Wednesday, January 7, 2009

Bailout creep: Chrysler Financial has a clever new plan

Is there no end to bailout creep and the many ingenious ways that US car makers and others are hatching fresh ideas to access federal bailout funds, government subsidies, loans and any other kind of public aid?

In the latest brazen attempt to double-dip into public coffers, Chrysler — barely before the ink dries on its $4bn bailout cheque received last Friday — has stepped up talks about changing the “status” of its Chrysler Financial unit in a way that will enable it to tap the federal troubled assets relief programme and other sources of credit.

Yes, the Detroit carmaker only received $4bn in government aid on Friday, part of $17.4bn of emergency bridge loans approved by the US Congress for Chrysler and GM last month. That was two days after GM took the first $4bn instalment of its loan on Wednesday; it is due to receive another $9.4bn by mid-February. Ford, in less immediate danger of failure than GM or Chrysler, says it plans to use federal emergency aid only if its markets worsen further.

But, as Chrysler pointed out on Monday, Chrysler Financial first applied three years ago to be classified as an “independent lending corporation” and that the recent push is merely an intensification of those talks.

Well that’s okay then.

Not like GMAC, General Motor’s financing unit, which received $5bn of federal aid last month, arguing that the money would enable it to relax its lending standards (so people could buy more cars they don’t want and can’t afford), and applied to turn into a bank holding company.

Indeed, as the FT notes, Chrysler’s sales in December were 53 per cent lower than a year earlier, the worst performance of any major carmaker.

Even so, as the FT reports Wednesday, Ron Kolka, Chrysler Financial’s chief financial officer, said the proposed new status would give Chrysler “multiple sources of funding and cheaper sources of funding for the finance company”.

Of course.

Cerberus Capital Management, which controls both GMAC and Chrysler Financial, is playing the bailout game skillfully. One condition of the GMAC bailout, however, is that both Cerberus and GM, which owns the remaining 49 per cent of GMAC, must sharply reduce their stakes, due to laws that require stakeholders to be below the 14.9 percent threshold set by the Bank Holding Company Act.

The rule does not apply to Chrysler Financial, which is merely trying to become an “independent lending corporation”.

In another concession required by the move to become a bank holding company, Ezra Merkin, a US money manager whose funds have been among the casualties of the alleged Bernard Madoff swindle, will step down soon as chairman of GMAC, to be replaced by an independent chairman.

Anyway, the car makers have until February 17 to present detailed restructuring plans and demonstrate they can achieve a positive net worth by the end of March to secure additional taxpayer funds aimed at securing their survival.

GM took the first $4bn instalment of its loan on Wednesday and was due to receive another $9.4bn by mid-February. Ford Motor, in less immediate danger of failure than GM or Chrysler, says it plans to use federal emergency aid only if its markets worsen further.

As DealBook’s “Deal Professor”, Steven Davidoff, points out on Wednesday, “bailout creep” is upon us - in earnest - and the auto industry bailout reflects the highly political nature of the Tarp scheme:

Initially, Treasury Secretary Henry Paulson Jr. submitted a three-page bill that allowed him to purchase mortgage-related assets. Some members of Congress threw a hissy fit, describing this as a power grab, and then proceeded to give Mr. Paulson more power than he asked for. The final bill provided Treasury the power to purchase securities in any institution established and regulated under the laws of the US or any state.

At the time, I predicted that this large grant of discretion would result in bailout creep. And sure enough, here we are.

With this ad hoc approach to the automakers, the government risks losing its objective for meaningful reform of these institutions. The interests involved (management, labor, dealers, suppliers) know full well that the government is increasingly all-in on an auto bailout. This will make gaining concessions from them more difficult and result in only partial reform at best. After all, why sacrifice when the government has said it will back you anyway?

And here, the actions of the government belie its tough words. The government provided GM and Chrysler their money but will only assess their progress on Feb. 17, the date by which the automakers must submit their restructuring plans. It increasingly looks as if this will be a punt, and the automakers will not be able to achieve the goals expected of them under their loans.

Instead, concludes Davidoff, GMAC will be the”first of a string of auto deals on kind terms, forgoing — at taxpayer expense — the hard choices the auto industry must make”.

That would be a shame and a loss for us all.

Interestingly, if we’re talking about cynicism on the part of bailout beneficiaries, it’s worth noting Davidoff’s point that the best deals on the list of cars for which GM is offering this special - heavily government-subsidised - financing are the 2008 Chevrolet TrailBlazer; GMC Envoy; and Saab 9-3, 9-5, 9-7X. The Trailblazer and GMC Envoy are SUVs, and the Saab 9-7X, also an SUV, is now made abroad, in Sweden, we believe, after production was recently suspended in the US.

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