Aid for Automakers? Why TARP Has No Teeth

It’s been awhile since I’ve updated this blog - about a week to be precise. It is not for lack of desire, but rather, it’s that the news is fluid these days. It changes so quickly that it’s hard to keep up, and even harder to provide any insightful analysis, but I certainly have been following the auto bailout story very closely.

I was slightly disappointed that the bill floated in Congress last week did not pass the Senate. Although the bill was not perfect, it was certainly much more thoughtful, and much better crafted, than the TARP legislation.

The bailout, as crafted, adequately protected the taxpayer - providing warrants, super-senior status, and collateralizing loans against the entire value of the enterprise. It also afforded detailed oversight of the automakers - the car czar, provisions regarding transparency, and GAO access to auto records. Moreover, the legislation would have firmly placed the onus upon the automakers to provide a detailed, and viable, restructuring plan by the end of March, granting the government the right to force bankruptcy if it deemed those plans unworthy.

My biggest complaint about the legislation is that it offered aid to both GM (GM) and Chrysler. I would have provided money to the former but not the latter (see Aid for Chrysler? Just Say No!). In addition, it deferred a decision on the plight of the automakers until the next administration, and did not nearly go far enough with respect to what exactly a “viable” plan might look like - how to deal with overcapacity, the proliferation of brands, the relationship with the UAW, and how the debt would be restructured. I provided recommendations in a prior post (see Pre-packaged Bankruptcy for GM Unlikely).

That said however, it was not a terrible piece of legislation. But, the more important issue becomes - Now that it has died in the Senate, where do we go from here?

According to accounts that I have read, it looks like President Bush will tap TARP funds to provide aid to GM and Chrysler. Pundits are speculating that aid could come in one of the following ways:

1. In the form of a small loan to tide the two firms over until Obama assumes office.
2. In the form of a full-fledged package of aid, equal in size to that offered by the original piece of legislation.
3. In the form of money provided to the financing arms of these firms (e.g., GMAC).
4. Or, it could come in some combination of any of the above.

In my opinion, tapping into TARP funds for any of these purposes would be misguided. Although I have expressed my disappointment in seeing the bailout legislation die in the Senate, I am not sure that it is appropriate for the President to disregard the outcome of a process in which legislators, expressing the will of their constituents, failed to support contentious legislation. Moreover, the TARP was never designed for this purpose. My understanding is that the TARP was designed to allow:

The Secretary…to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution…

This raises the issue of whether using the TARP to save automakers is, in fact, legally permissible, but I will leave that for the lawyers to decide.

For me, what is most troubling about using TARP funds is that the end-result is likely to be a hastily constructed program that is poorly designed:

• First, funds from the TARP are unlikely to be accompanied by tough provisions necessary to turn around the automakers.
• Second, although I am willing to concede that Hank Paulson and Neel Kashkari know something about banking and running banks, however, they know very little about the auto industry, and managing automobile assemblers.

I believe that a better approach to hastily misappropriating TARP funds in this fashion would be to explore the bankruptcy alternative that I advocated in a previous post (see Pre-packaged Bankruptcy for GM Unlikely). Unfortunately, at this point, I think that bankruptcy, with the government stepping in, as the DIP financier of only resort is a better way to accomplish a meaningful restructuring of GM and Chrysler. After providing the DIP financing, the government can then cram a restructuring plan down their throats.

Disclosure: No positions.

Comments

[robinjoe:]

There are two problems with your approaches. First the US government is not qualified to run a successful business. The second is the US automakers are not qualified to run successful businesses. So either plan is doomed to failure. Bankruptcy and the renewal of entrepreneurial endeavors in US auto making are the only long term hope. I can agree that this might not be the best time to endure this pain due to the other crisis that are going on, but long term this is the only solution.

2008 Dec 16 07:24 AM

[sstro:]

Gmac applied to TARP but did not have the capital needed. They must have pow wowed over the weekend because now GMAC is offering a 12 month CD at 4.1%. What made me laugh was the attempt to sell this as a safe investment when it's truly a means to get funds so they qualify for the TARP. These jokers will do anything to get the tax payers to bailout their failures.

2008 Dec 16 08:39 AM