Big Expectations

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Big expectations for autoBailout plan calls for radical changes in three months

By Michael OnealTribune
reporterDecember 20, 2008
Can Detroit's auto giants do in three months what has stymied them for 30 years?


That's the monumental challenge at the heart of the $17.4 billion plan from President George W. Bush's administration to prop up General Motors Corp. and Chrysler LLC long enough for them to attempt a pair of massive restructurings.
Ford Motor Co. so far doesn't need bailout funds, but the government is asking GM and Chrysler to:
•Convince holders of tens of billions in unsecured debt to swap two-thirds of their claims for equity of unknown value.
•Strong-arm the United Auto Workers into accepting work rules and wages that make them competitive with foreign rivals.
•Let the government examine their books and prove that they can be financially viable.
The moves are meant to blunt the onslaught of Toyota and Honda, which the Big Three have failed to do for decades. Experts say that will also involve shrinking dealer networks, eliminating tired brands and slashing manufacturing capacity.
"They will have to be radically transformed," said Douglas Baird, a corporate restructuring specialist at the University of Chicago Law School. "Maybe it works and let's hope it does. But can you really get all these people [to agree on anything]?"
After a long political battle over the fate of the auto companies, the Bush plan in many ways passes the crisis to the incoming Barack Obama administration.
It will extend $13.4 in emergency loans to GM and Chrysler right away in return for a pledge to meet a strict set of restructuring goals by March 31. At that point, the Obama team will have to decide if the companies have done enough to be considered viable.
If the answer is yes, they will be eligible to receive another $4 billion to fund operations. If not, they would have to pay back the original loans and fend for themselves. Until the inauguration, the effort will be overseen by Treasury Secretary Henry Paulson, who will assume the role of "car czar" contemplated in bailout legislation that failed to pass Congress earlier this month.
The rescue pits Bush against many in the Republican party and reverses his recent position. But if he didn't act, he faced the prospect of closing his presidency with the collapse of one of America's most important industries.
"Under ordinary economic circumstances … I would not favor intervening to prevent the automakers from going out of business," he said during a Friday press conference. "But these are not ordinary circumstances."
On Thursday, Bush and his spokeswoman Dana Perino hinted that the administration was giving serious thought to structuring a bailout around a so-called organized bankruptcy—an effort to forge a multiparty restructuring deal in advance of a Chapter 11 filing.
Bankruptcy experts applauded the idea, noting that a restructuring of this magnitude is almost impossible to accomplish outside the legal framework of bankruptcy court, where a judge has the ultimate power to rip up old contracts and enforce the enactment of new ones.
The auto lobby, however, argued vociferously that the taint of bankruptcy would scare off so many customers that the already teetering companies would never be able to recover. The Bush plan strikes a compromise: It uses the carrot of government funding to force the auto companies, their lenders, the UAW and countless other constituencies to strike a bankruptcy-like deal without the stigma of an actual filing.
Experts said the effort will face a thicket of difficulties.
The UAW and the auto dealers are showing no inclination to compromise. UAW President Ron Gettelfinger said the focus on labor was unfair and pledged to ask the Obama team to eliminate what many others feel are crucial provisions.
Annette Sykora, chairman of the National Automobile Dealers Association, said that while her membership understands that cuts must be made, they also demand fair compensation for individual dealers forced to close.
When asked what type of compensation dealers might settle for, Sykora hinted at the complexity the auto companies can expect. "We have close to 20,000 members, and you could get close to 20,000 answers to that question."
When it comes to restructuring the debt, the problems only multiply.
The Bush plan insists that GM and Chrysler swap two-thirds of their unsecured debt for equity. In a normal bankruptcy that might not be so difficult. But when the company is burning cash and survival is in question, the future value of the equity is a leap of faith. One bankruptcy attorney who asked not to be named said a swap leads to sticky negotiations over the rights of equity holders and what control they can exert.
"When you swap debt for equity, debt holders become owners," the attorney said. "They turn into busybodies and start making all sorts of demands."
U. of C.'s Baird notes that all of these negotiations would be easier in bankruptcy court. Rules allow a majority of bondholders to force an agreement on others. A judge can weigh dealer and labor contracts objectively and decide what makes sense for the greater good. Without that construct, success may become a test of Obama's resolve and clout.
"In these situations, motivation turns on the credibility of the threat," Baird said. "Is Obama going to hold them to it? We don't know."
mdoneal@tribune.comCopyright © 2008, Chicago Tribune