GOP bailout foe pushes alternate proposal

Tennessee's Corker fears automaker bankruptcy


Harry Stoffer
and April Wortham
Automotive News
December 11, 2008 - 12:55 pm ET
UPDATED: 12/11/08 4:52 p.m. EST



A freshman Republican senator from Tennessee, who savaged the Detroit 3 and the UAW in congressional hearings, now says he can save the companies.

Sen. Bob Corker said today that his alternative for providing emergency aid to General Motors and Chrysler LLC is gaining support, not just among lawmakers but also within the industry.




Corker wants to impose three conditions on providing $14 billion in immediate federal loans to GM and Chrysler:

• Detroit 3 companies would have to convert at least two-thirds of their creditors' debt to equity by March 31, 2009, or either repay the loans or file for bankruptcy protection.

•UAW workers for the Detroit 3 would have to accept the same pay, benefits and work rules as employees of import-brand factories.

• Half of Detroit 3 payments to UAW-administered health trusts for retired workers would be in stock, not cash.

Ford Motor Co., unlike GM and Chrysler, is not seeking immediate loans, but wants the federal government to guarantee a $9 billion line of credit.

'Big stick'

In a teleconference today with a Tennessee business group, Corker said the CEOs of GM and Chrysler are "working with us. They like this."

Industry executives "say this is actually a help to them," Corker said. "Without the big stick of government -- and, by the way, the threat of bankruptcy -- they will never be able to force the bondholders to do the things that they need to do."

GM and Chrysler say they need the loans by year end or they will run out of cash.

GM spokesman Greg Martin declined to confirm or deny that his company is interested in the Corker alternative.

"We're talking to quite a few senators. There's a lot of work being done" to hammer out a bill that will pass the Senate and be signed into law, he said.

Yesterday, the House of Representatives approved a bill to provide the loans. The Bush administration supports the House version. But the measure faces strong opposition in the Senate, mainly among Republicans but also from some Democrats.

Faced with the prospects of failing to muster the necessary 60 Senate votes to move on the House bill, Senate Majority Leader Harry Reid, D-Nev., challenged minority Republicans to offer an alternative.

Corker's bill is emerging as that alternative.

Senate Republican Leader Mitch McConnell of Kentucky said earlier today he opposes the House bill, carefully negotiated by the Bush White House and congressional Democratic leaders. He said he likes the Corker alternative.

Concern for suppliers

During previous Senate hearings on the Detroit 3's aid pleas, Corker said the companies should go into bankruptcy immediately. But he said today he has met with industry and UAW leaders, analysts and investors, and "came back with a much fuller understanding." He said he now fears what bankruptcy would do to the supply chain.

Corker's demands for UAW pay parity with import-brand factory workers would seem to be a nonstarter among Senate Democrats. But Democrats wanted to examine Corker's proposal to see if it could provide a framework for a compromise, a party aide told Reuters.

Reid had hoped to pass a bill similar to the House version by this weekend. But he would need Republican votes for that to happen, and even moderates warn there may not be enough GOP support for the measure.

The House bill would require the Detroit 3 to submit to restructuring, directed by a federal overseer dubbed the "car czar." McConnell said the House-passed measure's main flaw is that it commits taxpayer money immediately in exchange for promises of reform later by the Detroit 3.

White House lobbying

But proponents of the House bill are not giving up.

White House Press Secretary Dana Perino said today that President Bush and other administration officials are contacting senators to explain "why this legislation is the most effective and appropriate approach to help the auto companies become viable for the long term.

"We've been talking to them about the auto czar position and the sweeping powers that that person would have for doing one of two things with these companies: forcing a major restructuring or putting them into bankruptcy," Perino said. "And then at the end of the day, in either scenario, the taxpayers would be paid back."

The restructuring plans would qualify the companies for more aid. The Detroit 3 CEOs calculate they need at least $34 billion in loans and credit lines from the federal government.

If senators fail to pass an aid bill this year, they could try again on Jan. 6, when the new Congress convenes. Democrats will hold at least 58 seats in the 100-member Senate.

The White House also could help automakers by dipping into the $700 billion fund approved in October for the financial services industry. The administration has ruled out that approach so far.

"Both are options," a Democratic aide said, adding: "The question is, could automakers last that long" without an immediate infusion of federal cash.

 

Wonder if they asked that the brokers on all the Wall Street firms that were bailed out make less? Does AIG have some kind of provision that will make them go bankrupt if they don't do X in Y months?

 

Corker's plan, or something akin to it, holds a lot of promise. None of the options out there now are 'comfy' for all the parties involved... there will be pain in all quarters no matter how it goes down... but this at least offers the prospect of bringing the plane in for a hard landing instead of slamming into the ground and making a smoking crater

 

Components 1 and 3 of that plan make no sense. Why? GM owes $190B to various parties, and has a market cap of $2.5B. If you're a creditor of GM's, or the union, how much stock will you require GM to give up in exchange for debt? This plan would only work if an equity stake in GM was worth something... which it isn't until GM's long-term future is assured.

 

I think the idea is to give everyone a stake in restructuring. Basically....tell bond holders..you must take whatever stake, or GM will be forced in to bankruptcy and you get nothing. Same with the union I would imagine.

After reading it..that makes sense if those are the only 3 main requirements and there is no czar.

 

GM still has a claimed $130B in assets against its $190B in debt. Would you rather try to stake a claim on those assets in bankruptcy, or do you want to accept some stock with virtually no value?

Unless GM can absolutely assure its survival, this is going to be a very difficult plan to accept.

It'll also likely send a lot of suppliers into Chapter 11, as they'll be insolvent if GM is allowed to default on any portion of its accounts payable.

 

And BTW - if the bondholders and creditors have to receive a large "hair cut", then shouldn't the equity of the current shareholders be wiped out? If that doesn't occur, this is going to be a government-sponsored screw job.

 

I'd assume that a lot of that $130B in assets is leveraged anyway. So under bankruptcy the pie is probably pretty small after all security interests are paid. Whatever debt is not paid in full from selling the assets goes into the big pile with all the other creditors hoping for pennies on the dollar in the event of bankruptcy. Either way, the creditors will get the shaft whether they take an equity stake or get what they can in liquidation based on their current security interests.

-Bob

 

Often the case is, take the "hair cut" or take nothing. I don't know how you could legally wipe out the shareholder equity, short of bankruptcy.

-Bob

 

The Big 3 CEOs wondered the same thing at the last Senate hearing.
One Senator then said something like, "we're Congress; there's lot's of things we can do."

 

If you give the bondholders and UAW a big chunk of the company, by whatever method, then the current shareholders take a huge "haircut", because you've diluted their equity.

 

I don't think GM would be defaulting on their AP. As far as stock valuation, you pick an arbitrary number. For example, convert 1/2 the VEBA obligation to 1/4 of the company. To achieve that you issue shares equal to 1/3 the current company. Current shares are diluted.

This seems quite doable.

As far as accepting it, the alternative is 21 cents on the dollar, or thereabouts in a liquidation. This is not named the "big stick" approach for nothing.

 

The UAW refused to cut wages until 2011, thus, the Republicans didn't vote for it (a proceedural vote). It only got 52 votes.

As of this moment, it is dead in the water. However, look for this to all change in a few minutes.

 

Rachel Maddow of MSNBC had a great 1st segment on her show tonight.
All about the loan, the Southern Republicans who were against it, and their ideology.
I'm not sure if you can view her show on-line, but if you can, you should watch tonight's show.

 

Sort of a side note HuJass, since I've noticed in some of your posts, that you're framing this issue in a Unions vs Republicans sort of stuggle and the ideologies involved there.

The only "ideology" here is that unions have never supported Republicans in any way whatsoever - even if the majority of members actually agreed with with Republicans. Unions, (or rather their leaders), have expended untold resources, money and energy, pretty much since the beginning of time, to be as destructive to Republicans as possible.

So why is it so surprising that many Republicans view unions with some trepidation?