Government seeks bankruptcy financing for automakers

I confess, I'm impressed that the Obama administration seems willing to seriously contemplate putting the American auto industry into bankruptcy.  The auto industry is the symbol of the 1950's-style highly unionized technocratic economy that has soared back into prominence as the public dream of the Democratic party (oh where, oh where have the environmentalists gone?)  Bankruptcy will rip the last bastion of Galbraith's New Industrial State thoroughly asunder, shattering union contracts, closing plants, sending Detroit's legacy marks to the scrapyard.

It's clear at this point that there's little alternative to either bankruptcy, or a government-steered process that looks very like it.  Detroit's sales are now falling below the "worst case scenario" the Big Three presented to Congress last fall.  I suspect that Detroit knew it then, and hoped that they could rope the government into throwing good money after bad.

But I still wonder how serious the administration is about actually putting the Big Three into formal bankruptcy.  It seems more likely to me that they're playing chicken with the creditors, trying to entice them into taking a known haircut right now rather than risk the wrath of a bankruptcy judge. For one thing, debtor-in-possession financing does not seem to be eagerly forthcoming:

The initial discussions call for private banks to provide the financing -- known as a debtor-in-possession, or DIP, loan -- with the government guaranteeing or backstopping the loan. In this scenario, some of the financing would be used to pay back the $17.4 billion the government lent GM and Chrysler late last year.

Treasury advisers are handling the effort and keeping GM and Chrysler informed of the steps through back-door channels, said the people familiar with the matter. The interplay between the government, auto makers and the markets is proving to be complicated.

Lenders are reluctant to commit funding to GM or Chrysler for several reasons -- mostly concern they won't get all their money back. Recently, the government advisers have begun aggressively courting big lenders Citigroup Inc. and J.P. Morgan Chase & Co. -- themselves government-aid recipients -- to participate in any bankruptcy financing, said people familiar with the matter.

The government advisers also are looking at ways the Treasury could "prime" other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps. Both GM and Chrysler insist they can avoid bankruptcy, warning that option could cost the government as much as $125 billion in rescue financing. Bankruptcy experts say the sum isn't likely to be that high.

Even so, the estimated total of $40 billion in DIP financing GM and Chrysler would need would be five times as large as the previous record for such financing, which is used to fund day-to-day operations while companies sort out their debt. To fill such a large hole, Treasury's advisers are trying to corral as many as 70 lenders to participate in what is now informally called the "bank steering committee."

It's not clear to me why creditors, in exchange for the priceless gift of being bullied into lending money to an industry that is radically contracting, would agree to let Uncle Sam cut in the seniority queue.  Making them use their TARP funds for the purpose is little more than an accounting shell game--making frail banks lend on a bad bet just makes it more likely you'll have to pump more capital into the system.  This makes me think that they are not serious about getting DIP financing; they're just trying to force other creditors to the table for the restructuring talks that have so far gone nowhere, since creditors reasonably believe that they will get a worse deal from DC than they would from a judge.

The administration does not want to be the one giving a bottomless pool of money to the automakers.  It also does not want to be the one dealing a near death-blow to the UAW.  What happens to prosperous unions in bankruptcy is really not pretty--just ask an airline pilot.  Contracts are tossed out, slipping pension funds get gutted (though the Big Three funds are in good shape for struggling companies), jobs are slashed.  I suspect that the retirees can kiss those expensive, and yet unfunded, health care benefits good bye.  The administration seems to be hoping it can avoid doing both of these things, but this doesn't seem possible--either it will prop the companies up, or it will force a radical restructuring on the companies and creditors.

The bankrupcty theater only works if you think that bankruptcy will have such a devastating impact on Detroit sales that creditors will be better off letting the government give them a substantial haircut.  But the administration's political priorities mean that its primary sympathies are with the UAW, preserving as much of their wages, benefits, and jobs as possible.  Doing that will take a bigger haircut from the creditors than a restructuring plan that focuses on building a viable company without regard to preserving jobs and compensation--so for the creditors, it only makes sense if you think the bankruptcy will reduce the size of the pie substantially.  Or so I mote.

Of course, it may well do so.  The administrative costs, the damage to the brand, and the lost sales due to uncertainty, will all put a big crimp in revenues.  And bankruptcy means that the creditors have to spend a lot of their own time and money presenting evidence and negotiating.

On the other hand, I'm not sure that the restructuring outside of bankruptcy is really feasible.  The auto industry had excess capacity a year ago, but in the current tight credit market, it's got a massive glut.  Cars are piling up in ports, because it's so expensive to shut down and then restart a plant that global producers are still cranking them out in the dim hope that the market will somehow recover even though there's no financing available.  Someone needs to shed a whole lot of plants and marques (read: jobs), and Detroit is the weakest.  We could prop them up, hoping some other country will then go under and take the pressure off us--but everyone is just as nationalistic and irrational as we are about their car industry.  We'd be guaranteeing many years of ugly hemorrhage with no obvious return.