Detroit's Dance With the Devil

It's gone from long shot to sure thing and back to sorta, kinda, maybe. The bailout of the auto industry has ridden some rough road lately, and although a vote is possible in the House today, it's the nuts and bolts that may end up proving its undoing.

The general consensus is that General Motors (NYSE: GM  ) needs the help most -- and soon. Of the $14 billion being considered, the lion's share would be shoveled to it. Ford (NYSE: F  ) has decided to forgo any handouts right now, saying it's financially fit enough to survive, but it wants a line of credit of between $9 billion and $13 billion just in case.

Chrysler, while also in need of some short-term financing, presents a bit more of a conundrum. Its majority owner, Cerberus Capital Management, has been unwilling to commit much toward helping the carmaker, and some in Congress wonder why taxpayers should spend money when even its owners don't want to go there.

Any bailout measure looks likely to contain four main components:

  • A "car czar" to oversee the turnaround and rule on any further handouts.
  • Stock warrants for the government, so taxpayers can benefit if the carmakers survive.
  • Suspension of dividends.
  • Limitations on executive compensation and "golden parachutes" for departing execs.

The "car czar" would have significant oversight powers and would be required to recall the loans if GM and Chrysler aren't aggressive enough in crafting a firm profitability plan by the end of March. Upon accepting the loans -- at interest rates of 5% for five years and 9% for two years thereafter -- the companies would have to cede stock warrants to the government equal to at least 20% of the loan it provides to each firm.

Cerberus' participation remains a sticking point, as it also has another end game going in that it's the majority owner of GMAC, the financing arm of GM, which it is trying to convert into a bank holding company to gain access to Treasury's TARP funds.

All sides say they want to assist the companies if it means there will be a viable, profitable industry at the end. Tossing money at businesses that are doomed to failure serves no purpose. Yet achieving a consensus is no easy task, particularly with most polls showing little appetite among the public for another bailout after the $700 billion thrown at Wall Street.

With Ford not needing the money and Chrysler turning into a lightning rod for opposition to any bailout at all, it may be that the final bill will end up being an assistance bill solely for General Motors. And as some in Congress are looking for CEO Rick Wagoner's head to roll as a precondition of any deal, this may be a Faustian bargain Detroit might yet regret.

Related bailout Foolishness:

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy wonders who invented white chocolate.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 10, 2008, at 5:14 PM, ByrneShill wrote:

    "The general consensus is that General Motors (NYSE: GM) needs the help most -- and soon. Of the $14 billion being considered, the lion's share would be shoveled to it"

    "the companies would have to cede stock warrants to the government equal to at least 20% of the loan it provides to each firm."

    GM market cap: 2.81 bilions.

    In other words, GM would have to give warrants for almost the whole company. Makes me wonder why the stock isn't worth 0$.

  • Report this Comment On December 10, 2008, at 8:59 PM, PoliticalStray wrote:

    Anyone out there have a good memory of a time they had in an American car?

    Many years ago we dropped a 409 into a Chevy Impala and could blow the doors off of anything but a Porsche.

    What'd we get, 'bout 9 gallons to the mile? And it was fine.

  • Report this Comment On December 10, 2008, at 9:24 PM, BlueLakeVentures wrote:

    The bailout will hurt America, http://bluelakeventures.blogspot.com

  • Report this Comment On December 10, 2008, at 9:46 PM, MyDonkey wrote:

    One sunny afternoon, Big Banker (BB) drives his SUV into Joe Taxpayer (JT) who is mowing his lawn. The event is witnessed by The Fed (TF) and its Politicos (POS) who are parked across the street in a limo.

    JT is lying semi-conscious on the sidewalk with a sprained ankle and blood spurting from his neck. TF springs into action, stealing JT's hot tub to collect the spurting blood [bailout of big financial institutions], while the POS stand beside the victim arguing about how to treat his ankle [bailout of auto companies].

    As JT loses consciousness, the blood and hot tub are taken away in BB's SUV to be sold back at inflated prices to JT's children and grandchildren.

    A crowd gathers around the dying JT, and the POS continue to argue as the mainstream media arrive to distribute pamphlets labeled "Sprains versus Strains: the Dilemma of Our Time."

  • Report this Comment On December 11, 2008, at 6:14 AM, TMFMarlowe wrote:

    Rich, thank you for bringing a little sense to this discussion. So much of what has been said recently is surface-level analysis that completely misses the deeper reality -- or mere reliance on 20-year-old stereotypes about these companies.

    I don't see how Chrysler gets through this -- but that would be the third time in my lifetime (I'm 41) that I've thought that, and the first two worked out for them. Interesting times.

  • Report this Comment On December 11, 2008, at 6:15 AM, TMFMarlowe wrote:

    Rich, thank you for bringing a little sense to this discussion. So much of what has been said recently is surface-level analysis that completely misses the deeper reality -- or mere reliance on 20-year-old stereotypes about these companies.

    I don't see how Chrysler gets through this -- but that would be the third time in my lifetime (I'm 41) that I've thought that, and the first two worked out for them. Interesting times.

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