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Sunday, March 29, 2009 11:51 PM


Obama Denies Funding to Automakers; What Happens to $1T in CDS?


In news I did not expect to see this month, Obama denies bailout funds for automakers.

[Mish Note: In the 15 minutes or so it took me to write this, the link title above was changed from "Obama denies bailout funds for automakers" to "Obama conditions bailout funds for automakers". A sub-headline reads as follows, "White House: GM, Chrysler fail to submit restructuring plan that will get them more money." As best as I can tell, the body of the article was not changed.]

The White House says neither GM nor Chrysler submitted acceptable plans to receive more bailout money, setting the stage for a crisis in Detroit and putting in motion what could be the final two months of two American auto giants.

President Barack Obama and his top advisers have determined that neither company is viable and that taxpayers will not spend untold billions more to keep the pair of automakers open forever. In a last-ditch effort, the administration gave each company a brief deadline to try one last time to convince Washington it is worth saving, said senior administration officials who spoke on the condition of anonymity to more bluntly discuss the decision.

Obama was set to make the announcement at 11 a.m. Monday in the White House's foyer.

Frustrated administration officials said Chrysler cannot function as an independent company under its current plan. They have given Chrysler a 30-day window to complete a proposed partnership with Italian automaker Fiat SpA, and will offer up to $6 billion to the companies if they can negotiate a deal before time runs out.

If a Chrysler-Fiat union cannot be completed, Washington plans to walk away, leave Chrysler destined for a complete sell-off. No other money is available.

For GM, the administration offered 60 days of operating money to restructure.

Fritz Henderson, GM's president and chief operating officer, became the new CEO, a Treasury Department source said. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., will be interim chairman of the GM board.

One official said a majority of the GM board was expected to step down.

Obama advisers saw public outrage come to an ugly head in recent weeks, as populist anger escalated over bonuses paid to American International Group executives. They realized Americans are frustrated with the economy and its business leaders; they also said they would not invest one dollar more than was necessary to keep the companies alive and would walk away if it looked impossible.

Officials said GM had not made good on promises made in exchange for $13.4 billion in government loans, although there are no plans to call in those loans.

Administration officials still believe GM's chances are good, given its global brand and its research potential. Officials say they are confident GM can put together a plan that will keep production lines moving in the coming years. They planned to send a team to Detroit to help with that restructuring.

In progress reports filed with the government in February, GM asked for $16.6 billion more and Chrysler wanted $5 billion more. The White House balked and instead started a countdown clock.

GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in first- and second-term debt, mainly to banks. GM owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion.

An exasperated administration official noted that the companies had not done enough to reduce debt; in some cases, it actually increased during this restructuring and review process.

In February, GM said it intended to cut 47,000 jobs around the globe, or almost 20 percent of its work force, close hundreds of dealerships and focus on four core brands -- Chevrolet, Cadillac, GMC and Buick.

In an effort to bolster consumer confidence, Obama planned to announce government backing of warranties for GM and Chrysler vehicles. An administration official said there is no price tag yet associated with that promise.
Unless GM pulls a rabbit out of its hat by Tuesday, it is headed for restructuring, with 60 days financing provided by taxpayers. Moreover, You can kiss Chrysler goodbye completely unless Fiat is dumb enough to take it over. Many Chrysler dealers are likely to blow up on this news. However, given there is too much auto capacity, Chrysler going under is an overall good thing. Those directly involved will not see it that way.

It will be interesting to see what kind of auto discounts are available after this announcement.

Credit Event Triggered

One last point: This will be a "credit event" triggering payouts on credit default swap bets.

I have reported before that GM has a $trillion or so in credit default swaps written on it (but my information on this is well over a year old). If banks stocks rally tomorrow (or even if they simply do not collapse), you will know that banks are fully hedged or on the right side of those swaps.

However, given the swaps dwarf GM bonds, it is virtually guaranteed that someone is on the wrong side of them.

Addendum:

Instead of the "denies bailout funds" headline story later changed to "Obama conditions bailout funds for automakers", The New York Times presents a story that can be interpreted differently: U.S. Moves to Overhaul Ailing Carmakers.
The administration is giving G.M. 60 days to present a cost-cutting plan and will provide taxpayer assistance to keep it afloat during that time.

Representative Thaddeus G. McCotter, Republican of Michigan, whose district is just outside Detroit, expressed frustration over the ousting of Mr. Wagoner and with administration officials for not being clearer about the potential job losses that lie ahead.

“Why would you ask Rick Wagoner to resign when you are giving G.M. 60 days to meet a new target, but you aren’t saying what the new goal is yet,” Mr. McCotter said in an interview.
Is there 60 days to meet a new target or 60 days to restructure having missed targets?

The first article says "For GM, the administration offered 60 days of operating money to restructure."

60 days to meet a new target may not be a "credit event". 60 days of funding to restructure should be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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