A pivotal test of faith for Detroit
Pay a lot now, or much more later.
That’s the choice General Motors Corp. and Chrysler presented Washington this week as they requested $22 billion in additional bailout money -- and warned that the tab could be many times that should the companies go bankrupt.
Despite historic sales declines, critics contend that the automakers’ arguments are simply posturing to squeeze more money out of the government and to make billion-dollar cash infusions seem more palatable.
The Detroit companies’ stance amounts to a high-stakes game of chicken, critics said, as President Obama risks going too far to support a deeply troubled industry or not going far enough and letting them fail at possibly huge costs to the economy and the taxpayers.
GM and Chrysler said in business plans submitted to the government Tuesday that a bankruptcy filing would be costly not only in monetary terms, but also in the possible loss of hundreds of thousands of jobs -- a prospect that would be devastating to an already ravaged economy.
Yet with carmakers asking for a second round of funding less than two months after getting $17.4 billion in loans, concerns are rising that continuing to provide aid would only encourage them to come back and ask for more in the future.
“Will it cost less to give them what they want or to let them go bankrupt?” said Thomas Klier, senior economist at the Federal Reserve Bank of Chicago. “It’s the $64,000 question, and there’s no easy answer.”
White House Press Secretary Robert Gibbs declined Wednesday to say whether the administration would support the automakers’ request for billions in additional aid. Gibbs said Obama would convene a meeting of the President’s Task Force on Autos this week to evaluate the carmakers’ proposals.
“I know that many people [at the Treasury Department] were up well into the night evaluating those plans,” Gibbs said. “They continue to be evaluated.”
The administration, he said, recognized that it has to balance the desire to have a “vibrant auto industry” with the concern that more aid could provoke a “constant necessity for continued government intervention” and taxpayer-funded loans.
The task force, headed by Treasury Secretary Timothy F. Geithner and White House economic advisor Lawrence Summers, has until March 31 to decide if the plans to reduce debt and cut labor and retirement costs are satisfactory.
If they don’t pass muster, the administration could call for immediate repayment of the outstanding loans, which would likely trigger bankruptcies for both automakers. Or it could grant an extension of time.
In its business plan, GM asked for $16.6 billion in new loans, bringing its total request to $30 billion, while Chrysler said it could turn things around for $5 billion more, or a total of $9 billion. The alternative, the companies said, would be bankruptcies that would end up costing taxpayers as much as $100 billion for GM and $25 billion for Chrysler.
The companies argued that they needed more money because auto sales were even worse through the first six weeks of the year than they were last year and because even their most cautious forecasts indicated that the vehicle market is likely to be depressed through 2011.
The loans, they said, would help them continue to operate as they finish negotiations with the United Auto Workers union on reducing billions of dollars in obligations to a retiree healthcare fund, and help GM work out a deal with 25,000 bondholders to reduce $27 billion in unsecured debt by two-thirds.
Bankruptcy would be so costly, the automakers said, largely because consumers wouldn’t be willing to purchase vehicles from a bankrupt company, and the companies would have to support their suppliers in the face of flagging sales.
They also said that they would likely have difficulty borrowing money from private lenders to keep operations going while restructuring under bankruptcy laws, so the federal government would be forced to finance the process.
Both automakers called bankruptcy the least desirable option, with GM noting in its restructuring plan that bankruptcy would be “protracted with a significant possibility that exit would not be achieved.”
In December, when GM and Chrysler requested a combined $25 billion in federal loans, economist Mark Zandi predicted that the companies ultimately would need $75 billion to $100 billion to avoid Chapter 11 filings.
“Bankruptcy would mean liquidation, a loss of two to three million jobs. . . . It would be just too much for the economy to bear,” Zandi said Wednesday.
But skeptics suggest that the companies’ dire predictions could be overblown threats aimed at ensuring continued access to federal funds and at putting pressure on stakeholders facing huge losses should the companies go under.
“Am I concerned that this is endless? Yes. . . . Do I understand that the economic conditions that existed in December are worse today? Yes,” said Sen. Bob Corker (R-Tenn.), who opposed the bailout in December and said he was still undecided on whether to provide more aid now. “This is a defining moment.”
Some industry experts say that, far from a disaster, bankruptcy could be a good thing for the automakers.
“The process is there for a reason,” said Douglas Bernstein, a bankruptcy lawyer at Plunkett Cooney in Bloomfield Hills, Mich. “The administration doesn’t want them to file because it doesn’t want something like that on its hands. But if the automakers do file, it’s because they really can’t solve their problems any other way.”
Bernstein and others contend that an orderly bankruptcy process could allow GM and Chrysler to take far more aggressive steps to restructure, including reworking dealer franchise agreements and union contracts.
The process also could help them hurdle sticky negotiations with bondholders seeking to minimize their losses. In a bankruptcy, bondholders would likely lose all of their investments.
Obama, meanwhile, is under intense economic and political pressure to keep the companies from failing.
At one point last fall, GM posted data on its website suggesting that more than 3 million jobs could be lost should one of the automakers go under, with many of those from unions that heavily supported Obama’s presidential campaign.
Even if they obtain the additional $22 billion in loans, the carmakers’ plans call for laying off 50,000 more workers this year, along with continued reductions in years to come.
Obama “has certainly set a strong focus on job creation and job preservation, and I think would be looking for whatever ways he could achieve to protect those jobs and preserve those industries,” said John Sweeney, president of the AFL-CIO, the labor federation that includes the UAW.
But there also is the concern that the dealings between Washington and Detroit are fostering a breed of brinkmanship that encourages the automakers to overstate both their misery and financial wants. The last time GM and Chrysler requested loans, they got $7.5 billion less than they sought.
“There’s absolutely a lot of posturing going on,” said Stephen D’Arcy, head of the automotive practice at accounting firm PricewaterhouseCoopers. “If I go to the bank, I always ask for more money than I need.”
--
jim.puzzanghera@latimes.com
--
Times staff writer Peter Nicholas in Washington contributed to this report.
