GM, Chrysler May Face Bankruptcy to Protect U.S. Debt

[Sam Spade]

Predictable...
http://www.bloomberg.com/apps/news?pid=20601087&sid=ad_m06A_gtLk&refer=home

Feb. 9 (Bloomberg) -- General Motors Corp. and Chrysler LLC may have to be forced into bankruptcy by the U.S. government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them.

U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury’s Web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.

If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid. The government would finance the bankruptcy with a so-called “debtor in possession” or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.

“They are negotiating to see if they can reach an agreement,” said Workman, a bankruptcy lawyer based in Washington. “If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’” to be first in line for repayment.

GM rose 4 cents to $2.88 at 9:52 a.m. in New York Stock Exchange composite trading. Chrysler isn’t publicly traded.

Carmaker Opposition

The automakers have dismissed calls to reorganize under bankruptcy protection, saying a Chapter 11 restructuring would scare away buyers and lead to liquidation. They are working toward a Feb. 17 deadline to show progress on a plan put in place as part of the U.S. loans received in December from the Troubled Asset Relief Program. The companies must reduce labor costs and show how they will repay the money by next month.

GM and Chrysler are already trying to restructure out of court by cutting labor costs, reducing debt levels and eliminating dealers. GM is in talks to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity.

The company said it plans to shutter dealers and reduce obligations to a union retiree health fund by half to $10.2 billion in a separate equity swap. Chrysler Chief Executive Officer Robert Nardelli has said his company will also try to cut debt.

Delphi Talks

GM said today it’s in negotiations to take back portions of Delphi Corp., a parts supplier the automaker separated from a decade ago, in order to maintain portions of its supply chain. GM said it’s also considering more plant closures, job eliminations and pay cuts for administrative workers.

The automaker probably will close at least two factories, which according to the Wall Street Journal may include a truck plant in Pontiac, Michigan.

Chrysler will temporarily shut three plants, the company said last week. Those closures will be in Michigan and Canada.

January sales from automakers plunged 55 percent at Chrysler, 49 percent at GM and 40 percent at Ford Motor Co., the second-largest U.S. automaker. Ford has declined bailout funds.

The U.S. government has the option of working out an intercreditor agreement outside of bankruptcy that would give it rights to some collateral ahead of others. Such agreements, often made when money is lent to a company that already has liens on most of its assets, are usually negotiated when the loan is made.

U.S. Law Firm

Cadwalader, Wickersham & Taft LLP is advising the government on how to make sure it gets paid back first, including by way of intercreditor agreements, the people involved with the talks said. The law firm, hired last month, is working for the government with Sonnenschein, Nath & Rosenthal, a Chicago-based firm with capital-markets experience, and Rothschild Inc., an investment bank, the people said.

The issues are “extremely complex,” said Bruce Clark, a credit analyst at Moody’s Investors Service.

The existing loan agreements appear to give the banks a superior position to the government, Clark said.

“The ultimate position of the government could end up being determined by whatever concessions various creditors make, and the determination of a bankruptcy court if it ever gets there,” he said.

When the automakers were lobbying the government for assistance, lawmakers made a point of saying that the government must be assured that if the companies failed, taxpayers wouldn’t lose the investment.

Existing Lenders

Workman, who isn’t involved in the negotiations, said the U.S. couldn’t force its loans to supersede existing secured lenders, so it built in a measure that allowed the debt to be converted to debtor-in-possession financing.

“A carrot and stick approach is spot on,” he said.

As it stands, the government loans fall below existing debt secured by most assets for Auburn Hills, Michigan-based Chrysler and Detroit-based GM. Prior lenders have first position on some assets. The government has first position on assets not already pledged.

Chrysler has $7 billion in loans from a group of banks, including New York-based JPMorgan, Goldman Sachs and Citigroup. It also has $2 billion in loans from owners Cerberus Capital Management LP and Daimler AG. Cerberus owns 80.1 percent of Chrysler. Daimler owns the remainder.

GM has $6 billion in loans secured by assets from lenders including JPMorgan and Citigroup. JPMorgan spokesman Brian Marchiony, Goldman Sachs spokesman Michael Duvally and Citigroup spokeswoman Danielle Romero-Apsilos declined to comment.

Lori McTavish, a spokeswoman for Chrysler, declined to comment beyond confirming the primacy of the bank loans. GM spokeswoman Renee Rashid-Merem and Treasury spokesman Isaac Baker declined to comment.

Unless the automakers show by March 31 that they will be able to return to profit and repay the money, the government can demand return of the loans.

[Lief 🗽]

Shouldn't have pussy-footed around and just nationalized them. Too bad politicians are cowards, and it's too bad the far-right extremists like Fox and Limbaugh control the political debate.

[Franzl]

Time to let them go, I think.

[Sam Spade]

Shouldn't have pussy-footed around and just nationalized them. Too bad politicians are cowards, and it's too bad the far-right extremists like Fox and Limbaugh control the political debate.

Are you familiar with Britain car industry in the 1960s?

[opebo]

Are you familiar with Britain car industry in the 1960s?

How is that relevant?  Yes, that industry was nationalized.  The fact that it was eventually closed was the error, not the nationalization.  Had it not been nationalized, it would have closed earlier.

In any case a better course than bankrupting these companies would be to simply not be 'paid back'.  I've never been able to understand this simpleminded knee-jerk desire to 'be paid back' - when that is precisely what you don't want in a depression.  You want the money to just fly off the printing press and be spent.  There's no upside to it coming back.

[Southern Senator North Carolina Yankee]

Are you familiar with Britain car industry in the 1960s?

How is that relevant?  Yes, that industry was nationalized.  The fact that it was eventually closed was the error, not the nationalization.  Had it not been nationalized, it would have closed earlier.

In any case a better course than bankrupting these companies would be to simply not be 'paid back'.  I've never been able to understand this simpleminded knee-jerk desire to 'be paid back' - when that is precisely what you don't want in a depression.  You want the money to just fly off the printing press and be spent.  There's no upside to it coming back.

I think I am starting to understand your position more. In a Depression that is fine and dandy but in our present conditions the chances are such financially loose policies could lead to severe inflation once the economy returns. My question for you is where do you draw the line between Deflationary-Depression and Inflationary-Recovery and what policy changes would need to be in place to prevent the return of inflation and when do they need to be enacted?

[War on Want]

Shouldn't have pussy-footed around and just nationalized them. Too bad politicians are cowards, and it's too bad the far-right extremists like Fox and Limbaugh control the political debate.

I agree, the auto companies could have been privatized after the recession too.

[Queen Mum Inks.LWC]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

[○∙◄☻¥tπ[╪AV┼cVê└]

That stupid tax credit for buying a new car that the Senate passed isn't going to save them.

[opebo]

I think I am starting to understand your position more. In a Depression that is fine and dandy but in our present conditions the chances are such financially loose policies could lead to severe inflation once the economy returns. My question for you is where do you draw the line between Deflationary-Depression and Inflationary-Recovery and what policy changes would need to be in place to prevent the return of inflation and when do they need to be enacted?

I think our current situation is clearly a very severe depression/deflation, and we are a long way from inflation/recovery.  I haven't actually thought about how to change policy once recovery begins, but I assume one would just stop printing/spending.  In any case inflation is preferable to what is occurring now.

[Small Business Owner of Any Repute]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

[Franzl]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

[Sam Spade]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

The biggest mistake in analysis is believing that American car companies make cars people don't want to buy.  The fact in this economic downturn is that Japanese car companies have gotten killed just as badly as American companies in terms of sales, and in many cases are actually faring worse.

The problem is the "cost structure" of the American car companies, plain and simple.

[Franzl]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

The biggest mistake in analysis is believing that American car companies make cars people don't want to buy.  The fact in this economic downturn is that Japanese car companies have gotten killed just as badly as American companies in terms of sales, and in many cases are actually faring worse.

The problem is the "cost structure" of the American car companies, plain and simple.

So why is that then? I mean, foreign cars are usually pretty clearly of higher quality. Do people feel some type of loyalty towards American built cars?

[Queen Mum Inks.LWC]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

The biggest mistake in analysis is believing that American car companies make cars people don't want to buy.  The fact in this economic downturn is that Japanese car companies have gotten killed just as badly as American companies in terms of sales, and in many cases are actually faring worse.

The problem is the "cost structure" of the American car companies, plain and simple.

So why is that then? I mean, foreign cars are usually pretty clearly of higher quality. Do people feel some type of loyalty towards American built cars?

Get rid of the union chokehold, then they could afford to make better cars for the same price.

[Sam Spade]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

The biggest mistake in analysis is believing that American car companies make cars people don't want to buy.  The fact in this economic downturn is that Japanese car companies have gotten killed just as badly as American companies in terms of sales, and in many cases are actually faring worse.

The problem is the "cost structure" of the American car companies, plain and simple.

So why is that then? I mean, foreign cars are usually pretty clearly of higher quality. Do people feel some type of loyalty towards American built cars?

Loyalty is certainly an important factor.  I can attest to having observed it myself (not me, but other people I knew).

I've never actually owned an American or Japanese car (I've always owned an pre-1990 German car), but my parents' experience with both American and Japanese cars, in terms of quality, have been mixed.

[Beet]

Eh, part of the problem is that when the union movement was at its most needed in the late 19th  and early 20th centuries, they existed to bargain for things like wages, hours and working conditions, and then pensions and health care, whereas these days the government usually takes care of 'bargaining' for these things.

The greatest irony is that tolerance for CIO unions came into being at around the same time as tolerance for the welfare state, rendering unions redundant almost as soon as they became accepted (if by 'almost as soon' one means a couple of decades). Their greatest usefulness to workers now may be in political lobbying, as opposed to collective bargaining. When was the last time you saw a big strike?

[Franzl]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

The biggest mistake in analysis is believing that American car companies make cars people don't want to buy.  The fact in this economic downturn is that Japanese car companies have gotten killed just as badly as American companies in terms of sales, and in many cases are actually faring worse.

The problem is the "cost structure" of the American car companies, plain and simple.

So why is that then? I mean, foreign cars are usually pretty clearly of higher quality. Do people feel some type of loyalty towards American built cars?

Get rid of the union chokehold, then they could afford to make better cars for the same price.

While the unions obviously contribute to the financial problems of the automakers, I doubt that has much to do with the quality of their products. Look at Germany, and it's not like unions are weak.

And yes, I understand, German vehicles are more expensive....but if you add all things together (especially considering expensive gasoline as there is in Europe), you probably get a better deal by buying them.

One thing that people need, though, is a good public transport system....and that's something many American cities simply don't have.

[Southern Senator North Carolina Yankee]

I think I am starting to understand your position more. In a Depression that is fine and dandy but in our present conditions the chances are such financially loose policies could lead to severe inflation once the economy returns. My question for you is where do you draw the line between Deflationary-Depression and Inflationary-Recovery and what policy changes would need to be in place to prevent the return of inflation and when do they need to be enacted?

I think our current situation is clearly a very severe depression/deflation, and we are a long way from inflation/recovery.  I haven't actually thought about how to change policy once recovery begins, but I assume one would just stop printing/spending.  In any case inflation is preferable to what is occurring now.

What I fear is an inflationary/Depression. Which basically is what SAm has been describing where the currency collapses changing Deflation to inflation making said Depression worse, making Fed raise interest rates and driving us down even further into the whole then the 1930's. The only examples of an Inflationary Depression are Russin in the 1910's caused by ww1 cutting off trade. This speeded them to the the Russian Revolution. The other is Germany in the 1920's leading to Hitler's rise to power. If I have to choose between a Depression like we had and a Depression like Germany I would choose ours.

[Nym90]

When was the last time you saw a big strike?

True, and the reason that there aren't any is because unions have been severely weakened and the balance of power in the labor-management relationship has now tipped strongly in favor of management, instead of being at roughly equilibrium as it was 30 or 40 years ago.

[bullmoose88]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

The biggest mistake in analysis is believing that American car companies make cars people don't want to buy.  The fact in this economic downturn is that Japanese car companies have gotten killed just as badly as American companies in terms of sales, and in many cases are actually faring worse.

The problem is the "cost structure" of the American car companies, plain and simple.

So why is that then? I mean, foreign cars are usually pretty clearly of higher quality. Do people feel some type of loyalty towards American built cars?

Get rid of the union chokehold, then they could afford to make better cars for the same price.

While the unions obviously contribute to the financial problems of the automakers, I doubt that has much to do with the quality of their products. Look at Germany, and it's not like unions are weak.

And yes, I understand, German vehicles are more expensive....but if you add all things together (especially considering expensive gasoline as there is in Europe), you probably get a better deal by buying them.

One thing that people need, though, is a good public transport system....and that's something many American cities simply don't have.

Well, setting aside the union question for now (Whether German unions are better etc)...its not like BMW or Daimler Benz has to run a healthcare/pension organization for their labor...(I'm sure I'm not the most knowledgable here by far, so correct me if I'm wrong)...so that's one leg up they have on the big three...the german taxpayer is paying for things the Big 3 have to pay for now.

[War on Want]

When was the last time you saw a big strike?

True, and the reason that there aren't any is because unions have been severely weakened and the balance of power in the labor-management relationship has now tipped strongly in favor of management, instead of being at roughly equilibrium as it was 30 or 40 years ago.

Exactly, I think that this has as much to do with Reagan weakening unions as it did with unions becoming more redundant.

[Lief 🗽]

Well, setting aside the union question for now (Whether German unions are better etc)...its not like BMW or Daimler Benz has to run a healthcare/pension organization for their labor...(I'm sure I'm not the most knowledgable here by far, so correct me if I'm wrong)...so that's one leg up they have on the big three...the german taxpayer is paying for things the Big 3 have to pay for now.

Very true. If the government paid for healthcare in the United States, like in other civilized countries, it would save the auto companies billions of dollars.

[bullmoose88]

Well, setting aside the union question for now (Whether German unions are better etc)...its not like BMW or Daimler Benz has to run a healthcare/pension organization for their labor...(I'm sure I'm not the most knowledgable here by far, so correct me if I'm wrong)...so that's one leg up they have on the big three...the german taxpayer is paying for things the Big 3 have to pay for now.

Very true. If the government paid for healthcare in the United States, like in other civilized countries, it would save the auto companies billions of dollars.

I'm undecided on the healthcare issue, but I guess one could say that would fall under the pros of nationalized care.  (whether there are other pros, or how good of a pro that is, is a question I dont feel like delving into right now).

[opebo]

Time to let them go, I think.

We still have Ford anyway.  The auto companies don't need bailouts.  They just need to grow a pair and stand up to the UAW.

Or maybe make cars that people want to buy.

^^^^^^^^

precisely.

The biggest mistake in analysis is believing that American car companies make cars people don't want to buy.  The fact in this economic downturn is that Japanese car companies have gotten killed just as badly as American companies in terms of sales, and in many cases are actually faring worse.

The problem is the "cost structure" of the American car companies, plain and simple.

Haha, dumbs think they know what kind of cars the public wants to buy.  SS is not as dumb, but still thinks he knows 'what is the problem'.  Of course the real problem is government policy (the policy of having a depression).

But it is certainly true that there is nothing wrong with an american car - keep in mind why would one want the 'best quality' car?  That's fairly irrelevant.  One wants 1 - the cheapest car, biggest, most comfortable car for the money, and 2 - the most durable car.  So, that will almost certainly be a heavy full frame vehicle with a cast iron push rod motor: basically a full sized old american sedan, or, since the sad demise of that vehicle, the American SUV. 

To some extent the only real error of the auto companies is trying to make high-teck buzzy garbage like the foreigners make.