Detroit: Do Chrysler, Ford and GM Deserve $34 Billion?

Here we go again. The CEOs of General Motors, Ford and Chrysler are headed back to Washington to ask for Congressional help. But this time, they're driving instead of flying their corporate jets. And this time they've submitted detailed business plans describing how they would use some $34 billion in taxpayer loans to tide them over for the next few years. Ford CEO Alan Mulally has made a video.

The substantive plans and down-to-earth travel will be hailed as signs that the industry has recognized reality. But an air of fantasy hovers over this whole discussion. All these efforts— especially in the cases of GM and Chrysler– are geared toward avoiding Chapter 11 filings. As the plans note (here's the Chrysler plan, and here's the GM plan ), there's good reason for automakers to want to avoid bankruptcy filings. A filing would have lots of immediate negative effects on suppliers and dealers. And bankruptcy court isn't the best place to iron out the grand bargain among management, labor, suppliers, government and creditors to shrink the industry.

But it almost doesn't matter whether the Big Three file for Chapter 11 protection. To a large degree, the markets are treating the auto companies as if they're already in bankruptcy.

In a typical bankruptcy, stock is wiped out, and creditors—bondholders, employees, suppliers, wind up getting a fraction of what they're owed over time. Chrysler, which is majority-owned by private-equity firm Cerberus, doesn't have a market value per se. But as has been reported, Daimler, which owns about 20 percent of Chrysler, earlier this fall "reduced the carrying amount of its equity investment in Chrysler at September 30, 2008 to zero." Translation: the German automaker doesn't think its share in the automaker is worth much. Ford has a market capitalization of nearly $7 billion, and GM has a market capitalization of about $3 billion. But in GM's case, given the amount of cash it has on hand, and the size of its assets, $3 billion is effectively zero, too.

Bondholders, too, are treating the Big Three as dead firms walking. Bondholders of the Big Three are highly, highly dubious. GM bonds that mature in 2011 trade at a highly-distressed 29 cents on the dollar. Buy today and you get an annual yield of 87 percent if you (and the company) hold on for 25 months. This bond issued by Ford Motor Credit, which matures in about a year, is trading at 46 cents on the dollar.

Who can blame bond investors for being so glum? In their proposals, Ford and GM reinforce the sense that debtholders should not expect to get paid in full—even with a bailout. Should it get the help, GM pledges it will pay suppliers in full, but that it "plans to engage current lenders, bond holders and its unions to negotiate the needed changes." In other words, creditors of all kinds will have to take a big haircut, much as they do in bankruptcy proceedings. For its part, Chrysler notes that it has run through about $6.9 billion in cash in the second half of 2008, and is down to its last $2.5 billion. The company said it needs a "$7 billion secured working capital bridge loan by December 31, 2008" in order to make through the first quarter of 2009. Without it, who knows?

Yet while GM and Chrysler appear to exhibit many of the symptoms of bankrupt companies—miniscule stock values, distressed bonds, explicit statements that creditors won't be paid in full, and an admission that they're running out of cash—many of those in and around the Big Three act as if the industry has suffered mere flesh wounds. The CEOs of Ford and GM have said they'd be willing to accept $1 salaries in exchange for the bailout (Chrysler's CEO Robert Nardelli, who made a pile while running Home Depot, is already a dollar-a-year man). I'm curious as to what they think their salaries might be six months hence should the companies be forced into Chapter 11. And it's tough to imagine any scenario whereby a bankrupt GM, under the control of its creditors, would retain CEO Rick Wagoner.

The United Auto Workers union is also slowly coming to grips with the fact that its historic role as the guarantor of high wages, pensions and benefits, is likely a thing of the past. UAW President Ron Gettelfinger said Wednesday the union might be open to renegotiating contracts and forgoing contributions to its health-care trust and, as The Associated Press reported, "that the union will suspend the jobs bank, in which laid-off workers are paid up to 95 percent of their salaries while not working, but he did not give specifics or a timetable of when the program will end." Um, how about yesterday? It's one thing for a union to ask management to pay for no-work jobs. It's quite another for a union to ask taxpayers to pay for them. Asking for federal help without loudly killing the jobs bank immediately is about as tone-deaf as asking for a bailout after having alit from a corporate jet.

The sad fact is that the U.S. auto industry has essentially failed. Even if car sales come roaring back from their current anemic pace next year, there's no guarantee the Big Three will return to health, that they'll be able to stay current on debt payments, and be able to raise capital from tough-minded investors. The executives and union leaders speak as if the bailout money is simply needed to tide them over until the sun comes back out. Exuding and instilling such confidence is a big part of their job. But increasingly it seems that the federal funding they're requesting is necessary to help manage failure, not to stave it off.