The Senate Auto Industry Bailout Hearing - Round II

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December 5, 2008

Yesterday the key players (see witness list below) in the US auto industry faced another hearing before the US Senate Committee on Banking, Housing and Urban Affairs to plead their case for a Federal bailout. After watching almost 6-hours of testimony, I was left reassured; most of the members on the Committee understand or have taken a pragmatic view of the problems in the auto industry. This was in sharp contrast to the last Senate hearing in November.

Senator Richard Shelby, the Ranking member on the Banking Committee statement’s on the industry after the previous hearing sums up that event.

Mr. Shelby is quoted as saying:

“They seem to be three of the most arrogant, you know, non-repentant people I've ever seen to be running three losing companies.”

“They’ve failed in running these companies. They’ve burned hundreds of billions of dollars if you tie it all together,” he said, adding, “I believe one of them made $28 million last year. I'd be ashamed of that.”

By no means did Mr. Shelby change his tone on the US auto companies at yesterday’s hearing. It must be remembered that Mr. Shelby represents Alabama and has a vested interest in the other US auto industry. Alabama is home to Mercedes-Benz, Hyundai, Honda and Toyota’s brand new and heavily subsidized auto manufacturing facilities and supplier operation. The State is also a right-to-work state where the non-union foreign transplant auto industry supports 27,000 jobs at a $1 billion payroll. However the general tone of the discussions were critical and yet positive in moving forward on figuring out a solution.

I found the 6-hours of hearings entertaining with the Committee members recognizing that a critical restructuring is needed in this industry. On a high level the Committee made the points:

  • The Detroit based industry cannot fail because of the fallout to the larger economy,
  • The industry needs to be substantially restructured,
  • There must be decision making authority given to the administration to manage the restructuring.

The Committee was crystal clear, if money is to be loaned to the industry they do not want to make the same mistakes they did with the banking bailout. Their primarily concern was, months from now, they do not want GM, Ford or Chrysler coming back before Congress asking for another cash infusion. The Senate feels like they were burned by the Bush administration's handling of the $700 billion bailout of the financial services industry. It was also stressed, significant oversight and accountability should be written into any bailout legislation to help assure success.

There was also an admittance by some on the Committee that, the auto executives have faced a scrutiny that Wall Street and the rest of the banking industry were given a pass when congress passed the $700 billion bailout (TARP) a couple months ago. The recent $20 billion recapitilization of Citigroup comes to mind.

The hearing became very productive with the comments and questions from Senator Bob Corker as in my opinion he hit at the heart of a major problem with the US industry, Chrysler. Amusingly, he raised his concern that any bailout money given to Chrysler will not be used to turn the company around but only as a dowry to find another husband to replace Daimler as a result of the divorce last year. His statements were in reaction to Chrysler's viability plan calls out seeking alliances with other manufacturers.

Mr. Corker said:

“Chrysler doesn’t really want to be a stand-alone business and that’s well documented … you want to hang around long enough so you can date some day and hope to get married soon before you run out of money.”

Later he went on to discuss the GM-Chrysler merger that was being negotiated a couple months ago and subsequently called off because the deal failed to get funding from the banks because of the financial crisis. When asked about the possibility of reconstituting the idea, the CEOs from both GM and Chrysler were both receptive about reconvening those talks. Senator Bennett reinforced comments about a possible Chrysler merger with GM.

Mr Bennett said:

“Everything I have seen is that a merger between General Motors and Chrysler is a good thing, it’s not a shotgun wedding. It’s a marriage that makes sense.”

My conclusion is that the Committee understands that GM is the company that cannot fail and is in immediate need of fresh capital with Chapter 11 bankruptcy restructuring not a viable option. One Senator said as much. Some on the Committee also recognized that a bailout of Chrysler might be wasted tax payer money as they cannot be a viable company. It was pointed out by Mr. Cocker that Chrysler's cash-rich parent Cerberus will not even fund the operations.

It is expected the bailout legislations will be directed primarily at GM under a de facto bankruptcy "oversight" board that will allow the company to restructure its debt, labor agreements, supplier contracts without the stigma of a Chapter 11 bankruptcy. There also appears to be recognition that Chrysler cannot survive on its own and I fully expect some form of a GM-Chrysler merger will written into the legislation since a relationship and plan existed. With the proper authority built into the legislation, the oversight board could help expedite the absorption of Chrysler into GM and the liquidation of much of the duplicate assets and operations to raise capital including finding a solution for the Chrysler dealer franchises.

As for Ford, it appears the Committee recognizes was at the hearing for moral support for GM and to stress Ford’s survival is dependent on a shared supply base that could collapse with GM. With that I believe will not receive direct funds at this time because the company has access to liquidity for the time being. However, I do expect any bailout legislation will include giving the company access to a line of credit as a contingency if the greater economy deteriorates further and liquidity becomes a problem.

Overall, I heard the things I wanted to hear from the Senate Banking Committee members and expect sound, responsible legislation that will allow the industry and in particular GM to conduct the restructuring to reduce its legacy burden. I believe this is the perfect opportunity for the needed industry consolidation and confident, in some form, the legislation will require that. As I have argued in the past, consolidation will help both Ford and GM because it will reduce pricing pressure. After some hardship this should also help the suppliers for the same reason.

I was also reassured, the Senate Committee understands how the banking crisis has crippled the auto industry. There was a lot of discussions on how the lack of credit at the companies' captive finance units is preventing dealers and customers from being able to finance inventory, vehicle purchase and leases. It was stressed by the automakers and Committee members that the dealers just do not have access to wholesale financing. This may help speed up the approval process for the auto companies' finance units to receive bank holding company status which will allow them to gain access to the $700 billion TARP funds. The TARP money will help the finance units get money directly into the hands of the dealers and customers.

Finally as I write this, the US House of Representative is conducting its auto bailout hearing and the overall tone including topics is similar to what I heard yesterday. With that I expect draft legislation next week that will outline the key points I have touched on. In the absence of any agreement, at minium I expect the Federal Reserve to be directed to issue a small bridge loan to GM and Chrysler to carry them until an agreement can be reached.

Senate Hearing Homepage with transcripts:

The State of the Domestic Automobile Industry: Part II

Witnesses (transcripts at above links):

Mr. Gene L. Dodaro, Acting Comptroller General, United States Government Accountability Office

Mr. Ron Gettelfinger, President, International Union, United Automobile, Aerospace and Agricultural Implement Workers of America

Mr. Alan Mulally, President and Chief Executive Officer, Ford Motor Company

Mr. Robert Nardelli, Chairman and Chief Executive Officer, Chrysler LLC

Mr. G. Richard Wagoner, Jr., Chairman and Chief Executive Officer, General Motors

Mr. Keith Wandell, President, Johnson Controls, Inc.

Mr. James Fleming, President, Connecticut Automotive Retailers Association

Dr. Mark Zandi, Chief Economist and Cofounder, Moody's


Further Reading:

Detroit 3 CEOs make headway in Senate hearing, Automotive News, 2008

GM-Chrysler merger regains traction, Automotive News, 2008

Auto bailout could be tied to gov't-run overhaul, AP, 2008

Wagoner admits to 'Plan B' for General Motors: Bankruptcy, Detroit News, 2008

Chrysler's future as independent firm questioned, Detroit News, 2008

Auto aid deal dicey as Senate skeptics grill GM, Chrysler execs, Detroit News, 2008

Is Chrysler Simply Looking for a Mate?, New York Times, 2008

CEOs make 2nd pitch for -billion loan, Detroit Free Press, 2008

House of Representatives:

Financial Services Committee Hearing to Stabilize the Auto Industry


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