GM bailout proposal -- 10 point plan

CNN Reports that GM is burning through cash at a mind-boggling rate.

But the most shocking news came in its statements about its cash position. GM said it had burned through $6.9 billion during the quarter and warned that it "will approach the minimum amount necessary to operate its business" during the current quarter.

In addition, the company said that in the first half of next year its "estimated liquidity will fall significantly short" of what it needs to continue operating. It said the only thing that would save it would be a significant improvement in economic and automotive industry conditions, help from the federal government, better access to capital markets or some combination of those options.

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The slowing economy, poor product decisions, and the Union/Management relationship have all contributed to this situation, but one of the biggest issues likely has to due with the short term credit markets that froze up after Lehman Brothers fell. Ultimately, this credit freeze is what the $700 billion bail out may help with.

Regardless, looks to be seeking $10 billion to $60 billion in federal loans.

Shelly Lombard, senior high yield analyst at Gimme Credit, an independent research firm, estimates that GM will need to get between $10 billion and $15 billion in federal assistance in order to avoid bankruptcy by 2010 and that the chance of bankruptcy without help is probably 80% to 90%.

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Among the topics discussed were a $25 billion loan to fund union-controlled trust funds that would be set up in the coming year to cover the health care costs of retirees and their family members. Shifting about $100 billion of those costs from the automakers' balance sheet to the trust funds was a key concession the companies won from the UAW in the 2007 labor deals.

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The automakers also renewed their pre-election request to double the $25 billion low-interest loan program approved by Congress to help automakers convert operations to make more fuel-efficient vehicles and meet the demands of car buyers and new federal rules.

But Wagoner said just doubling the money available under that program won't solve the immediate cash crisis facing the industry. And for the first time, he put a dollar amount on the cash that automakers are looking for from the federal government right now.

"In the meeting yesterday we talked near-term liquidity support for the industry in the range of $25 billion," he said. "No one said yes or no to that number."

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Should the get the loans?

Absolutely. GMs failure would have serious repercussions for the economy. The hundreds of thousands of people that would be out of work would cost the US a huge amount of money anyway.

But we shouldn't reward GMs failures easily.

Here are my proposed terms for a GM Bailout

1. Up to $75 billion loan to be given to GM over 5 years.
2. Interest rate will = 30 year Treasury Bond rate, plus 2%.
3. Repayment begins in 6 years, and must be complete thirty years after that.
4. Within 10 years, the GM fleet fuel efficiency must be 5 MPG higher.
5. Each year after, the GM fleet fuel efficiency rating must rise by 1 MPG more. Note: the target fuel efficiency will always be based on today's standard. In other words, by year 10, standards will be 5 MPG higher. In year 11, they will be 6 MPG higher. In year 12, 7 MPG higher than today. If in year 11, they are actually 8 MPG higher than today, in year 12, they still only need to be 7 MPG higher than today, removing the incentive to sand bag the number.
   
6. The government will receive 20% of the company in some form of preferred stock that can, at the government's discretion, be sold on the open market.
7. That stock will earn dividends at the same rate as other share holders.
8. After accepting the loan, the CEO, CFO, and 50% of the remaining executive staff will leave the company, with renegotiated severance.
9. At least 50% of the replacement executives must come from outside the auto industry and be from companies that have generated a profit for at least 5 of the last 7 years.
10. Replacement executives from within the auto industry must come from companies that have generated a profit for 5 of the past 5 years.

This is a first draft, and there may be plenty of things to adjust here. Given the challenges with pay, working hours, locations, etc., I am open to discussing changes to the UAW contracts. While I'm not one to say the whole problem with the US auto industry is the union, decisions by both management and the union got GM to where it is today. And like the stock holders, suppliers, and local communities, the unions will also suffer tremendously if GM goes bankrupt.

It's an expensive plan for GM, but it's also a risky investment of tax payer dollars.

This plan should help GM survive, ensure there are consequences for executive failure, bring in people with a track record of success, compensate US tax payers for their risks, minimize the chances that hundreds of thousands of autoworkers will lose their jobs, and provide increased environmental protection through greater fuel efficiency.