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The Big Three's Stalemate

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By Steven Pearlstein
Wednesday, December 3, 2008

What we have here is a standoff worthy of a spaghetti western.

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The players in this high-stakes confrontation are the domestic auto companies, their creditors, their unions, their dealers and elected officials in Washington. Each party seeks advantage by pointing the equivalent of loaded guns at the other parties. But none really wants to pull the trigger, knowing nobody is likely to emerge a winner in the ensuing financial and political shootout.

The companies know that none of the parties wants to be held responsible for pushing them into a long and messy bankruptcy that could send the economy into a tailspin.

The creditors, the unions and the dealers all know that they are going to have to give up something to which they are legally entitled, but they hope that if they hang tough, the government will bail them out without having to give up too much.

And government leaders know that if they provide a bailout without wringing sufficient concessions from all of the parties, they will be publicly vilified and punished in the next election.

Meanwhile, the clock is quickly running out. General Motors and Chrysler both acknowledge that they will effectively be out of cash by the end of the month and will have to file for bankruptcy if they don't get a government loan. The fear is that if either files, the other two companies would be forced to follow suit as parts suppliers fail and consumers get even more nervous about buying a car from a company in trouble.

In truth, there's not much doubt that the government is going to step in here, just as it has done with the financial system. The consequences of doing nothing -- for the economy, for government revenue, for the political and social fabric -- are just too great. The only questions concern the size of the bailout and what form it will take.

Although each of the companies is looking for something slightly different, it was General Motors that presented the most detailed and convincing plan. After getting the first $4 billion installment to keep the wolf from the door, GM proposes, it would spend the next three months negotiating with various stakeholders the kind of deep restructuring that normally goes on as part of a "pre-packaged" bankruptcy -- only in this case without actually going to court. Additional sums -- up to $18 billion in all -- would be dependent on how successful the company is in executing its program, which it proposed to do under the watchful eye of a government oversight board much like the one created for the airline industry after the attacks of Sept. 11.

As part of its plan, GM envisions cutting a deal with creditors to reduce in half the amount of money it owes to bank lenders, bondholders and a new benefit plan set up to provide health care to retirees, in return for an unspecified ownership stake in the company. The automaker would effectively shed the Saab, Hummer, Pontiac and Saturn nameplates and reduce its network of dealers by 27 percent.

It would close an additional 9 assembly plants, shave an additional 25,000 jobs and negotiate reductions in pay and benefits to bring them in line with those at nonunionized plants. Shareholders would agree to go without dividends until the government loan is repaid and give ownership stakes to the government if things turn out as planned. Top executives would give up their bonuses and their private jets.

There is real pain in the GM plan, and the prospect of real gain. But there is no guarantee that the various parties will agree to it. GM's gamble is that the benefits afforded by a government bailout, and the threat of a bankruptcy filing, will finally bring folks around.

Ford, on the other hand, basically takes the position that it has already done the necessary restructuring over the past year and raised sufficient private capital that it probably won't need a government loan unless the economy falls even deeper into recession. That's why its request is for a standby $9 billion loan facility that it hopes to never use. Other than a vague reference to seeking further concessions from the United Auto Workers and a promise that its chief executive would forgo his $21 million annual salary and bonus, Ford presented no plan for how it would repay that $9 billion should it turn out that its optimism proves unfounded.

Another problem for Ford is that the company pledged as collateral all the remaining unsecured assets on its balance sheet when it borrowed $18.5 billion from private lenders two years ago. That means that should it be forced to use any of the $9 billion, Ford cannot honor Congress's demand that the government be first in line for repayment. Ford's position, effectively, is that the government will have to learn to live with its "junior" position in the company's capital structure. One would hope that congressional leaders would call that bluff and tell Ford that if it wants a government credit line, it will have to renegotiate the deal with its other lenders.

Finally, there is the proposal from Chrysler, which winds up being an unsatisfying blend of the GM and Ford approaches. On the one hand, Chrysler says that the economy is now so bad that it is running out of cash and needs $7 billion by the end of the month. On the other hand, it claims that it has already done most of the necessary restructuring to put it on a sound long-term footing, with only a vague and passing reference to "concessions from the company's constituencies."

As I read its proposal, Chrysler is basically looking for the government to tide it over until it can merge with GM or be sold off to a foreign automaker. Chrysler is now controlled by the private-equity firm Cerberus Capital, and its not-so-subtle message to Congress is that $7 billion is a lot less than the government would have to put up in a full-fledged bankruptcy restructuring and a whole lot more attractive than a forced liquidation.

Steven Pearlstein will host a Web discussion today at 2 p.m. at washingtonpost.com. He can be reached at pearlsteins@washpost.com.


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