Detroit Auto Industry Bailout Moves Forward

The slow dance towards a bailout of Detroit took another step towards finality today. Draft legislation was sent over to the White House providing for $15 billion in bridge loans to the industry.

So far the terms of the loan call for a seven year term with an interest rate of 5% for the first five years and then 9% for the last two. The government would get warrants for 20% of the common stock.

Congress is trying to sell this as a semi-chapter 11 type proceeding. A “car czar” is to be appointed who will have the authority to bring together all of the parties to negotiate a restructuring plan. The czar would have the authority to approve or disapprove any expenditure in excess of $25 million. Showing that they mean business, Nancy Pelosi had this to say:

“We call this the barbershop,” said House Speaker Nancy Pelosi, a California Democrat. “Everybody’s getting a haircut here, in terms of the conditions of the bill,” she said, noting the likely impact on labor, bondholders, shareholders, car dealers, suppliers and executives. “The management itself has to take a big haircut on all of this.”

Now we all know this is utter nonsense. The idea that the unions, creditors, management and dealers are going to trek to Washington to sit around a table and sing Kumbaya is beyond laughable. This merely gets the government in for a chunk of change and makes it all but certain that the long-term restructuring of this industry ends up as a political exercise not an economic one. As for the notion that some guy is going to sit around and approve every invoice of $25 million or more, I would submit that may be all he ever has time for. I have to believe that GM spends that for copier paper.

Just one more anchor for the economy to drag along for who knows how long.

more:here

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