- The Washington Times - Friday, December 26, 2008

The cost to taxpayers of the bailout for Detroit automakers could rise to more than $100 billion if the companies fail to radically restructure as the Bush administration is demanding in exchange for federal loans, financial analysts say.

President Bush agreed to hand over more than $13 billion in loans to domestic carmakers Dec. 19 as a way to help them through lean times, but continuing delays in reorganizing the companies’ finances and wage costs threaten to make that benefit little more than a down payment.

“The Big Three’s problems will not be resolved for $14 billion. We estimate it will cost the federal government between $75 billion and $125 billion to keep the Big Three out of bankruptcy over the next two years,” said Mark Zandi, an analyst with Moody’s Economy .com.

General Motors Corp. has put off serious negotiations with unions and creditors until after Jan. 5, and the United Auto Workers union has rejected the wage and benefit concessions sought by the Treasury Department shortly after the bailout was announced by Mr. Bush.

On Tuesday, UAW President Ron Gettelfinger told a Detroit radio station that GM’s bondholders must first agree to major concessions before the union will consider making further sacrifices.

Such delays and obstacles will make the tab for taxpayers grow, requiring far more than the $13.4 billion in loans provided by the Treasury, analysts say.

GM has tapped out all its private sources of loans and recently has been burning through $3 billion to $4 billion in cash every month to stay in business. Its $9.4 billion of Treasury loans are expected to get the company only through mid-February, when another $4 billion may come available if Congress gives the Treasury another $350 billion to refill its financial bailout coffer.

Chrysler LLC is in similar straits, but has shown more inclination than GM to carry out the major downsizing Treasury is demanding in exchange for $4 billion in loans. Chrysler told its dealers on Monday to brace for deep cost cuts, and has said it is willing to give workers as well as bondholders equity shares as part of a major restructuring. It “is working tirelessly around the clock, and the company has no higher priority than to satisfy the loan conditions laid out by the government,” said Chrysler spokeswoman Lori McTavish.

The Treasury’s stiff terms include requiring bondholders to accept company stock in exchange for two-thirds of their bond holdings, and requiring union workers to agree to wages and benefits packages that are similar to those earned by U.S. workers at Nissan, Toyota and Honda plants by the end of next year. The companies’ unions also would have to accept some payments of stock rather than cash into trust funds set up to pay retiree health benefits.

While the bondholders already have agreed to the draconian cuts, the UAW balked when such tough terms were demanded by Senate Republicans earlier this month, leading to the defeat of a bailout bill in Congress. But the union thinks it will get a more sympathetic ear from President-elect Barack Obama, who has said he doesn’t want a deal that goes too hard on workers, and with the more heavily Democratic Congress convening in January.

“The Big Three’s stakeholders, from creditors to vendors to the UAW, will concede just enough to satisfy policymakers and get the funds they need to avoid bankruptcy,” said Mr. Zandi, which is why he expects the bailout costs to balloon.

Moody’s economists agree with the automakers that a bankruptcy of any or all of the firms would be devastating for the economy, and could ultimately cost the government far more than a bailout, Mr. Zandi said. But avoiding such a disaster scenario also will come with a hefty cost to taxpayers.

Under a government-supervised reorganization, the automakers could become significantly smaller, and Chrysler might even be dismantled and sold off, he said. But it’s also possible that the legal and political obstacles that have prevented major downsizing in the past will prevail, and taxpayers will be left on the hook, he said.

“Given the depressed auto market, a positive cash flow cannot be accomplished soon, and GM and Chrysler will be asking for more federal loans” by the end of March, when they are required to present the government with plans to achieve financial viability, said Peter Morici, business professor at the University of Maryland.

“Given the likely duration of the recession, loans of well over $100 billion will be needed” from taxpayers, much of which may never be paid off, he said.

Mr. Morici said the major concessions sought by the Treasury are close to what’s needed to make the companies viable and profitable again. But he too questioned whether Detroit will achieve them.

The loan agreement permits the automakers to avoid making the concessions if they can show on paper that they can achieve the same results through other means. That gives them room to obfuscate and fudge the numbers as they have in the past through various complicated bargaining agreements, he said.

“Enter the accounting magicians,” Mr. Morici said. “A few quick pen strokes and a lousy business plan can be made a winner, with costs to taxpayers in unpaid loans only becoming apparent years later.”

The March 31 deadline will pose a test for Mr. Obama, who owes his election in part to union supporters, Mr. Morici said.

“Gettelfinger can be expected to try to sell Obama labor agreements that appear to create more concessions than are real and leave the Detroit Three in the red going forward,” he said. “If Obama caves to union pressures and chooses to subsidize the automakers, other unionized industries will line up.”

But Mr. Obama, like Mr. Bush, also has warned the auto companies that they need a major restructuring, and that taxpayers’ patience with Detroit is running thin.

Standard & Poor’s Corp. came to the conclusion earlier this week that Washington, Ottawa, and other world capitals will tire of Detroit’s constant pleas for money and eventually will let them slip into bankruptcy.

“We do not believe governments are willing to provide open-ended support to these companies,” said S&P; analyst Robert Schultz.

Mr. Bush clearly intended the loans to provide only a “brief window” for major restructuring or an orderly bankruptcy filing by the companies, he noted. And while Mr. Obama has the option of giving them more loans next year, he may also decide simply to escort them to the bankruptcy courts, he said.

“We believe the bankruptcy risk remains high for GM and Chrysler, as well as for Ford Motor Co., for the rest of next year,” even with government loans, Mr. Shultz said, as the companies will still have to grapple with falling sales, credit markets that are virtually closed to the companies and their finance arms, and even the possible failure of suppliers.

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