Treasury Becomes the Auto Pilot

It gets harder and harder to distinguish between news about the U.S. auto industry and news about the economy itself. The Bush administration, which not long ago resisted using the Treasury Department bailout program to rescue the automobile industry, has now extended its support to failed automakers by tossing $6 billion at GMAC, the ailing financial arm of General Motors. As The Wall Street Journal rather stiffly phrases it, the move "represents the second tranche of government aid that redounds to the benefit of giant private-equity firm Cerberus Capital Management, which owns Chrysler and, until these recent moves, a majority stake in GMAC." The Journal pointedly notes that "John Snow, a top player at Cerberus, was the Bush administration's Treasury secretary before Henry Paulson."

GMAC filed last week to change its status to that of a bank so that it could qualify for Treasury money. This is not a huge conceptual stretch; like the nation's banks, as the New York Times notes, GMAC "has been reeling from both the paralysis in credit markets and huge losses from its mortgage lending subsidiary, Residential Capital."

Under the new arrangement, the U.S. government now owns $5 billion worth of "senior preferred equity" in GMAC and will receive an 8 percent dividend on that investment. GM and Cerberus, meanwhile, must turn over some of their ownership of GMAC to their investors (in Cerberus' case, we don't even know who those people are, but that's another story). Still unresolved are the precise contours of GMAC's relationship with its bondholders, who've been frantically renegotiating to convert most of the firm's $38 billion in debt into bondholder equity. You might think that a few billion dollars of taxpayer aid would come with some requirements to disclose such details, but you would be wrong. The Detroit Free Press cites a GMAC spokeswoman who "declined to say Monday how much debt had been converted, but said the deal had met all conditions."

All this free-flowing federal cash must have veteran activist investor Kirk Kerkorian wondering if he should have held onto his shares in Ford. For a brief time earlier this year, Kerkorian's investment vehicle, Tracinda, was Ford's largest outside shareholder. According to the Reuters account, Tracinda has now sold off all of its Ford holdings. How much did Kerkorian lose on this venture? Evidently he held 133.5 million shares as of October, acquired at an average price of $7.10 a share, and began selling in October when shares were worth about $2.43, for a loss of some $600 million. The 91-year-old Kerkorian can withstand the hit, but maybe he, too, would have qualified for a bailout if he had yelled loud enough.

The day's last bit of auto news worth reading is a New York Times story examining the particular impact that the car companies' woes are having on African-American workers. Black workers make better wages in the auto and auto-parts industries than in other manufacturing jobs and have been disproportionately hit by the recent downturn, according to studies cited in the Times. As one former auto worker tells the paper: "There's a saying that when America catches a cold, African-Americans catch the flu."

Finally, the end of the year is an ideal time for the nation's business press to look back at one of the most tumultuous periods in American economic history. Yesterday's Wall Street Journal provided a recap of the last days of Lehman Bros., with a particular eye on how its fall signaled the end of Wall Street's tenuous ethos of cooperation. Today's Washington Post offers a chilling, forehead-slapping account (part two of a three-part series) of how the financial geniuses at AIG cooked up a system that couldn't possibly fail.