Monday, December 8, 2008

Road Kill

I was shocked! shocked! to learn last week that, after careful review, Detroit's bailout request of $25B was $9B short of the mark.  Hope Congress acts quickly on the bailout before $34B becomes $40, $55, and so on.... (which, of course, it will).

I've seen this played out elsewhere, even in the media biz, albeit with far fewer zeroes attached.  The scenarios are similar, though---a high-stakes 'bait and switch' in which lenders or equity stakeholders face an ever-rising tide of financial need after agreeing to the original financial commitment.  Human error and subjective judgments about trends in revenue and expenses are frequent in business, and most investors understand how the game is played.  Does Congress get it?

With the auto bailout, though, we have political theater, not rational business decision-making.  So, even though human livelihoods and well-being are at stake, the last-minute scramble for some kind of response before the worst-case news headlines unfold is frightening, with the potential for a Big Mistake written all over it.  Case in point:  Chris Dodd, who hasn't drawn a non-government paycheck in almost 35 years, insists that GM CEO Wagoner be dismissed as a precondition to government bailout. Well, ah....gee, ok, words fail me.

Senior management in Detroit has been pooping on us for years, starting with the Chrysler bailout under Iacocca, and we've been obliging with pooper scoopers instead of an enforced change in diet.  Last I checked, GM was hemorraging cash at the rate of $2B a month, so even $25B spread around the Big Three is clearly a bandaid that is flushed away in a matter of months.  These businesses are losers.  It's taken 20-30 years of mismanagement and union greed to create this predicament, and it will take years to solve it.  Change the CEO now if you want, and while you're at it, the CFO COO CMO and C3PO, too!  

I wrote a few weeks back that the solution lies in an orderly, unconventional neo-bankruptcy, ensuring continued operations, employment, and so forth for the auto manufacturers until these businesses can be sold off in part or in whole to new owners (preferably the Japanese).  This is a medium term solution, though, and the financial needs are immediate, probably in the neighborhood of the $100+B figure being suggested in news reports during the last 24 hours.

Here are some items we need in the recovery plan:

1. A credit facility of up to $100B, drawn down under the supervision of a business/government oversight board.  Loans will be converted to preferred equity and held for sale upon the disposition of the businesses or the assets.
2. No dividends paid until 2 consecutive years of profit.
3. Senior management required to sign on for a minimum of three years, at base salaries to exceed no more than 15x average yearly salary of blue collar work force.  Significant LT comp plans to be awarded, including generous cash and stock incentives for achieving profit goals over the next three years.
4. Hourly wages reduced by 10-20% for factory workers; these $$ will be placed in escrow for return to the work force if the companies achieve profitability for a minimum of 2 consecutive years.  Health care and other significant retirement benefits reset to average levels prevailing for non-automotive blue collar employees in the Midwest region.
5. Auto dealers and the federal government will jointly fund a $3-5,000 per car rebate plan for consumers that will encourage new car purchases (1 per household) of domestic manufacturer high fuel efficiency vehicles at any time over the next 24 months.  

Gentlemen, start your engines......

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