European Parliament Backs Regulations for Quieter, More Energy-Efficient Tires
GM China to Continue Push with More Models and Advanced Technologies

Moody’s Chief Economist Says US Automakers Would Likely Need Up to $125B; Recommends the Requested Government Aid Now

In testimony before the US Senate Committee on Banking, Housing and Urban Affairs on 4 December, Mark Zandi, Chief Economist and co-Founder of Moody’s Economy.com, said that under the most likely outlook for the economy and auto industry, the Detroit 3 will need between $75-$125 billion to avoid bankruptcy at some point in the next two years.

The three recently presented restructuring plans by the three automakers totaled up to a possible $34 billion (GM, $12 billion in loans and $6 billion in a line of credit; Ford, $9 billion in a line of credit; Chrysler, $7 billion in loans). Despite the potential quadrupling of that amount, Zandi said that the Federal government should provide the financial help that the automakers need.

Zandi made two other primary points in his testimony. First, while the restructuring plans could result in a viable long-term domestic auto industry, there is a “considerable risk” that those plans will not be executed effectively by all three. Second, he recommended that Congress provide the $34 billion in aid in two tranches in exchange for warrants and restrictions on executive compensation and dividend payments. The first payout should be sufficient to forestall the automakers’ imminent disorderly bankruptcy. The second payout should be made only if the restructuring plans are proceeding successfully.

If the restructuring plans are unsuccessful, he said, then the government should provide no more loans, but work to ensure that there is an orderly bankruptcy process by providing financing in bankruptcy and guaranteeing warranties on new vehicles sold.

Even in an orderly bankruptcy, there still would be substantial layoffs. The companies would come out of bankruptcy much smaller, reflecting the much smaller new-car market and their loss of market share. But if this rationalization is done in an orderly way, the job losses should be thousands of jobs per month and not hundreds of thousands. While painful, this is manageable.

The danger of filing for bankruptcy now, Zandi said, is that a Chapter 11 restructuring would likely turn rapidly into a Chapter 7 liquidation, with factories and other operations shut down and assets sold to pay creditors.

Given the collapse in the financial system and resulting credit crunch, debtor in possession, or DIP, financing would be all but impossible to get. Bankrupt firms need DIP financing to operate their businesses—to pay suppliers, finance inventories and meet payroll—while they restructure...in the current credit crunch nothing will persuade creditors to take the risk.

Zandi assessed GM as being in much worse shape than Chrysler, which is in much worse shape than Ford. Although Ford has more financial latitude, it too would be at significant risk of bankruptcy if GM or Chrysler failed given the disruption to their supply base, dealers and creditors, Zandi said. The collapse of the Detroit 3 would put some 2.5 million jobs at risk, he said.

The auto industry has among the largest economic multipliers of any industry. For every one lost job in auto assembly, another nine jobs are lost in other supplying industries. Industries that would face considerable negative repercussions include auto suppliers, auto dealers, steel and metal suppliers, plastic and rubber companies, healthcare providers, and trucking and freight operators.

The hit to already record low consumer and business confidence would be devastating. The economic fallout on the already very hard-hit industrial Midwest would be disastrous. The Michigan and Ohio economies have been in recession more or less since the beginning of this decade, and the collapse of the Big Three would completely undermine their economies well into the next decade.

Other state economies that would be significantly hurt include Indiana, Illinois and Wisconsin. Exacerbating the economic fallout in the industrial Midwest is that unemployed workers would find it difficult to move to perhaps Kentucky, Tennessee or Alabama to work for the stronger transplants. Their home values have fallen so sharply that many are now underwater—they owe more on their homes than they are worth. To move would require that they put more into their home or to default on their existing mortgages

Zandi based his $75-$125 billion cost estimate in part on the expectation that light vehicle sales will average close to 11 million units in 2009, 13.5 million units in 2010, and less than 15 million units in 2011. Vehicle sales in the US have averaged almost 17 million units annually from 1999 to 2006.

Also weighing on vehicle sales is the large amount of pent-up vehicle demand. Given broad demographic, wealth and income trends, underlying new vehicle sales are at best 16 million units annually. The automakers were able to maintain sales of closer to 17 million units during the first half of this decade only by providing increasingly large discounts and easier financing terms...Total pent-up vehicle demand is estimated to be over 10 million units; at the current sales pace, the entire auto industry would have to shut down production for nearly a year to work it all off.

Comments

Here is the golden opportunity for Big-3.
Use the billions given by Fed to retool their factories
to make smaller CUV's, Wagons and Hatches (Sedan offer
very little trunk space and are space inefficient).

Also ensure that each vehicle is either Hybrid or
Flex-fuelled or Bi-fuelled. This will move the people
away from Oil. So no more price surprises and the automakers can happily sell their vehicles without the fear of Hurricanes or mideast conflict or opec increasing the oil price.

Harvey D

Annon:

Those should be minimum conditions for step by step progressive financial supports.


However, measurable quantities (goals) at fixed given times should also be set prior to any bail outs. Failure to meet contracted goals would put an end to any further bail out money.

Compulsory goals should include:

- major reductions in labor cost (from $73/hr to less than $45/hr) and major reduction in management pay within 6 to 12 months.

- Introduction of extended range PHEVs and/or extended range BEVs at a progressive rate of at least an additional 5% (of total production) per year starting in calendar year 2010.

- Average fleet fuel reduction at the rate of at least 7.5% per year starting with calendar 2010.

- A fixed maximum number of local vs imported vehicles & parts. If not met, bail outs $$ would be reduced. Imported vehicles & parts would not be used to arrive at the other above goals.

- Quality goals should also be included to avoid voluntary deterioration to meet other production goals.

Tax payers $$ should benefit the people and the country not necessarily GM, Ford and Chrysler.

Jer

Hard Call.
I don't doubt that there is 'latent' demand out there. People want their vehicles; want new technology; want it cheap, fast, efficient, and non-petroleum. They want that lifestyle and they deserve to have it. BUT - Is the B-, PH-, FC-EV technology there in a mass-produced production line type-of-way. Road-ready prototypes and 5-year long test trials aside. We are talking 300 cars per hour per facility production ready - is the technology not only assembly-line ready - but public 'at-every-part-of-the-country' ready? People will spend and drive if the products available to them are efficient, cheap to run, sexy, convenient and contribute-to-the-lifestyle they want to live. Otherwise, people will hold onto the cars they have (they're not going to bicycles and transit en masse). And that's the problem - the industry depends on a fast turnover of vehicles of new and improved quality - tried and true. We are at a hump - EV tech is 'mostly' at a utilitarian level of quality - get you there - from A to B. Americans want more than A to B - and they won't pay until they can get it.
Perhaps if all 3 automakers are merged; financially-supported; given a long-list of gov't mandated pro-profit, pro-sustainability, pro-low-energy requirements; and a few years of growing-pain room, they'll make it (and what if share-holders don't buy in). But how much time and money will it take to get the EV car upto the same level of cost and desirability as the ICEs we are slowly leaving behind? The pit of money required appears deep and I don't think we can see the bottom of it just yet -- but also can we afford to walk away from the industry if its too much? It may be a no-win situation - and that is something Americans are not used to.

Jer

((besides it's a capitalist society and the executives don't need the pay - if it is not lucrative they'll walk away. Witness nationalized industries in socialized countries - they can't get the expertise they want at any price.. people only function at a high-level if their is a lucrative profit-motive involved. the gov't isn't holding all the cards as many people think))

John

This is a golden opportunity for Congress to enact a real, effective energy policy. By putting a price floor on a barrel of oil (through carbon or fuel taxes), the government could use market forces to change consumer habits and could make the automakers' jobs much easier.

When gas fluctuates wildly, the automakers have to change their product plans drastically. (Small cars don't sell well when prices are low, SUVs don't sell well when prices are high). A somewhat stable price of gasoline ($2.50-3.00) would both allow automakers to properly plan their product lineup, and also protect investment in alternative fuels and advanced technologies.

If the government would have done this after the last oil crisis in the late 70s/early 80s, we may not be where we are today.

Jer

".. the government could use market forces to change consumer habits ..."

Consumers in a capitalist society don't function productively that way over the long-term. People can only sacrifice, cut back, and be thrifty for so long. They deserve beautiful, exciting, and pro-lifestyle vehicles. It is a huge investment in each individual's life - it is often a defining part of their character. Rather than punish people to get to do what you want - ie negative reinforcement. Why not give people the cars they 'want' and then 'hide' all the sustainability and fuel efficiency under the hood. It is only a matter of technology, investment, and time. Real people don't get up in the morning and says "'woo-hoo' i am going to do something to save the earth today and promote sustainable practices." That's what separates us from them. 'We' believe that we can have it all - exciting, sexy, sustainable, efficient vehicle. We don't have to settle for less. This is a positive and pro-active stance. 'Them' are those who believe that we need to retreat, fall-back, that we don't have the.. what?... techno-savvy, ethics, discipline, time, money, who knows?.. perhaps, to embrace the potential. Of course, there is risk. But that is the defining concept of a successful society - embracing risk and the unknown - and that is the essence of technology.. to both further are lifestyles and i guess now, to save it -- at minimal (and decreasing) cost to the environment.

Joseph


John

533,000 people lost their job in November, the most in over 3 decades. The national unemployment rate is at 6.7%. 10.3 mil people that had a job this time last year are now scraping to stay afloat. $ 4.00 gas was one of the major contributors to the current recession we are in. If you honestly believe that now is a good time to raise any kind of tax, then you seriously need to consider professional help. I mean this with all sincerity because you either have a problem with compassion for others or you are out of touch with reality.

Matthew

The first commenter forgot to mention passing laws to require the people to buy these 'golden opportunity' vehicles that they may not otherwise want. Forcing the Big Three to build only certain vehicles is a surefire way to put them out of business, as all the other manufacturers will have no problem building what people actually want to buy.

Besides, this talk of a bailout is ridiculous. We'd all be better off if they go into Chapter 11 and live or die on their merits there.

JMartin

Jer: Most of these guys should walk away -- with nothing. I don't mind paying people to manage, but $14 mil is not incentive, it is tribute paid by cronies. They have been getting paid this money for years to run the companies into the ground -- remember Michael Moore's "Roger and Me?" The guy at Ford may be arrogant, but he may be the exception here, because he did not come from the auto industry.

Geoff T

A huge and scary number- but wait, there is another way to solve this problem!
Put the uaw and retirees onto a derivative of hr 676 Conyers-Kucinich medicare expansion. this will eliminate the per unit cost penalty that has killed the big 3 's competitiveness, and reduce outsouring pressures. Most importantly, since workers and employers both contribute, the additional cost to taxpayers will be spread out, making the bill easier to pass- eg no huge amounts up front.
Then once the impact of this can be assessed, Detroit can come up with a more focused plan that will end up with consolidation and major production cuts.

Look up the history of one of the most innovative companies of the 20th century. It was bought from a bankruptcy court for $40,000 in 1932 when Detroit Aircraft went bankrupt. It got bailed out once in the 70's and paid off with interest. It helped launch the birth of Silicon Valley and was and is one of the most creative defense companies in the world today. It has built more spacecraft than any other company and it's planes are legendary. Lockheed

All from a Bankruptcy.

AA

Zandi made a number of good points during his testimony, the most important being the plans submitted by the Detroit Three are a good start and they deserve the chance to continue thru Q1 2008.

The cost to the taxpayers would be higher if they went bankrupt and at this point its not the shock the economy needs.

The $125B is an apples to oranges comparison vs. what the Detroit Three presented.

The topic of the hearings were Bridge loans which are paid out in installments and with a Government Review Board in place to ensure debt holders etc. receive cents on the dollar as they would in bankruptcy court and the companies were restructuring as the plan says. The loans for GM are $12B and for Chrysler $7B, for a total of $19B. Under a "Worst" Case scenario that Congress requested (essentially a FOUR year recession scenario) Ford would then need to draw and GM needs increase, the new total required then grows to $34B. Even under the dire four year recession scenario. Payments to the taxpayer start in 2011 and 2012 depending on the automaker. (There will also be significant Local, State and Federal Tax payments from thousands and thousands of people who didn't lose their jobs and of course the positive multiplier effect of jobs and industry).

All Three automakers plan to use funds ($25B) from the recently approved Energy Independence and Security Act which to make newer more fuel efficient cars and fund R&D to continue action on this front. So now the total is $44B to $59B. BTW none of this $25B has been released to date, yet development continues on more hybrids and Volt technology, Fuel Cells etc.

The final piece of the puzzle is not accounted for by Dr. Zandi, represents his estimation of money requested by the Financing Arms of the Big Three under terms of the TARP. Believe that the TARP basically has the Federal Gov't investing directly into Co's and bypassing the middle man. So if this is true than the lending that happens when you get a car loan, lease etc. or when dealers borrow to stock their lots of "floorplan" would trigger payment back to the Treasury almost immediately (this is what is "frozen" right now). As car loans default rates while up are no where near as bad as the housing foreclosure rates (most people still need a car to get to work etc). This is a relatively safe bet of tax payer money.


Think this is how Zandi did his math. While this is a big number he did state it far cheaper than the alternative.

Think the hearings overall did a fantastic job of bringing transparencey to the public. This should be the standard going forward for AIG, Citi etc. There is a better understanding of how this industry works, some new ideas of alternative solutions introduced by Senator's Schumer and Bennett and even some bipartisianship.

Joseph,

You seem to lack the necessary comprehension of reality in order to posses any "compassion" for the masses. The uncertainty of an absolute necessity such as motor fuel is absolutely inhumane. There are no assistance programs for motorfuel such as there are for home heating oil and gas. The average lower class blue collar worker cannot budget and adjust their life with any amount of certainty that things won't change drastically in the next few days. Therefore, a stabilized motorfuel price, even if considered "high", is the most compassionate and human thing that can be done for the masses.

Further, many professional studies, easily found online, show that a more stable motorfuel price, even if "high", would result in a stronger and more vibrant economy.

Motorfuel, for better or worse, is an absolute necessity in this country. It should be controlled and regulated as such.

dailyshow

comment

matt

I say take the 25 billion and give 2.5 million consumers a rebate of $10,000 to buy an American-made vehicle that gets better than 60 mpg. Then, the $40,000 Volt, for example, is in a reasonable price range, which creates a bigger market, which causes even larger sales, resulting in a lower price of oil. In this way the consumers are supporting the car companies through demand.

Jorge

The Big 3 also want help from the government of Canada.

fred

matt, GM already coerced its corrupt legislators to write in a $7500 rebate for anyone buying a hybrid with a battery the size the Volt has.
the disturbing point is that they quietly glossed over the issue that GM would not survive chapter 11 and go into chapter 7 with loss of all jobs and the projections of increased sales is also ludicrous. GM's plan to dump 30,000 workers but somehow get the UAw to accept wages/benefits comparable to the nonunion companies is not reasonable without the courts stepping in. Close review of the GM plan makes it look like they worked it out on the drive into town. the assumptions cannot be supported by history, there was no agreement or acknowledgement from the UAW that they supported any part of it, and it did not change their business plan in a fashion that would allow them to pay off their current $66 billion in debts much less these loans. and far from being a "bridge" loan, it is obvious they cant get loans because they cant possibly qualify because they cant repay them or even survive with them.
The only chance for GM is a structured bankruptcy that reduces the UAw wages/benefits by 40% ( and direct them to keep the extra 30,000 people that would otherwise draw unemployment), abolition not suspension of the jobs bank, and turnover of the retirement/benefits to the Pension Guaranty Corp so they can be restructured consistent with industry standard plans ( ie strip the gold out of them).
Ford is still viable for 2 years without that, and Chrysler can be supported by cerberus since they would sell it first chance they get anyway.

Engineer-Poet

Quoth Jer:

".. the government could use market forces to change consumer habits ..."

Consumers in a capitalist society don't function productively that way over the long-term. People can only sacrifice, cut back, and be thrifty for so long.

Why?  Do you think that today's wastrel society should be continued... or even can be continued?  The peak of world oil production is certainly in the rear-view mirror, as the markets cannot sustain the prices needed to supply the investment to push it up again.  We can either be thrifty with oil, or let OPEC collapse our financial markets again (and again, and again).  We need heavy taxes on petroleum products to get the public to treat oil as something scarce; our minimum price should be $5/gallon, maybe more.
They deserve beautiful, exciting, and pro-lifestyle vehicles. It is a huge investment in each individual's life - it is often a defining part of their character.
For some people, so is binge drinking.

People don't "deserve" what they can't find, make or trade for.  The USA cannot find much more oil on its own territory, we can't make it, and the peaking of production means that we can't trade for it either.  What we "deserve" as a nation is what we produce, about 5.8 million barrels a day and falling.  Besides, the world doesn't have the atmosphere to absorb the combustion products of more oil.

Rather than punish people to get to do what you want - ie negative reinforcement. Why not give people the cars they 'want' and then 'hide' all the sustainability and fuel efficiency under the hood.
Because you can't deliver that much magic at a price people can afford.  You probably can't make a 50-MPG gasoline-powered Suburban no matter what.

The USA was built by people who were thrifty and invested rather than consuming, adding more to their wealth over time.  Anything that consumes oil sends money out of our economy to people who hate us, both draining our economy and increasing our expenses for protection.  It's time to treat the use of oil as giving aid and comfort to the the enemy, an evil that's necessary only until we can dispense with it.

And I'm not willing to settle for less.  I'm all for beautiful, exciting and pro-lifestyle... and "OPEC go to hell" is part of that lifestyle as well as a national security imperative.  That's why I intend to get an Aptera as soon as finances permit.

treehugger

I agree with John, this is a huge opportunity for the government to put a tax on gaz (1$ right now then incrementally increased until we reduced our foreign oil dependency 80 percent) contrary to the simplistic reasoning of Joseph it is the best way to insure a predictable and stable oil price in the future and to foster the development of alternative. What we are seeing now is a catastrophe all the alternative project are going on hold because oil price is collapsing, the problem is than in that in 2 years when economy take off again the oil price will skyrocket to 200$ overnight, then back into recession.

Anyway with all the money that the government is distributing now they have to increase taxes somewhere and gaz tax is the best increase you can propose when you accept a little bit to think of it, because the benefits are much more than the downsides, but I agree you have to move away from the truck culture, but isn't the best that can happen to america? a bit less of beef attitude a bit more of finesse would made america a better place to live.

terry

$125 Billion bailout?!!!! Just how stupid is this so-called "chief economist" Mark Zandi? The total current market capitalization of Ford, GM and Chrysler combined is less than $15 Billion. And this clown wants the US taxpayers to guarantee loans for over 800% of what these companies are worth?

God help us.

DC

BREAKING: They got $15 billion to hold out until March when Obama is in office.

I'm not even for a Big 3 bailout otherwise, but it is flat out highway robbery to guarantee CitiGroup $200+ billion, when it is known their liabilities dwarf their assets, and not bail the Big 3 too. Don't people get it? This is a flat-out looting, the debt on the money from the banks won't be repaid by anyone but you, at least the automakers have a chance to pay it back.

IMO at this point, a pre-arranged Ch. 11 of GM financed by the Feds that includes folding Chrysler into GM might be the way to go. The supply side needs to shrink, and Chrysler has little worth saving except Jeep, the minivans, and the new Phoenix V6 engines.

GM is flat-out unviable any time soon without Ch.11 or some huge blow up that sheds brands, debt, dealers and a huge chunk of the work force. Nevermind if it gets worse.

Ford says they want need a bailout "if conditions don't worsen". Well, guess what folks, this is only the beginning of a big un-winding, and it is as sure to get worse before it gets better as there is gravity. As much as I think Ford has positioned themselves better than GM/Chrysler, they will need the bailout too. Bailing GM out without forced re-structuring is doomed to failure, and Chrysler is doomed regardless.

AL

Anyone tracking current insanity of stock market knows that right investment in overdepressed stock of number of companies will produce 20-times return on investment in 5-year term.

Along with DNN, DRYS, TCK, OSK, PAL, etc., Big3 represents to US government (US taxpayers) unique opportunity to profit something of 2 trillion dollars in 5 years.

John Taylor

The big three want a bailout = free money.

They knew for years that cars needed to change to electric, and did all they could to prevent the technology from emerging.

No government should invest a single dime in fossil fuel cars.

There are plenty of little companies (like Tesla) that have the technology and deserve financed.

fred

Citigroup at least has capablities of repaying the loans, unlike GM who is locked into abusive union contracts and has been losing market share consistently.
But folding Chrysler into GM only makes Cerberus happy, since GM was planning on looting them anyway.GM's plan is old school, cut 30,000 jobs and 200 dealers, they could have done it at the beginning of the year. As for their push to have an "auto czar", that is a thinly veiled attempt at having the government responsible for cutting union wages instead of the court. and we know how good an Obama government will be at challenging the unions...

If you honestly believe that now is a good time to raise any kind of tax, then you seriously need to consider professional help. I mean this with all sincerity because you either have a problem with compassion for others or you are out of touch with reality.

Amen to that!!! Put thinking, compassionate, people in charge rather than the blathering, emotional, tax increasers. Raising taxes throws people out of work and reduces quality/output.

The comments to this entry are closed.