Any US government help for the battered auto industry will likely come with significant strings attached, including sharp cutbacks in operations and workers, analysts say.
There also will be provisions to protect taxpayers at the expense of stock and bondholders, they add.
The industry is pushing for an emergency government loan of at least $25 billion to fend off a cash crunch that analysts say could cripple General Motors' (NYSE: GM) operations by early next year.
The so-called bridge loan would be on top of a $25 billion loan Congress approved in September for the industry. But auto makers believe that money—with tight conditions on its use—can't be unlocked fast enough to help them survive.
The White House Tuesday said it was open to considering proposals from Congress to accelerate those loans. A White House spokesman also denied a report in the New York Times that Bush linked support for further aid to auto makers to congressional passage of free-trade pacts. President-elect Barack Obama had urged further aid for the auto sector during his meeting with Bush on Monday.
The issue may have to be resolved next week when Congress returns at least for a partial lame-duck session.
Whatever help the auto industry ends up getting, it likely will be accompanied by a radical restructuring that includes major downsizing and job losses.
"We believe that political pressure to protect taxpayers may lead to a solution similar to the 1979 Chrysler bailout, which was accompanied by concessions from debt holders, labor, suppliers and management,'' according to a Barclays Capital note issued Monday.
Under the “shared sacrifice” model of the Chrysler bailout, shareholders would see most of their equity transferred to the government as compensation for government guarantees.
Under the present situation, “we believe current shareholders might be left with under 5 percent of their newly recapitalized firm,” said analyst Brian Johnson.
There also is talk of having the entire industry file for bankruptcy protection.
“A general industry-wide solution of Chapter 11 might be an option as one way to restructure the whole industry,” Philippe Houchois, an industry analyst with UBS said on CNBC. This coordinated approach would be necessary, he said, because “if just one player were to go in that direction, I think the damage to competitors and suppliers would be huge.”
The US industry needs to get used to a significantly smaller market of about 11-12 million new units sold per year, Houchois added, compared to 17 million a year in recent years.
“The whole industry needs to look at a downsizing in its capacity to a much lower level of sales,” he said, adding that the availability of easy credit had delayed this inevitable adjustment..
Industry executives insist they were well into painful restructuring even before the credit meltdown caused a collapse of sales and pushed the companies into a liquidity crisis.
Michigan Governor Jennifer Granholm told CNBC that her state had lost 400,000 jobs in the last eight years as a result of this restructuring. She argued strongly against any form of bankruptcy because of the studies that have shown that customers will not continue to buy cars from companies in Chapter 11.
But there are a growing number of industry critics who insist management has not done enough to overhaul the industry. Some argue that the government needs to appoint an oversight board to replace the current auto company managements and the boards.
Advocates argue that the airlines industry, placed under similar government stewardship after the crushing blow to the travel industry caused by 9/11, eventually emerged stronger.
There are plenty of skeptics, however, of putting government in a position to second-guess and even over-rule private management.
Louis Lataif, dean of Boston University's graduate School of Management, and a former Ford executive, said the “cleanest way” for Washington to help Detroit would to simply act as “the banker of last resort.”
See video here for discussion of a possible bailout.
The government should offer a low-interest (between 5-6 percent), he added, and there was a reasonably good chance that this would be paid back after the industry’s sales rise with an economic recovery in 24 months or so.
“To wipe out the board and the management people is pretty presumptuous that there is anybody on the planet who could by their magic make this thing work [now],” says Lataif, a 27-year industry veteran, who retired as president of Ford Europe.
“We need a shake-out, we need a couple of years of the weak demand and then all the pent-up demand that inevitably that comes after that.”
Whatever Washington decides to do, however, many analyts think it needs to be soon.
GM and Ford (NYSE: F) burned through more than $2 billion per month, during the third quarter, the companies revealed Friday and the Barclays note said: “We now believe GM is likely to exhaust its cash around February 2009, without government assistance.”
These reports led to a series of analyst downgrades Monday, including from Deutsche Bank which put its new target share price at zero.
The sense of urgency was reinforced in a letter House Speaker Nancy Pelosi and Senate president Harry Reid sent to Treasury over the weekend asking Hank Paulson to "review the feasibility" of using the federal bailout money to help automakers.
Tapping into the $700 billion fund would obviate the complications of winning Congressional support for additional financial support for Detroit, which could come in a stimulus package that is expected to be considered in the lame-duck session later this month.
“A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector's workforce,” argued the letter sent by Pelosi and Reid.
The Democratic leaders also said govenment help should come with limits on executive compensation and for equity stakes for the public.
Some say a collapse of the auto industry could tip the economy into a depression.
“The impact of that [collapse] on an economy that is already in recession.....this could get way out of hand, we are talking about driving the country into the depths of almost a depression,” said Charles Magliano, an automotive expert with IHS Global Insight.
The auto industry’s has a high economic multiplier effect. Nearly 3 million jobs would be lost if the three US automakers were to ceased operation, according to a study released Thursday by the Center for Automotive Research.
“This is a issue of national economic survival,” added Lataif. “If the government stepped in, it wouldn’t be so much to bailout the companies as much as to help bailout the economy, because if you allow more or more of them to fail… the cumulative effects of that across the economy would be just devastating.”
Cheaper Course for Taxpayers
Another compelling reason for government assistance is that saving the industry will be far cheaper for the taxpayers than picking up the pieces if the industry goes under.
Through a combination of lost personal income and Social Security tax receipts, plus increased payment for more unemployment insurance and welfare payments, the US government would lose $60 billion in the first year of a the Detroit Three.
This would rise to $156 billion by the third year, making a rescue financing a “no-brainer,” according to David Cole, chairman of the Center for Automotive Research. “On a cash-flow basis the cost of that failure [bankruptcy] to the economy is substantially higher than keeping these guys in the game,” he said.
Cole is among those who insist the industry’s “massive restructuring” in recent years had teed up a sustainable recovery once the gloom of recession lifts. After that, he said, “We are going to see profitability in this industry like we have not seen in a long, long time.”
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