Bus tours of GM and Chrysler execs’ homes?   Angry marches through the bucolic neighborhoods of Bloomfield Hills, Michigan?

Let’s hope not.   But one wonders if GM will end up getting  any of the same treatment so far reserved for AIG… given that it’s entirely possible the bankrupt car company could replace the insurance company as the taxpayers’ biggest debtor.

Consider it.

Today 10 banks said they will repay TARP funds.   The repayments total $68 billion, along with another $4.5 billion in interest.   The payments take many banks off the borrowing table, save for Citigroup and the $45 billion in direct TARP funds it borrowed.   The much-villified AIG has taken about $160 billion of taxpayer money (note: you see the $183 billion figure tossed around … but that’s just what the company has been authorized to borrow.  To date it has actually borrowed just under $160 billion).

GM has taken $19 billion in direct aid and another reported $33 billion made available in bankruptcy financing.   $15 billion of that has already been tapped, and with $172 billion in debts it is likely GM will be forced to use all of that money, if not more.    Even if no additional money is authorized by the courts it would put the GM taxpayer tab at about $42 billion bucks … more than any company not named AIG or Citigroup.   Citigroup would then only have to pay back $3 billion to knock GM up to #2 on our national corporate debtor list.

And it’s possible GM could move up to number 1.

AIG - despite being arguably the most disliked company in America - has a very real fundamental insurance business.  It remains number 1 or number 2 in every segment of the insurance industry it participates in.  While the financial products business of AIG has been decimated, its core insurance business remains strong.    While it doesn’t get much attention, there is some real value in many parts of AIG and valuable assets to sell.   AIG has already said it will sell off many of those to raise money and repay taxpayers.    Former AIG CEO Ed Liddy recently said the company believes it can pay all the money back.

While AIG works to pay back the government, GM moves in the opposite direction and may face even more problems down its well-potholed road.  On the show today, Rasmussen Reports Scott Rasmussen revealed that his latest poll indicates a whopping 43% of GM car owners say they will never again buy another General Motors car!  Much of that may simply be angry reaction to the still fresh GM bankruptcy news, but it still doesn’t portend well for GM or taxpayer.    The company is already losing money and prospects for paying back the taxpayer cash are low at best.   If GM were to lose yet more market share it would be devastating to the company’s already broken finances.    The ability of a money-losing company to pay back anything it owes - especially to what will be a very soft creditor in the U.S. government - is small at best.

Citi pays back a few billion.   AIG sells some assets and uses proceeds from its moneymaking core insurance business and pays down much of what it owes to the taxpayer.    GM meantime continues to lose market share and money.    The bankruptcy court must authorize more government-lent debtor in possession financing.    The debt grows.

While there is still a long way to go before “catching” AIG’s big taxpayer debt load, GM is certainly on its way.    And if it happens, can GM expect an AIG-like reception?   Or will the same pro-big labor groups who helped organize the AIG bus tours save their anger only for non-union companies?

Remember the Chrysler TC?   Don’t worry, few do and those who do wish they didn’t.

Today’s Fiat / Chrysler deal is not the first time the now bankrupt automaker has partnered with an Italian car company.   Back in the mid-1980s Chrysler partnered up with (now Fiat owned) Maserati to build the “TC.”  It was meant to help Chrysler enter the luxury market, but was really just a LeBaron with a slightly better 2.2 liter engine and better leather.   After being delayed by two years the car finally hit the market, then promptly didn’t sell and was yanked just over a year later.

Resale on these “gems” - how to put it gently - sucks.   Edmunds has the car worth about $1,200 bucks.   Not exactly a collectors item.

Let’s hope this Chrysler, Italian linkup goes better.

Lost in the headlines about the Chrysler bankruptcy and Fiat purchase is that Fiat says it will use this to return to the North American market for its Fiat and Alfa brands.   It is already here with the Ferrari brand, but it wants a piece of the American mass market.

Cheap and easy credit helped get the American economy into this mess, but apparently cheap and easy credit is going to get us out.   At least that’s what General Motors is hoping, but the government-backed easy money may create more headaches than it cures.

Today the government agreed to give GM financing arm G.M.A.C an additional $6 billion dollars.  It’s a move to help GM provide financing for consumer car purchases and comes on top of the $174 billion dollar loan provided to GM and Chrysler.  The market likes this news and GM shares are on the rise, but will this meaningfully change the game for the company?

Tougher credit has been a part of the downward spiral of General Motors.    As the Journal article notes:

GMAC finances about 80% the wholesale purchases of GM’s cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom.  The car company said last month that a 45% sales skid for October was fueled by GMAC’s restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago.

Credit is blamed for some of the pain, but it doesn’t mean that more easy credit will provide the solution either.   There are some telling numbers that give a different view, one that mitigates some of the optimism around the GMAC announcement today.  Let’s start with the size and scope of the numbers.

The $6 billion dollars GMAC received today certainly will not all go toward financing GM cars, but to make a point about what the money may mean let’s say that it does (and with GM’s announcement today that it is now offering 0% financing for up to 60 months on many cars the company is clearly covering more and more of the cost). $6 billion dollars used entirely for financing would pay for 200,000 vehicles selling at $30,000 each.    While GM would love to sell an additional 200,000 cars and trucks, this is actually a fairly small number.   Remember, even with November’s 41% drop in sales GM still sold 153,404 vehicles in the U.S that month.    Clearly GM won’t finance 100% of the cost of a car, but even at lower percentages it is difficult to see how this additional $6 billion will meaningfully move the GM sales needle.    $6 billion is real money, but for a company with hundreds of billions in revenue per year it is actually a drop in the financing bucket.

There are two other potential negatives here as well; more delinquent car loans and the continued destruction of the value of cars on the road by flooding the used car market.

With everyone fixated on home foreclosures few are looking at the auto-related problem: delinquent car loans and repossessions.    According to lender Capital One Financial, nearly 10% of its car loans were late, with more than $100 million dollars being deemed uncollectable.   Other articles note this trend is national, with more and more consumers unable to pay their car loans on time, if at all.    Credit agency Experian notes that loans at least 60 days late have risen by 12.7% in November from last year’s same period.

Still, GM announced today that it will lower the required credit score of car buyers eligible for GMAC financing from 700 to 621.   Credit scores, known as a FICO score, run from 850 down to about 350.   850 is considered perfect credit and anything below 620 is considered subprime.    This is presumably how GM arrived at the 621 credit score figure for lending cut off.   Credit has been available for people with credit score above 700 (about 55% of the population) but apparently those consumers haven’t been biting.   So GM’s answer is to give credit - using government money - to the 25% or so of the population with credit scores just above subprime.

Second, the car market is already saturated with cars for sale.  Prices are weak as both new and used car dealers try to do what they can to move cars off the lot.    Repossessed cars and cars coming off lease add even more inventory.    Yet GM is doing its best to push new cars out the doors to borrowers who may end up becoming delinquent on the loan, sending more cars to auctions and onto used car dealers’ lots.    This pushes prices down further, and the cycle begins again.

General Motors and its 6,000-plus car dealers need to sell cars to support an infrastructure built in large part on the 16 million cars sold as early as two years ago.    They seem unwilling to accept the new reality that it may be difficult to sell 11 million cars in 2008, with Nissan predicting a similar sales figure for next year.    Even if the lower credit score borrowers GM is tempting with taxpayer funded dollars buy a new car, the data from Capital One and other shows that about 1 in 10 are likely to pay that loan late or not at all.

We have too many foreclosed homes, we don’t need more repossessed cars in their driveways.

Interesting interview with Grant Thorton Partner Kim Rodriguez today.  She has been working in and around the auto industry for 20 years and few know more about the industry from a financial perspective than she does.

We discussed the big issue few seem to be talking about - the pension obligations.  It is an incredibly difficult situation.   On one hand the men and women of the industry worked for a bargained benefit; the pension.   This was part of their deal and many count on this money as their lifeline and primary retirement income.

On the other hand the pension costs - estimated at $13 per worker per hour more than the non-domestic auto companies in America that have little to no defined benefits - are the primary reason the cost structure is so much higher for GM, Ford and Chrysler.    Higher costs, lower selling prices.   It’s a trend that has in large part gotten these companies to where they are today.

So how to solve the problem?  We asked Kim.

Here’s the scenario: The roof of your house is on fire.   At the same time a tree falls in your yard, smashing your neighbors fence.   The neighbor comes out and you begin discussing the broken fence, how to fix it and who should cover the cost.   You spend lots of time talking about this, reach a deal and feel good about it.    All while your roof keeps burning and eventually the entire home burns down.   The fence deal doesn’t look so good after that.  Neither does the recently-approved auto loan package in that it does not address the “fire” of the massive UAW pension obligations.

The Wall Street Journal describes the primary terms around the $17.4 billion dollar loan as:

The deal’s ambitious targets for the companies include replacing two-thirds of their debt with stock; using more stock instead of cash to fund retiree health-care obligations; eliminating much-criticized union “jobs banks” that pay laid-off auto workers; and establishing wage structures and workplace rules that are more competitive with foreign rivals.

Notice the pension costs faced by GM and Chrysler are not even discussed.   They are obvious in their absence.   It is clear that the pensions are sacrosanct, the cow so sacred that it dare not even be discussed.   Sadly, that cow is also the one kicking the lamp over in the barn and setting off the inferno.

Reference again the New York Times story a week ago laying out the cost differences between the domestic and foreign auto companies.   According to the article, on average GM, Ford and Chrysler pay $3 per hour more in actual wages, $5 per hour more in vacation and overtime, just $1 per more in current benefits, but a whopping $13 per hour more in legacy costs such as pensions.  Put another way, the legacy costs per worker per hour are more than all the other higher costs combined.   Yet the UAW, automakers and the government only continue to discuss the wages and health care issues and leave the real problem of pension reform presumably to the imagination.

The problem is growing worse by the year, as the UAW workforce continues to age and place an increased burden on the companies.  Check out this page from the UAW’s own website, written back in 2003.   It notes that the average age of a GM/Delphi worker was 48.9 that year with the average length of service at 23.3.   30 years of service is the primary retirement figure.   This means that in less than 7 years (2010, as this article was written in 2003) most GM/Delphi workers would be eligible to retire with full benefits.   All the the ripe old age of 56.

56 years old.  Today, that is basically middle age.  The average lifespan of an American is now nearly 80 years.     It is very likely that many workers will be getting benefits for longer than they actually worked at a given company.

If the domestics were more profitable than their foreign counterparts the problem may not be so severe.    Yet they are less profitable, indeed not profitable at all.   The Times article also notes that the Detroit 3 sell their cars for an average of $2,500 less than Toyota, Honda and others.  Higher costs, lower margins and selling prices.   It doesn’t a PhD in economics to understand the problem.

The reality is simple: until the domestic auto companies can figure out a way to deal with their crippling legacy and pension costs, they will continue to be at a significant cost disadvantage to their non-union competitors.   The union and its members no doubt consider the pension untouchable.   Understandable, given that more than a million retirees count on it.    Yet the pension is also the problem, and the thing that will likely permanently prevent them from ever being truly cost competitive.

Which brings us to the decision no one wants to address: find a way to wind down the pensions or find a way to wind down GM, Ford and Chrysler.    Years of fiddling with other aspects of the problem have delayed the need to get to this hard conclusion, but nearly everyone knew it was coming.    The downturn in the economy and credit markets is a problem, but not the problem.   It is merely the “black swan” event that exposed the structural flaw.   It’s like having $10,000 in credit card debt on a $100,000 per year salary, having your salary cut to $50,000 and then blaming your bankruptcy on the pay cut.   Yes, the pay cut hurt, but the real problem was the initial debt load.

If the pension plan is not addressed and altered in a serious manner soon, the only option will be bankruptcy and a breaking of the plan regardless.   The cow may be sacred, but it’s not immortal.

This just crossing … the UAW is unhappy with some terms of the auto loan and will ask President-Elect Barack Obama to change some of the terms it views as ‘unfair.’

The union demanded the loan - got it  less than 2 hours ago - and now wants it changed.  You can’t make this stuff up, folks.

Below is the official UAW release.   It’s clear they believe the incoming administration will help them change what they view as ‘unfair’ terms.

INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE & AGRICULTURAL IMPLEMENT WORKERS OF AMERICA – UAW
RON GETTELFINGER, President ELIZABETH BUNN, Secretary-Treasurer
VICE PRESIDENTS: GENERAL HOLIEFIELD • BOB KING • CAL RAPSON • JIMMY SETTLES • TERRY THURMAN
IN REPLY REFER TO
1757 N STREET, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: (202) 828-8500
FAX (202) 293-3457

For immediate release December 19, 2008 UAW applauds auto loans, but says workers must not be singled out for unfair conditions DETROIT – “We’re pleased that the Bush administration has acted today to provide urgently needed emergency bridge loans to America’s auto companies and to pursue a process for restructuring outside of bankruptcy,” said UAW President Ron Gettelfinger. “This will keep the doors of America’s factories open, keep Americans working and prevent the devastating economic consequences for millions of Americans and thousands of businesses that would have resulted from a liquidation of operations by one or more auto companies.” The UAW, Gettelfinger said, is reviewing the documents released today. “All stakeholders – management, directors, bondholders, suppliers, dealers, workers – will have to participate in shared sacrifices to help the industry move forward,” he said, noting that UAW members have already made substantial sacrifices to help make the domestic auto companies more competitive. “While we appreciate that President Bush has taken the emergency action needed to help America’s auto companies weather the current financial crisis, we are disappointed that he has added unfair conditions singling out workers,” said Gettelfinger. “These conditions were not included in the bipartisan legislation endorsed by the White House, which passed the House of Representatives and which won support from a majority of senators.” “We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,” said Gettelfinger, “as we join in the coming months with all stakeholders to create a viable future for the U.S. auto industry.”

Quick thoughts on the auto rescue loan news…

GM and Chrysler received their loans from the U.S. government today.   Ford is not participating in the program.    General Motors and Chrysler will get $13.4 billion now, with GM to receive another $4 billion in February.    The loan requires the automakers to become “viable” by the end of March, 2009.    As I wrote last week, “viability” in three months is a tall order.

The fundamental issue is quite simple: the companies spend more than they make.    They are working on the spending part.   GM announced today after the loan was approved that it will continue to cut costs, particularly in payroll, and it hopes to cut hourly labor costs to a total of $4.8 billlion by $8 billion.    That’s a 60% reduction in total pay, so it is clear more job and pay cuts are coming.

The problem is that there are two sides to any balance sheet: costs and assets.  GM can work to cut costs but it has little control over the revenue side of the story.    The point is, very simply, GM and the Chrysler must sell more cars and make money on the cars they sell.   And with the economy in the tank and credit harder to come by, car sales are falling.    And the Detroit 3 have very little control over  the economy and consumer.

The government wants all this and wants it wthin three months.    I would like to believe the car companies can do it, but since they only have control over half of their problem I am skeptical.   Look for more financial need ahead.

How do we fix GM, Ford and Chrysler?

That’s the question being asked from Detroit to D.C.    The issues being discussed and debated are sold as complex.  At first glance they seem to be, primarily because everybody is trying to analyze every possible problem and solution.  Me included.

Then I realized that over analysis is unnecessary.  The problems are easy to understand and realistically there are only a few logical conclusions.   It is the aftermath that is going to be more difficult.

First, the problem.   The multitude of grandstanding questions by Congress missed the only one that mattered: “Why do your liabilities outweigh your assets?”   That is, quite simply, the root of the problem.   It is basic.   A balance sheet issue.   GM and the others lose billions and need help because they must spend billions more than they take in to keep operating.   It’s called, unscientifically, a “loss.”.   For GM, that loss was $22 billion dollars last quarter.  So the real question is, again, a very easy one: what can we do to fill the gaping hole between costs and revenues at these companies?

So while Congress, industry pundits and the media search for the most arcane analysis, let’s cut through it and realize there are only five possible solutions for GM, Ford and Chrysler:

1. Start selling enough cars to make the money to cover expenses
2. Cut expenses enough to match the lower revenues
3. Be given an unlimited amount of government money until #1 starts happening again
4. Be given a one-time, fixed amount of government money until #1 starts happening again
5. A combination of #2 and #4.

Five options.  That’s it.   And we can whittle it down even more by eliminating the obviously incorrect answers.

Eliminate #1.   It’s simply not going to happen anytime soon.   GM sales fell 41% in November from last year, the economy stinks and credit is tighter.   Cars will be sold in America in the next 12 months, just not enough to cover the Detroit 3’s crippling costs.

Cross off #3 as well.   It’s clear there is still large public and political opposition to a rescue package.    Enough opposition that a bottomless piggy bank is a political non-starter.   Yet something is coming.   Most Democrats, some Republicans and the incoming President support some type of financial aid package.    Too many votes were tied to that promise and too many jobs may be lost without help in an economy that is already hemmoraging employment.

We are left with just three choices, #2, #4 and #5.   We are ready to eliminate one more.

These companies, particularly GM, have worked on #2, but its not enough.  GM’s workforce is half of what it was years ago, plants have been closed and more shutdowns must come to match slowing sales.  The UAW, blamed by some to be the source of many of the problems, has realized the urgency and agreed to make changes to its contract.   Even with these cuts, GM and the others’ fixed costs are simply too high to balance out slowing sales and lack of profitability on what they are selling.   The asset side of the balance sheet isn’t changing as fast as the liability side.  Again, simple accounting, and its simply going in the wrong direction.   Cross off #2 from your answer sheet.

Most multiple choice tests have a “leader” answer.   The one that looks right at first glance and the quick pencils hit, only to be proven wrong.   They are the tricks of the testing business.   The trick answer here would be #4.   We know some money is coming.   Again, too many promises were made and too many jobs would be lost without government help.  Despite the posturing and the asking of pretend hard questions with populist tones (”Did you drive or fly here?   Did you drive a hybrid?   Did you expense lunch?”) we all know the Democrats must agree to provide some cash.   Big labor helped them win big labor states and the Presidency.   Aid is coming.   But not without major changes.

Which leads us to the correct answer, #5.   Perhaps this is, as we say in the media business, “Captain Obvious” because it does seem readily apparent.   So let’s get on with it.   Congress will give some money.  Probably the $25 billion already pledged, plus a little more, but without the “green handcuff” provisions forcing them to use the money for fuel efficient cars.   That provision, which sounds warm and fuzzy in front of a microphone, has been ridiculous from the start.  It’s like offering a starving person food only if they agree to eat vegan and organic.   Give them the food, get them healthy, then start making demands.

As to who gets that money, it’s all about General Motors.  GM is the biggest of the three and in the most dire condition.   Ford is in a slightly better spot because it sold a huge amount of debt back in 2006, so it has some funding and doesn’t have the urgency of GM.  Chrysler is a different story.  It’s owned by mysterious private equity firm Cerberus and Congress is keenly aware of that fact.   Cerberus owns many different businesses, and it is highly unlikely that Chrysler will get much, if any, aid because of the private equity ownership.   The public may have sympathy for Chrysler workers, but none for ownership.   Private equity and bailout will never be used in the same sentence unless there’s a “won’t get a…” somewhere in there.

That’s just the first part of #5.   It’s not just about giving money, it’s also about changes and deeper cost cuts.   It is likely Congress forces Chrysler onto GM and the two merge as part of any agreement to dole out cash.  Cerberus will get little, if any, value for its investment and the “return” will simply be being allowed to exist in some form.   Without aid, Chrysler has little hope because it is nearly a pure domestic U.S. brand unlike GM, which at least has a growing international business.

So my guess is that the final answer to the Detroit test is going to be #5; enough money to keep operating for a while and more cuts, including a forced merger with Chrysler to basically end that brand (minus Jeep, which has value), the elimination or selloff of Buick, Saab and Saturn and more plant closings.   GM will survive, only smaller.  Ford too.  Chrysler’s name may go on, but probably under the GM umbrella.

That’s my answer to the Detroit test.  Let’s hope whatever the final answer, Congress sharpens it’s pencils soon and picks one.   We need to plan more for what comes next, which will be a larger problem.