Big Three Auto Plans--Time to Thin the Herd...

This took a little bit of time, but I went through the three Business Long-Term Viability Plans for GM, Ford, and Chrysler. Here are some things I liked, some things I didn't like, and some thoughts and conclusions on what the Congress should do on each proposal.

General Motors:

The ask: $18 Billion--$12B in Loans, $6B in a Credit facility.


Reasons to give GM the Loan:

• a bankrupt GM is a loss of 3 million American jobs. That would be a wipe out of the Upper Midwest. It would BE a Great Depression.

Analysis:

They are in trouble. Burning through cash at $2B a month. They won't survive the next fiscal year at this rate. The report is troubling. Among the troubles are the following:

• Sales estimates used do show projections, using lower car and truck sales. But they only show a 20% drop in sales as a worst case scenario. This guy thinks THAT is a rosy scenario, and any worsening in the sales projections destroy the assumptions underlying the loan demands.
• Pension Cuts--the thing that is most galling here is that there are little to no NEW ideas as to how to really get at the huge liabilities these companies are saddled with. The biggest NEW concession I could find in this space? Stopping the 401k match for employees as of 11/1/08. Not exactly the stuff of legends.
• The structural cost reduction plan shows a reduction from $45B to $35B by 2012. Is that fast enough? If the company can't survive the next year, what does the sharper reductions in 2011 and 2012 get you?
• Pension Funding Status--We didn't get any background on the plan assets for 2008. they had only an $11B surplus of assets over obligations as of YE 2007. Everyone knows what a disaster 2008 has been from an investments standpoint. If Plan assets have dropped more than 20% (very possible...), the pension is underfunded. Where are the '08 numbers?
• All of the suggested cuts were very telling. It was all about shedding JOBS. What about shedding Pension obligations? I thought we would rather try to KEEP the jobs, so we could produce better cars, and take our lumps in the Pension obligation area. There need to be concessions there. Big ones. Period. That's the road to viability.
• Overall, the plan is a "thread the needle" proposition. If everything goes to plan, they will barely remain liquid. It's a suicide mission.

Conclusion:

Loan GM $8B for the next two Months, and they had better come back with significant cuts in Pension Obligations. The Unions will need to give here too. It will suck. It is the ONLY WAY. If you don't have the Pension cuts, any more money is throwing money down a well. If GM is unwilling, cut the funds. Let it die.

FORD

The ask:

A $9B Credit facility, on terms and conditions governing the existing TARP program. No immediate Loans are requested.

Reasons to give Ford the Loan:

This was a much more cogent plan, and argument than the other two. Specifically, calling for callable loans if the specific performance benchmarks are not met.

Analysis:

I didn't like some of the following points:

• Total vehicle sales estimates in the Ford plan are equally unrealistic, and low end projections are still to high, in my opinion. We need an estimate of cash needs in the event of a truly depressed economy over the next two to three years. The estimates used are just too rosy for me.
• On page 29 of the plan, there is mention that the loan dollars could be used to cover pension costs. This point would HAVE to be removed from any agreement.

Conclusion:

Ford has the best plan of the three. Giving the credit facility would be the least risky use of tax payer funds, and I would do it, AS LONG AS there are promises to not use it to cover pension costs, and again, there need to be some NEW concessions from the Pension benefit recipients. The other option is laying off workers. It's a terrible choice. I would pick the workers.

Chrysler

The ask: $7B Secured Bridge Loan

Reasons to give Chrysler the Loan:

The cashflow situation, or "cash-burn" rate on Chrysler sounds terrible. They were at $7.5B in cash as of 7/1/08. Now they are at $2.5B. At this rate, they will be out of cash by February. When a car company with no viable credit facilities runs out of cash, it's time to shutter the doors. It's over. Chrysler has the advantage of being privately-owned. It's parent could float some money to keep it going, but to what end?

Analysis:

The viable business model for Chrysler is the weakest. Maintaining a 10% market share in an increasingly competitive market does beg for a thinning of the herd. Chrysler is the weakest.

As part of this report (which was the worst laid-out of the three) , one thing really jumped out at me. There is a desire for 500,000 plug in vehicles to be sold by 2013. That's it? 1.4M autos looking to be sold by Chrysler, and only a third will be plug ins, 5 years from now? Not really exciting me here. Think bigger.

No Pension obligation cuts. When are these guys going to go after the parts of the business that can really make them viable?

Conclusion:

Cut em off. Nothing These guys are the part of the herd that may need to be "thinned". The problem I see with this proposal is that the Chrysler cars and brand just doesn't have the kind of gravitas to come back, like GM, and they aren't in as good a financial position as Ford. Nardelli won't share enough about the company to help me decide any way, but cutting Chrysler loose.

FINAL ANALYSIS

So over all, Pragmatic analysis, and some emotional calls, have led me to believe that some of these bailout loans and facilities could do good. I am trying to cut this turd with a scalpel, not a hatchet.

• Keep GM alive long enough to make the tough calls
• Help Ford help themselves
• Let Chrysler die.

One thing is clear. No one has gone after the sacred cow--the Pension Obligations--in any meaningful way, since showing up in Washington, hat in hand, a month ago. And that is the most disappointing thing I see.