Perspective on the Chrysler/GM Bridge Loans

The Detroit Outsider is amazed by the Bush Administration’s agreement to $17.4 billion in loans for Chrysler and General Motors, mainly because it’s a good plan. It has some fundamental flaws, but they’re flaws that can be addressed and revised by the Obama administration come March.

This agreement is basically a punt to Obama – and that’s exactly what was appropriate and prudent. Doing nothing wasn’t an option, and a broad, sweeping long-term agreement with no foresight into the complexity and dynamism of the industry’s future would have been premature and would tie the next president’s hands – in short, exactly what you’d expect from the current president. His record suggests that he would be more likely to take his ball and go home, or to deflate it and shred it, rather than punt. To be realistic, this is exactly what was best for W, because it makes him the short-term hero at little political or economic cost, and he also holds no responsibility for future failure (which is highly probable). Even this self-interest represents some deft strategic thinking, and that is as unexpected as anything. The Detroit Outsider will go out on a limb and say this is George W. Bush’s finest hour.

Aspects of this agreement are good, some are bad and some are both. What’s good about it:

The funds come from the Troubled Asset Relief Program – the original $700 billion Treasury Secretary Paulson granted to the financial sector, which means a few things: First, no additional taxpayer money has been allocated, which should calm anyone with bailout fatigue. Second, it underscores that this move was primarily to protect the economy, as was the justification behind TARP. Third, it represents a little equity for the working class after hundreds of billions of dollars were thrown at Wall Street with no hearings or public CEO flogging. Finally, it doesn’t rob the $25 billion Department of Energy fund set aside the for the purpose of retooling for more efficient cars. (The Detroit Outsider knows this would have been a moot point if the companies had been allowed to collapse, but at least it looks better and is a reprieve for environmentalists.)

The amount granted is relatively small, $17.4 billion, and will come in two installments starting with $13.4 billion ASAP. This is lower than the original $25 billion requested (later upped to $34 billion), so taxpayer exposure is at least limited. This is partly because Ford is no longer part of the deal. Being in better financial shape and confident that it can weather the storm if the others don’t collapse and shock the system, Ford is wise to distance itself from the two companies in crisis. It bodes better for their image and investment prospects.

There’s no “car czar.” There’s mention of a designee, which presumably is Henry Paulson. That’s a little worrisome, given the TARP’s ineffectiveness to date, but there’s very little time left in his tenure, and at least Bush hasn’t appointed someone who can’t be removed and who might be the wrong person – either a bad pick in general or someone who wouldn’t operate well within a new administration.

Then there are the aspects that are both good and bad:

Threat of Chapter 11: It’s good that the government isn’t ruling out a forced bankruptcy at the end of March 2009 because it pressures all the players into making concessions. If they know that they might end up with nothing, they’re more likely to make the sacrifices necessary for long-term viability. The specter of bankruptcy is also bad, though. For one thing, these companies need private investment. They can’t become viable on taxpayer money and restructuring alone. GM’s investment prospects rise along with federal support. If it appears that the government is committed to keeping the company afloat, investors will see GM as a safer bet. As structured, the agreement is equivocal, to say the least. Then there’s the issue of time and resources. Given a finite loan, Chrysler and GM are being asked to devote resources both toward becoming viable and toward planning for possible bankruptcy protection. Can you do both?

Chrysler is included in the loan: On the downside, Chrysler is a privately owned company with the least assets and the most questionable future, which makes this assistance – though it’s only a loan – even more extraordinary in a capitalist system. On the upside, it once again supports the argument that this is about protecting the industry and thus the economy. The collapse of a U.S. automaker, private or public, would have the same consequences.

Then there’s the bad part of the plan:

The companies must prove their viability at the end of the term or pay the loan back. How does a company that’s not viable pay the loan back? Isn’t it all or nothing? The answer depends on how viability is determined. The term “positive net present value” sounds ominous, but the language suggests that there’s wiggle room here, that there are targets to hit along the way, and that these are also “non-binding in the sense that negotiations can deviate from the quantitative targets…providing that that company reports the reasons and makes the business case to achieve long-term viability in spite of the deviations,” according to a White House summary.

What this boils down to is that important decisions will be made by the Obama administration as this saga unfolds. Obama doesn’t seem to shy away from complexity, which is a good sign, but whether you’re an Obama supporter or not, what he and the industry will now enjoy is more time, and you can’t overestimate the value in situations like this. For perspective, the loan granted to Chrysler in the ’70s came together over the course of 10 months. That was one loan to one company in a much healthier economic climate. That loan was repaid, with dividends. Though it’s frustrating that Bush and Treasury didn’t act immediately, which they could have done (avoiding the Congressional circus), in the interim many questions were asked, Congress educated itself and economic and employment conditions worsened, illustrating to everyone, including reticent taxpayers, why this action is necessary. If the new plan’s $17.4 sounds like a king’s ransom, the three months is a pot of gold. Now the automakers have time, under pressure, to make their case for future viability. If they prove it, the bankruptcy threat may be softened or lifted, inspiring the necessary private investment. The plan is actually very well thought out.

The Detroit Outsider will be dissecting and exploring the many issues over the coming months, including how the government is likely to ensure this plan’s failure. More perspective will come this weekend. Thanks for checking in.