Big Three Auto Companies' Pleas for a Bailout: A Hook??

The CEOs of our big three domestic automobile companies are back in Congress today, asking for emergency loan funds to stave off bankruptcy.  They drove, rather than flew in private jets, in energy efficient cars the 520 miles to Washington.  They submitted "viability plans" and they came with fresh union concessions (no more "job bank" payments and delay in payments to a new health care fund).  Congress will give them funds -- at issue is whether this Congress or the next one that takes over in early January will do it.  Republicans still have the votes to block the funding in this rump Congress. 

Several notable features of the "plans" spell trouble. 

First, the companies structural changes (selling brands and shutting dealerships) will take time and not produce immediate cash savings. 

Second, the new plans show the need for a $9 billion increase in funds over the amount that the Big Three asked for two weeks ago. 

Third, their emphasis on "green" cars comes when gas prices have fallen to historic lows and when the sales of green cars are falling substantially worldwide.  Moreover, green cars are often subsidized sales -- their price does not cover their costs. 

Fourth, labor costs of $75 an hour are not reduced and are too high compared to the labor costs of domestic plants of foreign auto companies ($45 an hour) and other manufacturing in the United States ($31 an hour).  Instead of reducing wages the companies, and this is classic, are firing workers and saving the high wages of senior workers who remain. The simple fact is that the company need to reduce hourly wages.  Short of wage cuts, my reading of their situation suggests that the most profitable move they could make would be to shut down most all their domestic manufacturing and import cars into the United States from their overseas plants in Brazil, for example.

Fifth, what are they going to do with the cash?  Pay down debt?  I hope not.  Debt holders should be taking haircuts and any bailout money should not be absorbed immediately by debtholders who are otherwise giving interest rate concessions.  My reading of their situation suggests that the most profitable move they could make would be to shut down most all their domestic manufacturing and import cars into the United States from their overseas plants in Brazil, for example.

And sixth, and most important perhaps, no one is doing a thorough due diligence on the companies and their plans.  When have their normal financials and 37 page plans but, as would happen in a normal acquisition or a normal workout, there is no due diligence being performed by anyone on the companies.  Government officials, before any bailout, should check all the company's confidential books and records, just like bank examiners do for banks.  Will they?  I doubt it. 

All this adds up to trouble.  The amount requested looks to be a hook for more requests later.  Once the initial money is gone, one could conservatively estimate that another $75 billion of successful requests will follow.  A popular suggestion is to  loan some now and some later with the later money coming only on the condition that benchmarks have been met.  Either meet the conditions or take Chapter 11, but the problem is Congress's stomach for Chapter 11 -- it could later rescind the conditions. 

Will the government take warrants or other equity with the loans?  The bailouts of the banks and AIG came with grants of equity.    We are now seeing the AIG and bank bailouts come back to bite us -- "Why bail out Wall Street and not Main Street (with 2.5 million workers)" is the public cry from Michigan.