Obama Transition Said to Consider a ‘Prepack’ Auto Bankruptcy

[steinravnik]

Obama Transition Said to Consider a ‘Prepack’ Auto Bankruptcy



Nov. 21 (Bloomberg) -- President-Elect Barack Obama‘s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.

Obama’s team has already contacted at least one bankruptcy- law firm to say that Daniel Tarullo, a professor at Georgetown University’s law school who heads Obama’s economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.

U.S. lawmakers yesterday postponed until December a vote on whether to give General Motors Corp., Ford Motor Co. and Chrysler LLC a $25 billion bailout as an alternative. Automakers such as GM could use court protection to reduce debt and reject unfavorable contracts.

“It creates the environment to deal with GM’s problems but limits government financial commitment,” said bankruptcy lawyer Mark Bane of Ropes & Gray in New York.

Tarullo referred the matter to the transition team press office. Team spokeswoman Stephanie Cutter said, “We have not put out anything specific for the auto industry except that something needs to be done immediately.”

GM, the largest U.S. automaker, said it might run out of cash as early as the end of the year and that the risk was even greater by mid-2009. GM Chief Executive Officer Rick Wagoner said this week GM would have to liquidate if it went into bankruptcy.

The automaker probably has weeks rather than months left before it runs out of money unless it gets federal aid, Jerome York, an adviser to billionaire Kirk Kerkorian and a former GM board member, told Bloomberg Television yesterday.

How Prepacks Work

In a prepackaged bankruptcy, an automaker would go into court with financing in hand after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed. The process might take six to 12 months, compared with two to five years if the automakers followed an ordinary Chapter 11 proceeding and worked out agreements under a judge’s supervision, Bane said.

Automakers would have to depend on government financing to restructure in bankruptcy court and probably couldn’t attract private loans until they were ready to emerge from the process, Bane said.

Officials of the three automakers told members of Congress this week that they had studied a pre-arranged bankruptcy, championed by Republican lawmakers such as Senator Bob Corker of Tennessee, before dismissing the idea as unworkable.

“We have looked at all aspects, whether it’s a prepackage, whether it’s prenegotiated,” Chrysler CEO Robert Nardelli told a Senate committee on Nov. 18. The options are all “more negative” than restructuring as a condition of receiving federal aid, he said.

Prepacks Rejected

Wagoner and Alan Mulally, CEO of Dearborn, Michigan-based Ford, also said under congressional questioning that their companies had studied and rejected the idea of reorganizing under court protection.

House Speaker Nancy Pelosi said yesterday that Democrats reject bankruptcy as an option.

In or out of court, automakers will have to submit a viable business plan to gain government funds, Peter Peterson, senior chairman of Blackstone Group LP, said in an interview.

“Unless they can show us the plan, we can’t show them the money,” Pelosi said yesterday.

GM, Ford and Chrysler must submit viability plans by Dec. 2, and Congress would meet the week of Dec. 8 to consider aid, Senate Majority Leader Harry Reid said yesterday. Congress must see accountability from automakers, Pelosi said.

The congressional deadlock was triggered by disagreement over how to pay for the $25 billion the Big Three automakers are seeking.

Democrats’ Position

Democratic leaders have demanded that the recently approved $700 billion bank-rescue fund be tapped for the auto aid. Their plan stalled with opposition from Republicans and President George W. Bush‘s administration.

The Bush administration joined Levin, Missouri Republican Senator Christopher Bond and others pushing the alternative that would tap the fuel-efficiency loans instead.

“There are other alternatives” to a bridge loan for automakers, Senate Financial Services Chairman Christopher Dodd, a Connecticut Democrat Dodd, told reporters yesterday. “The prepackaged bankruptcy is not an idea without constituency here.”

A GM bankruptcy is the “only way” for the biggest U.S. automaker to end union costs that make it uncompetitive, Republican Senator James DeMint of South Carolina said in an interview on Bloomberg Radio.

http://www.bloomberg.com/apps/news?p...5lk&refer=home

[PAULSTS1]

I watched the Capitol Hill begging on Bloomberg earlier this week and know that a Chapter 11 for GM isn't possible because of their cash and outstanding obligations. If the prepackaged plan can work, GM should get the paperwork rolling, ASAP. I believe the only hesitation maybe that Rick Wagoner may realize that he will be asked to step aside in order for GM to continue in business. For what he has seen in the past years and the loss of over 70 billion dollars, he should volunteer his resignation!

[zete]

This makes sense as it's not a typical bankruptcy. Instead, they can market it as government protection, which won't impact sales as much. The government would have to stand behind Detroit and indicate that they're backstopping them until they get things sorted out. That gives the perception that Detroit is safe and buying a car from the Big 3 is safe since the US government is in there with them.

Of course, the PR and marketing have to be spot on. They have to show themselves WITH Obama as many times as possible and use words like "Thank you for saving Detroit". The "b" word should never be uttered publicly so as not to confuse the easily confused public.

[fp115]

Originally Posted by zete

This makes sense as it's not a typical bankruptcy. Instead, they can market it as government protection, which won't impact sales as much. The government would have to stand behind Detroit and indicate that they're backstopping them until they get things sorted out. That gives the perception that Detroit is safe and buying a car from the Big 3 is safe since the US government is in there with them.

Of course, the PR and marketing have to be spot on. They have to show themselves WITH Obama as many times as possible and use words like "Thank you for saving Detroit". The "b" word should never be uttered publicly so as not to confuse the easily confused public.

Not ever seeing the B word will be impossible. Just look at what the media reports these days, whether true or false.

[zete]

Originally Posted by fp115

Not ever seeing the B word will be impossible. Just look at what the media reports these days, whether true or false.

True, but GM and the government should stay away from it. You can't stop the media from saying things, but you might be able to convince them to rephrase things.

In fact, if they can ensure the INITIAL reports re: the package use favourable phraseology and don't use the b word at all then that's what people will remember. People are stupid, in general. Most still think the 9/11 terrorists originated in Canada due to some early reports to the effect. Subsequent proof to the contrary has still not convinced people and the fallacy that the terrorists came from Canada persists, even in some recent articles on 9/11.

There was even an article that commented on the fact that people remember the first instance of a story they hear and it takes a concerted effort to change their minds thereafter. Thus, don't mention bankruptcy at all initially and most people will be convinced it's not a bankruptcy, no matter the facts thereafter.

Need proof? Look at the Detroit only builds trucks line of reasoning. Logically everyone should know it's not true yet many believe Detroit is a bunch of dinosaurs because they just build trucks and SUVs. People are just generally stupid.

[zlohban]

GM begging in front of congress evokes the same " I Won't Buy till the Dust Settles" fear into buyers as a bankruptcy. GM should take advantage of the economic times and take a "Prepack".

Leave Detroit, leave the lofty towers, keep the best plants, keep Chevrolet and Cadillac, loose everything else.

The corporation that I work for left NY City a few years back and moved to a mid-sized city and uncovered enough dead weight to eliminate half of the HQ employees.

Moving cleans a house.

[ksr]

If the new administration is involved, you know that the UAW will be well protected in any pre-packaged bankruptcy. Which would, in the long run, mean that we'll be revisiting this in the not-too-distant future.

[lio45]

Originally Posted by zete

People are just generally stupid.

Yep... remember, half of them have below-average intellect

(as some GMIer's sig says... don't remember who.)

[wolverine]

Originally Posted by steinravnik

Obama Transition Said to Consider a ‘Prepack’ Auto Bankruptcy



Nov. 21 (Bloomberg) -- President-Elect Barack Obama‘s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter..........................

A GM bankruptcy is the “only way” for the biggest U.S. automaker to end union costs that make it uncompetitive, Republican Senator James DeMint of South Carolina said in an interview on Bloomberg Radio.

http://www.bloomberg.com/apps/news?p...5lk&refer=home

This line is such Bulls**t. The unions have just given plenty that will help GM (and Ford) become "competitive" and it appears as though we are about to give more in our new "plan" to be presented to the wise and all-knowing congress of the United States of Amerika. By 2010 worker costs will not be the problem as relates to GM being able to compete with the foreign auto companies. Seems this whole line of arguement being made by our Southern representitives in congress is an attempt to bust the unions.

[tholland]

Originally Posted by zete

This makes sense as it's not a typical bankruptcy. Instead, they can market it as government protection, which won't impact sales as much. The government would have to stand behind Detroit and indicate that they're backstopping them until they get things sorted out. That gives the perception that Detroit is safe and buying a car from the Big 3 is safe since the US government is in there with them.

Of course, the PR and marketing have to be spot on. They have to show themselves WITH Obama as many times as possible and use words like "Thank you for saving Detroit". The "b" word should never be uttered publicly so as not to confuse the easily confused public.

I think the "b" word factor is already in play... so the scenario you described might be the best course of action. It could allow GM to realize the union cost savings now rather than later to speed up the turn around. I would add that GMAC should be given access to the TARP as long as they use an appropriate percentage for new auto loans/leases.

The only problem is, what effect would this have on a struggling supplier? Any disruption it would cause would likely have a shockwave effect, so you would have to protect the supply chain and possibly the dealers too... any stress on the dependants will hurt the host.

[rcworker]

A GM bankruptcy is the “only way” for the biggest U.S. automaker to end union costs that make it uncompetitive

Auto-makers have said for years that health care costs are killing their bottom line. And the so-called legacy costs, which are health care costs of retirees both hourly AND salary.

So what is the solution, stop paying for employee health care? Stop paying retiree health care? Or just a thought, if the cash strapped corporations are in front of Congress anyway, why not ask for help with health care?

[PhishPhood]

The main stumbling block remains the UAW as you saw from Gettlefinger's commentary in various places. The UAW has three legally binding contracts in hand and it don't have to do squat...unless the BK route is taken.

Then the question is who gets what. What he and the UAW must have is a fully funded VEBA - Helloooo Bailout money - even more than adjustments plus/minus for the current workers. The current workers might accept a little less or some bonus arrangement but they will still have jobs. It's the retirees that have no recourse other than the VEBA and it's empty right now.

The D3 need to get the funding for the VEBA off their books ASAP - Hellooo Bailout money -because that cost structure is keeping them in the RED and burning cash. The three were going to borrow the money to fund the VEBA but that dried up in Sept.

They also need to close outdated plants all over the country. By outdated I don't mean 'old' I mean that these plants were producing midsized and large BOF vehicles. They need to get them off the books.

Then they have to cut the dealer network in half.

Except for Chrysler the detroit products are coming around and the new labor cost structure is probably competitive. So if they can get favorable terms to fund the VEBA early, get old plants off the books, get a more streamlined dealer network and then get the $25 Billion to fund the advanced technology R&D then presumably the ongoing operations will be at least profitable.

[rcworker]

The D3 need to get the funding for the VEBA off their books ASAP - Hellooo Bailout money

PhishPhood, has my support to be Obama's car guy. This is the kind of common sense missing in management.

[Ed Arcuri]

This is DOA.
The complaints from the UAW, suppliers, and dealers will kill it.
The final "plan" will have a government VEBA contribution, a "bridge loan," and might have a tax incentive to boost sales. The UAW gets its VEBA contribution - sold to the electorate as "money we'd have to pay anyway through the Pension Benefit Guaranty Corp.", the companies get operating cash, and the GOP gets a tax cut, of sorts, that will help the home town car dealers.
Mr. Wagoner's successor will have to decide what to do with the bridge loan.
Possibly.
Cheers,
Ed

[63GrandSport001]

The best Idea Ive seen for bailing GM out is for the government to move auto workers to medical for the big three, do it for at least 5 years so they can get back on track.

For those hating the union this would instantly put US auto workers on pay parity with those of Japanese autoworkers so you get exactly what you want.

And if the big 3 still needs some cash then GM can hand them a loan for just a few billion dollars instead of the 25 billion now and 25 billion later.