Auto: 03-31-09 GM & Chryler (Intervention, A Bridge Too Far)

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This morning the President announced that his Auto Task Force has completed its evaluation of the viability of General Motors and Chrysler in light of their requests for federal assistance. In addition to releasing the viability assessments, he also released a new policy with the American government guaranteeing warrantees for cars from those companies to ensure that if you have one it “will be safer than it’s ever been”:

• Fact Sheet on the New Path to Viability for GM & Chrysler (pdf)
  
• Warrantee Commitment Program Explanation (pdf)
  
• GM Viability Assessment (pdf)
  
• Chrysler Viability Assessment (pdf)
  

In the course of his remarks, the President pledged in no uncertain terms that he would not simply stand by and watch the American auto industry fail. He pledged to work with Congress on further action. And he made clear that the government has no interest in running these companies.

In broader terms, he laid out early what led to his decisions announced today, the bottom line being that the Task Force has determined the companies’ submitted plans to restructure simply do not go far enough:

And so today I’m announcing that my administration will offer GM and Chrysler a limited additional period of time to work with creditors, unions, and other stakeholders to fundamentally restructure in a way that would justify an investment of additional taxpayer dollars.  During this period they must produce plans that would give the American people confidence in their long-term prospects for success.

Now, what we’re asking for is difficult.  It will require hard choices by companies.  It will require unions and workers who have already made extraordinarily painful concessions to do more.  It’ll require creditors to recognize that they can’t hold out for the prospect of endless government bailouts.  It’ll have to — it will require efforts from a whole host of other stakeholders, including dealers and suppliers.  Only then can we ask American taxpayers who have already put up so much of their hard-earned money to once more invest in a revitalized auto industry.

But I’m confident that if each are willing to do their part, if all of us are doing our part, then this restructuring, as painful as it will be in the short term, will mark not an end, but a new beginning for a great American industry — an auto industry that is once more out-competing the world; a 21st century auto industry that is creating new jobs, unleashing new prosperity, and manufacturing the fuel-efficient cars and trucks that will carry us towards an energy-independent future.  I am absolutely committed to working with Congress and the auto companies to meet one goal:  The United States of America will lead the world in building the next generation of clean cars.

He laid out his prescription for GM:

GM has made a good faith effort to restructure over the past several months — but the plan that they’ve put forward is, in its current form, not strong enough.  However, after broad consultation with a range of industry experts and financial advisors, I’m absolutely confident that GM can rise again, providing that it undergoes a fundamental restructuring.  As an initial step, GM is announcing today that Rick Wagoner is stepping aside as Chairman and CEO.  This is not meant as a condemnation of Mr. Wagoner, who’s devoted his life to this company and has had a distinguished career; rather, it’s a recognition that will take new vision and new direction to create the GM of the future.

In this context, my administration will offer General Motors adequate working capital over the next 60 days.  And during this time, my team will be working closely with GM to produce a better business plan.  They must ask themselves:  Have they consolidated enough unprofitable brands?  Have they cleaned up their balance sheets, or are they still saddled with so much debt that they can’t make future investments?  Above all, have they created a credible model for how not only to survive, but to succeed in this competitive global market?

And he explained the differences underlying his prescription for Chrysler:

The situation at Chrysler is more challenging.  It’s with deep reluctance but also a clear-eyed recognition of the facts that we’ve determined, after careful review, that Chrysler needs a partner to remain viable.  Recently, Chrysler reached out and found what could be a potential partner — the international car company Fiat, where the current management team has executed an impressive turnaround.  Fiat is prepared to transfer its cutting-edge technology to Chrysler and, after working closely with my team, has committed to build — building new fuel-efficient cars and engines right here in the United States.  We’ve also secured an agreement that will ensure that Chrysler repays taxpayers for any new investments that are made before Fiat is allowed to take a majority ownership stake in Chrysler.

Still, such a deal would require an additional investment of taxpayer dollars, and there are a number of hurdles that must be overcome to make it work.  I’m committed to doing all I can to see if a deal can be struck in a way that upholds the interests of American taxpayers.  And that’s why we’ll give Chrysler and Fiat 30 days to overcome these hurdles and reach a final agreement — and we will provide Chrysler with adequate capital to continue operating during that time.  If they are able to come to a sound agreement that protects American taxpayers, we will consider lending up to $6 billion to help their plan succeed.  But if they and their stakeholders are unable to reach such an agreement, and in the absence of any other viable partnership, we will not be able to justify investing additional tax dollars to keep Chrysler in business.

He ended on a hopeful note, however, making clear that his decisions were not made out of despair, but out of certainty that the ingenuity and determination Americans and these companies have shown for decades.

Bankruptcy: 03-04-09 US Auto Sales Drop at Least 40 Pct

It is time for bankruptcy.

Major automakers’ U.S. sales continued their deep slump in February, putting the industry on track for its worst sales month in more than 27 years. (March 3)

Corporate Jet: 02-25-09 It’s 10 pm, where is your corporate jet?

A student sent me this…..Thanks Frankie

Dilbert

Auto Industy: 02-19-09 What’s Next?

Facing the prospect of layoffs, plant closings and even the possibility their companies may have to declare bankruptcy, auto workers wonder how to survive the economic downturn. (Feb. 18)

Auto: 02-16-09 What Schould be Expect from GM & Chrysler

Class, the “BIG” business plans are due tomorrow? Any expectation on “what” will be delivered to Congress. On a sad note, does it really matter? Full article here.

Troubled U.S. auto makers and union representatives dug in late Monday for all-night cost-cutting negotiations as the government advanced its point person on auto restructuring, a former investment banker with a record for demanding harsh concessions from manufacturers, unions and investors alike.

General Motors Corp. and Chrysler LLC are required to submit recovery plans to the government on Tuesday as part of their agreement to receive billions of dollars in federal loans. As the government’s auto-industry task force began to take shape ahead of the deadline, President Barack Obama’s administration appeared to be turning up the pressure on GM and Chrysler to carry out tough restructuring measures, possibly through the use of the bankruptcy court.

The administration stepped back over the weekend from naming a “car czar,” as it had planned, to oversee the restructuring. But according to people familiar with the task force, it named former Lazard Freres & Co. investment banker Ron Bloom a key adviser. Mr. Bloom, who made a name advising U.S. steelworkers to accept major concessions in several bankruptcy cases, is expected to take the force’s lead role, a senior U.S. Treasury official says.

People who know Mr. Bloom expect him to push for harsh concessions from the auto makers, the United Auto Workers and other parties involved in their restructuring.

“The management of the Big Three are probably not going to like what Ron Bloom has to say; the UAW is not going to like what Ron Bloom has to say; and certainly the stockholders and creditors will not like what he has to say,” said Michael Psaros, a co-founder of private-equity group KPS Capital Partners, who has worked with Mr. Bloom in and out of bankruptcy courts. Mr. Bloom, he added, has “repeatedly shown an ability to transform struggling companies into profitable going concerns.”

Auto: 02-15-09 No Car Czar will be Created

Class, would it have anything to do with specific knowledge or what Hayck would call “time and place”?

If we … agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place … decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communi-cating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization.

Full article here. Partial article below

WASHINGTON — The Obama administration will not name a “car czar” to help oversee the auto industry’s restructuring and will instead create an inter-agency task force to deal with the issue, according to senior administration officials.

Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, will jointly oversee the task force, with Mr. Geithner overseeing the $17.4 billion in federal loan agreements between the automakers and the U.S. government.

As a condition of receiving government aid, General Motors Corp. and Chrysler LLC are required to submit extensive restructuring plans and concession commitments from unions and bondholders by Feb. 17 to a presidential designee, commonly dubbed the czar.

The administration has decided to forgo naming one individual to oversee the process. Treasury is expected to bring in Ron Bloom, a special assistant to the president of United Steelworkers union and a former investment banker, as a senior advisor to help handle auto-related issues, these people said.

The hiatus, in which the industry awaited the car czar, slowed progress in restructuring talks between automakers, bondholders and the United Auto Workers union, according to people familiar with the matter. Without someone firmly in charge, the various stakeholders have not felt compelled to come to the bargaining table, these people said.

The auto companies were given the loans as a sort of bridge financing to help them through tough economic times and their own missteps while working on plans to make their industries more viable for the long-term. Government officials believe both GM and Chrysler may soon need more money.

Treasury: 01-09-09 Fourth Tranche Report

I. INTRODUCTION

This Fourth Tranche Report to Congress meets the requirement for reporting at the $250 billion commitment level under section 105(b) of the Emergency Economic Stabilization Act of 2008 (EESA). The recent transactions under the newly established Automotive Industry Financing Program and Targeted Investment Program, when combined with $187.5 billion of transactions under the Capital Purchase Program and the $40 billion transaction under the program for Systemically Significant Failing Institutions, bring the total amount of transactions to $266.9 billion. Treasury will submit the next report when transaction levels reach the $300 billion level.

The Report addresses the following six areas:

• A description of all the transactions made during the reporting period.
• A description of the pricing mechanism for the transactions.
• A justification of the price paid for, and other financial terms associated with, the transactions.
• A description of the impact of the exercise of such authority on the financial system.
• A description of the challenges that remain in the financial system, including any benchmarks yet to be achieved.
• An estimate of additional actions under the authority provided pursuant to the EESA that may be necessary to address such challenges.

II. TRANSACTION INFORMATION BY PROGRAM

This Fourth Tranche Report discusses transactions under three programs: the Capital Purchase Program (CPP), the Automotive Industry Financing Program (AIFP), and the Targeted Investment Program (TIP). Since the last tranche report, submitted to Congress on December 2, 2008, Treasury has closed $65.4 billion in transactions under these three programs. A report listing all transactions under the Troubled Asset Relief Program is attached as Appendix 1, and has been posted on our web site.

Capital Purchase Program

Treasury continues to invest funds in financial institutions across the United States through the CPP, in order to build these institutions’ capital base and increase their capacity to lend to businesses and consumers. Since the last tranche report, Treasury has closed $26 billion in transactions under the CPP, bringing the total amount of funds disbursed under the CPP to $177.54 billion, with an additional $10 billion scheduled to settle at a later date. Treasury has completed CPP transactions with 215 United States financial institutions and Community Development Financial Institutions in over 40 states and Puerto Rico.

Under the CPP, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms. The Program is available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged solely or predominately in financial activities permitted under the relevant law. We reported in detail on the CPP in Treasury’s First Tranche Report to Congress and Second Tranche Report to Congress, and provided an update in Treasury’s Third Tranche Report to Congress, and there have been no changes to the purpose or use of the CPP since the submission of these reports.

Automotive Industry Financing Program

Treasury announced a new program in December, the AIFP, to prevent a significant disruption of the American automotive industry, which would pose a systemic risk to financial market stability and have a negative effect on the economy of the United States. The program requires participating institutions to implement plans that will achieve long-term viability. Participating institutions must also adhere to rigorous executive compensation standards and other measures to protect the taxpayer’s interests, including limits on the institution’s expenditures and other corporate governance requirements. Guidelines for the AIFP are published on Treasury’s web site. Between December 29 and January 2, Treasury committed to provide $19.4 billion in TARP funds under this program, with an additional $4 billion subject to certain conditions. On December 29, 2008, Treasury purchased $5 billion of senior preferred equity with an 8% annual distribution right from GMAC LLC (GMAC) through the AIFP. Under the agreement, GMAC issued warrants to Treasury to purchase, for a nominal price, additional preferred equity in an amount equal to 5% of the preferred equity purchased. These warrants were exercised at closing of the investment transaction. The additional preferred equity provides for a 9% annual distribution right. Additionally, Treasury committed to lend up to $1 billion of TARP funds to GM so that GM can participate in a rights offering by GMAC in support of GMAC’s reorganization as a bank holding company. The rights offering is expected to close, and the loan to GM is expected to be funded, on January 16, 2009. The loan will be secured by GMAC equity interests owned by GM and those being acquired by GM in the rights offering, and it will be exchangeable at any time, at Treasury’s option, for the GMAC equity interests being acquired by GM in the rights offering. The ultimate level of funding under this facility will depend upon the level of current investor participation in GMAC’s rights offering.

Treasury completed an additional transaction with GM on December 31. Under the GM agreement, Treasury will provide GM with up to a total of $13.4 billion in a three-year loan from the TARP, secured by various collateral. Treasury funded $4 billion of this loan immediately, and committed to fund an additional $5.4 billion on January 16, 2009. Treasury will provide an additional $4 billion on February 17, 2009, subject to certain conditions. To protect taxpayers, the agreement requires GM to develop and implement a restructuring plan to achieve long-term financial viability. The restructuring plan is to be reviewed by a designee of the President, who will determine whether the goals of the restructuring have been met. If the President’s Designee does not find that the goals have been met, the loan will be automatically accelerated and will come due 30 days thereafter. This agreement also includes other binding terms and conditions designed to protect taxpayer funds, including compliance with certain enhanced executive compensation and expense control requirements. Furthermore, Treasury received a warrant for shares of GM common stock and an additional senior unsecured note in the principal amount of $748.6 million.

On January 2, 2009, Treasury provided a three-year $4 billion loan to Chrysler Holding LLC (Chrysler) under the new AIFP. The loan is secured by various collateral, including parts inventory, real estate, and certain equity interests held by Chrysler. Like the GM agreement, this agreement requires Chrysler to submit a restructuring plan to achieve long-term viability for review by the President’s designee and provides for acceleration of the loan if those goals are not met. The agreement includes other binding terms and conditions designed to protect taxpayer funds, including compliance with certain enhanced executive compensation and expense-control requirements. Furthermore, Treasury received a senior unsecured note of Chrysler payable to Treasury in the principal amount of $267 million.

Targeted Investment Program

Treasury also announced the Targeted Investment Program (TIP) in December. The TIP is designed to prevent a loss of confidence in financial institutions that could result in significant market disruptions, threatening the financial strength of similarly situated financial institutions, impairing broader financial markets, and undermining the overall economy. Institutions will be considered for this program on a case-by-case basis, based on a number of factors described in the program guidelines. These factors include the threats posed by destabilization of the institution, the risks caused by a loss of confidence in the institution, and the institution’s importance to the nation’s economy. Program guidelines for the TIP were published on Treasury’s web site on January 2, as required by section 101(d) of the EESA. Treasury completed the first transaction under the TIP on December 31, 2008, when it invested $20 billion in Citigroup perpetual preferred stock and warrants. Under the agreement with Citigroup, Treasury will receive an 8% annual dividend, payable quarterly. As part of this agreement, Citigroup must implement rigorous executive compensation standards and other restrictions on corporate expenditures. As previously disclosed on October 28, 2008, Treasury invested $25 billion in Citigroup through the CPP.

III. ASSESSMENT OF CURRENT MEASURES AND THE CHALLENGES AHEAD

Impact of the Transactions

The measures Treasury has taken under EESA have been part of a comprehensive strategy to stabilize the financial system and housing markets, and strengthen our financial institutions. The strategy is working. Treasury’s actions, in concert with the work of other regulators, has stemmed a series of financial institution failures and made the financial system fundamentally more stable than it was when Congress passed EESA.

Treasury is monitoring the effects our strategy is having on lending and is working with banking regulators to develop appropriate ways of measuring these effects. Through the CPP, Treasury has moved rapidly to move capital into the system, with funds placed in large and small institutions in over 40 states and Puerto Rico. By injecting capital into healthy banks, the CPP has helped banks maintain strong balance sheets and eased the pressure on them to scale back their lending and investment activities while enabling greater lending capacity. We are still at a point of low confidence, due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit demanded and extended.

Treasury’s investment in GM, GMAC, and Chrysler prevented significant disruption to the economy, while putting the companies on a path to the major restructuring necessary to achieve long-term viability. GM and Chrysler had issued a substantial amount of debt that is widely distributed throughout the global financial system. A disorderly bankruptcy filing by GM and Chrysler would have called into question not only this debt, but also debt issued by other automotive companies. Potential losses on this debt would have impacted financial institutions, which are already suffering losses in this credit environment. In addition, GM and Chrysler employ over 150,000 people in 48 states, and provide healthcare and pension benefits for a large
number of people.

A disorderly bankruptcy could have negatively affected these individuals, as well as ancillary businesses such as auto dealers, part suppliers, and service providers. Treasury’s investment in Citigroup was necessary to prevent a significant adverse effect on U.S. and global financial markets. Citigroup is one of the nation’s largest financial institutions, providing commercial and retail banking services and other financial services in the United States and internationally. The company has some 200 million customer accounts and does business in more than 100 countries. At the end of the third quarter of 2008, Citigroup had assets of $2.05 trillion, making it the second largest banking organization in the United States in terms of assets. In an environment of high volatility and severe financial market strains, the loss of confidence in a major financial institution could result in significant market disruptions and threaten the financial strength of similarly situated financial institutions and thus broader financial markets and pose a threat to the overall economy. Treasury’s investment in Citigroup provided additional liquidity and has helped restore confidence in that institution.

Challenges That Lie Ahead

Treasury is actively engaged in developing additional programs to strengthen our financial system so that credit flows to our communities. We have made significant progress, but recognize there is no single action the federal government can take to end the financial market turmoil and the economic downturn. Treasury is confident that it is pursuing the right strategy to stabilize the financial system and support the flow of credit into the U.S. economy.

As a result of Treasury’s decision to support GM, GMAC, and Chrysler, Treasury has effectively allocated the first $350 billion from the TARP. The actual disbursement of allocated but undisbursed funds is subject, in the case of the CPP, to approval of bank capital applications, many of which remain with the regulators and will not reach Treasury for review for some weeks, and to closing of CPP transactions, which in turn remain subject to documentation, shareholder approvals in certain cases, and other closing procedures. Further, disbursement is also subject to finalizing the structure of the Federal Reserve-Treasury consumer credit program (TALF), which we discussed in the Third Tranche Report to Congress. In the very short term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, are likely to provide the necessary resources to address a significant financial market event. Treasury believes, however, that the remainder of the TARP funds will be needed to support financial market stability.

An appendix to the report can be found here. It lists detailed information on the banks and the amount of the money they received.

Treasury: 01-06-09: EESA Dec 2008 Report

The Treasury Department today released the attached report, required by section 105(a) of the Emergency Economic Stabilization Act. The first in the series of reports was delivered on December 5, 2008. The first part of the report is reproduced below.

I. OVERVIEW

The current financial crisis is one of the most serious and challenging in recent history. In response, Treasury has acted quickly and creatively to implement several programs under the Troubled Asset Relief Program (TARP) with the following three critical objectives: one, to stabilize financial markets and reduce systemic risk; two, to support the housing market by avoiding preventable foreclosures and supporting mortgage finance; and three, to protect taxpayers. While there is no single action the Federal Government can take to end the financial market turmoil and the economic downturn, Treasury has focused on developing the most effective combination of tools to further stabilize the financial system and speed the process of economic recovery.

During this reporting period, Treasury continued to make significant investments in United States financial institutions through the Capital Purchase Program (CPP). These investments have improved the capitalization of these institutions, which is essential to improving the flow of credit to businesses and consumers and boosting the confidence of depositors, investors, and counterparties alike. With higher capital levels and restored confidence, banks can continue to play their vital role as lenders in our communities, a necessary requisite for economic recovery and a return to prosperity. As of December 31, 2008, Treasury has invested $177.5 billion in United States financial institutions through the CPP, providing support to small and large financial institutions, as well as Community Development Financial Institutions, in over 40 states and Puerto Rico. Treasury has committed an additional $10 billion with a deferred settlement
date.

In December, Treasury also moved swiftly and thoughtfully to support auto makers and auto financing companies through the newly established Automotive Industry Financing Program (AIFP). On December 29, Treasury agreed to loan up to $1 billion to General Motors (GM) to assist the company in supporting the reorganization as a bank holding company of GMAC LLC (GMAC), a financing company that supports GM. Treasury also invested $5 billion directly in GMAC pursuant to its reorganization as a bank holding company. On December 31, 2008, Treasury loaned an additional $4 billion to GM and committed to an additional loan of $5.4 billion in January 2009, with an additional loan of $4 billion possible in February. Under each of these arrangements, the company has agreed to rigorous restrictions on executive privileges and compensation and other terms designed to protect the taxpayer. These steps will facilitate the restructuring of the domestic auto industry and prevent disorderly bankruptcies during a time of economic difficulty.

Treasury also made a significant investment in Citigroup on December 31, 2008, purchasing $20 billion in preferred stock and warrants. Treasury announced its plans to make this investment in November 2008. The investment is part of a new Targeted Investment Program (TIP), which is designed to preserve confidence in financial institutions and foster financial market stability, thereby strengthening the economy, protecting American jobs, savings, and retirement security. Treasury will consider financial institutions for participation in the TIP on a case-by-case basis, based on criteria in the TIP program guidelines.

In addition to making these investments, Treasury transmitted a report to Congress on an insurance program, known as the Asset Guarantee Program, as required by section 102 of the Emergency Economic Stabilization Act of 2008 (EESA). This program provides guarantees for assets held by systemically significant financial institutions that face a high risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. This program will be applied with extreme discretion in order to improve market confidence in the systemically significant institution and in financial markets broadly. Treasury does not anticipate making the program widely available.

At the same time that TARP programs are being designed and executed, Treasury is continuing to build the Office of Financial Stability, focusing on hiring a highly-qualified staff, implementing a comprehensive process for monitoring contractors, and establishing a strong compliance program. Treasury also has robust controls in place to ensure that the use of TARP funds under section 115 of the EESA does not exceed the current limit of $350 billion. Treasury has made significant progress since the TARP was launched in October, and many challenges lie ahead. We will continue to remain vigilant, ready to respond and to manage unpredictable events as they occur, with economic recovery as the first priority.

II. REPORTING REQUIREMENTS

This is Treasury’s second Section 105(a) Troubled Asset Relief Program Report to Congress (TARP Report) required by EESA. Treasury transmitted its first TARP Report to Congress on December 5, 2008, covering activities through November 30, 2008. This TARP Report covers the next 30-day period, as well as activities occurring on December 31, 2008, and addresses the following three areas required by EESA section 105(a):

• An overview of actions taken by the Secretary, including the considerations required by section 103 and the efforts under section 109.

• The actual obligation and expenditure of the funds provided for administrative expenses by section 118.

• A detailed financial statement with respect to the exercise of authority, including:

1. all agreements made or renewed;
2. all insurance contracts entered into pursuant to section 102;
3. all transactions occurring during the initial 60-day period, including the types of parties involved;
4. the nature of the assets purchased;
5. all projected costs and liabilities;
6. operating expenses, including compensation for financial agents;
7. the valuation or pricing method used for each transaction; and
8. a description of the vehicles established to exercise such authority.

III. INDIVIDUAL PROGRAMS AND INITIATIVES

The Capital Purchase Program

Under the voluntary Capital Purchase Program (CPP), the Treasury is purchasing senior preferred shares from qualified financial institutions. In accordance with the considerations of the EESA, a broad spectrum of institutions is eligible for the program: U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies. To protect the interests of the taxpayer, only viable institutions are accepted into the program. A recommendation on acceptance is received from the institution’s primary federal regulator or, in some cases, from a council of representatives from each federal regulator. The Treasury is responsible for final approval.

The minimum subscription amount is 1 percent of the institution’s risk-weighted assets; the maximum subscription amount is 3 percent of risk-weighted assets (up to a maximum of $25 billion). Standardized terms have been developed for institutions that are organized as publicly traded and privately held institutions; terms applicable to S corporations and mutual organizations are still under consideration. The standardized terms impose restrictions on executive compensation and corporate governance and include provisions (such as the issuance of warrants) that will enable the taxpayer to benefit from the future appreciation of the firm. Between December 1, 2008 and December 31, 2008, Treasury purchased $26.1 billion in senior preferred shares from 162 financial institutions under the CPP. Since the launch of the CPP in
October 2008 through December 31, 2008, Treasury has invested a total of $177.5 billion in senior preferred shares in 214 financial institutions in over 40 states and Puerto Rico, and committed to purchase another $10 billion from an additional institution with a deferred settlement date.

Complete details about the Capital Purchase Program are available on the Treasury website at: http://www.treas.gov/initiatives/eesa/. The Automotive Industry Financing Program The objective of the Automotive Industry Financing Program (AIFP) is to prevent a significant disruption of the American automotive industry, which would pose a systemic risk to financial market stability and have a negative effect on the economy of the United States. The program requires participating institutions to implement plans that will achieve long-term viability. Participating institutions must also adhere to rigorous executive compensation standards and other measures to protect the taxpayer’s interests, including limits on the institution’s expenditures and other corporate governance requirements. Guidelines for the AIFP are published on Treasury’s website.

On December 19, 2008, Treasury announced a plan to make emergency loans available from the TARP to General Motors Corporation (GM) and Chrysler LLC (Chrysler) to assist the domestic auto industry in becoming financially viable. This step was taken to stave off a disorderly bankruptcy of one or more auto companies and prevent significant disruption to the already fragile economy. Treasury will carry out these transactions under the newly established AIFP.

Treasury closed on its agreement with GM on December 31, 2008, and its agreement with Chrysler on January 2. Under the GM agreement, Treasury will provide GM with up to a total of $13.4 billion in short-term financing from the TARP. Treasury funded $4 billion of this loan immediately, and committed to fund an additional $5.4 billon on January 16, 2009. Treasury will provide an additional $4 billion on February 17, 2009, subject to GM meeting certain conditions and funds being available to Treasury to purchase troubled assets under section 115(a) of the EESA. To protect taxpayers, the agreement requires GM to use these funds to become financially viable and includes other binding terms. The Chrysler agreement is outside the reporting period and will be discussed in the next report under section 105(a) of EESA.

On December 29, 2008, Treasury also purchased $5 billion of senior preferred equity with an 8% annual distribution right from GMAC LLC (GMAC) through the AIFP. Under the agreement, GMAC issued warrants to Treasury in the form of additional preferred equity in an amount equal to 5% of the preferred stock purchase; these warrants were exercised at closing of the investment transaction for additional preferred equity with a 9% annual distribution right. Additionally, Treasury agreed to lend up to $1 billion of TARP funds to GM so that GM can participate in a rights offering by GMAC in support of GMAC’s reorganization as a bank holding company.

The loan will be secured by collateral including certain GMAC equity interests owned by GM and those being acquired by GM in the rights offering, and it will be exchangeable at any time, at Treasury’s option, for the GMAC equity interests being acquired by GM in the rights offering. The ultimate level of funding under this facility will depend upon the level of current investor participation in GMAC’s rights offering. Under these agreements, both GMAC and GM must comply with enhanced restrictions on executive compensation.

The Targeted Investment Program

The Targeted Investment Program (TIP) is designed to prevent a loss of confidence in financial institutions that could result in significant market disruptions, threatening the financial strength of similarly situated financial institutions, impairing broader financial markets, and undermining the overall economy. Institutions will be considered for this program on a case-by-case basis, based on a number of factors described in the program guidelines. These factors include the threats posed by destabilization of the institution, the risks caused by a loss of confidence in the institution, and the institution’s importance to the nation’s economy. Program guidelines for the TIP were published on Treasury’s web site on January 2, as required by section 101(d) of the EESA.

Treasury completed the first transaction under the TIP on December 31, 2008, when it invested $20 billion in Citigroup perpetual preferred stock and warrants. Under the agreement with Citigroup, Treasury will receive an 8% annual dividend, payable quarterly. As part of this agreement, Citigroup must implement rigorous executive compensation standards and other restrictions on corporate expenditures. The transaction represents Treasury’s second investment in Citigroup; in October 2008, Treasury also invested $25 billion in the company through the CPP.

The Asset Guarantee Program

On December 31, 2008, Treasury transmitted to Congress a report that describes the Asset Guarantee Program (AGP) established under section 102 of the EESA. This program provides guarantees for assets held by systemically significant financial institutions that face a risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. The AGP will be applied with extreme discretion in order to improve market confidence in the systemically significant institution and in financial markets broadly. Treasury does not anticipate that the program will be made widely available, and notes that the EESA requires that premiums under section 102 be set to ensure that taxpayers are fully protected Treasury is exploring use of the AGP to address the guarantee provisions of the non-binding agreement with Citigroup Inc. announced on November 23, 2008, and described in Treasury’s 105(a) Report to Congress dated December 5, 2008.

The insurance program report to Congress is available on Treasury’s website.

Other Initiatives:

Term Asset-Backed Securities Loan Facility

The Treasury will provide $20 billion from the TARP to support the Federal Reserve’s $200 billion Term Asset-Backed Securities Loan Facility (TALF). This facility will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The TALF is expected to begin operation early in 2009.

Credit market stresses led to a steep decline in the issuance of ABS for these types of loans in the third quarter of 2008, and the market essentially came to a halt in October. At the same time, higher risk premiums drove interest rate spreads on AAA-rated tranches of ABS to levels well outside the range of historical experience. The purpose of the TALF is to increase credit availability by stimulating the issuance of consumer and small business ABS at more normal interest rate spreads.

On December 19, 2008, the Federal Reserve released revised terms and conditions and questions and answers detailing operational aspects of the TALF. Under the revised terms and conditions, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS fully secured by newly and recently originated consumer and small business loans. TALF loans will have a term of three years and will be fully secured by eligible collateral. Haircuts (a percentage reduction used for collateral valuation) will be determined based on the riskiness of each type of eligible collateral and the maturity of the eligible collateral pledged to the Federal Reserve. The haircuts will provide additional protection to taxpayers by protecting the Federal Government from loss. Treasury will provide $20 billion of credit protection to the Federal Reserve in connection with the TALF. The sponsor of the eligible ABS must agree to comply with the same
executive compensation restrictions required for participants in the CPP.

Report Continued in PDF File here.

Bankruptcy (Auto): 12-29-08 Ed Altman

Summary

Ed testified before the US House Financial Services Committee, providing expert commentary on a plan to bailout the big three American automobile makers. Professor Altman believes that the current loan that General Motors is asking for is inadequate and is likely to fail. He advocates for the company to file for Chapter 11 bankruptcy protection and for the company to receive a $40-50 billion debtor-in-possession (DIP) loan from the government. This type of loan will entitle the government to receive priority status over other creditors, and limit any financial loss to taxpayers. Under Chapter 11 bankruptcy, the firm is not liquidated—it remains in business. Therefore, Chapter 11, he added, provides an opportunity for the company to restructure itself and potentially renegotiate legacy pension claims and other costs. Professor Altman also suggests that the US Treasury encourage banks that have received money under the government’s TARP plan to participate in the supply of DIP financing to GM.

ps. Ed is a very nice person as well! You can download his testimony here. Also, below is some information about Ed from the NYU website.

Edward I. Altman Max L. Heine Professor of Finance Joined Stern: 1967 Leonard N. Stern School of Business Kaufman Management Center 44 West 4th Street, Room 9-61 New York, NY 10012 Email: ealtman@stern.nyu.edu Research, publications, honors, and more

Corporate Finance Bankruptcy and Reorganization	Bankruptcy Analysis and Prediction Credit and Lending Policies Risk Management in Banking, Corporate Finance

Academic Background
PhD, Finance, 1967	University of California, Los Angeles
MBA, Business Finance, 1965	University of California, Los Angeles
BA, Economics, 1963	City College of New York

Biography

Edward I. Altman is the Max L. Heine Professor of Finance at the Stern School of Business, New York University. He is the Director of Research in Credit and Debt Markets at the NYU Salomon Center for the Study of Financial Institutions. Prior to serving in his present position, Professor Altman chaired the Stern School’s MBA Program for 12 years. He has been a visiting Professor at the Hautes Etudes Commerciales and Universite de Paris-Dauphine in France, at the Pontificia Catolica Universidade in Rio de Janeiro, at the Australian Graduate School of Management in Sydney, Luigi Bocconi University in Milan and CEMFI in Madrid. Dr. Altman was named to the Max L. Heine endowed professorship at Stern in 1988.

Dr. Altman has an international reputation as an expert on corporate bankruptcy, high yield bonds, distressed debt and credit risk analysis. He was named Laureate 1984 by the Hautes Etudes Commerciales Foundation in Paris for his accumulated works on corporate distress prediction models and procedures for firm financial rehabilitation and awarded the Graham & Dodd Scroll for 1985 by the Financial Analysts Federation for his work on Default Rates on High Yield Corporate Debt and was named “Profesor Honorario” by the University of Buenos Aires in 1996. He is currently an advisor to the Centrale dei Bilanci in Italy and to several foreign central banks. Professor Altman is also the Chairman of the Academic Advisory Council of the Turnaround Management Association. He received his MBA and Ph.D. in Finance from the University of California, Los Angeles. He was inducted into the Fixed Income Analysts Society Hall of Fame in 2001, President of the Financial Management Association (2003) and a FMA Fellow in 2004. In 2005, Prof. Altman was named one of the “100 Most Influential People in Finance” by the Treasury & Risk Management magazine.

Professor Altman is one of the founders and an Executive Editor of the international publication, the Journal of Banking and Finance and Advisory Editor of a publisher series, the John Wiley Frontiers in Finance Series. He has published or edited almost two-dozen books and more than 130 articles in scholarly finance, accounting and economic journals. He was the editor of the Handbook of Corporate Finance and the Handbook of Financial Markets and Institutions and the author of a number of recent books, including Distressed Securities; and his most recent works on Managing Credit Risk and Bankruptcy, Credit Risk and High Yield Junk Bonds (2002), Recovery Risk (2005), Corporate Financial Distress & Bankruptcy (3rd ed., 2005) and Recovery Risk (2005. His work has appeared in many languages including French, German, Italian, Japanese, Korean, Portuguese and Spanish.

Dr. Altman’s primary areas of research include bankruptcy analysis and prediction, credit and lending policies, risk management and regulation in banking, corporate finance and capital markets. He has been a consultant to several government agencies, major financial and accounting institutions and industrial companies and has lectured to executives in North America, South America, Europe, Australia-New Zealand, Asia and Africa. He has testified before the U.S. Congress, the New York State Senate and several other government and regulatory organizations and is a Director and a member of the Advisory Board of a number of corporate, publishing, academic and financial institutions, including the New York State Common Retirement Fund’s Investment Committee. He has been Chairman of the Academic Council of the Turnaround Management Association since 2002.

Dr. Altman is Chairman Emeritus and a member of the Board of Trustees of the InterSchool Orchestras of New York and a founding member of the Board of Trustees of the Museum of American Finance.

Treasury: 12-27-08 Auto Bailout

Summary

Today (12-19-08) , we have acted to support General Motors and Chrysler, with the requirement that they move quickly to develop and adopt acceptable plans for long term viability. This step will prevent significant disruption to our economy, while putting the companies on a path to the significant restructuring necessary to achieve long-term viability. At the same time, we are including loan provisions to protect the taxpayers to the maximum extent possible.

Term Sheet here for Chrysler; Term Sheet here for General Motors.

Comment: I find it unbelievable that a Republican President would start the United States down the path to major interventions by the federal government.  TARP monies were to be used to mitigate systemic banking risk and not to bailout “auto companies” or other companies.

Full Release below

Today (12-19-08) , we have acted to support General Motors and Chrysler, with the requirement that they move quickly to develop and adopt acceptable plans for long term viability. This step will prevent significant disruption to our economy, while putting the companies on a path to the significant restructuring necessary to achieve long-term viability. At the same time, we are including loan provisions to protect the taxpayers to the maximum extent possible.

Treasury will make these loans using authority provided for the Troubled Asset Relief Program. While the purpose of this program and the enabling legislation is to stabilize our financial sector, the authority allows us to take this action. Absent Congressional action, no other authorities existed to stave off a disorderly bankruptcy of one or more auto companies.

As a result of this decision, Treasury effectively has allocated the first $350 billion from the TARP. The actual disbursement of this amount is subject to approval of bank capital applications, many of which remain with the regulators and will not reach Treasury for review until early next year. Disbursement is also subject to finalizing the structure for the Federal Reserve-Treasury consumer credit program (TALF). In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect’s transition team in the near future.

Subject Matter Experts in Industrial Organization:

Editorial Board of ERN IO: Productivity, Innovation & Technology: Armen Alchian, Steven Berry, Dennis Carlton, Harold Demsetz, Nicholas Economides, Paul Joskow, Paul Macavoy, Roger Noll, Sam Peltzman, Nancy Rose, Garth Saloner, Richard Schmalensee, William Treanor, Hal Varian, Oliver Williamson, Robert Willig,

Editorial Board of the Journal of Industrial Economics: Pierre Régibeau, Yeon-Koo Che, Kenneth Corts, Thomas Hubbard, Patrick Legros, Frank Verboven, Steven T. Berry John Van Reenen Patrick Rey Michael Salinger, Marcus Asplund, Gary Biglaiser, Ramon Caminal, Bruno Cassiman, Yongmin Chen, James Dana, Peter Davis, Sara Fisher Ellison, Ian Gale, Richard Green, Paul Heidhues, Igal Hendel, Saul Lach, Nancy Lutz, Robin Mason, Aviv Nevo, Ted O’Donoghue, Bruce Peterson,Amil Petrin, Jozsef Sakovics,Monika Schnitzer,Fiona Scott-Morton,Chris R.Taylor,Otto Toivanen,Tommaso Valletti,Nikolas Vettas, Catherine Wolfram,

Editorial Board of the International Journal of Industrial Organization: P. Bajari, B. Caillaud, N. Gandal, J. Levinsohn, F. Malerba, R. Porter, M. Riordan, M. Slade, M. Waterson, J.P. Choi, J. Gans, A. Hortacsu, R.A. Jensen, G.Z. Jin, B. Jullien, D. Martimort, V. Nocke, H.J. Paarsch, A.K. Petrin, M. Shum, V. Aguirregabiria, R. Amir, S. Clerides, G.S. Crawford, J. Dana, U. Doraszelski, S. Fisher Ellison, J. Fox, K. Graddy, T.D. Jeitschko, F. Khalil, K. Krishna, J. Lerner, D. McAdams, E.J. Miravete, M. Peitz, B. Ruffle, S.P. Ryan, M. Rysman, O. Shy, C. Snyder, Y. Spiegel, V. Stango, R. Stenbacka, S. Stern, G. Tan, J. Thisse, N. Vettas, R. Veugelers