Case
Supplementary Resources
Abstract
On December 11, 2008, Greg Goodnight, Mayor of Kokomo, Indiana, looked out his window at the holiday preparations taking place in his metro area of 50,000 and wondered whether 2009 would bring hope or despair to the citizens of his city. He had just received the news that congressional leaders had failed to agree on terms for emergency federal financial assistance for the U.S. “Big Three” automakers. Without some sort of substantial government intervention, at least one of the three – General Motors – seemed headed for almost certain and fairly immediate bankruptcy and possible cessation of operations. The entire country was focused on this issue, but Mayor Goodnight had particular cause for concern: nearly one quarter of the Kokomo area's workforce was employed directly in the auto industry. The two biggest employers in Kokomo were the local factories of automaker Chrysler and Delphi Automotive, a parts supplier already mired in unresolved bankruptcy.
Mayor Goodnight had been working long hours for months, in tandem with other like-minded elected officials and labor and industry leaders, to help secure government bridge loans to the auto industry. But regardless of efforts by elected officials from auto industry-dependent communities across the nation, the 110th Congress had not passed a “bailout” package. In the absence of specific legislative authority to help the automakers, President George W. Bush had stepped in with up to $17 billion in loans to the auto industry. He utilized funds authorized for the Troubled Assets Relief Program (TARP) by the Emergency Economic Stabilization Act of 2008. This money would allow GM and Chrysler, the two most troubled “Big Three” U.S. automakers, to continue operations through March 2009.
It was unclear what would happen next, after the incoming Obama Administration and the 111th Congress took office. The employment of up to 3.3 million Americans who worked in (or were dependent upon) the auto industry and the fate of heavily auto industry-dependent communities, like Kokomo, hung in the balance.
Mayor Goodnight sat in the quiet of his office developing his options. He planned to continue lobbying for the support needed to allow the U.S. automakers and their suppliers to remain in business, providing jobs. But he knew that he had to prepare for the worst, and so he reviewed his administration's plans to address the fallout if Kokomo's core employers shut down their operations and laid off their workers in 2009. At the same time, he committed himself to redoubling Kokomo's efforts to develop new directions for the city's economic future.
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Resources
Exhibit 1: Financing Assistance to Facilitate the Restructuring of Auto Manufacturers to Attain Financial Viability (A White House Fact Sheet)
Conditioned Loans to the Domestic Auto Industry Will Enable Vital Restructuring, While Protecting the American Taxpayer
Today, President Bush announced that the Treasury Department will make loans available from the Troubled Asset Relief Program (TARP) to assist the domestic auto industry in becoming financially viable. The terms and conditions of this financing will facilitate the restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive assistance.
- These auto manufacturers will be provided with $13.4 billion in short-term financing from the TARP. An additional $4 billion would be made available in February, contingent upon drawing down the final tranche of TARP funds.
- The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. In the event that firms have not attained viability by March 31, 2009 , the loan will be called and all funds returned to the Treasury Department.
- A firm will only be considered viable if it has a positive net present value , taking into account all current and future costs, and can fully repay the government loan .
- The President's preference was not to use TARP funds to assist these firms, but since Congress failed to act, executive branch action is necessary.
Terms and Conditions
The binding terms and conditions established by the Treasury will mirror those that were supported by a majority of both houses of Congress, including:
- Firms must provide warrants for non-voting stock.
- Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
- Debt owed to the government would be senior to other debts, to the extent permitted by law.
- Firms must allow the government to examine their books and records.
- Firms must report and the government has the power to block any large transactions (more than $100 million).
- Firms must comply with applicable Federal fuel efficiency and emissions requirements.
- Firms must not issue new dividends while they owe government debt.
The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:
- Reduce unsecured debt by two-thirds via a debt for equity exchange.
- Make one-half of Voluntary Employee Beneficiary Association (VEBA) payments in the form of stock.
- Eliminate the jobs bank.
- Work rules that are competitive with transplant auto manufacturers by December 31, 2009.
- Wages that are competitive with those of transplant auto manufacturers by December 31, 2009.
These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case that it will achieve long-term viability in spite of the deviations. In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.
Effects of a Domestic Auto Industry Failure
During this very critical time for the global economy, the impact of a disorderly bankruptcy would be very damaging to our manufacturing base, affecting jobs well beyond the auto industry. The additional job losses and loss from Gross Domestic Product (GDP) would likely postpone our economic recovery considerably. In addition, these effects could multiply and result in additional declines in investment, consumption, and growth, which could worsen the current recession.
- The direct costs of American automakers failing and laying off their workers in the near term would result in a more than one-percent reduction in real GDP growth and about 1.1 million workers losing their jobs, including workers from auto suppliers and dealers. Many workers would apply for unemployment benefits, and to the extent that retirees and other workers lost health insurance, apply for Medicaid. These new unemployment claims could cost about $13 billion and would likely add sizeable costs to State Medicaid programs. Additionally, suppliers may not be able to absorb losses from writing off the accounts payable owed by auto manufacturers and may not be able to downsize quickly, resulting in remaining auto companies having supply chains disrupted. These effects on our economy could multiply as a result of the failure of these companies.
Source: White House Press Office, December 19, 2008, available at http://www.whitehouse.gov/news/releases/2008/12/20081219-6.html (last visited January 6, 2009).
Exhibit 2: Jobs Lost Due to Auto Industry Shutdown (states ranked by number of jobs lost)
Rank | States | GM only | Total industry shutdown | Rank | States | GM only | Total industry shutdown |
1 | Michigan | 112,500 | 407,300 | 27 | Oklahoma | 9,700 | 35,200 |
2 | California | 84,500 | 305,900 | 28 | Iowa | 9,400 | 33,900 |
3 | Ohio | 60,500 | 219,100 | 29 | Mississippi | 8,800 | 31,700 |
4 | Texas | 55,200 | 200,000 | 30 | Connecticut | 8,600 | 31,200 |
5 | Illinois | 42,800 | 154,900 | 31 | Louisiana | 7,900 | 28,500 |
6 | Indiana | 40,700 | 147,300 | 32 | Kansas | 7,700 | 27,900 |
7 | New York | 39,900 | 144,600 | 33 | Arkansas | 7,000 | 25,300 |
8 | Florida | 34,900 | 126,300 | 34 | Utah | 6,300 | 22,700 |
9 | Pennsylvania | 33,200 | 120,100 | 35 | Nebraska | 6,000 | 21,800 |
10 | Tennessee | 29,400 | 106,400 | 36 | Nevada | 5,200 | 19,000 |
11 | N. Carolina | 26,400 | 95,600 | 37 | New Hampshire | 3,500 | 12,800 |
12 | Wisconsin | 23,600 | 85,400 | 38 | West Virginia | 3,500 | 12,700 |
13 | Georgia | 23,000 | 83,400 | 39 | Idaho | 3,300 | 12,000 |
14 | Missouri | 22,800 | 82,600 | 40 | New Mexico | 2,900 | 10,500 |
15 | Alabama | 21,000 | 76,100 | 41 | Maine | 2,800 | 10,300 |
16 | Kentucky | 20,700 | 75,000 | 42 | Rhode Island | 2,500 | 9,200 |
17 | New Jersey | 17,900 | 65,000 | 43 | Delaware | 2,000 | 7,100 |
18 | S. Carolina | 16,100 | 58,200 | 44 | Hawaii | 1,800 | 6,700 |
19 | Virginia | 15,500 | 56,000 | 45 | South Dakota | 1,800 | 6,500 |
20 | Washington | 14,700 | 53,300 | 46 | Montana | 1,500 | 5,300 |
21 | Minnesota | 14,200 | 51,500 | 47 | North Dakota | 1,500 | 5,500 |
22 | Arizona | 13,100 | 47,500 | 48 | Vermont | 1,200 | 4,400 |
23 | Massachusetts | 12,800 | 46,200 | 49 | Alaska | 1,000 | 3,600 |
24 | Maryland | 10,300 | 37,200 | 50 | Wyoming | 1,000 | 3,600 |
25 | Oregon | 10,300 | 37,300 | 51 | Washington D. C. | 900 | 3,300 |
26 | Colorado | 10,200 | 36,800 | TOTAL U.S. | 914,000 | 3,309,700 |
Source: Robert E.Scott, When Giants Fall, Washington, D.C.: Economic Policy Institute, December 3, 2008.
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved