Tough Terms for Detroit Bailout

In extending help to Detroit, Congress has the whip hand and will be using it

Congress, having worked through the weekend, delivered a bill on Monday, Dec. 8, to the White House that is designed to bail out the ailing U.S. auto industry with $15 billion in loans. Despite lingering objections by the Bush Administration and Congressional Republicans, it looks as though the aid package will pass.

Speaker of the House Nancy Pelosi (D-Calif.) agreed over the weekend to tap a $25 billion loan program from the Energy Dept. that was meant to help automakers and suppliers retool factories to build greener vehicles. The White House said it would not consider approving any other source of funds, such as the $700 billion Wall Street bailout fund, a measure favored by Democrats.

The primary sticking point for the White House and Republicans is that there is no clear-cut language in the bill requiring the automakers to restructure their enormous debt before they take on new debt to taxpayers. "Once bond holders see that the government is in this, they will have no incentive to write down the value of the debt they hold," said Senator Bob Corker (R-Tenn.), a member of the Senate Banking Committee who has been influential during the negotiations despite his freshman status. "These companies cannot be restructured for success without a complete restructuring of their debt and labor and retiree obligations, and the debt is the biggest issue," said Corker, who added, "I wanted to see more teeth in the bill."

Unions Looking for Board Seat

General Motors (GM), for example, already has $42 billion in secured and unsecured debt, plus it owes the United Auto Workers $21 billion in future payments to a fund meant to pay health-care benefits for workers and retirees. Corker and other analysts have recommended bond holders take a writedown of as much as 20% on the face value of the debt, and accept a swap of stock for another 50% of the bonds' value. They are also encouraging the union to take equity for half the future health-care payments.

Such moves would make the union, the bond holders, and the government the largest owners of GM. To that end, the UAW is, according to congressional aides, looking for a seat on GM's board as part of the government-supervised overhaul and oversight of the companies.

Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said Monday there is some negotiating to do on final language, but that he is confident that the framework for a vote this week is in place.

Welcome to the "Barber Shop"

General Motors shares rose by 21%, while Ford Motor (F) shares climbed 24% on the news. Chrysler is private and majority-owned by private equity firm Cerberus Capital Management.

Ford's balance sheet is in better shape, though. It has said it will not be seeking a short-term bridge loan.

Pelosi said Monday that she feels the bill will be successful in bringing stakeholders to the table to make sacrifices, though there are few specifics spelled out in the draft bill. "I call this the barber shop," said Pelosi. "Everyone is going to get a haircut—management, bond holders, labor, dealers." The term "haircut" describes when stakeholders agree to take less than what they are owed to avoid a Chapter 11 bankruptcy in which they might end up with nothing.

The bill, expected to be voted on by Wednesday, Dec. 10—if the White House and Republicans, whose votes are needed, can hammer out a compromise on the language—puts many limits on how the automakers can operate as long as they remain indebted to the taxpayer.

• No stock dividends, no executive bonuses paid to the top 25 executives, no golden parachutes, no owned/leased corporate aircraft.

• All transactions exceeding $25 million would be authorized by a "car czar" to be designated by the White House.

• The car czar, which some are calling the "Financial Viability Advisor (FVA)," would establish guidelines and measurements of success for each company by Jan. 1, and then report to Congress by Feb. 15 as to their progress.

• Speaker Pelosi said the companies' financial viability would be determined by the FVA, Congress, and the Government Accountability Office (GAO) by Mar. 31. By that time, all the money needed will have been allocated by legislation, the Treasury Dept., or a combination of the two.

• The companies would have to drop all lawsuits and opposition to meeting Federal and state regulations on fuel economy and greenhouse gas emissions. If this provision makes it through the White House, it paves the way for California's emissions rules, tougher than those proposed at the federal level, to be the de facto national standard.

• The Treasury would get stock warrants in the companies equal to 20% of the total aid package to each automaker.

• Automakers would pay 5% interest on the loans for the first five years. The FVA can set longer terms on the loans, but it would cost the companies 9% after five years.

• Open books at the automakers would be reviewed by the FVA and GAO.

• The companies must explore with the FVA the viability of using closed auto factories to build transit buses and rail cars in demand from many cities and municipalities.

The selection of the car czar, or FVA, will be of keen interest to both political parties and the companies. One name floated by congressional and White House staffers is Ken Feinberg, a lawyer who oversaw the federal September 11 victims' compensation fund. Other names to surface include that of former Massachusetts Governor Mitt Romney, a former business owner and financier who has experience in corporate restructuring, a familiarity with the auto industry, and a facility for dealing with government bureaucracy.

GM officials said they support the idea of a car czar and have been prepared to have its operations scrutinized and micromanaged to the point where every transaction of at least $25 million is subject to oversight. "We are very prepared to work with an oversight board," said GM Executive Vice- President Troy Clarke.

Of course, the automakers don't really have much choice. GM and Chrysler have both said they will run out of cash by the end of the year.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.