Unstructured Finance

The Value of Experience

BRITAIN/(Corrected – Bank of America did not purchase Countrywide early this decade)

Now that the nation’s top public servant is wielding The Donald-like powers over chief executives of bailed-out companies, expectations are high that more heads will roll, and Bank of America CEO Kenneth Lewis is looking like the next contestant on a new economic prime-time drama: The Executive.

Rick Wagoner, ousted as General Motors CEO, had spent more than three decades in the company and had been in the driver’s seat for most of the last one. He also presided over the era of the energy-unfriendly Sport Utility Vehicle and is criticized for sticking with trucks far longer than he should have.

Lewis has been Bank of America CEO for about eight years. He bought CountryWide, the biggest lender after the market went crazy for real estate and was ultimately forced to buy Merrill Lynch as the salad days of Wall Street wilted.

By contrast, Citigroup’s Vikram Pandit has been running things for just about long enough to endure the worst of the crisis, and AIG’s Edward Liddy was installed by the government. Perhaps it’s the longevity of characters like Wagoner and Lewis that make them seem so deserving of a presidential pink slip.

Fiat a compli

GENERAL-MOTORS/In retrospect, GM CEO Rick Wagoner’s demise was perhaps the most inevitable twist in the autos overhaul saga to date. The chance that he would present a radical plan to Obama this week, one dramatic enough to save his job, was slim at best. A more shocking result, one clearly less viable for Obama, would have been to make a few more threatening noises and hand out the cash that the company so desperately needs without demanding a very public pound of flesh – a head, in this case.

With only another 60 days to effect a U-turn in defiance of a skidding market, former GM COO Fritz Henderson doesn’t have a lot of room to maneuver. It’s hardly enough time for Washington to have installed a new crash-test chief executive.

The Chrysler bailout story is more intriguing. The private-equity owned car maker has been given 30 days to do a deal with Fiat, which has in deal talks to date pledged somewhere around zero in financial support. If that price was too much for the Italian auto maker, they may think that the ticking of the clock could give them some leverage to squeeze a few billion out of either Chrysler’s private-equity owners or U.S. taxpayers.

Going… going…

USA/General Motors said it expects auditors to cast doubt on its ability to remain viable as it endures the worst market in decades. Posting a deeper-than-expected quarterly loss as revenue plunged by more than a third, the automaker said it could receive a “going concern” notice from its auditors.

It will be interesting to see how the auditors, in assessing GM’s viability, value the billions of dollars of government bailout injections. The automaker has asked for up to $30 billion in aid and says it can’t survive without it.

GM argues it is turning the corner on production efficiency, design and quality, but that may be an even harder computation for auditors to crunch than state support.

Saab Story

GM/SAABIn its latest turnaround plan, General Motors made clear that its money-losing Swedish unit Saab would be independent within a year. Wasting no time, Saab said it would seek protection from creditors and restructure. Better to start with a clean slate.

Saab said it would seek funding from public and private sources through the reorganization, and that GM would provide liquidity.

On another front in the same war, talk of bank nationalization has been dragging down financial markets. Alan Greenspan is talking about it, giving even Republicans an excuse to support this most abhorrently socialist of measures. Even the dire and vague positions of Treasury Secretary Tim Geithner seem designed to ease Americans into accepting what would normally be unthinkable to a God-fearing capitalist.

GM to cut 10,000 salaried jobs

General Motors employees hold signs and chant before a vehicle reveal during press days at the North American International Auto Show in Detroit, Michigan, January 11, 2009. REUTERS/Rebecca Cook

The pain in the auto industry keeps getting worse. General Motors has just announced that it will cut its global salaried workforce to about 63,000 from 73,000 this year. The remainder of its salaried staff face pay cuts.

In the United States, approximately 3,400 of GM’s 29,500 salaried employees will be cut. The temporary pay cut for most U.S. salaried employees runs May 1 through the end of the year. Executive employees will have their base pay cut by 10 percent, with others seeing cuts of 3 percent to 7 percent.

If you’re among those likely to be affected, tell us about the mood where you work. What severance terms and other assistance is the company expected to offer? How will you cope with reduced income?

Santa for automakers, Grinch for taxpayers?

grinchA company in the U.S. auto industry fails — and the government steps in as savior. Yet again. That’s right. Santa visits the automakers this year while the Grinch steals taxpayers’ Christmas.

The Bush administration is buying $5 billion in equity in GMAC – the finance arm owned by GM and Cerberus Capital Management. The Treasury has also offered a new $1 billion loan to GM so the automaker could participate in a rights offering at GMAC.

Yes, this in addition to the recent $17.4 billion emergency loan to save GM and Chrysler from bankruptcy.  In fact, the government already helped GMAC last week, when the Federal Reserve approved the finance company’s application to become a bank-holding company.

Autos closer to life support

CAMBODIA-BIRDFLU/The lame duck may have some quack in it yet.

When President Bush said on Thursday that his administration would not allow a “disorderly” bankruptcy or collapse of the U.S. automakers — leaving “orderly” bankruptcy on the table — it seems to have spurred on the negotiations between Detroit and the White House. General Motors and Chrysler are now close to securing emergency loans as part of a U.S. government aid package, according to sources familiar with the talks.

The aid package being spearheaded by the White House would demand that both automakers restructure by seeking new concessions from unions and creditors, two people briefed on the talks said. With the automakers and the United Auto Workers both desperate to stave off a Chapter 11 filing, which they say would be disastrous, the White House’s discussion of “orderly bankruptcy” may have kickstarted negotiations that have been dragging on ever since Congress rejected the bailout bill once and for all.

UPDATE: Bush is now due to make an announcement on the auto rescue plan at 9 a.m. Eastern time.

One way to shrink a bailout…

USA-BUSH/Each day that goes by without a Detroit bailout, the Dwindling Three get smaller. Chrysler is shutting down production for at least a month, and The Wall Street Journal reports that the company is again negotiating with GM about a merger. GM, which is denying it is talking again with Chrysler, slashed its Q1 production target by 60 percent and said it would temporarily idle about 30 percent of its North American assembly plant volume.

On his way out the door, U.S. President George W. Bush went on Fox News and talked about how seriously he was looking at a bailout, which is shaping up to be one of his last acts as president. Treasury Secretary Hank Paulson, who if nothing else opposes a bailout being funded from the TARP money set aside for banks, is behind the wheel. Moody’s said the chance of an automaker bankruptcy – prepackaged, coupled with government assistance – is now 70 percent.

Would it be cynical to note that each passing day may lower the price of a sector-wide bailout? What started as a request for $35 billion was quickly lopped down to $15 billion and is now widely quoted as somewhere closer to $14 billion.

Racing to the Rescue

FRANCE/Who in the world doesn’t believe in supporting the auto business? As the U.S. Treasury contemplates the extent to which it will pump funds into the Detroit Three, European leaders are revving up measures to keep their car companies chugging along.

French President Nicolas Sarkozy said France would consider making consumer auto loans more attractive as a way to help car makers hit by the global credit crunch and slowing economy. As if his country were plagued with a reckless, cut-throat sort of capitalism, the French president declared: “We cannot be the only country in the world that does not support our builders and manufacturers. We have to help industrial infrastructure.” He’s already offered 1,000 euros to every driver who trades in an old vehicle for a less-polluting one, so softening up auto loans would seem to be right up a Parisian alley.

In Italy, Fiat’s admission last week that its car business needs a partner to survive is seen as a way to put pressure on the Italian government for a solution. While media reports cite France’s PSA Peugeot-Citroen and Germany’s BMW as potential partners, industry watchers do not see a deal any time soon. Volkswagen says its finance arm has no capital problems, but is applying for state loan guarantees nonetheless. Sweden and Canada wasted no time pledging support for their auto sectors.

A bailout too far

AUTOS/Senate Republicans who killed an auto industry bailout must have had a particularly nasty sense of deja vu. If they didn’t get on board, the economy would collapse. “For the hundreds of thousands of people whose jobs depend on this industry, this will not be joyous season,” bellowed Sen. Chris Dodd. It was up to the Republicans. To save Detroit, all they had to do was sign over a fraction of what they’d agreed to for Wall Street.

It wasn’t as if there was another industry waiting in the wings, ready to head to Washington demanding a bailout as soon as the automakers got theirs. So the Republicans couldn’t have feared yet another dollop of largess around the corner. Ultimately, it came down to good old lefty Union vs. rightly Republicans arguing over when workers would agree to take pay cuts.

Has the countdown begun to industrywide bankruptcy? That’s what the automakers say — because of their shared suppliers and vendors, the failure of one Detroit automaker could drag down the other two, as well as other businesses. GM, Ford and Chrysler employ nearly 250,000 people directly, and 100,000 more jobs at parts suppliers could hang on their survival. The companies say one in 10 U.S. jobs is related to the auto sector.