Will U.S. automakers receive a bailout?

November 18, 2008

As I watched C-Span and saw the three CEO’s from the auto industry begging for a bail out loan. I wonder how these guys got to the top! They avoided so many questions and how they were going to pay back these loans. They didn’t tell us how much they really need and when they would come back for more.

They avoided the $100,000.00 question per employee compensation. What in the world are we doing? I wish I made half of that amount!

I pay for my own medical insurance plan; I’ve lost half of my 401K plan. No one has come to my rescue EVER!

When I went to my boss for a raise in pay I came prepared with all the past performance information and what I plan to do in the coming year.

These guys came with nothing! What are we doing even talking to these people?

We need to run this country like a business and stop spending my money like it’s yours.

Let’s work on trickle up instead of trickle down.

I’m dead set against this LOAN, BAILOUT, HELPING HAND OR WHAT EVER ELSE YOU WANT TO CALL IT.

Tax Payer:

Jay C. Price

How to win over the public? When asking for $25 billion because your company is on the ropes be sure to fly to D.C. in your private jet:

http://abcnews.go.com/Blotter/WallStreet/story?id=6285739&page=1

Now this is starting to seem more likely. Congress wants some sort of "plan" before they hand over cash. Sounds like an excuse. . .

Correct, for this prediction to come true there would have to be new money put up from Congress, which is what the automakers are seeking. Changing the terms or use of the previously approved money would not equal a favorable judgment to this prediction.

With this kind of fear mongering is it any wondering that the odds of a bailout are increasing:

http://biz.yahoo.com/ap/081203/meltdown_autos.html

David, I agree that interpretation matches the intention of the prediction.

This is looking likely now that Dems and White House agree on bailout terms. Judgment can be made as early as next week when the vote is made.

In order for there to be an unfavorable ruling on this prediction, the money MUST come from: "...the $25 billion in loan assistance to help build clean vehicles...approved by Congress and President Bush in the 2007 energy law."

Specifically this quote is referencing: H.R. 6, The 2007-2008 Energy Independence and Security Act of 2007.

H.R. 6 was clearly the definition of the assistance "...approved previously" that would render an unfavorable ruling on this prediction.

If the legislation that provides the $15 billion to automakers (most likely this week) does not clearly reference H.R. 6 as the source of the funds, then there MUST be a favorable ruling on this prediction.

Bailout to be affirmed as early as tomorrow.

@Edward, kudos on your analysis (except a minor error on $500M rather than $5B from Energy Independence and Security Act of 2007).

As of today, the latest bill (http://www.house.gov/apps/list/press/financialsvcs_dem/autobill.pdf) has been revised to reflect new money (up to $6.5B) being appropriated
$14B appropriated
- $7B (Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009)
- $500M (Energy Independence and Security Act of 2007)

Just for comparison, the proposed auto bill as of Tuesday can be found at http://taxpayer.net/user_uploads/file/Bailout/2008-12-08_Draft_AutoBailo... where it specifically indicate that the funding shall be provided solely from the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009 which if passed would have rendered an unfavorable judgment.

That said, the prediction still requires that a bill that appropriate new money being passed and signed into law by President Bush. As of now, House GOP are threatening to filibuster the bill vote. So, the clock is ticking and it can still go either way at this point.

@David, thanks for the feedback. Quick comment on your response.

You stated that an unfavorable judgment would have been required if legislation had gone forward with funding being provided solely from the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009.

Were you saying this because it would have in some way been considered “…new federal assistance beyond what was approved previously”? If so, I have to disagree. As I have previously contended, the Prediction here makes explicit that the the federal assistance “approved previously” was only applicable to the Independence and Security Act of 2007. The prediction was not casting a wide net and including all previously approved federal assistance, it was very narrow – including only the 2007 Act.

Therefore, although the 2009 Act, in a broad sense is federal assistance that was previously approved, taken in the narrow terms put forth by this prediction, it would have qualified as new assistance because it would be a new type of funding beyond the previoulsy approved Independence and Security Act of 2007. As such, even if the funding had come solely from the 2009 Act, it would have required a favorable prediction.

What do you think?

@ David. Thanks for the response.

I have to disagree with you. The prediction is specifically referring to the Energy Independence and Security Act of 2007, which was signed into law on December 19, 2007.

Firstly, the language of this prediction explicitly refers to an Act passed in 2007, not 2009.

Secondly, the language of the prediction makes clear that it is the Energy Law of 2007, which is clearly referencing the Energy Independence and Security Act of 2007.

Finally, and most importantly, I have to flatly disagree with your assessment that “there are no mention of $25B amount in the Independence and Security Act of 2007." In fact, it is made explicit under Section 136 of that Act, which Directs the Secretary “to establish a program to provide up to $25 billion in loans for the costs of such activities.”

Below, please see the relevant section, which also makes clear that the focus of the 2007 Energy Law was automakers.

I want to close my mentioning that this is just friendly “conversation,” I don’t want to come of as being combative. I appreciate the dialogue. Thank you.

Section 136 – of The Energy Independence and Security Act of 2007
Directs the Secretary of Energy to provide facility funding awards to automobile manufacturers and component suppliers to pay up to 30% of the cost of: (1) modifying or establishing manufacturing facilities to produce qualifying advanced technology vehicles or components; and (2) engineering integration performed in the United States of qualifying vehicles and qualifying components.
****Directs such Secretary to establish a program to provide up to $25 billion in loans for the costs of such activities.*****
Requires loan applicants to provide written assurances that laborers and mechanics employed by contractors or subcontractors during construction, alteration, or repair financed by such loan shall be paid wages at rates not less than those prevailing on similar construction in the locality.
Instructs the Secretary to use at least 10% of loan funds for awards to small automobile manufacturers and component suppliers.

@David. You are correct when you say that the 2009 Act is not technically "New" federal assistance. However, as I have previoulsy pointed out the prediction narrowly defined "New Funding" as being anything other than from the 2007 Act, as it explicitly stated:

"This new assistance would be in addition to the $25 billion in loan assistance to help build clean vehicles that was approved by Congress and President Bush in the 2007 energy law."

Moving money from somewhere else (such as the 2009 Bill) to provide bailout assistance is still "New" federal assistance in the sense that it is assistance in addition to the $25B provided by the 2007 Energy Law.

The term "new" as used in this prediction is not the broad term as we use it in everyday language. It was prefaced by the above mentioned specific language-making its usage very narrow. Therefore, anything outside of the 2007 Energy Funds is: New.

@David. I agree that hope is not lost.

It is going to happen, just not today.

Even those in opposition to the current legislation acknowledge that something needs to be done. Specifically, Senator McConnell, one of the lead voices of opposition to the legislation in its current form has voiced support of an Amendment to the current legislation that was developed by Senator Corker.

According to Senator McConnell, The Corker Amendment forces necessary reforms, holds companies accountable, and assures taxpayers that these companies won’t be back for more. McConnell noted that the Corker proposal would make many much needed and dramatic improvements to the underlying bill.

I am keeping all of my money in on this one!

A promising compromise deal broke down due to UAW unwillingness to accept the deep wage cut (see prior comment). Looks like bankruptcy is the most viable alternative at this time.

@Garrick, latest is that White House is considering using money from TARP to lend to the automakers. TARP was approved funds to bailout the finance industry. As per your comment below, this does not constitute NEW money. Please confirm.

"Correct, for this prediction to come true there would have to be new money put up from Congress, which is what the automakers are seeking. Changing the terms or use of the previously approved money would not equal a favorable judgment to this prediction."

@Garrick, thanks for the clarification. That still leaves a small window of the possibility that the prediction could still come true if and only if the new Congress/Senate work and voted favorably on a new bill appropriating new funds to be signed by Bush no later than Jan 16.

I have to say, I totally disagree with the disallowing of "new federal aid" to include monies from the $700B bailout. From the US auto industry's perspective, ANY money to bail them out would be NEW money from their perspective. A loan is a loan. When you said new money, Garrick, you seemed to strongly imply "new" in terms of additional funds beyond the $25B they'd already received, not what the source would be.

If the White House decides to go over the Congress and pull some "temporary" funds (I say temporary because some analysts suggest the auto companies would need over $125B to really be put right) out of the $700B financial rescue package and hand it to Detroit, that seems to fit the bill of this prediction to me. To start to parse the word "new" I find a bit surprising.

Disclosure: when I read that the Senate blocked the original plan, and that the White House was considering making a move on its own, I placed a significant load In Favor of this occurring. Sure, it's a risky bet, but I didn't consider the word "new" making it a deal breaker at the time. (sigh)

@TIS, seems like this one will be somewhat controversial. Will leave it to TIS to arbitrate while I watch from the sideline.

@Edward, the Total Bets of "75" represents a cumulative count of every bet and cash out. I alone accounted for 21. So, I anticipate the number of TIS members who have an active bet on this one no more than 10-15.

From http://www.politico.com/news/stories/1208/16740.html

Fact Sheet: Financing Assistance to Facilitate the Restructuring of Automobile Manufacturers to Attain Financial Viability

Purpose: The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing.

Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second tranche of TARP funds.

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

Definition of Viability: A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan.

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:
? Firms must provide warrants for non-voting stock.
? Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
? Debt owed to the government would be senior to other debts, to the extent permitted by law.
? Firms must allow the government to examine their books and records.
? Firms must report and the government has the power to block any large transactions (> $100 M).
? Firms must comply with applicable Federal fuel efficiency and emissions requirements.
? Firms must not issue new dividends while they owe government debt.

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

? Reduce debts by 2/3 via a debt for equity exchange.
? Make one-half of VEBA payments in the form of stock.
? Eliminate the jobs bank.
? Work rules that are competitive with transplant auto manufacturers by 12/31/09.
? Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.

I've been in this situation before myself, so I know Garrick will be torn over this. My final argument - the title, "Will U.S. automakers receive a bailout?" seems to say it all right there.

Today's lead headline on the front page of NYTimes.com, "Bush Approves $17.4 Billion Auto Bailout"

First off, I have no stake in the outcome of this prediction.

Unfortunately, this development doesn’t provide a crystal clear basis for judgment. There are problems with both the spirit and technical interpretations of the prediction.

The outcome of the Executive branch bypassing Congress to provide the automakers with a loan is not in alignment with the language in the prediction. However, on Dec. 4 I clarified with a response to David's question saying that the Administration acting alone was ok.

Congress did approve TARP, which is where the funds are coming from to be provided to GMAC & Chrysler Financial (both financial firms). Unless there is a legal challenge or formal protest from Congress to Bush’s decision then one could make a good argument that Congress did in fact approve the money when it approved TARP.

Further, to Edward’s point, TARP represents new money to the automakers in the sense that it is separate from the $25 billion the automakers were approved earlier this year, as mentioned in the prediction. The reference to new money was narrowly intended to address the talk of simply shifting the previously approved $25 billion for clean car development towards the bailout. It was not intended to cover all previously approved funding sources, such as TARP. However, one could argue that the prediction’s language is problematic on this count and that TARP funds don’t technically qualify as “new.” Hence the reasons for my earlier comment about TARP not meeting the criteria of the prediction. But, contradicting my earlier comment, I would agree that TARP money should be ok because the original intention was to simply address the shift of the $25 billion. However, I directly contradicted this with my previous TARP response to David's clarifying question.

So those are the issues with rendering judgment on this prediction. If people don't have a problem with my reversal on TARP, then I would say that we render a favorable judgment.

Thoughts?

Bush Approves $17.4 Billion Auto Bailout
AT: http://www.nytimes.com/2008/12/20/business/20auto.html?ref=us

WASHINGTON — President Bush announced $13.4 billion in emergency loans on Friday to prevent the collapse of General Motors and Chrysler, and said another $4 billion would be available for the hobbled automakers in February.

The money to aid the automakers will come from the Treasury’s $700 billion financial stabilization fund. Shortly after Mr. Bush’s announcement, the Treasury secretary, Henry M. Paulson Jr., who will oversee the aid to the auto industry, said Congress would need to release the second $350 billion for that program in short order.

Now - Let's wait and see how this prediction is determined.
I think that it is going to be a favorable judgment.

It's been an exciting bet.