US Treasury To End Supplier Guarantees By April

Come April, the U.S. Treasury will end an assistance program to automotive suppliers. Last March, the government used $5 billion to smooth credit transactions across the auto industry. Neil Barofsky, a special government inspector supervising the financial and auto bailout money, reported to Congress that the arrangement is “scheduled to terminate in April.” Since its inception last year, the program has been reduced from $5 billion to $3.5 billion, including $1 billion for Chrysler’s suppliers and $2.5 billion for those of The General.

The assistance was important to the entire industry at a time when the automakers’ obligations to repay their debts were in question. A simple example illustrates the importance of Treasury intervention. Suppose GM bought $100,000 worth of parts from a supplier last April. It may not have had to pay that bill until the end of May. In the meantime, the supplier needed to be able to assemble and deliver all of GM’s orders for May. The supplier would have likely needed to borrow the money for those materials from a bank. In order to secure those loans, the supplier would use the promise of a $100,000 payment from GM at the end of the month as collateral. However, if GM went bankrupt, i.e., was no longer responsible for its debts, banks would lose faith in the collateral the supplier put forward. Moreover, banks knew that they could not readily foreclose on the merchandise because it would already be installed in cars by that point. And even if they could foreclose, the fact that GM could not pay for it in the first place suggested there might not be any market for the parts, leaving the bank with a pile of worthless components. To avoid such an unfortunate outcome, the banks would have ceased lending money to suppliers, and the whole system would have ground to a halt. To avoid the collapse of the auto industry, the Treasury agreed to pay automakers’ obligations to their suppliers should the companies default. The suppliers could then borrow against the government’s promise to pay the automakers’ bills. Those promises end in April. The Obama administration has denied supplier requests for additional guarantees.

In related news, GM CEO Ed Whiteacre has not established a schedule for a public offering, despite Treasury hopes that one will occur before July 10, 2010, exactly one year after the company emerged from bankruptcy. Herbert Allison, a senior Treasury official, told Congress that per its bankruptcy agreement, GM must use its “reasonable best efforts” to attempt an IPO by that date. A GM spokesperson, Greg Martin, said that an IPO will occur “when the time is right,” with Whiteacre aiming for the second half of the year. The Treasury owns 61 percent of General Motors as payment for nearly $50 billion in loans. The Treasury also holds 56 percent of GMAC. GM is planning to repay U.S. and Canadian government loans this summer.