U.S. Auto Manufacturers to seek $25B Bailout

[jlomon]

http://www.thestar.com/Business/article/483749

U.S. carmakers seek $25B bailout: Report

Aug 22, 2008 11:31 AM
Reuters news Agency

DETROIT–The Big 3 Detroit-based automakers are seeking about $25 billion (U.S.) in federal loans as they struggle to ride out a steep downturn in U.S. auto sales, The Wall Street Journal reported on Friday.

Lobbyists for the U.S. automakers – General Motors Corp , Ford Motor Co and Chrysler LLC – briefed White House officials, as well as U.S. Rep. John Dingell and other Michigan Democrats, on a possible bailout and plan to unveil the proposal after Labor Day, according to the report.

The plan is for the government to lend some $25 billion to the automakers in the first year at an interest rate of 4.5 per cent, or about one-third what the companies are currently paying to borrow, the report said.

Under the proposal, the government would have the option of deferring any payment at all for up to five years, the article said.

Representatives at GM, Ford and Chrysler were not immediately available for comment.

In a letter to U.S. Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi, Michigan congressmen sought up to $25 billion in low-interest credit for U.S. automakers and parts suppliers from the federal government.

"This incentive program will make it more economically feasible for U.S. auto manufacturers and part suppliers to retool their facilities by providing low-interest credit," said the letter, dated Aug. 1.

"The federal government must be a strong partner in the investment in the advanced technologies," the letter said.

GM chief executive Rick Wagoner said on Thursday that the top U.S. automaker was seeking federal loan guarantees for itself and its suppliers. He declined to say how much the company was looking to borrow under such a program if it were approved by the government.

The embattled automakers are closing truck plants and laying off thousands of workers in response to changing consumer tastes and to conserve cash at a time when U.S. vehicle sales are hovering at decade lows. At the same time, the companies are ramping up investment in more fuel-efficient small cars, hybrids and electric vehicles in response to record gas prices.

The Detroit Free Press reported earlier this month that executives at GM, Ford and Chrysler met and agreed that they would need about $40 billion to ride out their current troubles, and the way out of the losing streak would be a government bailout.

[Dee8go]

Where's Lee Iacoca? Get Lee on the phone . . .

[pawoSD]

They're all doomed if things keep going the way they have been. I think it would be awesome....then we can usher in a new era of efficiency, safety, technology, and alternative fuels. I would not care at all if they all disappear.

[SwampYankee]

Our regular light truck dealer was in today. Between rebates and the Employee Pricing program, 1/2- and 3/4 ton pickups (what our salespeople drive depending on how much they carry) are starting at almost $10K off sticker. Tahoes and Suburbans are close to that.

[Dee8go]

They'll never be able to compete until they get some relief from the pension and health benefits commitments. They're in the same boat as Social Security.

[75Sv1]

Looks like they are trying to preserve the last American bastion of over paid corperate executives. Can we say corperate welfare. Didn't the tax payer give them 80 some billion in the mid 90's to produce the car of the future with 80 mpg? Where did the money go?
Tom

[Mistress]

Originally Posted by 75Sv1

Looks like they are trying to preserve the last American bastion of over paid corperate executives. Can we say corperate welfare. Didn't the tax payer give them 80 some billion in the mid 90's to produce the car of the future with 80 mpg? Where did the money go?
Tom

Gianormous houses and lavish lifestyles for the CEO's...

[jlomon]

Originally Posted by Dee8go

They'll never be able to compete until they get some relief from the pension and health benefits commitments. They're in the same boat as Social Security.

I think their real problem is in the product offerings. It isn't quality, they've made leaps and bounds on that issue (although the perception in the marketplace has been tough to overcome). For the past 10 years profits have been driven by full-size truck derived vehicles that had comparatively low product development costs and very high profit margins, especially when they are leased. They didn't drive the profits into research or development for anything other than "more of the same". The market has turned and is demanding something else, and they don't have what the market wants.

Pension and health care benefits are a problem, there's no doubt. But Japanese and European manufacturers have proven that people will pay a premium when there is perceived value in the product. Right now there is no perceived value for a full-sized SUV with a V8 engine as a way to transport your family around the city. I think it is a market phase that has come and gone.

[Kuan]

I've always wondered why Ford didn't have an economy brand like GM's Saturn. Then it dawned on me, Ford IS the economy brand.

[pawoSD]

On the news yesterday they talked about all the SUV's sitting on the lots, but the dumb car dealer guy said "I don't care if it costs me an extra $1000 a year in gas to protect my family, I will still drive an SUV", suggesting that big SUV's are so safe compared to a normal car. They're really not, in fact most are less safe. The only reason they do ok is because its like being inside a house on wheels, its just plain huge. Engineering should be what makes a vehicle safe, not sheer quantity and size of the materials. I bet that guy will change his mind when its an extra $5000 a year in fuel. They had an analyst on the show who said gas prices would have to be steady between 2.75 and 3.00 a gallon for SUV's to become popular again.....and who thinks that is going to happen?

The SUV era is fading, and I am more than happy to wave goodbye to it, I'm tired of watching these whale sized vehicles meander through traffic and annoyingly slow speeds.

[dynalow]

I heard about this at a seminar the other day. In essence, GM's accountants don't know WTF they are doing.

This report, now required by Sarbannes Oxley, is GM's own admission.

Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting of the Corporation. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

The Corporation’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, the Corporation determined that there were control deficiencies that constituted material weaknesses, as described below.

The Corporation lacked the technical expertise and processes to ensure compliance with SFAS No. 109, Accounting for Income Taxes, and did not maintain adequate controls with respect to (a) timely tax account reconciliations and analyses, (b) coordination and communication between Corporate Accounting and Tax Staffs, and (c) timely review and analysis of corporate journals recorded in the consolidation process. This material weakness resulted in a restatement of prior financial statements, as described in Note 2 to the Consolidated Financial Statements, and, if not remediated, has the potential to cause a material misstatement in the future.

The Corporation in certain instances lacked the technical expertise and did not maintain adequate procedures to ensure that the accounting for derivative financial instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was appropriate. Procedures relating to hedging transactions in certain instances did not operate effectively to (a) properly evaluate hedge accounting treatment (b) meet the documentation requirements of SFAS No. 133, (c) adequately assess and measure hedge effectiveness on a quarterly basis, and (d) establish the appropriate communication and coordination between relevant GM departments involved in complex financial transactions. This material weakness resulted in a restatement of prior financial statements, as described in Note 2 to the Consolidated Financial Statements and, if not remediated, has the potential to cause a material misstatement in the future.


The Corporation did not maintain a sufficient complement of personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with the Corporation’s complex financial accounting and reporting requirements and low materiality thresholds. This was evidenced by a significant number of out-of-period adjustment noted during the year-end closing process. This material weakness contributed to the restatement of prior financial statements, as described in Note 2 to the Consolidated Financial Statements and, if not remediated, has the potential to cause a material misstatement in the future.
Due to the previously reported material weaknesses, as evidenced by the significant number and magnitude of out-of-period adjustments identified during the year-end closing process and the resulting restatements related to deferred taxes and hedging activities, management has concluded that the controls over the period-end financial reporting process were not operating effectively. Specifically, controls were not effective to ensure that significant non-routine transactions, accounting estimates, and other adjustments were appropriately reviewed, analyzed, and monitored on a timely basis. A material weakness in the period-end financial reporting process could result in the Corporation not being able to meet its regulatory filing deadlines and, if not remediated, has the potential to cause a material misstatement or to miss a filing deadline in the future.
Management performed an assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006, utilizing the criteria described in the “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The objective of this assessment was to determine whether the Corporation’s internal control over financial reporting was effective as of December 31, 2006.

Based on our assessment, and because of the material weaknesses described above, management has concluded that our internal control over financial reporting was not effective as of December 31, 2006.
Management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting
During the fourth quarter of 2006, GM sold a 51% interest in our wholly-owned subsidiary General Motors Acceptance Corporation (GMAC), which is described in more detail in Note 4 of the Notes to the Consolidated Financial Statements. Accordingly, GMAC’s controls were not part of management’s assessment of internal control over financial reporting as of December 31, 2006; however, the Corporation has designed and implemented controls to ensure the appropriate recognition of equity method earnings and losses for GMAC and the effective monitoring of its investment account balance.

Certain of the personnel changes described below in “Remediation of Material Weaknesses” occurred during the fourth quarter of 2006. Other than as described above, there have not been any other changes in the Corporation’s internal control over financial reporting during the quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.



G. Richard Wagoner
Chairman and Chief Executive Officer
March 14, 2007
Frederick A. Henderson

Vice Chairman and Chief Financial Officer

March

http://www.gm.com/corporate/investor_information/docs/fin_data/gm06ar/content/financials/mar/mar_01.html

[dynalow]

^^^ They ought to be fired and made to return their stock options, bonuses, etc granted during their tenure.

[jlomon]

Originally Posted by dynalow

I heard about this at a seminar the other day. In essence, GM's accountants don't know WTF they are doing.

This report, now required by Sarbannes Oxley, is GM's own admission.

Unbelievable. Try going into your bank manager with that kind of a business plan and ask for a loan. Especially one at 4.5%

Having said that, the Big 3 know they've got the government by the short and curlies. They collectively employ something like 650,000 people worldwide (I don't know the US figure, but it would have to be a substantial percentage). There are probably 5 times as many employees in Tier 1, Tier 2 and Tier 3 supplier firms. Not to mention finance companies and dealership employees. These are the reasonably high paying jobs that don't come back when they vanish. The jobs that are responsible for a middle class lifestyle. The jobs that prop up the service economies in countless towns and cities. Southern Ontario is auto manufacturing ground zero in Canada. Something like 1 out of 9 jobs in the province is in some way dependent upon the auto industry, either directly or indirectly. That would have to be the same in lots of places all over the US.

No government in an election year could possibly stand by and risk that kind of job loss. The Big 3 are being very smart about their timing here. If their market tanked 12 months from now they'd be in a much worse position. They've got great political leverage here.

Originally Posted by 75Sv1

Looks like they are trying to preserve the last American bastion of over paid corperate executives. Can we say corperate welfare. Didn't the tax payer give them 80 some billion in the mid 90's to produce the car of the future with 80 mpg? Where did the money go?
Tom

Would you take on the responsibility of being the CEO of General Motors for your current salary?

Who should determine what is "excessive pay?" Congress?

[dynalow]

Originally Posted by mrhills0146

Would you take on the responsibility of being the CEO of General Motors for your current salary?

Who should determine what is "excessive pay?" Congress?

Of course not.
But, their compensation should be tied to increasing shareholder value, among other things. And if there is a "bailout", why not fire them and/or wipe out shareholder equity as part of the deal?

From yesterday's WSJ

The Next Bailout: Detroit
August 21, 2008 10:58 p.m.; Page A14

First came Bear Stearns, then mortgage lenders and borrowers, followed by Fannie Mae and Freddie Mac: They've all looked to Uncle Sam for a bailout, and now the word around Washington is that Detroit will be next on the taxpayer supplicant list.

Earlier this month, the Detroit Free Press reported that the top dogs at Ford, GM and Chrysler had a meeting of the minds and decided that the way out of their current losing streak would be to ask the feds for a lifeline. They figure they'll need $40 billion or so to ride out their current troubles until they reach the promised land of hybrids, the Chevy Volt, and, who knows, maybe even profits.

We've since heard that lobbyists for the car makers are taking their pitch for direct federal loans around Washington, with a goal of unveiling the plan after Labor Day -- conveniently in the frenzy of the fall election campaign. They've briefed Congressman John Dingell, the dean of Michigan Democrats, as well as officials in the Bush White House.


The plan is for the government to lend some $25 billion to auto makers in the first year at an interest rate of 4.5%, or about one-third what they're currently paying to borrow. What's more, the government would have the option of deferring any payment at all for up to five years. Meanwhile, Barack Obama recently signaled that he's open to federal money to help the auto makers invest in "renewable" technology, and Michigan Senator Debbie Stabenow and Mr. Dingell are supporting the $25 billion in loans to the not-so-Big Three as part of a second-round economic "stimulus."
Detroit's political calculation is plain: Having seen the way Washington has bowed to rescue the mortgage industry and Wall Street, why shouldn't auto makers give it a try? Michigan is up for grabs in the election, so now is the time to strike with a goal of getting the Bush Administration and both Presidential candidates to agree.

The car makers can also claim with justification to have been hurt as badly as anyone by Washington's policy blunders. The weak dollar has contributed to the spike in oil prices that has socked their most profitable vehicles. And the nonsensical way that fuel-economy standards force Detroit to subsidize cars that consumers won't buy has helped put the Big Three in this hole.

Then again, the car makers saddled themselves with a cost structure in flush times that has proved unsustainable as their market share has eroded. They have made great strides of late in shedding legacy pension and health-care costs, but they took decades to do so. The fact that GM's lending arm, now 51% owned by the owners of Chrysler, dipped its toes in mortgage lending hasn't helped either.

There also happens to be a thriving U.S. auto industry outside of Michigan. These plants are owned by foreign companies, but they employ 92,000 Americans and build and sell cars here. Tens of thousands of their shareholders are Americans. Would these companies and plants get equal consideration under any bailout plan? And if Toyota and Honda get help, why not Delphi and other auto suppliers? We're told the low-interest loan proposal would give priority to the "oldest" plants -- which is another way of saying those plants organized by the United Auto Workers.

Bailing out "national champions" because of their long history or politically connected work forces is something you'd expect from France. With rare exceptions -- Chrysler in the 1970s -- the U.S. government has managed to remain immune to that European disease. But as the nearby table shows, Washington has begun to make a habit of bailing out any business or industry that can marshal enough political clout. That's a lot of risk to put on the taxpayer dime, and that's not counting such other runaway liabilities as Medicare.

* * *
We wish the Treasury and Federal Reserve hadn't started all this with its Wall Street rescues, but at least Bear Stearns was put out of business and its shareholders lost nearly everything. That's also typically what happens when the Federal Deposit Insurance Corp. takes over a failing bank, as in the case of IndyMac in July.

If Fannie and Freddie require a taxpayer infusion, we can't believe Treasury wouldn't wipe out their shareholders and fire their managers as well. And if Detroit's executives really want taxpayers to save them, then at a minimum they should suffer the same fate as these other companies and shareholders. Somehow we doubt this is what the Big Three really have in mind.

Regardless of where and why these federal bailouts started, American taxpayers can't save everyone. The only way to stop this parade of supplicants is to start saying no -- and Detroit is as good a place as any