Obama’s Auto Task Force Struggles

The WSJ is out this evening with a pretty extensive article on the state of the negotiations between the government, GM and Chrysler. It isn’t a really pretty picture.

A large part of the article is given over to a discussion of the absence of industry expertise among the members of the auto industry team.

In session after session in a warren of offices at the Treasury Department, the team has sat through tutorials on dealer financing, studied basic data and debated the future of U.S. car sales. They have spent days trying to understand the complexities of the hundreds of companies that supply the car companies with axles, seats and other parts.

Steven Rattner, a former journalist-turned-investment banker, was picked last month to head the team. He reports to Treasury Secretary Timothy Geithner and Lawrence Summers, the chief White House economic adviser. Mr. Rattner compares the challenge to a complicated puzzle.

“It’s like a Rubik’s cube, trying to untwist it and trying to get all the colors to line up,” he said in an interview. “So we’ve learned a lot about how car dealers work, and how companies get paid when they sell a car to a dealer, and why there are a certain number of dealers more than are optimal. Have we learned everything? Of course not, but I think we are learning what we need to learn to do this job.”

The team’s industrial expertise comes from Ron Bloom, a scrappy Harvard Business School graduate who gave up investment banking in 1996 to work as a top adviser to the United Steelworkers union. When Mr. Bloom’s aging 1997 Ford Taurus conked out a few weeks ago, he traded it for a green Mustang with 50,000 miles on the clock.

Several team members, such as Brian Deese, a 31-year-old former Obama campaign aide, are on loan from the White House’s National Economic Council. Three others specialize in climate change. The rest come from agencies such as the Energy and Labor departments. Backing them up are about 30 accountants and advisers.

Mr. Rattner dismisses the idea that his team may not have enough auto expertise to tackle the job. “We are not trying to run car companies,” he says. He compares the work to what he and others have done in the private sector. “This is the type of investment decision that many of us on this team are used to making.”

Disquieting isn’t it. I can’t fault the members for trying to get their hands around the industry whose future they are deciding but I don’t understand why a few people with real industry expertise aren’t integral members of the panel. It’s one thing to get a crash course and quite another to apply the lessons in a cogent manner. Erroneous conclusions based on incomplete information or faulty conclusions are inevitable. Experts can steer around those kind of potholes.

Ratner’s assertion that this is an investment decision like others the members have made in the past, is very much an oversimplification. His recommendations are going to commit the country to not only a great deal of money initially and lock it into a continuing commitment of long-term support. The financial commitment is such that he and his team should know how to run a car company because they are going to be intimately involved in doing that for a very long time.

Resolution of the haircut that bondholders are going to take if the deal is going to work is of critical importance. It appears as if the bondholders and the auto group have less than an optimal working relationship.

The task force met with a committee representing GM’s bondholders on the same day it met with Fiat executives. GM’s bondholders hold about $27 billion in unsecured GM debt, and consequently will play a critical role in efforts to save the company. In June, GM will owe the bondholders $1 billion on convertible debt coming due.

The bondholders’ attorneys laid out the details of a plan to exchange debt for equity, which would reduce pressure on GM to repay the bondholders. As the lawyers walked through a litany of potential challenges, Messrs. Rattner and Bloom took notes, offering minimal commentary, according to people who attended the meeting. Since then, the bondholders committee has had little contact with the task force. Its lawyers say they were surprised two weeks later when Mr. Rattner publicly criticized them for not being flexible enough.

Mr. Rattner and the Treasury Department haven’t responded to requests for comment on the complaints by bondholders. On Sunday, a committee representing bondholders sent a letter to the Treasury Secretary Geithner that said they are “disappointed” that they haven’t received a response to their proposal. They reminded Mr. Geithner that “the result of a failed [debt-for-equity] exchange would likely be a bankruptcy that would have dire consequences for the company.”

Remember that we’ve been down this road before with GMAC. That time the bondholders played hardball and won. They simply kept stringing out the game until the government basically said never mind and went ahead and recapitalized GMAC. That lesson has no doubt not been lost on the creditors.

We know that the protection of senior creditors seems to be a mantra to which Treasury adheres. Witness the banking crisis to date. Frankly, there is no downside to playing hardball to the end on this one. Expect the bondholders to either be demonized by the political class or pull of another great escape. I think it will be the latter.

The over riding tone of the article is that any sort of bankruptcy is out of the question. An auto analyst with Deutsche Bank who briefed the task force remarked that, “This is a policy decision, not an economic one. One way or another, GM will have to be saved.” The end of the article quotes Mr. Ratner after a tour of an auto plant, “At the end of all the numbers we are generating there are real people.”

Not the things you would expect to hear in an impartial analysis of an investment is it? He’s right, there are real people involved and the decisions this task force makes are going to have lasting effects on an entire region of this country.

They are also going to have lasting effects on the entire population of the United States. A decision to keep GM and Chrysler out of bankruptcy will forever change the nature of the automobile manufacturing business in the country, not necessarily for the better. Mr. Ratner would do well to dwell on the repercussions which have ensued from the bailout of AIG and ask himself if he wants to put the country on an even more precarious road with the auto companies.

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