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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 20, 2008 2:34 PM ET
Almost everyone seems to know what’s wrong with the U.S. auto industry (legacy costs, lousy designs, decades of general mismanagement, etc.), but no one seems to have stumbled across what seems to us to be an obvious solution, at least in the short term: Make bailed-out banks help the car makers restructure themselves. Yes, things are even more dire for automakers given the rapidly declining economy and barren lending landscape. But that outlook didn’t evoke much sympathy last week on Capitol Hill, where the Big Three’s executives were grilled, peppered and thoroughly sliced. Those in Congress willing to extend financial support to the quickly shrinking threesome are largely only resigned to doing so. The car companies’ latest crisis has the feel of the same old problems plaguing the trio. Any money thrown at Detroit is probably just life support for companies in need of major surgery, or so those opposed to giving them federal money would argue. Congress and the U.S. automakers are afraid of two different Killer Bs: bailouts and bankruptcy. Bankruptcies happen in every industry and can have the effect of making companies stronger. That’s their intent or at least the intent of a Chapter 11 bankruptcy. But automakers insist it would be their demise. They argue that no one will buy a vehicle from a bankrupt company, and that even if bankruptcy were an option, there is no financing available to get a company the size of GM through it. For its part, Congress is wary of anything even resembling another bailout—such as the bridge loan to better times the automakers have asked for—while it tries to figure out exactly how the bank bailout has been handled to date and how it would like it handled going forward. One area that has been sticking in Congress’s craw is what banks are doing with the billions of dollars in capital the Treasury has given to them so far. As far as legislators can tell, banks haven’t been lending it. Detroit, even while struggling (or perhaps because of its struggles), has been a boon to Wall Street. GM alone has more than $40 billion in debt outstanding. There likely isn’t a Wall Street firm (currently existing or recently expired) that hasn’t participated in underwriting and distributing car companies’ debt, or extending credit facilities to the beleaguered companies, raking in hefty fees along the way. But banks have plenty more at stake when credit default protection they’ve written against the automakers’ debt is factored in. According to recent data from the Depository Trust & Clearing Corp., nearly $65 billion in gross CDS exposure is outstanding on GM and another $54 billion on Ford debt. (The net number, which excludes offsetting trades, does come down to a much less frightening $3 billion on each company, but that ignores potentially huge isolated exposures for key individual players.) The bankruptcy of one or more of the Big Three could wallop the remaining big banks more than any of them might like to admit. The Detroit Three have defied financial logic for a long time. GM had negative shareholder equity of $60 billion at the end of the third quarter. It hasn’t posted actual shareholder equity since the third quarter of 2006. Ford had a shareholder equity deficit of $2 billion at the end of the September. Chrysler has been private since last year, but its prospects may be the worst of the three. Until now, banks have been eager to provide the financial engineering to keep the car manufacturers going. They say they no longer can. Since banks grease the skids for the broader economy, Washington has begrudgingly opened its purse to buy them more grease. Detroit, on the other hand, looks old, rusted and not worth oiling up as it is. Whether one believes the estimates of potential job losses that would follow a Big Three bankruptcy, jobs will be lost, enough of them to be felt throughout the country. While it is not the government’s job to directly rescue every industry that’s ailing as a result of its own behavior or general economic circumstances, the U.S. is in a unique position to apply some pressure on lenders. When looking to attach strings to the remaining $350 billion of the bank bailout, Congress should consider requiring that the recipients of capital aid in providing debtor-in-possession financing and funding to support warranty services to the automakers. That’s not a direct bailout, but it would allow the automakers a smoother transition into a massive restructuring. After all, if much of the bank bailout feels like good money being sent after bad, why not make the banks throw some of it back to solve a problem they helped create?
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