Posted on: December 25th, 2008 Loans to Chrysler and GM Part I–There’s a Hole in Daddy’s Arm Where All the Money Goes
Protecting auto industry jobs, wages and pensions is extremely important, not just for workers, but for the economy. This is not going to happen with the direction Washington and Ottawa are taking. Providing billions in loans with oversight on major expenditures and asking for a recovery plan by March 2009 is tantamount to kissing the dollars goodbye.
Problems in the auto industry run much deeper than the sums being asked for. Although improved design and technology in manufacturing are needed, their absence are neither the biggest nor most expensive blunders made by automakers in recent years. Before structural reforms can take place we need to untangle complex and expensive arrangements embedded in automakers’ financing arms. If you look closely you can see track marks—this is an industry high on risky debt, over-exposed assets, and off-balance sheet arrangements that dwarf the problems apparent in their financial statements.
By the time March rolls around the extent of the damage may be so enormous that standing in line in front of debt holders won’t be anywhere near the front of the line of other creditors. Regardless, even before March automakers will be back asking for substantially more credit.
On December 19, 2008, President George Bush announced $17.4 billion in funding for Chrysler and General Motors (GM). The next day, Prime Minister Stephen Harper announced $4 billion in Canadian dollar loans. He said “we have a social responsibility that goes beyond the marketplace.” Nice words if he actually meant them. But he doesn’t. This is a man who just a month ago wanted to restrict public sector strike rights, suspend pay equity for women and stack the deck in favor of his party’s political funding.
Harper also said “we will not allow a catastrophic failure” of the Canadian auto industry. That also sounds good, except the Canadian auto industry takes its orders from its U.S. parent. If head office asks for the cash, head office will get it. Even if it means circuitously through inter-company relationships.
General Motors Acceptance Corporation of Canada (GMACCL) has CDN $7.7 billion in loans due over the next nine months. General Motors Acceptance Corporation (GMAC) guarantees these obligations, and GM—who we’ve loaned money to—owns 49% of GMAC. A failure on GMACCL’s part to pay its debt could unduly harm GMAC—but wait, the credit facility granted by Canadian taxpayers may be a way to avoid the hit. It’s not clear whether the terms of the deal Harper made explicitly restricts such an event. The terms of the deal have not been made public even though taxpayers may ultimately be responsible for it.
On December 24, 2008, the Fed approved GMAC’s bank holding company application underscoring GMAC’s desperate situation. The mortgage and auto financing activities must be deteriorating extremely rapidly to precipitate such dramatic action. Even with the requirement that GM’s ownership in GMAC be reduced to 10% sometime in the future, it’s hard to see how GM’s current obligation to fund 49% of GMAC’s losses will be avoided this year.
Then there’s the relationship between Chrysler and Chrysler Financial. How do we know where the money is going and who’s receiving it? Cerberus Capital Management, the private equity fund that bought 80% of Chrysler from Daimler in 2007, isn’t talking. But in early December, Bob Nardelli, Chrysler’s CEO told Congress that Chrysler requires $4-$5 billion to make auto loans which gives us a little insight into the challenges the financing side of the business is facing.
Meanwhile, Daimler has written its remaining 20% ownership in Chrysler down to zero giving us an indication of what it thinks of the automaker’s future. More significantly, in November Cerberus issued a press release accusing Daimler of “intentionally and materially” misrepresenting it underwriting practices of vehicle acquisition financing and leasing. Cerberus alleges it suffered losses well in excess of what it should have and is demanding $7.2 billion from Daimler.
None of this information addresses the bigger issue regarding Chrysler Financial’s losses in its on and off-balance sheet financing activities. If we are not being told how large that hole is, we can only assume it is very large. As lenders, we should be privy to this information. After all, look what happened with Citigroup and AIG after their initial granting of support.
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