Detroit Bailout Dies in the Senate
By Chris Haak
In the face of Senate Republican opposition, the $14 billion auto industry aid bill that passed in the House of Representatives on Tuesday has died. The biggest concerns raised among Senate Republicans were that the House version was not tough enough, so a day of negotiations yielded tougher language suggested by Senator Bob Corker (R-TN) surrounding restructuring. The changes that Senate Republicans sought to make to the House-approved bill were 1) converting at least 2/3 of the companies’ outstanding debt to equity by March 31, 2009 – or repay the loans, or face bankruptcy, 2) half of the GM/Ford/Chrysler VEBA contributions would be in the form of equity and not cash, and 3) UAW workers would have to accept the same pay, benefits, and work rules as transplant workers now have by 2009.
Ironically, before this news hit the wire tonight, I was going to write about how Senator Corker (pictured above) – who came off as a grandstanding smart ass during the Big Three CEOs’ testimony – came to grips with the reality of what a failed domestic auto industry would mean to the economy after having spoken with industry and UAW leaders, analysts and investors, and said that he “came back with a much fuller understanding.” He said during a conference that he fears what effect an OEM bankruptcy would do to the supply chain. Well, yeah! I do applaud him for not only offering a reasonable alternative, albeit one that was not palatable to the UAW.
Senate Democrats eventually accepted all of Corker’s proposal with the exception of the wage parity by 2009; they apparently were on board with the concept, but not the timeframe. The ironic thing is that the actual wages are not that far from what transplant autoworkers make, but the benefits are better, and the work rules – while getting closer – are still quite different. Oh, and there’s that whole pension/legacy cost thing hanging over UAW workers’ [over]heads.
So what does this mean? The Dow Jones Industrial Average will bomb upon its open on Friday and it will close quite a bit lower than the 8565.09 that it ended at yesterday; GM’s non-performance has already harmed the Dow over the past year. So, my 401(k) balance is going to be smaller tomorrow. More importantly, barring any sort of last minute miracle compromise, GM and Chrysler will declare bankruptcy in the next two weeks and try to pick up the pieces from that point. Sales for both companies will fall off a cliff for the foreseeable future, many of their suppliers will also be forced to seek bankruptcy protection, and hundreds of thousands of people will be out of work. Foreign automakers such as Honda, Toyota, Nissan, and Hyundai will see increased market share over the next few years. But hey, at least the Senate was able to stick it to the UAW, right? (To be fair to the Senate, the UAW is apparently to blame for its unwillingness to accept the third condition – wage and benefit parity – although I can certainly empathize with the union’s reluctance, since they bargained for what they have over six or seven decades, and obviously are better bargainers than their management counterparts were).
Meanwhile, the Wall Street Journal reported last evening that, like Chrysler, GM has sought the advice of a noted bankruptcy specialist. In GM’s case, it is the New York-based law firm of Weil Gotshal & Manges LP, with bankruptcy expert Harvey Miller leading their team. According to the Journal, GM has retained numerous other experts to help it decide whether and how to handle a bankruptcy filing. In the WSJ’s words:
Others involved in the matter include restructuring veterans Jay Alix, Evercore Partners’ William Repko, Blackstone Group’s Arthur Newman and Martin Bienenstock at the law firm of Dewey & LeBoeuf LLP who worked on the Enron bankruptcy.
Mr. Alix, who has been in semi-retirement for several years, founded the Detroit-based turnaround and advisory firm AlixPartners and worked with GM on a number of high-profile cases in the 1990s, such as National Car Rental.
Evercore has been advising GM for many months, including on the failed merger with Chrysler LLC. Blackstone is focusing on GM’s multi-billion-dollar voluntary employee beneficiary association plan.
Legal fees alone for this bankruptcy filing will be in the billions of dollars. Unemployment benefits for all of those autoworkers won’t be cheap. With the credit markets in the state they’re in, nobody will be able to lend GM debtor in possession financing, so that will fall to the Federal government to lend, and it will be way more than the $14 billion on the table this week, and collectively – if all three go down – it will be more than the $34 billion they asked for last week.
From a car guy standpoint, we can probably forget about seeing fun cars like the Solstice, Camaro, and Corvette for a number of years. How on earth would GM be able to spend multiple millions launching the Camaro – which as a pretty dubious business case, if they need to sell 100,000 units to break even – when GM is doing things like cutting back on nightly garbage collection at workstations? Under the stewardship of a bankruptcy judge, GM won’t be able to roll out products based on emotion or nostalgia – it will be based on nothing but the business case. I’d say that in spite of the three quarters of a billion dollars already spent on the Chevy Volt program that it now faces an even more uphill climb to reach the market, because how can a company fighting for its very survival afford to produce a car that’s guaranteed to lose money from day one?
I really hope that the “ahh, let ’em fail” attitude that prevailed prior to the Lehman Brothers bankruptcy (and is now tinged with regret in most corners of the market for what it did to the economy, by the way) isn’t the same thing that happens when GM and Chrysler go belly up. And when their suppliers go bankrupt and can’t build parts for Ford, guess who’s next in line for Chapter 11? This will be an ugly day all around.
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