Auto Bailout Update

I admit – I have auto bailout fatigue. But given the amount of virtual ink that has been spilled on this topic here, I think I owe you a place where you can express your thoughts on the current plan.

The Times says we are close to a vote, although Senate Republicans may block it. Here is the draft bill. The news article says it would take the form of $15 billion in short-term emergency loans. Reading the bill itself, though, I can’t find the number “$15 billion” anywhere. This is what I read:

  1. The President can appoint a person (or persons) to implement the bill, apparently colloquially known as the car czar.
  2. Once the bill passes, the car czar can make bridge loans or lines of credit right now. Those loans can be for as much as is needed under the plans submitted to Congress last week.
  3. The money is coming from “section 129 of division A of the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009, relating to funding for the manufacture of advanced technology vehicles,” which I’m guessing is the pre-existing bill providing $25 billion in loans for R&D for fuel-efficient vehicles. That money will be then be replenished. It’s not clear whether this creates a $25 billion cap or not (how many times can the car czar draw on that money after it’s been replenished?).
  4. The loans are at 5%, increasing to 9% after 5 years. The government also gets a warrant to buy up to 20% of the loan amount in stock, at a price equal to the average price during the 15 days prior to December 2.
  5. The short-term loans are conditional on the government, the automakers, and all interested parties (including unions and creditors) being able to agree on a comprehensive, long-term restructuring plan by March 31, 2009. The car czar can extend this deadline by 30 days, but that’s it.
  6. The car czar has a lot of power to monitor the auto companies and make sure they are meeting the targets of their restructuring plans; if they aren’t, he can call in the loans.
  7. There are some other fun but peripheral provisions, like getting rid of corporate aircraft, dropping lawsuits against state greenhouse gas regulation, and executive compensation limitations.

The big point is #5 (in my list). In short, this isn’t a comprehensive bailout: it’s a bridge loan to buy time to come up with a comprehensive bailout. This is roughly what Simon predicted (although I can’t remember where). It enables the Bush administration to avoid having a car company fail on its watch, and enables the Democratic majority to say that they are doing something for the automakers, while deferring the hard questions. I assume that all of the controversial questions, like how big a concession the unions have to make, and whether or not it’s possible to force creditors to take equity in place of debt, will re-emerge over the next few months.

Of course, we may still have the live TV drama of not quite knowing if the Republicans will provide the needed votes, like we had with the first TARP vote. I would also be shocked to see President Bush sign a bill that requires car companies to drop their lawsuits against greenhouse gas regulation.

Let me know if I read the bill wrong.

Update: More from Felix Salmon on why it may be hard to get bondholders to agree to restructuring short of bankruptcy.

15 thoughts on “Auto Bailout Update

  1. another problem solved by Congress. with just a few tiny exceptions: a) proper funding, b) a plan, c) clear objectives.

    otherwise it’s flawless. senate banking committee time well spent.

  2. Am I reading this right? The bill is stalled because they dont want to force them to drop the lawsuits vs certain states for imposing greenhouse gas emissions?
    Isn’t part of the deal so they will make “greener” cars?
    So they want a bailout to pay legal fees on a lawsuit that will let them make vehicles nobody wants?

  3. That was actually just a side observation of mine. It’s not clear the Senate Republicans will block the bill; they have just expressed reservations about it, I think claiming there is insufficient taxpayer protection. I do believe I read somewhere that Bush had threatened to veto the bill if it had the greenhouse gas provision; I don’t know where the negotiation stands on tha tpoint.

  4. GOP objections certainly include the requirement that the Big 3 drop any challenges to greenhouse gas regulations; some like Sen. Shelby (R-Hyundai) don’t want to rescue any unionized businesses. Something caught my eye at the end, where listed under “Coordination with other laws” on page 31 is a provision that allows federal judges to have their annual cost-of-living pay increase. Not to be too cynical, but it is the first of many Christmas ornaments, I suspect.

  5. I think you hit all the main points James. The only other thing in the bill that I think worth noting is on page 23 in reference to debt seniority. They managed to include the stipulation that government loans take precedence over any other existing debt. I definitely agree that this is needed, but I have a feeling their existing debtors are going to put up a fight. I think its interesting for them to detail it out in two subsections. It looks to me like they are making sure there aren’t loopholes and over emphasizing the fact that the government assistance will be the most senior. I have no idea what stipulations and contractual obligations are in place for the big 3’s existing debt, but it could get ugly.

  6. Why not liquidate big 3 and invest bailout funds ($34bn) to start up new industries in MI.
    I do not see any significant demand for autos in 2009 (Look at major automakers sales number for last month and numbers are just going to get worse, at the same time they are going to burn multiple billions of dollars every month). We are just going to put money in some black hole and never going to see it again.
    Also, govt has no business of saving private industries, it has already sent wrong messages. Big financial COs will keep taking bad risks and behave irresponsibly because they know they are too big too fail. Taxpayers will have to suffer in multiple ways, e.g. one with lost money in bailouts and other with bubbled up prices of assets.

  7. Gli: Thanks for catching that. I saw it but forgot to include it in my summary. Making the U.S. debt senior to existing bonds will reduce the value of those bonds, which may be intended to pressure those bondholders to exchange them for equity. On the other hand, it may make those bondholders less willing to go along with any restructuring plan that involves large amounts of government loans. I’m not sure how this will work out.

    In any case, when a company is headed for bankruptcy, it is logical for the new lender to insist that its new loans be senior to existing loans.

  8. A few things:

    First, your correct that the statutory reference is to the $25m in loans already appropriated in P.L. 110-329, the omnibus appropriations act that is funding most of our government agencies right now.

    Next, there’s no real pretense that this is anything but a bridge loan to give the automakers time to come up with a real restructuring plan. In this sense, the bailout is looking like it could be functioning much the same as a bankruptcy with the USG functioning as the provider of DIP financing.

    The notion that the car companies can’t participate in lawsuits re state greenhouse gas laws is very silly, and certainly unconstitutional. We CAN say that no funds from the bailout can be used for these purposes, but the way the bill is drafted, a company couldn’t even put its name on an amicus brief, even if it were provided gratis to them. The less control the government has in telling the automakers what to make the better. It wasn’t the product mix, but their failure to control their labor costs, that got them into this mess.

    What’s really not clear to me is where the long term financing is coming from that is to be provided once the car czar approves the restructuring plans.

    Potentially, this could operate as a bankruptcy in name only, but it will require that Obama administration to get really tough with their own political allies, the unions.

  9. “In any case, when a company is headed for bankruptcy, it is logical for the new lender to insist that its new loans be senior to existing loans.”

    Exactly – another sign that this is looking more like a bankruptcy without having to call it that.

  10. CNN confirms it is a bridge loan.

    “The White House and leading congressional Democrats reach an agreement on legislation to provide a stopgap $14 billion bailout to ailing U.S. automakers, according to officials from the administration and Congress.”

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