Grand Debt Auto

Just when I feared that the Detroit automaker executives were going to carjack TARP with ease, Congress finally started doing its job by pointing out the weakness of their case. The ineptitude of these managers is breathtaking - if you're pleading poverty, flying in on private jets is not the best signal to send. Mind you, given that a fair part of the blame lies with unrealistic past demands, the mendacity of the United Auto Workers union is equally astounding.

Let's take a step back and think of the endgame. Taking GM as an example, their existing bonds are trading at yields north of 50%. At those levels, you are well into distressed territory. As of their latest accounts, GM's retirement obligations amount to $58Bln. Assume that GM needs to pay 10% per year on that liability amount - not unreasonable given the ageing population and rich benefits of that scheme. Ignoring any inflation uplift, that's $6Bln per year. So under the heroic assumption that GM's restructuring was cash neutral (!), a $12Bln loan would be burned in 2 years by simply servicing the retirement liability.

The ultimate (although politically difficult) solution is to decide what is most important to the US Treasury; either a) protecting automaker retirement benefits and union contracts or b) restructuring a hopelessly outdated and inefficient manufacturing facility. It can't do (or afford) both.

I have a modest suggestion. The private equity managers I deal with (particularly on the mega cap side) are frankly bone idle. Pop all these automakers into a fund vehicle, hire a couple of them to manage it. Offer a 0% management fee and 25%. You get focused and highly motivated managers with no vested interest apart from making these operations profitable again.

A bailout would be nothing short of mugging the taxpayer. The executives would make a clean getaway - although as they probably would be driving a Detroit-built SUV, I think that's a bit of a contradiction in terms.