years GM has traded in a rage of about $38.00 a share with highs as much as $93.00 a share. A direct investment in GM of 1 billion to day could reasonably be expected to return 13.66 Billion dollars if we pegged our investment to sell at the historical norm. Fords historical norm of about $4.00 with highs around $25.00, should return about $3.15 for each dollar invested. Is this a bail out? No it is a bargain. If these companies close their doors we will have unemployment like we last saw in the 1970’s if not the 1930’s. Put Main Street on the unemployment line and we may lose so much of the national worth that we will not recognize what comes out of this crisis. Keep America at Work and this hard time will pass. How much return will we get from the Wall Street bankers and AIG?

I am about 15 years from retirement and have seen my IRA and 401 investments drop in value about 50 percent since September. In addition to this, our home is worth much less than it was just a year ago. These investments have taken my wife and I our life time to scrip and save to accumulate. Investments that were to pay for our children’s to college then to retire, now because this perfect storm in the Housing, Finical and Auto Industries have left us holding all the bags.

I work in the transportation industry, for a Railroad where we move the goods that the Auto and Housing industry uses to produce cars. We move steel, chemicals, electronics, raw materials and recycled materials as well as the finished product. If Congress were to allow any one of these industries to collapse on this three legged stool that we call the economy, I can only imagine what would happen.

However, having read about the decade of the 1930’s I hope Congress will not allow this to become the next Great Depression? To paraphrase an ex president, it all about the jobs.

Simran Wadhwa, SG Analytics (Serving the global community)

December 5, 2008 7:04 AM

Detroit’s big three automakers who have come second time for a government bailout are definitely going to require more than the $35 billion they are currently pleading for. The impact of the embarrassment they faced last time can be clearly seen in their agreement to cut down their salaries to $1 a year if the federal loan is approved. GM which is currently in desperate need of $4 bn will surely run out this emergency fund also in a blink. Merger of two firms sounds far better!

Ardent Observer

December 5, 2008 10:22 AM

re "Bankrupcy":

The airlines did it: we still fly!!

re Mergers/takeovers..the big 3 to the big 1 or 2: come on, do you think we are really avoiding monopoly in corporate America with even 3 big US companies? Or are we just fooling ourselves into thinking that we have true competitionamongst the big 3, rather than their working as one?

walter michaels

December 5, 2008 8:43 PM

With auto maker CEO's and oil company CEO's making more than 100 million a year why doesn't the goverment require each of the CEO's to put up 500 million of their own money then match the combined amount instead of once again asking the American public to bail them out. If not for the private jets and enormous saleries the CEO's demand auto makers would not be in the bind they find themselves in today.

Alex Bartra

December 5, 2008 10:04 PM

I think one of the senators hit the nail on the head when he postulated the idea of combining the big three's green technological advances into one. This would then streamline the process of creating a viable product that could quickly generate profits.

mike

December 8, 2008 5:15 PM

It is so simple to fix the auto companies. Quit building cars that could be sold and start building cars that are sold. Building cars without a sale is speculative and with no idea of the outcome. Be smart build as they order, build what the customer wants not what they settle for. Insure the car loan "before delivery".

Paul Zugschwert

December 11, 2008 12:56 AM

If we let the government run the auto industry, what's next?
The market buys what the market wants.
If the gas prices stay lower, there is no personal restriction on what I want to drive. I don't care about mileage or consuming fossil fuel! I live two blocks from my office, I own my own business, and I need to drive a gas guzzler for the nature of my business.

I just finished watching Nancy Pelosi on C-Span and I want to puke. Then I watched the senator from Michigan, pardon me for not remembering her name, pontificating about the crush on the american auto worker with the recent downturns in the economy and the auto industry.

I too am directly affected by the economy but nobody is jumping on my contruction idustry related business. I will survive because I'm not going to hope that someone will bail me out.

I'm going to survive because I will change my business model to satisfy my client's wishes and adapt to the changing economy. That's what I can do for myself. I don't need a handout, I don't need someone in elected office determining what is best for me or my industry, and I especially don't need to be taxed any more for doing a good job for good customers and being penalized for those who are not.

I can't believe the arrogance of the kingpins of the auto industry flying private jets to put their collective hands out.

Get out of here. How about letting the guys and gals on the plant floor give you some direction instead of the mucky-mucks in Washington.

The Auto industry's best resources are already working for them. Tap that brain power and let them tell you what you should do to make a difference in the market.

I'm so disgusted!!!!!

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