The Detroit-based Big Three automakers – a foundation of American industrial might for a century – are going to be altered under any US government bailout. The question now may be only how profound those changes will be.

It’s possible that the Bush administration still may offer a simple bridge loan to the desperate industry, postponing tough decisions until President-elect Obama takes office. But Bush officials ultimately could also decide on a rescue plan that puts the most troubled firms, General Motors and Chrysler, through something resembling a managed bankruptcy, according to administration officials.

“There’s an orderly way to do bankruptcies that provides for more of a soft landing. I think that’s what we would be talking about,” said White House press secretary Dana Perino on Thursday.

Any federal offer of aid would come attached to more Washington oversight, via an “auto czar” or some other mechanism. That means Woodward Avenue, metro Detroit’s main drag, in essence would then run through D.C.

Under the more involved plans under discussion, unions would have to make concessions, as would other stakeholders in the industry, such as bondholders. Plans would call for the number of dealerships to be trimmed.

Some suppliers are likely to go bankrupt, whether or not the United States provides the industry with aid.

As recent announcements of lengthy holiday plant shutdowns demonstrate, the industry has reached a turning point in its history. Ford has said it can shoulder along without US help. But GM and Chrysler can see a river from where they’re standing, metaphorically speaking – the Rubicon.

“The auto industry is on very delicate financial footing. The situation is quite dire,” says Dennis Virag, president of the Automotive Consulting Group, based in Ann Arbor, Mich.

The Big Three have long closed their US factories around the holidays. Typically, the seasonal shutdown lasts about two weeks.

But on Wednesday, Chrysler announced it was closing all its North American manufacturing plants for at least a month. The plants employ some 46,000 union workers. Ford announced that it would extend the holiday shutdown at 10 of its plants to three weeks, instead of the previously planned two.

The closures come at a time when sales of vehicles in the US are as low as at any time in the past quarter-century. Over the past three months, car and truck sales have declined at a “stunning” 43.7 annual rate, according to a Wachovia Economics Group analysis.

“The one bit of good news in these data is that the rate of decline in motor vehicle sales has clearly slowed, with the sales for motor vehicles now coming below replacement demand,” concluded the Dec. 15 analysis.

Meanwhile, in Washington, an aid plan for the industry has been longer in coming than many expected. After the Senate voted down a rescue plan last week, the White House announced that it would offer some kind of aid on its own authority.

At press time, the administration had yet to release a detailed bailout strategy.

President Bush said at an appearance Thursday at the American Enterprise Institute that he had not yet decided what to do. Under normal circumstances, bankruptcy court would be the best way for auto firms to work through credit and debt restructuring. “These aren’t normal circumstances. That’s the problem,” he said.

Mr. Bush said he was worried about the effect of an auto-industry collapse on financial markets. At the same time, he said, he was worried about throwing good government money into a bad situation.

On one matter, Bush was definite: He did not want to punt the problem to Mr. Obama. “I believe that good policy is not to dump him a major catastrophe on his first day in office,” Bush said.

The policy of not wanting to use taxpayer dollars to prop up enterprises that are going to collapse anyway is a good one, according to one economic expert. And that’s a likely reason that an aid decision has been delayed. Government officials are poring over GM and Chrysler financial records and talking to firm stakeholders in an attempt to understand the firms’ way forward.

“There is no reason to give credit if the firms have business plans you think are likely to fail. It’s better to say ‘no’ at the outset,” says Gary Burtless, a senior fellow in economic studies at the Brookings Institution.

But simply allowing GM and Chrysler to go bankrupt on their own risks their liquidation, according to Mr. Burtless. Foreign auto firms might buy some of GM and Chrysler’s assets, but not all.

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Mitsubishi Estate Co. gained 10 percent in Tokyo as traders increased bets the Bank of Japan will reduce borrowing costs this week, while Sun Hung Kai Properties Ltd. added 4 percent in Hong Kong. Angang Steel Co. jumped 12 percent after China said it will boost reserves of raw materials. Honda Motor Co. fell 4.2 percent in Japan, where shares retreated from earlier highs on concern the yen’s advance to a 13-year high against the dollar will shrink exporters’ profits.

“This is a strong statement that the U.S. is doing all it can to support the market and prevent a sharp economic deterioration,” said Masahiko Ejiri, who manages Asian equities at Tokyo-based Mizuho Asset Management Co., which oversees $26 billion. “It’s also a sign that things are getting worse. There will be less room for them to maneuver from here.”

The MSCI Asia Pacific Index added 2.7 percent to 89.82 as of 7:22 p.m. in Tokyo, its highest close since Nov. 10. The gauge has rallied 19 percent since reaching a five-year low four weeks ago as governments from the U.S. to Australia took steps to buttress their economies from the worst financial crisis since the Great Depression.

Japan’s Nikkei 225 Stock Average gained 0.5 percent to 8,612.52. Hong Kong’s Hang Seng Index added 2.2 percent, led by a 4.2 percent advance in China Unicom (Hong Kong) Ltd. after the nation’s second-biggest mobile-phone carrier agreed to buy telecommunication assets from its parent.

Futures Drop

The Standard & Poor’s 500 Index rallied 5.1 percent yesterday after the Fed cut its target rate for overnight loans between banks to a range of zero to 0.25 percent. A senior Fed official indicated that the bank will now shift its policy focus to asset purchases as a means of providing liquidity. Futures on the S&P 500 Index fell 1.8 percent recently.

The Fed’s move came as simultaneous recessions in the U.S., Japan and Europe dragged global equity markets lower, with MSCI’s Asian index down 48 percent from its 2007 peak. Shares on the index trade at an average 12.6 times estimated earnings, a quarter less than the level at the start of the year.

In Japan, expectations the Bank of Japan will cut interest rates rose after the government urged the central bank to do more to support the economy.

Mitsubishi Estate soared 10 percent to 1,450 yen, while Mitsui Fudosan Co., the largest, added 4 percent to 1,342 yen. Sumitomo Mitsui Financial Group Inc., Japan’s third-largest bank, rallied 4.4 percent to 354,000 yen. Lower borrowing costs may increase the attractiveness of property to prospective buyers.

Rate Cut Likelihood

Investors see a 52 percent chance that the BOJ’s policy board will reduce the overnight call rate from 0.3 percent at this week’s meeting, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading, up from 20 percent yesterday morning. The meeting ends on Dec. 19.

Sun Hung Kai, Hong Kong’s largest developer by market value, added 4 percent to HK$68.70. Henderson Land Development Co. climbed 7.8 percent to HK$33.05.

The Hong Kong Monetary Authority lowered its base rate to 0.5 percent from 1.5 percent and asked lenders to follow suit to help prop up the economy. Movements in Hong Kong rates typically track U.S. credit policy because the city’s currency is pegged to the dollar.

“You can see that Hong Kong is reacting and Japan is under a lot of pressure to follow suit in cutting rates,” said Scott Lim, who helps manage the equivalent of $710 million as chief executive officer of MIDF Amanah Asset Management Sdn. in Kuala Lumpur. “The whole region will follow suit.”

Yen Advances

The Fed’s move drove the yen above 88.53 against the dollar for the first time since August 1995, as the rate cut made the greenback the lowest-yielding currency among industrialized nations. A higher yen shrinks repatriated profits for Japanese companies.

Honda, which gets more than half its sales in North America, fell 4.2 percent to 1,891 yen. After the market closed, Japan’s second-largest automaker cut its annual operating profit forecast to 180 billion yen ($2.03 billion) from its previous estimate of 550 billion yen. The Nikkei newspaper earlier said the carmaker would cut its goal to 300 billion yen.

Nissan Motor Co., the nation’s third-biggest automaker, lost 4.1 percent to 302 yen. The company will cut local production by 78,000 vehicles from next month.

China Reserves

Angang Steel, China’s second-largest steelmaker, surged 12 percent to HK$8.65. Zijin Mining Group Co., China’s biggest gold producer, surged 8 percent to HK$4.63. China Oilfield Services Ltd., a unit of the nation’s largest offshore oil producer, rallied 15 percent to HK$6.52.

China’s plan to bolster its materials inventories is among several measures to help the steel, metal and petroleum industries, which have suffered from losses as prices plunged, the Ministry of Industry and Information Technology said yesterday. It didn’t specify the materials to be purchased.

The government also said it will order banks to increase loans to developers of low-priced houses as well as ease ownership limits and lending caps, allowing owners of smaller- than-average apartments to buy a second apartment.

China Unicom climbed 4.2 percent to HK$10.46 after agreeing to buy fixed-line assets for 6.43 billion yuan ($940 million) from its state-owned shareholders. The acquisitions are part of a government plan to let carriers offer both wireless and landline services.

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Another benefit is paying China 0% on all the T-Bills they purchase Which if done and marketed correctly could possibly help the U.S start to pull out of our massive debt we currently owe to China and many of the oil nation coutries.

Investors are so nervous they’re willing to accept the same return from government debt that they’d get from burying money in a coffee can — zero.

The Treasury Department said Tuesday it had sold $30 billion in four-week bills at an interest rate of zero percent, the first time that’s happened since the government began issuing the notes in 2001.
And when investors traded their T-bills with each other, the yield sometimes went negative. That’s how extreme the market anxiety is: Some are willing to give up a little of their money just to park it in a relatively safe place.

“No one wants to run the risk of any accidents,” said Lou Crandall, chief economist at Wrightson ICAP, a research company that specializes in government finance. At last week’s government auction of the four-week bills, the interest rate was a slightly higher but still paltry 0.04 percent. Three-month T-bills auctioned by the government on Monday paid poorly, too — 0.005 percent.

While everyday people can keep their cash in an interest-earning CD or savings account at the bank, institutional investors with hundreds of millions of dollars on their hands often use government debt as part of their investment strategy. In the Treasury market, the U.S. government, considered the most creditworthy of borrowers, issues IOUs of varying durations to raise money.

The zero percent interest rate is no reason to panic. As recently as Monday, investors were plowing cash into stocks, and averages like the Dow industrials are off their lows. And long-term government bonds, while near record lows, are still paying decent money considering the tumultuous climate. The yield on a 30-year bond on Tuesday was a little higher than 3 percent.

There’s good news in all this for taxpayers: Low interest rates on government debt mean the United States is financing its $700 billion bailout of the financial system very cheaply. The Treasury has sold mountains of debt to pay for it. But the trend also underlines stubborn anxiety in the financial market that could keep the economy sluggish for years to come, and it translates into stagnant returns for people who have their money in places like money market funds.

“There’s a price for safety,” said Peter Crane, president of money market mutual fund information company Crane Data LLC. “Down slightly is the new up.” As the stock market has taken its alarming plunge, people have been moving money from riskier assets to safer ones. According to Crane Data, funds invested purely in Treasurys have surged more than 150 percent over the past year, to $726 billion.

Earning zero percent on an investment for a short while may not seem that dire for the average person. But a zero percent rate has serious consequences for the complex credit markets.
Those markets have been dysfunctional since Lehman Brothers Holdings Inc. went bankrupt in September, scaring away investors who normally buy bonds from seemingly creditworthy borrowers. Lending, the lifeblood of the economy, has frozen up.

One corner of the credit markets is the repurchase markets, known as “repo,” where banks and securities firms make and receive short-term loans backed by collateral, usually Treasury bills.
When those T-bills are yielding nothing, there’s little incentive to deliver them on time. If the holder loses the interest, it’s no big deal.

“This is a particular problem in a time like this, because people are buying Treasury securities for their security, for their safety. It’s important that they’re delivered,” Crandall said. And high demand for government debt rather than corporate debt could stifle economic growth. Corporate bond rates have been surging to record levels compared with Treasurys, which makes it more expensive for companies to raise money. And when companies can’t raise money, they often have to cut costs, sometimes through layoffs.

Only a few corporate bond deals have been going through lately, and most have been through the government, which has agreed to guarantee financial institutions’ bond sales. American Express Co., for one, said Tuesday it has issued $5.5 billion through the government program. Many worry that the government will become the most attractive lender and borrower in the market — crowding out others in the private sector.

“Because they have a printing press, they can borrow ever greater quantities,” said Howard Simons, strategist with Bianco Research in Chicago. The 2-year note rose 6/32 to 100 25/32 and its yield fell to 0.85 percent from 0.94 percent late Monday. The 10-year note rose 25/32 to 109 17/32 and its yield fell to 2.65 percent from 2.75 percent. The 30-year bond rose 2 21/32 to 128 5/32 and its yield fell to 3.04 percent from 3.16 percent.

The three-month Treasury bill by late trading yielded 0.03 percent, up marginally from 0.02 percent late Monday. The discount rate was 0.02 percent. And bank-to-bank lending rates slipped. The London Interbank Offered Rate, or Libor, for three-month loans in dollars fell nearly 0.03 percentage points to just over 2.16 percent, according to the British Bankers’ Association.

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