“It is not my job to hire and fire, but what I’m trying to suggest is that you need to have new teams in place,” Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, said today on “Good Morning America”.  “If you are going to restructure a company you can’t be asking the people frankly, many who were involved in creating the problems we’re in, to be involved in restructuring.”

That’s just one of several possible strings attached to a bailout to the Big Three – General Motors Corp. (GM), Ford Motor Co. (F), and Chrysler Corp. The first is that the $34 billion requested could be turn out to be about $15 billion. Another could be forcing GM to cancel its long-established dividend. (Ford suspended its dividend last year.)

Another could be additional concessions from the United Auto Workers union, Reuters reported.

Another possible change that will no doubt garner some attention is the creation of a government-appointed “car czar” to oversee the bailout. The New York Times reported Sunday that Democrats were drafting legislation that would call for the strict government control of a czar-controlled oversight board comprised of five cabinet secretaries and the head of the Environmental Protection Agency.

Whatever concessions are on the table, some form of bailout is likely to pass, the Associated Press reported.

“It sounds like we have agreement on those basic principles that would be required for a bill that the president could sign,” White House press secretary Dana Perino told reporters today.

So far, the carmakers have proposed a wide range of changes to help persuade lawmakers to approve the bailout money, the carmakers proposed a wide range of changes. Among the highlights:

• Executive salary cuts: Ford announced that the salary of Ford CEO Alan Mulally would be cut to $1 a year if the firm actually borrowed money from the government. General Motors said that Wagoner, the CEO, also will accept a $1 salary. Chrysler’s Robert “Bob” Nardelli is already being paid only $1 a year, according to the Chrysler plan. Mulally had a base salary of $2 million and total compensation of $21.7 million last year, according to the company’s filings. Wagoner received base pay of $1.6 million and total compensation of $14.4 million. Closely held Chrysler does not disclose executive pay.

• Financial restructuring: GM intends to renegotiate its outstanding debt with lenders and bondholders. As of the third-quarter’s close, the firm had more than $30 billion in unsecured debt. GM said it anticipates making all of the roughly $28 billion in payments it owes its suppliers.

• Product streamlining: As part of its cost-cutting efforts, GM suggested that two of its brands – Pontiac and Saturn – could be dropped from its product mix. Pontiac – known in the past for such cars as the Firebird, Trans-Am and GTO – could become a niche brand sold by other dealerships. GM would look for alternatives for dealers of the Saturn, which revolutionized the industry with its no-haggle pricing policies. The company has already said it was considering the sale of its Hummer vehicle line.

• Union concessions: GM intends to seek additional changes in the labor contract it has with the United Auto Workers union – enabling it to modify retiree health care plans and job guarantees the company says it can no longer afford. Money Morning previously reported that national union leaders with all three of the U.S. automakers are planning to hold an emergency meeting in Detroit today (Wednesday).

• New alliances: Chrysler, which a year ago was sold by German automaker Daimler AG (DAI) to the U.S. private equity group Cerberus Capital Management LP, said it remains focused on “developing partnerships, strategic alliances or consolidations” as part of its long-term plans. Chrysler leaders say the firm could save between $3.5 billion and $9 billion a year if it merged with another automaker. GM last month said that it had halted discussions about a possible combination with Chrysler to focus on its own turnaround efforts.

• More hybrids, no corporate jets: Each of the Big Three pledged an accelerated introduction of hybrid vehicles. Ford yesterday promised to put “a family of hybrids, plug-in electric vehicles, and battery-electric vehicles” on sale by 2012, BusinessWeek.com reported. The specific plan calls for a battery-powered electric commercial van in 2010 and a battery-powered retail sedan in 2011. The company is also believed to be developing plug-in versions of its Focus and Fusion cars by 2012-2013. By 2010, Ford said 80% of its investments will be in cars and so-called “crossover” vehicles-as opposed to trucks and SUVs. That’s up from 60% in 2007. Ford and GM also announced plans to get rid of corporate jets. Mulally, Wagoner and Nardelli were all criticized at a House hearing last month – and ridiculed in the media afterwards – when they admitted they had each flown their corporate jets to Washington to ask for rescue money. According to CNNMoney, Ford promised to sell its five corporate jets, while GM vowed to sell four of its seven – and to transfer the leases on the remaining three to another operator. Chrysler spokesman Ed Garsten says Chrysler does not own any private aircraft but instead leases them on an “as-needed” basis. The CEOs apparently learned their lessons well, albeit a bit late: When they return to Washington to beg for the loan money later this week, Mulally and Wagoner will be wheeling hybrid vehicles made by their companies; Nardelli will also drive a hybrid in his return to Capitol Hill, published reports state.

Not on that list: Replacing current CEOs. And GM said putting Wagoner on the chopping block isn’t a constructive solution, despite Dodd’s suggestion.

“GM employees, dealers, suppliers and the GM board of directors feel strongly that Rick is the right guy to lead GM through this incredibly difficult and challenging time,” GM spokesman Steve Harris told the AP.

Source: Auto Bailout Could Have Strings Attached: Ousting CEOs, Appointing Car Czar

According to published reports, 25 members of the U.S. Congress have reported on their financial disclosure forms that they own stock in – or have other capital interests in – the Big Three, based on data compiled from the Center for Responsive Politics, a Washington, D.C., research group that tracks money in U.S. politics. [Editor’s Note: Fox News senior information specialist James Farrell pulled the data displayed in the accompanying chart, which was created by Money Morning staffers].

Details of the Bailout

The Big Three initially sought $25 billion in loans – and were almost laughed out of Washington after the chief executive officers of the three companies traveled to Capitol Hill in their corporate jets. And while the new plans include such politically palatable moves as salary cuts for top-tier executives, the sale of cushy corporate jets and the elimination of moribund brands, the three embattled U.S. automakers are also now seeking government aid of as much as $34 billion – which is as much as $9 billion more than that initial $25 billion figure that had been on the table from the very beginning of the industry’s bid for bailout money.
Here’s the breakdown:

• General Motors, the largest domestic automaker, said late yesterday that it is seeking as much as $18 billion to survive into 2010 – and that it needs $4 billion of that cash just this month in order to dodge a bankruptcy filing. GM is seeking a loan of $12 billion. It’s also requesting an additional $6 billion line of credit to provide more cushion, should the severe current market downturn persist.
• Ford is asking for $9 billion. The Dearborn, Mich.-based carmaker hopes it won’t need to utilize the federal loans, and that it just wants to have access to the capital as a backstop. Ford is aiming to return to profitability by 2011.
• Chrysler confirmed its previous request for a $7 billion loan that its executives detailed during Congressional hearings two weeks ago. But it now says that it needs the loans by the end of the year if it’s to survive, because its projected year-end cash reserves of $2.5 billion won’t come close to covering its projected major first-quarter expenses of $11.6 billion, Dow Jones Newswires reported. The loans – coupled with Chrysler’s ongoing restructuring efforts – would keep that carmaker operating through the end of March. But it will need to access the capital before the end of this year.

Ethical Issues?

According to Fox News’ Farrell, judicial ethics rules “prevent any bankruptcy judge with holdings in a company from presiding over a bankruptcy case. Essentially deciding whether the company has to file seems to be a little different.”

Added Farrell: “If GM files for bankruptcy, the stock held by the politicians becomes essentially worthless overnight because they would be unsecured creditors at the absolute bottom of the bankruptcy food chain,” noting that, at a minimum, all shareholders “would get a significant haircut.”

So why is this an issue for Congress? Currently, the bailout of the U.S. auto industry bailout is actually being debated as a specific piece of new legislation. But whether it gets enacted as an amendment to the initial legislation that actually created the Troubled Asset Relief Program (TARP) is not yet clear.

But if it is new legislation, all of Congress will have to vote on it.

Already, U.S. Sen. Elizabeth Dole, R-N.C., who lost her re-election bid, and U.S. Rep. Michael Castle, R-Del., and a number of other Congressmen who own stakes sit on committees that conducted the first hearings on the auto industry bailout request prior to Thanksgiving, Fox News reported.
U.S. Rep. John Campbell, R-Calif., said he only will vote “present” on any automaker bailout, since, as the former owner of a car dealership, still owns land on which his former business sits. According to Rep. Campbell’s staff, Campbell doesn’t even want the appearance of a conflict of interest. But a report indicates Campbell voted “yes” on the financial bailout.

The information on the lawmakers’ holdings came from Congress’s 2007 financial disclosure forms, filed in May 2008, the most recent data available. Members of Congress are not required to report actual dollar sums. Instead, they are allowed to report dollar ranges.

Note: The wife of U.S. Rep. John Dingell is the executive director for public affairs for General Motors, and a descendant of the Fisher brothers, who founded the company that became General Motors 100 years ago, Fox News said.

While Dingell’s spouse, Deborah Dingell, does not lobby Congress or the administration on GM’s behalf, “she makes the case for the company, the auto industry and the state of Michigan in public and in private,” a recent New York Times story says.

Source: Congressional Members Hold Stakes in the “Big Three”

Of course, the reality is that bailouts are likely to do more harm than good in the long run, regardless of what sector they are in. But given the choice, I would rather bail out General Motors Corp. (GM) than Citigroup Inc. (C), because the automaker has a better long-term future.

The financial services industry got far too big during the 1995-2007 bubble. Its growth accelerated in the 1990s on the back of innovative new financing techniques such as derivatives and securitization, as well as a huge expansion in areas such as leveraged buyouts. As a result, its share of United States gross domestic product (GDP) has approximately doubled since the late 1970s.

It is now clear that many of the new financing techniques were misapplied or even spurious. The problem of separating loan origination from credit-risk assumption has become obvious, and so securitization will have a much more limited future.

Of the derivatives, credit default swaps are clearly destabilizing and will be tightly regulated. Many of the new market participants, such as hedge funds and private equity funds, should disappear, since they merely represented conduits through which higher fees could be charged rather than truly innovative investment choices. It is thus likely that the financial services business will revert to close to its previous share of GDP. That would involve a downsizing of its 2007 capacity by 50%.

The automobile industry, on the other hand, has no obvious need to become smaller. With global warming now high on the political agenda, its products need to change radically, employing new technologies that greatly reduce carbon emissions. However, the basic demand for personal transportation has not gone away.

Indeed, it is still expanding rapidly in the growth economies of emerging markets such as China and India. And U.S. urban geography, with its widely spread suburban developments, is wholly incompatible with a sharp drop in automobile usage and would be impossibly expensive to modify except over a very long term.

Why Citi Should Fail

Allowing a large bank such as Citigroup to disappear is probably beneficial. It reduces competition for other major banks, allows medium-sized banks to expand into the space opened up, and provides an appropriate penalty for decades of bad management. Citi was a leader in the Latin American loan crisis of the 1980s; its then-Chairman Walter B. Wriston famously opined that “countries don’t go bust,” a sentiment that has been repeatedly disproved.

Wriston got his succession wrong in 1984, choosing the overaggressive retail banker John Reed (who had pioneered the unsolicited credit card offer in 1978 and lost $100 million – real money back then – in 1980 by doing so) over the capable corporate banker Tom Theobald.

Citi almost went bust in 1991, but was bailed out by Saudi Prince Alwaleed bin Talal. It assembled a financial services conglomerate in 1998 that proved unmanageable, and from 2003-2005 was prevented from making any more acquisitions because of its shaky position.

In short, Citi has been a classically mismanaged behemoth that, in any other industry would, have already collapsed.

Yet, its bailout risks more than $300 billion of taxpayer money, and to no obvious economic benefit.

Meanwhile, General Motors has been damaged by two factors: Misguided government regulation of the automobile industry, and a drastic societal shift away from unionized labor.

CAFÉ Backfires

GM had a 60% share of the U.S. market in the 1950s, and was recognized for large cars that performed distinctly better than their imported competitors and were well suited to U.S. driving conditions. Some expansion of foreign competition was inevitable, as Europe recovered and Japan became a major automobile producer, but GM was particularly hard hit by the Corporate Average Fuel Economy (CAFÉ) legislation. CAFÉ, which mandated fuel economy standards instead of simply raising the gasoline tax, put GM’s large models at a disadvantage to their smaller imported competitors.

However, U.S. automobile companies found a loophole, which is that its standards were limited to automobiles. Vehicles built on a truck chassis were exempt. That gave rise to the sports utility vehicle.  Now, higher fuel costs, environmental concerns, and tighter CAFÉ standards have made the SUV an endangered species, but it was a Frankenstein’s monster that only existed because of government meddling.

If GM and the other U.S. automobile manufacturers go out of business, only their foreign competitors will benefit. Furthermore, they have an interdependent network of suppliers, with a total of 3 million employees, which could easily be forced into bankruptcy by the disappearance of their major customers.  U.S. automobile manufacturers have important, and in some areas unique technological capabilities, whose loss would severely damage the U.S. economy as a whole.

The automobile business is unprofitable now, but will eventually return its previous size in the United States, as well as expand worldwide. So, while there is no capacity downsizing needed, capacity restructuring, away from SUVs and towards smaller cars, hybrids and innovative power technologies, is essential.

Ultimately, the right decision would have been to bail out General Motors and allow Citi to go to the wall.

The Case for Citi

Of course, there are important modifiers to this recommendation. In Citi’s case, its interconnection with the financial system as a whole is such that an immediate bankruptcy followed by years-long court proceedings could render many of its counterparties unviable and damage the global economy badly. Hence, an orderly liquidation is needed, with a receiver appointed to wind down Citi’s positions and sell the viable portion of its operations, making good on those obligations incurred by Citi that appear to have systemic importance. Even if the taxpayer made Citi’s counterparts completely whole, however, it would not have been as expensive as the bailout.

As for GM, it has labor costs and pension obligations making it uncompetitive with foreign-owned producers. Those “legacy” costs can most efficiently be removed through a Chapter 11 bankruptcy filing. The pension obligations will then fall on the taxpayer through the Pension Benefits Guaranty Corporation, while the labor contracts can be rewritten in a way that is competitive with the market in which GM operates. If a government subsidy is then needed to cover GM’s operating cash deficit during the recession, and the investment costs of transforming GM into a producer of environmentally friendly automobiles, it should be provided through a post bankruptcy “debtor-in-possession” financing.

There is nothing magic about banking that should allow the industry to be uniquely permitted access to taxpayer money when disaster hits. Only bank customers and the market should be protected. Conversely, the automobile industry plays an important role in the U.S. economy that is unlikely to be significantly downsized. So, there is considerable justification for assistance to GM and Ford Motor Co. (F), which have valuable capabilities and long-term competitiveness, though less for a bailout of the smaller and less industrially valuable Chrysler Corp.

Source: Why GM is More Bailout-Worthy Than Citigroup

And while the plans include such politically palatable moves as salary cuts for top-tier executives, the sale of cushy corporate jets and the elimination of moribund brands, the three embattled U.S. automakers are also now seeking government aid of as much as $34 billion – which is as much as $9 billion more than the $25 billion figure that’s been on the table from the very beginning of the industry’s bid for bailout money.

Here’s the breakdown:

• General Motors, the largest domestic automaker, said late yesterday that it is seeking as much as $18 billion to survive into 2010 – and that it needs $4 billion of that cash just this month in order to dodge a bankruptcy filing. GM is seeking a loan of $12 billion. It’s also requesting an additional $6 billion line of credit to provide more cushion, should the severe current market downturn persist.
• Ford is asking for $9 billion. The Dearborn, Mich.-based carmaker hopes it won’t need to utilize the federal loans, and that it just wants to have access to the capital as a backstop. Ford is aiming to return to profitability by 2011.
• Chrysler confirmed its previous request for a $7 billion loan that its executives detailed during Congressional hearings two weeks ago. But it now says that it needs the loans by the end of the year if it’s to survive, because its projected year-end cash reserves of $2.5 billion won’t come close to covering its projected major first-quarter expenses of $11.6 billion, Dow Jones Newswires reported. The loans – coupled with Chrysler’s ongoing restructuring efforts – would keep that carmaker operating through the end of March. But it will need to access the capital before the end of this year.

The plans were submitted on the same day that the auto industry reported the worst U.S. sales in 25 years. Both U.S. and top overseas automakers all reported sales declines of more than 30% from year-ago sales, increasing the level of urgency for the embattled Big Three, CNNMoney.com reported yesterday.

“This is part of an urgent request for federal funding to create ‘a new GM’ – a lean and fully competitive company,” GM Chief Executive Officer Richard Wagoner said during a conference call with journalists. “Taking these tough actions will help us weather the current economic stresses, and will position the new GM to be profitable.”

U.S. Sen. Carl Levin, D-Mich., a strong advocate of the bailout, said he is confident Congress will return next week to approve a loan package. He said he’s not concerned about the higher price tag being requested, stating that lawmakers wanted an honest accounting of how much might be needed in a worst-case scenario.

Speaking at a press conference late yesterday, House Speaker Nancy Pelosi, D-Calif., told listeners that it was imperative that the Big Three get the federal rescue money immediately.

“Bankruptcy is not an option,” Pelosi said. “Everyone is disadvantaged by bankruptcy. It takes too long. What takes a year we can do in a few weeks … I don’t think anyone wants to see bankruptcy.”

Despite those concerns, Pelosi would not commit to having Congress pass a Big Three bailout when it returns next week. But if Congress doesn’t return, Pelosi urged the U.S. Treasury Department to use money available under the previous $700 billion Wall Street bailout to tide the automakers over until early next year.

It’s not clear if the Treasury Department would agree to this, since the Bush Administration does support the concept of aid for the U.S. auto sector, but opposes using the $700 billion Troubled Assets Relief Program (TARP) to money to help them.

To help persuade lawmakers to approve the bailout money, the carmakers proposed a wide range of changes. Among the highlights:

• Executive salary cuts: Ford announced that the salary of Ford CEO Alan Mulally would be cut to $1 a year if the firm actually borrowed money from the government. General Motors said that Wagoner, the CEO, also will accept a $1 salary. Chrysler’s Robert “Bob” Nardelli is already being paid only $1 a year, according to the Chrysler plan. Mulally had a base salary of $2 million and total compensation of $21.7 million last year, according to the company’s filings. Wagoner received base pay of $1.6 million and total compensation of $14.4 million. Closely held Chrysler does not disclose executive pay.
• Financial restructuring: GM intends to renegotiate its outstanding debt with lenders and bondholders. As of the third-quarter’s close, the firm had more than $30 billion in unsecured debt. GM said it anticipates making all of the roughly $28 billion in payments it owes its suppliers.
• Product streamlining: As part of its cost-cutting efforts, GM suggested that two of its brands – Pontiac and Saturn – could be dropped from its product mix. Pontiac – known in the past for such cars as the Firebird, Trans-Am and GTO – could become a niche brand sold by other dealerships. GM would look for alternatives for dealers of the Saturn, which revolutionized the industry with its no-haggle pricing policies. The company has already said it was considering the sale of its Hummer vehicle line.
• Union concessions: GM intends to seek additional changes in the labor contract it has with the United Auto Workers union – enabling it to modify retiree health care plans and job guarantees the company says it can no longer afford. Money Morning previously reported that national union leaders with all three of the U.S. automakers are planning to hold an emergency meeting in Detroit today (Wednesday).
• New alliances: Chrysler, which a year ago was sold by German automaker Daimler AG (DAI) to the U.S. private equity group Cerberus Capital Management LP, said it remains focused on “developing partnerships, strategic alliances or consolidations” as part of its long-term plans. Chrysler leaders say the firm could save between $3.5 billion and $9 billion a year if it merged with another automaker. GM last month said that it had halted discussions about a possible combination with Chrysler to focus on its own turnaround efforts.
• More hybrids, no corporate jets: Each of the Big Three pledged an accelerated introduction of hybrid vehicles. Ford yesterday promised to put “a family of hybrids, plug-in electric vehicles, and battery-electric vehicles” on sale by 2012, BusinessWeek.com reported. The specific plan calls for a battery-powered electric commercial van in 2010 and a battery-powered retail sedan in 2011. The company is also believed to be developing plug-in versions of its Focus and Fusion cars by 2012-2013. By 2010, Ford said 80% of its investments will be in cars and so-called “crossover” vehicles—as opposed to trucks and SUVs. That’s up from 60% in 2007. Ford and GM also announced plans to get rid of corporate jets. Mulally, Wagoner and Nardelli were all criticized at a House hearing last month – and ridiculed in the media afterwards – when they admitted they had each flown their corporate jets to Washington to ask for rescue money. According to CNNMoney, Ford promised to sell its five corporate jets, while GM vowed to sell four of its seven – and to transfer the leases on the remaining three to another operator. Chrysler spokesman Ed Garsten says Chrysler does not own any private aircraft but instead leases them on an “as-needed” basis. The CEOs apparently learned their lessons well, albeit a bit late: When they return to Washington to beg for the loan money later this week, Mulally and Wagoner will be wheeling hybrid vehicles made by their companies; Nardelli will also drive a hybrid in his return to Capitol Hill, published reports state.

Planning to Stand Tall

The bailout loans aren’t the ultimate answer for the auto companies, however. Indeed, the cash is intended to tide the firms over and buy time for their restructuring plans to take hold and yield results.

With the turnaround plan its leaders have crafted, Ford believes its North American auto operations will be breakeven – or possibly profitable – by 2011, on a pre-tax basis. Ford had previously announced a goal of returning those operations to profitability in the New Year, but dropped that target in May, without providing a new objective.

Ford also said it expects industrywide sales of 12.5 million vehicles in 2009, 14.5 million vehicles in 2010 and 15.5 million vehicles in 2011. That’s well below the industry average of roughly 17 million a year – which was the standard every year from 1998 through the end of 2006.
GM and Chrysler submitted plans with far more conservative sales forecasts.

GM said once its restructuring plans are complete, it thinks it can be profitable even if annual vehicle sales only range between 12.5 and 13 million. GM President Frederick A. “Fritz” Henderson said the company’s restructuring plan will make it fully competitive with Japanese automaker Toyota Motor Corp. (ADR: TM) by 2012.

Chrysler is forecasting a return to profitability with industrywide sales of 13.7 million vehicles in 2011 and 2012.

Those less-aggressive forecasts might be the ones the Big Three wants to concentrate on, for current sales figures have been horrid.

GM said yesterday that light vehicle sales plunged 41% in November, dropping to 153,404 vehicles last month from 261,273 during the same month a year ago. Ford didn’t fare much better, with U.S. sales in November falling 31%. Every line of Ford vehicle posted falling sales, and the company responded by slashing first-quarter North American output by 38% to 430,000 vehicles, Bloomberg reported.

Wagoner has been fuzzy on the company’s goal to cut at least $15 billion in costs, but few options have been ruled out.

GM could further reduce its North American work force. It could eliminate and/or sell one or more of its brands. The primary name on the table is Sweden-based Saab, and the interested buyer is the Swedish government.

Some of its directors say filing for Chapter 11 bankruptcy protection is also an option, though it’s one option that Wagoner has repeatedly said is not on the table, TheStreet.com reported.

So far, GM has asked to delay a $7 billion payment to a union retiree health fund. It returned two of its leased private jets. It stopped running its escalator at 7 p.m. at its headquarters. It stopped buying batteries for hanging wall clocks, eliminated voicemail in plants and consolidated printers and copies. It’s also buying cheaper toilet paper and pencils.

Meanwhile, Ford has pulled back the curtain on nearly all of its plans to hopefully break even by 2011.

In the cost-cutting arena, the company is canceling 2009 bonuses for its managers around the world, as well as for all U.S. employees. Mulally would work for $1 a year if Ford receives a bailout. Ford will continue reducing its dealer and supplier base, estimating it will have 3,790 dealers by end of 2008, Reuters reported.

Ford also is considering the sale its Sweden-based car unit Volvo Car Corp. to Sweden. Despite high safety ratings, Volvo only captured a 0.5% of the market through October, down from 0.8% a year earlier and accounting for 3.7% of Ford’s total sales last year.

Ford is also hatching plans to produce better and more-appealing vehicles. It plans to invest about $14 billion over the next seven years in fuel-efficient technologies and products. And it is planning a line of electric cars, but details on those won’t be revealed until the Detroit Auto Show.
Chrysler has been mum on current cutback plans.

In October, Nardelli ordered a 25% reduction in the Chrysler’s salaried workforce. And the company is close enough to its stated goal of eliminating 5,000 salaried jobs by year’s end – largely facilitated by salaried employees who accepted buyouts and early retirement – that it doesn’t anticipate many more layoffs.

Nardelli was the first of the CEOs to suggest he’d work for $1 a year. He also said that Chrysler’s owner, private equity firm Cerberus Capital Management LP, will pledge to forgo any profits from a Chrysler sale if the car company receives government money, The Detroit Free Press reported.

Emergency Meeting With Union

Before their bigwigs arrive in Washington D.C., the companies will ask United Auto Workers officials to reopen a 2007 labor agreement to further cut costs, a person familiar with the situation told Bloomberg.

According to Bloomberg, GM will seek to stop paying union workers when plants are closed and no work is available, and Ford and Chrysler likely will ask for similar concessions. Union leaders with each company will hold an emergency meeting in Detroit today, published reports state.

“We are at the bargaining table every day working on things to make these companies, to put them in better shape if you will,” UAW President Ron Gettelfinger said in an interview on Bloomberg Television. “Other people need to come in to see what they can do to assist these companies.”

Source: That $25 Billion in Loans America’s “Big Three” Automakers Had Sought … It’s Now $34 Billion

Each CEO – GM’s Richard Wagoner, Ford Chief Executive Alan Mulally and Chrysler’s Robert “Bob” Nardelli – left Washington D.C. two weeks ago scolded, and with a clear understanding that the government is expecting each company to shed costs and present forward-looking plans that prove taxpayer money will not be wasted.

Wagoner has been fuzzy on the company’s goal to cut at least $15 billion in costs, but few options have been ruled out.

GM could further reduce its North American workforce. It could eliminate and/or sell one or more of its brands. The primary name on the table is Sweden-based Saab, and the interested buyer is the Swedish government.

Some of its directors say filing for Chapter 11 bankruptcy protection is also an option, though one Wagoner has said is off the table, The Street reported.

So far, GM has asked to delay a $7 billion payment to a union retiree health fund. It returned two of its leased private jets. It stopped running its escalator at 7 p.m. at its headquarters. It stopped buying batteries for hanging wall clocks, eliminated voicemail in plants and consolidated printers and copies. It’s also buying cheaper toilet paper and pencils.

Meanwhile, Ford has pulled back the curtain on nearly all of its plans to hopefully break even by 2011.

In the cost-cutting arena, the company is canceling 2009 bonuses for its managers around the world, as well as all U.S. employees. Mulally would work for $1/year if Ford receives a bailout. Ford will sell its corporate aircraft will continue reducing its dealer and supplier base, estimating it will have 3,790 dealers by end of 2008, Reuters reported.

It’s also weighing the sale its Sweden-based car unit Volvo Car Corp. to Sweden. Despite high safety ratings, Volvo only captured a 0.5% of the market through October, down from 0.8% a year earlier and accounting for 3.7% of Ford’s total sales last year.

Ford is also hatching plans to produce better and more-appealing vehicles. It plans to invest about $14 billion over the next seven years in fuel-efficient technologies and products. And it is planning a line of electric cars, but details on those won’t be revealed until the Detroit Auto Show.

Chrysler has been mum on current cutback plans.

In October, Nardelli ordered a 25% reduction in the Chrysler’s salaried workforce. And the company is close enough to its stated goal of eliminating 5,000 salaried jobs by year’s end – largely facilitated by salaried employees who accepted buyouts and early retirement – that it doesn’t anticipate many more layoffs.

Nardelli was the first of the CEOs to suggest he’d work for $1 a year. He also said that Chrysler’s owner, private equity firm Cerberus Capital Management LP, will pledge to forgo any profits from a Chrysler sale if the car company receives government money, The Detroit Free Press reported.

And in case you were wondering each CEOs travel plans Thursday:

• GM’s Wagoner will drive a Chevy Malibu hybrid from Detroit to DC.
• Ford’s Mulally will travel in a Ford Escape Hybrid
• Chrysler’s Nardelli is keeping his travel plans secret for security reasons, but will ditch the corporate jet.

Emergency Meeting With Union

Before their bigwigs arrive in Washington D.C., the companies will ask United Auto Workers officials to reopen a 2007 labor agreement to further cut costs, a person familiar with the situation told Bloomberg.

According to Bloomberg, GM will seek to stop paying union workers when plants are closed and no work is available, and Ford and Chrysler likely will ask for similar concessions.

“We are at the bargaining table every day working on things to make these companies, to put them in better shape if you will,” UAW President Ron Gettelfinger said in an interview on Bloomberg Television. “Other people need to come in to see what they can do to assist these companies.”

GM said today (Tuesday) that light vehicle sales dropped 41% in November, from 261,273 vehicles a year ago to 153,404.

Ford didn’t fare much better, with U.S. sales in November falling 31%. Every line of Ford vehicle posted falling sales, and the company responded by slashing first-quarter North American output for 38% to 430,000 vehicles, Bloomberg reported.

Source: Big Three Auto Companies Weighing How to Shed Weight for Gov’t Bailout

This from Money Morning:

With America’s “Big Three” automakers all due to submit turnaround plans to Congress today (Tuesday) – a requirement if General Motor Corp. (NYSE:GM), Ford Motor Co. (NYSE:F), and Chrysler Corp., are to receive $25 billion in government loans – I couldn’t help but recall the moment eight years ago when I realized the U.S. auto industry was skidding toward a financial collapse.

I’ve been thinking about that market call of mine a lot of late, particularly after recently reading that JP Morgan Chase & Co. (NYSE:JPM) credit analysts had rated GM’s distressed debt as a “Buy,” noting that the company was likely going to survive.

It was October 2000, and I’d just joined a multi-billion-dollar asset management organization as its head of credit. While most of my experience before this was with very risky and fast-moving emerging markets, this new position was focused on the top tier of the investment market, since the group I was joining had a marked risk aversion and was managed with capital preservation as its main mantra.

“Piece of cake,” I thought to myself.  After decades of deciphering volatile emerging economies, I had “graduated” to analyzing strong companies in the top economies in the world. These credits were all rated “A” or better. And the proportion of our holdings that were not rated “AAA” was a rounding error.

WorldCom Inc., Enron Corp., and the U.S. “Big Three” carmakers were among the companies I had to analyze, as well as some 208 structured investment vehicles (SIVs).  The curious asymmetry was that while companies like Enron and WorldCom were rated “A,” and had tremendous – yet officially unrecognized – risks to the downside, their commercial paper was rated “A1” and “P1,” the highest possible rating offered by leading rating agencies.

The SIVs, Enron, and WorldCom did not resist even minimal analysis. I axed the two companies, as well as the SIVs that did not offer a full guarantee from the sponsor. So I ended up starting with the corporate bonds, by first addressing the largest exposures we had.

A Debt-Focused Tour of America’s “Big Three”

Since the three U.S. carmakers – all carrying “A” ratings on their bonds, and “A1” to “P1” on their commercial paper – accounted for about one-third of all investment-grade paper outstanding, I analyzed them first.  I had a large advantage over my peers in the investment grade industry:  Since emerging-market credits – both sovereign and corporate – were overwhelmingly in junk bond territory, I had seen over years how late the rating agencies were in adjusting their ratings to the credit reality of the issuers in general.

The foregone conclusion in “junk land” was that the rating agencies provided lagging indicators of credit risk.  In addition, having analyzed credits in Argentina with 1% inflation a day, as well as massive, surprising devaluations, I knew how distorted financial statements can become and was highly skeptical.

When I downloaded the balance sheet for General Motor back in the third quarter of 2000, I was stunned. Something just wasn’t right. These numbers I saw just couldn’t be correct.

“Surely I had made a mistake and downloaded the wrong one,” I thought to myself.  “I must have downloaded a subsidiary’s or maybe the parent company’s unconsolidated balance sheet.”

I checked and re-checked.  I had the right one.  The company’s equity-to-assets ratio was only about 2%  – and that was before counting its under-funded pension liabilities. With that deficit factored in, GM had negative equity.

In other words, the leading U.S. carmaker was technically bankrupt.

Now, I wouldn’t even lend money to a bank with such high leverage. And a bank diversifies the risks in its lending portfolio, is highly regulated, and secures a huge amount of its lending with hard assets.

But an industrial company sitting on hoards of car inventories and loans backed by used cars … that nobody particularly liked?  Not a chance.

With such low levels of equity, the ability of a company to withstand an economic shock is almost nonexistent.  So, I searched around for any possible redeeming qualities that I could be missing.  But after a very thorough review, I concluded that we had to drop all three of the U.S. carmakers – GM, Ford and Chrysler.

When I brought my decision to the firm’s chief investment officer, a portfolio manager with years of experience in the investment-grade debt market, and a person I’d known back during my days at Merrill Lynch & Co. Inc. (NYSE:MER), he was unnerved.  He trusted my judgment, but he, like the rest of the market, was confident that each of the Big Three was “too big to fail.”

Nevertheless, with our firm’s overarching commitment to capital preservation, we negotiated a fast wind-down of exposures: We would sell all the long-term exposure immediately, freeze any new exposure and we would not roll over the commercial paper – most of which was due to mature within a couple of weeks.  In this way, all of our Big Three exposure would be gone within weeks, and we were confident each of the three had the cash and near-term liquidity to pay us back.

A couple of weeks later, at a charity function, I happened to bump into the former head of one of the premier asset management organizations in the world.  In a short conversation, I mentioned my private concerns. The gentleman draped an arm across my shoulders and essentially told me that “the Big Three are not going to go bankrupt.”  That was it.  Another too-big-to-fail advocate.

The Too-Big-to-Fail Myth

Evidently, there were reasons beyond mere creditworthiness that led this very smart man – and others – to keep ignoring the fact that the automotive emperor had no clothes.  The pre-eminent one is the “too-big-to-fail argument,” and those who make that argument are trafficking in the moral hazard trade.  Yet, even today, GM on its website ardently contends that it is indispensable to the U.S. economy, hoping to persuade U.S. taxpayers to throw good money after bad.

(We’ll find out how Congress feels about that argument after GM, Ford and Chrysler submit their plans today. It certainly won’t help that today we’ll also likely find that November sales from the major automakers show only a limited bounce from 25-year lows.)

The other argument is that the auto industry is “strategic” to national interests.  That is to say: How can a country defend itself if it produces no vehicles?  And what about advanced transportation and classified technologies research?

But that argument does not hold up under scrutiny, either.

As eminent economist Martin Feldstein has reminded us, giving the Big Three $25 billion will last less than a year. The reason: They are burning through about $7 billion each a quarter.

Clearly, forcing the three carmakers to restructure will be in everybody’s interest.

Through bankruptcy – with some, minimal government intervention – we should force the inevitable restructuring to take place. As a result of that restructuring, worker compensation levels will be brought into line, employee and retiree health benefits will be reduced to lower-but-still-competitive levels, any dividends will be eliminated, and executive payouts and perks will be capped. How far must this go?

That’s easy – keep cutting until the companies are restored to health and, most important of all, to a state of long-term viability.

This does not mean that the Big Three will disappear. What will disappear is corporate waste. The companies will restructure/continuing profitable activities and liberating resources from unprofitable ones to expand future development.  This has been done successfully – and en masse – in many “strategic” industries, such as the steel business in the United States, and telephony, utilities, energy, aerospace, and many others that were restructured in the 1990s in Argentina, Brazil and South Korea.

There is no reason why each of the Big Three – each currently the laughingstock of the global auto industry – should not regain their leadership positions, as measured by profitability and technological prowess. In this way, GM, Ford or Chrysler – or even all three – can create good, secure jobs and contribute to the U.S. economy, rather than detracting from it.

To be fair to GM and the others, they all have attempted to restructure. They’ve secured agreements with the United Auto Workers union that were designed to control costs. And they’ve tried to launch newer, better vehicles.  But those agreements are too little/too late, and the sands have run out of the hourglass.

Union leaders from GM, Ford and Chrysler have now scheduled an emergency session for tomorrow (Wednesday) in Detroit as the companies plan to seek concessions from the United Auto Workers to help land those win $25 billion in government loans, Bloomberg News reported yesterday (Monday). Participants will be asked to reopen a 2007 labor agreement to consider concessions. GM, which has said it may run out of cash to meet its obligations, wants to stop paying union workers when plants are closed and there isn’t any other work for them to do. Now Ford and Chrysler are expected to ask the UAW for similar concessions as part of their bid for the government aid package, Bloomberg said.

All three of the American carmakers were technically bankrupt since at least the time of my first analysis near the end of 2000, and the union agreements still did not bring compensation down to levels comparable to that of their competitors. Now the U.S. automakers are on life support.  There is no time left for gradualism.  They missed that window long ago and the costs imposed on all U.S. taxpayers figure to be huge.

The current predicament in which GM, Ford and Chrysler now find themselves is not only their own fault, as we’ve now already been subsidizing the unions for far too long.

Are Unions to Blame?

One of the biggest reasons Detroit’s Big Three have run out of capital is the extraordinary compensation that has been paid out to unionized workers in the United States.

Even in the last reported quarter, when the economies of Europe and Asia had slowed dramatically, GM was almost breakeven in those two regions and actually had 10% profit growth in Latin America, Africa and the Middle East, where GM also has unionized work forces. But the company is losing money in the United States.

That’s because the GM pays about $75 per hour – $156,000 a year – to its assembly line employees.

And because of that, the Big Three are lagging far behind in technology investment. That has not only damaged the auto-related technology industry, but has decreased productivity and innovation, delaying the shift to more fuel-efficient technologies.  And because they have jointly held the market leadership, they set prices high, allowing foreign competitors to undercut them.

These phenomena have increased the costs of transportation for all Americans for decades.  Americans have overwhelmingly voted with their dollars by buying foreign brands, which has contributed to our growing trade deficit.

Ultimately, inefficiencies in the auto industry have imposed huge costs on the rest of the economy, putting the Big Three at a competitive disadvantage that has hurt profits, cost the economy jobs, and opened the door to foreign companies to export U.S. dollars back to Germany and Japan (and now South Korea and China).

GM lost $21.3 billion in the third quarter and burned through about $7 billion in cash.  It has only about $16 billion in cash left, and already its liabilities are $60 billion larger than its assets, which means that GM has negative equity.

And the current quarter will be worse.

The bottom line is that GM is essentially bankrupt – and has been for years.

At this point, GM should – like so many companies before – have to restructure its costs to a point that allows it to be competitive before receiving a single taxpayer dollar.  Otherwise, we are just throwing good money after bad and it won’t be long before GM comes crawling back for more.

I just hope that the politicians and government officials in Washington are wise and determined enough to control the situation, and force the bitter medicine down the company’s throat.

To Buy, or Not to Buy

In this environment of high uncertainty, I would not go near any GM securities.

However, highly sophisticated players may consider making a very small bet, in one of several ways. With GM’s bonds and credit default swaps trading at near-bankruptcy levels (15 cents on the dollar), it may be attractive (albeit highly speculative) to buy GM’s bonds, in the hope of converting these debt securities into the debt-and-equity of a newly restructured General Motors. Over the course of a couple of years, this could turn out to be extremely profitable, but only if GM’s work-force wage-and-benefits costs are brought into line with the company’s global rivals – and if the U.S. economy recovers. Among the many financial scenarios under review, GM’s board of directors is reportedly considering an option that would grant current bondholders equity in a restructured company in return for maneuvering room, according to media reports.

Reuters reported that GM’s bonds fell nearly 12% early yesterday (Monday) as investors waited for the automaker to submit a new turnaround plan that might actually have a chance of winning lawmaker support. GM’s 7.125% notes due in 2013 fell to 23 cents on the dollar, down from 26 cents on Friday, according to MarketAxess. As we noted earlier, GM is due to submit that plan by today.

When JP Morgan’s credit analysts made their market call last month, GM’s benchmark 8.375% bond due 2033 has dropped to 25.75 cents on the dollar, which was down from 36.5 cents at the end of October, MarketAxess said. The bonds had traded at more than 80 cents on the dollar at the beginning of the year and currently yield 32.5%.

In the case of selling credit default swaps, an investor would get paid some 80% to 85% of the value they are “insuring” up front. If GM gets bailed out, which is an increasingly likely scenario, that investor would keep the full premium and walk away.  And in the case of default, that investor would have to pay the buyer 100%, therefore losing some 15% to 20% after the default, but getting the bonds he is insuring in exchange for that loss.  We would then take the bonds into the restructuring as noted above.

I would not buy the actual GM shares, even though I have friends in high places in finance that still believe in the too-big-to-fail theory. My concern with GM’s stock is that there would be a very strong chance the company’s equity gets totally wiped out in a bankruptcy, or at least heavily diluted as a result of any government infusion the company receives.

GM’s shares closed yesterday at $4.59 each, down 65 cents each, or 12.4%. They have traded as high as $29.95 in the past 12 months. The company right now has a market value of only $2.8 billion.

Source: Buy, Sell or Hold Insight: GM Remains a High Risk Profit Play – Even as it Files its Turnaround Plan Today

I’m serious.

Flying coach would have been little more than a gesture, sure. But it would have said something at least. It would have shown that these knuckleheads aren’t completely tone-deaf. But they are tone deaf. They’re crap at the little things.

And in the end, it’s really all about the little things. When you add up all the little things, you get a big impact.

Take Honda, for example. Did you know Honda is in the soybean business? As Forbes tells it, “Honda couldn’t brook the sight of the shipping containers that brought parts from Japan to its nearby auto factories returning empty. So Harmony [a Honda soybean-growing subsidiary in Marysville, Ohio] now ships 33,000 pounds of soybeans to Japan.”

Is it any wonder the U.S. automakers are getting killed? Honda finds ways to eliminate waste just for fun. They approach logistical problems with the air of an excited kid. With Detroit, in contrast, the attitude seems to be “Not my fault… Not my problem… Not my job.”

Oh, sure, Detroit goes through the motions. In a recent cost-cutting move, GM even stopped buying batteries for the wall clocks and switched to cheaper pencils. Talk about rearranging deck chairs on the Titanic!

The difference is, no one has to tell Honda and Toyota to be efficient. (And I mean really efficient, not goofing around with pencils or wall clocks.) No one has to pound it into their heads that eliminating waste and constantly improving efficiency is, you know, maybe a good idea. That’s just how they do things.

Nor does the difference come down to country or geographic location. Honda and Toyota plants in the United States, staffed by Americans, do the same excellent work as the Japanese plants back home. (Same story with BMW and Mercedes.)

A Cynical Game of Chicken

Back to the reason for those jets: the Big Three’s performance on Capitol Hill was awful. They came with nothing but the same old rambling mess, threatening disaster and hoping for cash.

The worst of all was Rick Wagoner, the CEO of General Motors. What an utter slimeball this guy is. Wagoner actually tried to blame GM’s problems on “the global financial crisis” with a straight face – as if GM hadn’t burned through a whopping $72 billion in the past four years, most of it before the crisis hit.

GM is now burning up $2 billion in cash every month. They are well on the way to oblivion. And yet, amazingly, Wagoner admitted to no contingency plan, no plan “B” if rescue funds didn’t come his way (other then letting all hell break loose).

Wagoner came off as wooden and arrogant in his testimony, talking about all the successes his team has enjoyed – we’ve “taken this measure,” “cut that cost,” and so on – even while demanding a rescue. You’d think a little humility would be in order.

I think GM’s CEO is playing a cynical game of chicken at this point. (Chicken, if you’ll recall, entails two cars driving head-on at top speed. The object is to see who “chickens out” and swerves first.)

Wagoner knows the absolute havoc a forced liquidation of GM would wreak. He knows it would potentially vaporize large sections of the U.S. economy. Wagoner also knows that even if the Chapter 11 advocates get their way, taxpayers could still be on the hook for tens of billions – maybe as much as $70-80 billion – by way of pension liabilities for GM retirees. (The Pension Benefit Guaranty Corporation, or PBGC, backstops corporate pensions much as the FDIC backstops bank accounts.)

Wagoner furthermore knows he should be fired. GM has failed in the sense of no longer being a viable business – and thus its longtime CEO has failed too. To need a bailout is to have failed by definition… let alone a blackmail-style bailout in which the method of persuasion is putting a gun to the U.S. economy’s head.

And Then The Unions

And then we have the unions, who archly feel they have sacrificed “enough” – that their impossibly high-paying jobs and benefits should be preserved at all costs.

It’s understandable to feel a sense of entitlement. Countless studies show human beings have a very strong “ownership bias.” That which has been “ours” for an extended length of time takes on the feel of being ours by moral right.

But then again, so what. None of us can claim a “right” to something just because emotions wish it so.

The unions should remember what they are asking for – and who they are asking it of – when they demand that non-unionized taxpayers shell out for their perks. On a 2,000-hour work year basis, the average U.S. wage is nowhere near the Detroit union wage. Does it make sense for someone with a $70-per-hour guaranteed job to turn to someone with a $25-per-hour non-guaranteed job and say: “Dig in your pocket to help me?” Of course it doesn’t.

Adult Supervision Required

The trouble here is that the parties involved refuse to act like grownups. The Big Three CEOs continue to stick their heads in the sand. The unions cling to impossibly cushy terms, drawn up under dubious circumstances in much fatter times.

It’s true that outright failure remains a huge risk… maybe too big a risk. Those who say “let ‘em fail” forget the reality that “letting ‘em fail” could cost us big time. The risk of tens of billions down the drain – or hundreds of billions if the knock-on effect is severe enough – cannot simply be waved away. We don’t have the luxury of taking the high road without a pragmatic nod toward the cost of our actions.

The way I see it, that’s why this whole fiasco needs adult supervision in a serious way. In other words, these jokers need their heads cracked together. Hard.

The automakers are supposed to come up with a better plan in the next few weeks. “Show us the plan and we’ll show you the money,” Speaker Pelosi says.

As far as I’m concerned, the government needs to show the Big Three more than money at this point. A frying pan to the face might be good. If I were Uncle Sam, here is what I would say:

The bottom line is, in a fragile time where failure puts the whole economy in peril, incompetence puts us all in peril too.

We need someone smart and objective (and perhaps a bit ruthless) to hold sway over the knuckleheads on both sides of this table – the auto bosses, the union leaders, the dealerships, all of ‘em – and crack skulls until a fix is worked out that doesn’t rip off taxpayers or blow up the U.S. economy.

That’s my take anyway. Now let’s hear what some of you had to say (in response to last week’s piece on whether or not GM should be saved).

Well said Hervey. I agree 100% that the auto industry has no chance of surviving in its present form. (Or make that the Detroit half at least – the auto industry down South seems to be doing just fine.)

I wonder, though, if Chapter 11 is the best option (as opposed to some kind of binding arbitration). The trouble is that bankruptcy can be a long and messy process with no one really in charge. The risk of shutdown and chain-reaction failure in an undirected process like that is high. In my view we need someone competent in charge from the start.

Extremely lucky, Greg? Only for those fully stocked up on bottled water, canned food, and shotgun shells. I’ve always thought the Mel Gibson “Mad Max” movies were cool, but never had the urge to live one out.

Thanks Webb – can’t argue with you on the Big Three losing touch. That’s why I think whatever happens, current management needs to be shown the door.

Einstein once noted (paraphrasing here) that a problem can’t be solved by the same consciousness that created it. That statement really rings true in this case. The industry needs new blood and new talent – with profit incentives to draw that talent in. Overall I think Detroit just needs completely newmanagement, with the guts and the go-ahead to slaughter every sacred cow in sight.

Hmm. You’ve got me scratching my head with this one Wes… how can a car built in the United States be considered foreign made? If the workers are American, the suppliers are American, and the buyers are American, what’s truly “foreign” about an Ohio-made Honda or an Alabama-made Mercedes (except the company of origin)?

Also, what about the world beyond cars? On the whole, America benefits more from free trade than any other country in the world. We ship the lion’s share of the highest profit-margin products in the world. We are home to more world-class multinationals than any other country in the world.

Do we really want to shoot ourselves in the foot with a protectionist machine gun, then, just to save Detroit from self-inflicted wounds?

As for the truth about who really makes the best cars: so it’s actually the Big Three eh? I’m glad to hear it! But that begs another question – if the Big Three are truly superior, why do you see all those foreign models at the stoplight? Why is America so confused? Maybe it’s the marketing… that must be Japan’s secret weapon. Could Madison Avenue save GM?

Unfortunately the math doesn’t quite work. There are well over 200 million driving-age adults in the United States. Even if you cut the number of qualifying taxpayers down to just 100 million, that would still amount to $2 trillion at $20,000 a pop.

Phil, we can agree to disagree on Lehman. What I can’t tell is whether you recognize the fact that actions have consequences.

Letting all the scumsuckers crash might feel great – but where does that put us if the economy is left in ruins? Starting from zero isn’t really an option, unless, like Greg, we’re happy to sign up for the headaches of systemic financial failure, total credit evaporation, mass logistical failure, urban shutdown, and starvation riots in all major cities.

You can’t just shut down a complex system. Remember the movie Jurassic Park? Maybe it was a dumb idea to bring the reptiles to life in the first place. But letting the grid go down wasn’t a hot move either. It’s sort of like the fossil-fuels dilemma: if we are to transition to a saner world, we’ll have to do so one step at a time. Total collapse doesn’t take us back to a better place. It takes us back to square zero – nature red in tooth and claw.

As for little guys competing with the government – my money would be on the little guys in that kind of match-up. And if the goons succeed in killing our diehard entrepreneurial spirit, then we deserve to hand the flame over to Estonia or New Zealand or some other such place.

Interesting and well-articulated thoughts DhunMai. My guess is you’re probably closest to what the Obama administration will actually propose. Whether they succeed or not is anyone’s guess.

Happy Thanksgiving to all – and thanks again for the record outpouring of responses. I regret we could only post a small fraction of your worthy replies.

Justice Litle, Editorial Director, Taipan Publishing Group

Source: Cracking Heads at GM, Ford and Chrysler: Your Responses on the Big Three Bailout

This from Money Morning:

The U.S. housing market is already being pounded by the “perfect storm.” And the outlook for the New Year is for the stormy weather to continue – and probably to get worse.

As if a locked-up credit market and tidal waves of foreclosures weren’t already enough, we’re now watching unemployment climb and consumer confidence plunge.

But even when the housing market is taking on water, there are ways to stay afloat. Indeed, investors nimble enough to maneuver can even make money.

The watchword on this market, though, is caution.  If an investor decides to test the waters, beware of the extraordinary financial undertow.

Here’s a look at what’s happening now, and what the implications there are for investors in the New Year.

Rising Unemployment Feeds into Sinking Demand

The grim reality is that skyrocketing unemployment is a major threat to the recovery of the U.S. housing market.  And consumers shackled with record levels of debt are unlikely to ride to the rescue this time.

Since this recession is expected to be long and deep, economists are projecting high rates of unemployment. And the latest statistics released by the U.S. Labor Department show the crucial jobs market deteriorating at an alarmingly rapid pace.

The U.S. unemployment rate jumped to a 14-year high of 6.5% in October as another 240,000 jobs were cut – an uptick from 6.1% in September and the 10th month in a row the jobless rate has risen. Most forecasts are calling for unemployment to spike as high as 8.5%, which would be the worst showing since 1980.

So far this year, a staggering 1.2 million jobs have disappeared. More than half the decrease occurred in the past three months alone, Money Morning reported in its “Outlook 2009” series economic forecast story. Even worse: A year ago, job cuts were concentrated in the financial-services and homebuilding sectors. Now they’re rising across the board; virtually every part of the economy is feeling the squeeze.

For instance:

• U.S. automaker Chrysler Corp., one of Detroit’s wheezing “Big Three,” is laying off 25% of its white-collar work force of 18,500.
• Appliance maker Whirlpool Corp. (WHR) recently announced it would cut 5,000 jobs to cope with declining sales.
• Worldwide shipping giant DHL, a subsidiary of Deutsche Post AG, is laying off 9,500 people, and threatening to close its U.S. distribution center.
• Onetime Internet search giant Yahoo! Inc. (YHOO) plans to let 1,100 workers go – on top of the 1,000 already jettisoned in January – the result of several botched merger attempts.
• Ailing banking giant Citigroup Inc. (C) heaped more bad news on the financial sector, announcing whopping 50,000 layoffs in the next 12 months.

Layoffs of this magnitude are more than a mere shot across the bow of the housing market – they’re actually a direct hit amid ship. People who are unemployed cannot buy homes. Period. But even consumers who are afraid that they might be joining the jobless ranks are loath to take on the added risk – making them unlikely candidates to buy a new home.

Foreclosures Still Rising

As unemployment climbs, foreclosures will continue to multiply. That only exacerbates an already unappealing combination – more houses being dumped onto the market even as the pool of potential buyers grows increasingly smaller.

RealtyTrac Inc. reported that more than 81,000 homes were foreclosed on in September – 71% increase from the same period just a year ago. For 2008, foreclosures rose to a record 765,558.

“I wouldn’t be surprised to see foreclosures increase as the economy slows down,” said Rick Sharga, RealtyTrac’s vice president of marketing. “The people living paycheck to paycheck are at risk if they lose their jobs. It will cause more people to lose their homes.”

And while foreclosure volumes are outpacing projections, the cumulative losses by banks on bad mortgages may have yet to hit their books.  Since loan losses don’t get recorded until the property is sold, it’s likely there’s a lot of bank-owned inventory that hasn’t been unloaded – meaning there may be more foreclosures out there investors don’t yet know about.

“We are in uncharted waters,” said Brian Bethune, an economist at research firm Global Insight (IHS).

Making the waters even rougher was the decision by Standard & Poor’s Inc. (MHP) to cut the ratings on $34.1 billion of “Alt-A” residential loan packages that had been issued in 2006 and 2007.  Alt-A mortgages are those written with little or no documentation, i.e., without proof of income or assets. Even worse, S&P put an additional $351.7 billion of Alt-A securities up for possible review reflecting the rating company’s “belief that further declines in home sales will depress prices further and push loss severities higher than we had previously assumed.”

On top of all that, record numbers of borrowers are already “underwater,” or “upside down” on their mortgages, making it more attractive for them to default by simply walking away, than to hang around and drown.

About 18% of homes nationwide are now “upside down,” according to a report from First American CoreLogic.  Almost two-thirds of those homes are in just seven states: Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio. In Mountain House, Calif., an unincorporated planned housing community located in the foothills of the Diablo mountain range, the housing crisis right now has nearly 90% of the homeowners owing more on their houses than they are worth – the highest percentage in the country, The New York Times reported on Nov. 10. The average homeowner is underwater by $122,000, the newspaper said.

Other areas are suffering almost as much: In Nevada, alone, borrowers owed a whopping 89% of the value of their homes.

Despite such dramatic anecdotes, this housing slump is nationwide in nature. It’s more severe than any other such downturn since World War II, mostly because of the risky lending practices that inflated the real-estate bubble in the first place.

The Downdraft in Housing Prices

Meanwhile, while unemployment rises, the downward spiral in housing prices is gaining momentum.

“The No.1 thing that drives housing values is incomes,” said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. “When incomes fall, demand for housing falls.”

The S&P/Case-Shiller Index of home prices plunged 16.6% in August from the year before, following a 16.3% drop in July. The index has fallen every month since January 2007 (See accompanying chart, “Plummeting Prices.”).

Prices were lower in all 20 of the major cities the index covers, with Phoenix and Las Vegas down nearly 31% from last year.

Nationwide home prices have fallen 20.3% since peaking in June 2006.

And the skid isn’t over.

According to Fitch Ratings Inc., U.S. home prices will fall another 8% to 10% before they show signs of stabilizing.  According to a Fitch forecast, the peak-to-trough price decline will be 30%.
And still one other reliable indicator of housing prices seems to confirm that, in many cities, home prices still have further to fall.

According to analysis by Moody’s Investors Service (MCO), Miami houses are right now priced at about 22 times annual rental income – versus an average of just 15 over the past two decades. This suggests that a home currently priced at $350,000 is actually worth only $238,600 – meaning the price would have to drop 32% to reach the fair-value point.

Congressional Missteps

In an effort to help more than 400,000 homeowners avoid foreclosure, Congress came up with the “Hope for Homeowners” program.  Unfortunately, in their infinite wisdom, federal lawmakers designed a program that is almost certain to fail.

The program supposedly makes as much as $300 billion available to at-risk borrowers, enabling them to refinance into a 30-year, fixed-rate loan insured by the Federal Housing Administration (FHA).

The biggest mistake Congress made was to make this program strictly voluntary for participating banks, experts say.

Just as bad: In an effort to make the program more affordable for beleaguered homeowners, it also requires the lenders to write the value of the home down to 90% of its current market value. So in a downtrodden market like Phoenix, if a lender holds a $400,000 mortgage on a home currently appraised at $300,000, the bank would have to settle for a new mortgage worth only $270,000.

Needless to say, the response has been underwhelming.  After four weeks, a whopping 79 people had applied for the program.

Not to be deterred, the Federal Deposit Insurance Corp. (FDIC) is proposing another package, which would extend the terms of at-risk loans from 30 years to 40 years, with interest rates as low as 3.0%.  Housing payments for delinquent borrowers could not exceed 38% of gross monthly income.

In order to sweeten the pot for lenders, the government would share as much as 50% of the losses if a borrower ended up in default anyway.  In addition, the FDIC would pay servicers who process these new mortgages a fee of $1,000 for each re-worked loan.

FDIC officials estimate that this anti-foreclosure program would cost $24.4 billion, and would prevent 1.5 million of the 2.2 million at-risk homes from falling into foreclosure.

But that also means the taxpayer will be on the hook for half the value of 700,000 mortgages that do fail.

Can you say “fuzzy math?”

Homebuilders on the Ropes

You can probably guess where this leaves the nation’s homebuilders – gasping for air.

D.R. Horton Inc. (DHI), one of the nation’s biggest homebuilders, just wrote down $1.1 billion in land, deposits and inventory in the third quarter, as sales fell by half. The Ft. Worth, Tex.-based company expects to post a fourth-quarter net loss of between $800 million and $900 million, 18 times more than it lost in the fourth quarter a year ago.

Other builders are in similar shape. Pulte Homes Inc. (PHM) and The Ryland Group Inc. (RYL) just reported quarterly losses of $280.4 million and $65.7 million, respectively.

Even Toll Bros. Inc. (TOL), which caters to the high-end buyer, said fourth-quarter revenue fell 41% from the same period last year.

The Forecast for 2009: More Pain Before Any Gain

No matter what happens in the U.S. housing market, until a large inventory reduction takes place, housing prices will not stabilize.

In a recent Forbes magazine column, A. Gary Shilling, president of an economic consulting firm of the same name, said the worst is yet to come. Says Schilling: “Excess inventory, the mortal enemy of prices, now amounts to 1.8 million homes, which is a huge number relative to the net demand (new families minus departures due to deaths and moves to nursing homes) which is only 1.5 million a year.”

And one of the architects of the U.S. housing debacle – former U.S. Federal Reserve Chairman Alan Greenspan – is also downbeat: “At a minimum, stabilization of home prices is still many months in the future,” Greenspan said in an October speech.

The question that needs to be answered, then, is this: In the current atmosphere, does anyone believe we actually need homebuilders to add even one new home to the market?

Some pundits claim this may be a golden opportunity to short U.S. homebuilders. Even though they’re already down 80% from their highs, the deadly combination of skyrocketing unemployment, deflating prices and tight credit continue to spell further pain for the industry.

Short sellers would obviously look at any of the companies mentioned above. They might also consider iShares US Home Construction (ITB), the prominent exchange traded fund (ETF) for the group. However, any such move would have to be made with extreme caution.

The reason: All bets are off if the new Barack Obama Administration implements a moratorium on mortgage foreclosures. There’s also the possibility that Obama will be able to shepherd through any one or more of the proposed mortgage guarantee programs now on the table.

Those kinds of moves could provide a boost to homebuilders and leave short sellers in the grips of an uncomfortable squeeze – just like the millions of homeowners saddled with mortgages they can no longer pay.

Source: New Year U.S. Housing Market Forecast: No Gain, More Pain

Bear in mind that each new economic report, earnings statement, news report or trading session represents a new opportunity for fear and uncertainty to reemerge.

Fortunately, next week’s economic calendar remains quite light, although retailers may just weigh in with “doom-and-gloom” holiday predictions.  Earnings season may be weak as well (with even more pessimistic outlooks), so investors should not overreact even if Texas Instruments Inc. (TXN), Halliburton Inc. (HAL), Amazon.com Inc. (AMZN) and others fail to meet expectations.  Volatility should continue and the days of triple-digit index moves (often up and down in the same day) may be here for a while.

So try not to get so overwhelmed with the seemingly never-ending challenges and uncertainties: The credit crisis, weak economy, plunging stock market, presidential election, etc.  Take everything one day at a time. The government actions are starting to thaw out the credit concerns and lending/borrowing should return to a somewhat normal level in due time. Declining energy and commodities prices should improve the inflation picture, which will help the consumer and allow the U.S. Federal Reserve to better focus on the struggling economy. Stocks tend to be leading indicators and often begin to rise even when the economy remains in the midst of a recession. The election (regardless of the victor) represents a new beginning, a new direction, a new attitude, and hopefully renewed confidence.

Market Matters

So much for less government.  With the presidential election at the homestretch, the candidates pushed their respective plans to rescue the economy in an attempt to appeal directly to Main Street folks like Joe the Plumber (basically more tax cuts vs. “spread the wealth”).  The bailout moves continued as U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. (a self-proclaimed free-market capitalist, if there ever was one) announced that the government would invest $250 billion into the nation’s banks to stabilize the financial system.  Proponents refused to label it as”nationalization.” But don’t tell that to the pundits on Fox News this past weekend: Some went as far as to question whether the U.S. government is embracing full-fledged “socialization.”

The Federal Deposit Insurance Corp. (FDIC) will be expanding its insurance program on non-interest bearing accounts, a move designed to assist small businesses. Throughout Europe and Asia, similar moves also were approved, as the global efforts appeared to be well coordinated.  The Swiss National Bank took over about $60 billion of bad assets from UBS AG (UBS), leaving the institution with one of the cleanest balance sheets around.  Morgan Stanley (MS) received a $9 billion investment from Mitsubishi Bank UFJ Financial Group Inc.  (ADR: MTU), giving the Japanese giant a 21% interest in one of the last remaining domestic financial super-powers (and at better terms than initially negotiated).  JPMorgan Chase & Co. (JPM) posted an 84% decline in third quarter profits (which still somehow bested analysts’ pessimistic expectations).  Likewise Wells Fargo & Co. (WFC), Citigroup Inc. (C), and Merrill Lynch & Co. Inc. (MER) (still under its pre-Bank of America Corp. (BAC) brand) suffered through “challenging” quarters, to say the least, and their short-term outlooks do not look any better. (Bring on those direct government investments).

While the technology sector struggles from dire expectations of future corporate IT expenditures, eBay Inc. (EBAY), Google Inc. (GOOG), Intel Corp. (INTC) and International Business Machines Corp. (IBM) all announced relatively strong quarters – IBM even “pre-announced” its strong results – and chipmaker Advanced Micro Devices Inc. (AMD) reported a narrower-than-expected loss.

Intel, IBM and AMD were all three topics of Money Morning’s new “Hot Stocks” feature, which chronicles the prospects of companies that are in the news.

Microsoft Corp. (MSFT) apparently still thinks a deal to acquire Yahoo! Inc. (YHOO) would make “economic sense,” though that $33 a share offer most likely would no longer apply for a stock trading below $13 a share.  General Motors Corp. (GM) intensified its merger talks with Chrysler Corp. and continued to explore sale options for its Hummer unit. But does $70 a barrel oil make those cool gas-guzzlers look attractive again?

Speaking of oil prices, the “black gold” plummeted to its lowest level in 13 months as prospects for a recession – or worse – continued to dampen energy demand.  Goldman Sachs Group Inc. (GS) became the first to predict a decline as far as $50 a barrel, ironically just a few months after its analysts called for $200 oil over the next two years.  The 50% percent slide in prices has prompted a panicking Organization of the Petroleum Exporting Countries (OPEC) to schedule an emergency meeting on Friday in Vienna, Austria. It will be the cartel’s 150th meeting. Gas prices are following in step as they pushed downward – in some areas through $3 a gallon, a 25% drop from the $4.11-per-gallon highs set in July.

Even so, as Money Morning reported, Merrill Lynch sees oil at $150 a barrel and gold at $1,500 an ounce, though its analysts provided no time frame.

Volatility continued as triple-digit-daily moves remain the norm.  Last Monday, the Dow Jones Industrial Average broke its eight-day (2,400 point) losing streak with a 936-point gain, its largest ever recorded.  Profit-taking and hedge fund redemptions followed, though bargain hunters reemerged at week’s end (until the final hour of trading).  The limited investor confidence was a welcome sign after the mass hysteria of the past weeks.

The credit markets seem to be slowly (but surely) recovering with the government actions, though some banks remain hesitant to lend and businesses and consumers have been slow to borrow.  Then again, given time, more government just may work.

Economically Speaking

At this point, there should be no real surprises in terms of weak economic data.  However, when September retail sales was reported as down 1.2% (for the third consecutive month) and the Philly Fed survey plunged to its worst showing in 18 years, investors were surprisingly caught off guard.  While the “official” definition of a recession is two consecutive quarters of negative growth, many analysts claim the country is already mired within one’s midst and the numbers will continue to reflect such weakness well into 2009.  The Fed Beige Book depicted that each region of the country is struggling and U.S. Federal Reserve Chairman Ben S. Bernanke did not rule out an additional rate cut at (or before) the Fed’s late October meeting.  Housing starts fell to the lowest level in 17 years and many believe that any recovery must start with a rebound in this long-suffering sector.  In fact, construction activity has plunged over 30% since September 2007.  (Could the next government intervention involve some direct mortgage relief for ailing homeowners?).

Now for some positive news (for a change).  The inflation picture is starting to look more promising as falling energy and other commodity prices begin to work their way through the U.S. economic system.  The wholesale inflation gauge – known a the producer price index, or PPI, fell for the second straight month, and consumer prices remained flat from August as gasoline prices slowly retreated.  Bear in mind, just a few short months ago, inflation was high on the Fed’s radar screen as Bernanke and friends were forced to tackle a weak economy and rising prices.  While the Fed’s “challenges” are far from over, talks of higher rates have disappeared and policymakers can focus all their energies on repairing the sluggish economy. 

Source: Here’s Why the Stock Market Relief of Late Last Week May Not Last

Indeed, the Wall Street consensus called for Ford to lose 27 cents per share – instead, Ford lost 62 cents per share. Even though Ford outperformed in its European, South American and Asia-Pacific operations, the massive undertow of its U.S. operations was just too much to overcome.

That’s not really a surprise, you see, since auto sales in the United States are the weakest they’ve been since 1993, reports J.D. Power and Associates.

U.S. auto sales have been shot down by three key factors:

• The negative wealth effect of the U.S. housing market.
• The credit crunch for the last year or so.
• And, lately, the meteoric increase in the price of oil and gasoline.

All of these detract from consumer wealth and purchasing power even as they weaken the general economy.

But there’s an additional catalyst for Ford’s malaise: While economies of scale in the car industry are very important and volume is critical to allow to keep manufacturing costs down, compensation for Ford’s work force is problematic.

For decades, Detroit’s “Big Three” – Ford, General Motors Corp. (GM) and Chrysler Corp. (now Chrysler LLC) – which once ruled the worldwide auto industry, have been losing their leadership. Call it the typical story of success sowing the seeds of destruction.

With their global dominance of the auto industry, the U.S. Big Three grew complacent and, despite their market and technological leadership, fell into the trap of granting overly rich compensation-and-benefit packages to their work forces. How rich? The pension plans were super-generous and the health-care plans required no co-payments from workers.

Then came the double-whammy that put the U.S. auto sector on a path to destruction: U.S. health-care costs ballooned and carmakers watched their work forces age, forcing the automakers to assume a massive cost burden – one that they ultimately couldn’t afford.

By 2000, in fact, that cost burden was so huge that the companies were no longer making money from automobile production; any profits they were reaping actually came from their auto-financing arms, which finance auto sales.

These longer-term trends left Ford and GM in a highly vulnerable position. And it likely blunted innovation and kept the companies from quicker development of hybrid vehicle lines.

Then came the energy bubble.

The meteoric rise in the price of oil has put an already heavily cost-burdened U.S. auto industry in a near-panic-mode situation, since customers have shifted away from Detroit’s line-up of trucks and sport-utility vehicles to smaller, more-fuel-efficient cars and hybrids offered by Japanese rivals.

With Ford, at least, there has been major progress on the cost-cutting front. In the first quarter, under the leadership of Chief Executive Officer Alan R. Mulally, the very able engineer who turned around The Boeing Co. (BA), Ford was able to secure a new contract with the United Auto Workers Union that allowed for reductions in 20% of personnel. This allowed Ford to start the process of discontinuing unprofitable models without having to keep the workers employed.

At the same time, Ford announced cuts of another 4,000 employees in the most recent quarter, and is in the process of starting another round of layoffs of some 15% of salaried personnel.

Ford opted to cut loose Land Rover and Jaguar to raise cash and improve profitability. It’s launching new, fuel-efficient cars and has dramatically improved the quality of its products – especially its cars.

To deal with the recent effects of the economy, it has postponed the launch of its redesigned F-150 pickup truck, which has been the industry’s standard-bearer for decades. That’s a huge move, given that the Ford pickup truck is an icon in the industry, with consumers, with collectors, and even with hot rodders – and has been for generations — reaching all the way back to the Ford Model T and Model A trucks of the 1920s and 1930s.

Managing liquidity and maintaining enough cash to complete the restructuring plan is a big challenge for Ford, given the shifting market tastes and the highly uncertain economic environment. Should the company successfully navigate these dangerous financial straits, Ford’s stock will likely enjoy a major increase, generating huge capital gains for current stockholders.

But there is a significant probability that the company’s equity holders will get wiped out and the bondholders will end up owning the company. This reality is reflected in the upfront cost of almost 30% in credit insurance needed for certain Ford obligations.

Therefore, while Ford’s restructuring plan seems to be moving forward well and even accelerating in pace, and Mulally has distinguished himself with his execution, the unpredictability of oil prices and the slow resolution of the housing crisis ahead makes this stock very speculative. I cannot recommend it without warning that Ford shareholders must accept a large degree of risk and accept the potential for some pain.

A much better play, yet also with the potential for pain, is to look for convertible debt, with the view that even in a restructuring, bondholders will end up owning the company and capture the huge upside that this franchise will have once it finishes dealing with its problems and is able once more to deliver competitively the high quality products that it was known for.

Action to Take: BUY Ford Motor Co. (but as a highly speculative position). This once-great U.S. automaker may once again find its way, but possibly only after the bondholders end up owning the company. If you are going to buy Ford shares, keep the position small.

A Better Buy: Ford debt, especially senior convertible issues.
[Editor’s Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a brand-new Money Morning feature that so far has covered Cisco Systems Inc. (CS), ABB Ltd (ADR: ABB), Cummins Inc. (CMI), and Chevron Corp. (CVX). We continue to appreciate all the readers who are writing to us, suggesting stocks they’d like to see analyzed.]

Source: Buy, Sell or Hold: Ford Motor Co.