GM and Chrysler Get an Early Christmas Present

Merry Christmas Detroit! President Bush offered a holiday treat to General Motors (NYSE: GM) and Chrysler on Friday. Unfortunately, since Old Saint Hank was out of TARP funds, Ford (NYSE: F) found an empty stocking.

The President released the remaining TARP funds to GM and Chrysler, with another $4 billion earmarked for GM in February, assuming Congress first approves the release of additional TARP capital to the Treasury. For now, the $13.4 billion dollars offer the two burdened companies a short window of opportunity to restructure for the long-term... and to survive.

The plan requires concessions from the stubborn UAW, cash-strapped auto parts suppliers, and creditors who in some instances might be better off in a liquidation scenario. The concessions from management were the easiest to obtain. Rick Wagoner and the executive teams have agreed to sacrifice bonuses, to adjust golden parachutes and otherwise alter compensation and governance to meet the standards of the United States Treasury [UST] for as long as it holds the slightest interest in the saved firms. Although they have already implied they would sell their private jets due to public scrutiny, they'll now sign their names to it. The companies won't even be able to sell anything of substance without Paulson's prior approval.

By the 17th of February, GM and Chrysler must each submit to the President's designee their plans to "achieve and sustain long-term viability, international competitiveness and energy efficiency." Automakers will have to demonstrate they can manufacture advanced technology vehicles and meet fuel efficiency standards, as laid out in the Energy Independence and Security Act of 2007. The companies will also be asked to achieve positive net present value through the rationalization of costs, capitalization and capacity.

The government wants these firms to cut outstanding unsecured public indebtedness by not less than two-thirds through conversion of public debt into equity or debt. Actually, since this is unsecured debt, it is quite possible to accomplish. I would take an equity interest in a company over unsecured debt if the deal helped to raise the chances I would get my money back.

The government wants the cost of labor and benefits of Chrysler and GM to match that of the average of Honda (HMC), Toyota (TM) and Nissan (NSANY) in the U.S. In other words, UAW members in Michigan are asked to swallow a pay cut to match the autoworkers of these Asian firms operating in southern states. Never has the United States been closer to reviving civil war between north and south than now...

The government wants the UAW to agree to this with GM and Chrysler by December 31st 2009. Without the UAW and the fact that GM's assets are so fixed, the company would naturally gravitate toward states where it could find equally qualified workers willing to take less pay. If Americans can accept what Nissan, Toyota and Honda offer, then a near bankrupt GM needs to restructure this cost.

By February 17th, the companies need to show all parties have agreed to these stipulations. GM and Chrysler can deviate from them, but are charged with the responsibility of explaining those actions to sometimes-unruly Congressmen. They'll have to show how changes have not impaired the contract position of the UST. I for one wouldn't want to face that angry firing line.

In any event, it’s nice to know that Midwestern American families can now exhale and enjoy the holidays. Merry Christmas Detroit.

Comments

[PastTense:]

I doubt if the auto manufacturers and UAW will pay much attention to these "requirements". Instead they will just put pressure on the new Democratic Congress and President to deliver some pork--and Congress and the President will deliver.

2008 Dec 21 12:25 PM