Posted by MataHarley on 27 March, 2009 at 4:10 pm. 3 comments already!


The Obama administration’s team of a dozen or more auto czars are set to launch a tag team assault on the auto industry with Congress – wresting for not only financial control, but production control. Two stories, multiple developments… all with a common goal. Defacto control over the US auto manufacturing industry and their product line.

At specific risk is another $22 bil in bailout funds for GM and Chrysler, atop the $17.4 bil they’ve already received… a decision Obama promises to reach by next Tuesday after final analyses by his auto czars.

Also at risk is a potential Congressional mandate, forcing all but 20% of vehicles made in sold in the US as Flex-Fuel Vehicles. Let me ‘splain…

Tag Team Member #1:
Obama’s know-nothing “task force” of auto czars

In a comment INRE the TARP I “auto czar” creation under Bush, I pointed out that Obama fulfilled a promise for job creation (government, at least) by upping the singular czar position to another one of his famous “task forces”. It is their job to “restructure” the auto manufacturers that receive federal funds.

In quintessential Obama style, vetting proved but a fantasy, and the task force is composed of the auto industry inexperienced and the clueless. A WSJ article by Neil King Jr and John Stoll a few days ago documents a somewhat ironic amusement as they follow this group of auto czars thru their frantic crash course in the business…

Also in the article, we get a hint to their perspectives via their composition of “talent”.

President Barack Obama last month handed his auto-industry team a seemingly impossible task: to engineer the most complicated industrial restructuring ever attempted by the federal government, and to do it fast.

With almost no experience in the car business, the team’s dozen core members have undergone a crash course in the myriad woes plaguing the U.S. auto industry. Within days, just over a month after setting to work, they’ll begin announcing decisions.


It’s clear the team is not yet ready to put forward a comprehensive fix. “It’s a steep learning curve that they’ve been climbing, and there is still a lot to do,” said Michigan Rep. Gary Peters, whose district in suburban Detroit houses hundreds of auto suppliers, a few days after meeting with the task force. “That’s why I suspect they’ll come out with some preliminary statements, and then get back to work.”

In session after session in a warren of offices at the Treasury Department, the team has sat through tutorials on dealer financing, studied basic data and debated the future of U.S. car sales. They have spent days trying to understand the complexities of the hundreds of companies that supply the car companies with axles, seats and other parts.

Steven Rattner, a former journalist-turned-investment banker, was picked last month to head the team. He reports to Treasury Secretary Timothy Geithner and Lawrence Summers, the chief White House economic adviser. Mr. Rattner compares the challenge to a complicated puzzle.


The team’s industrial expertise comes from Ron Bloom, a scrappy Harvard Business School graduate who gave up investment banking in 1996 to work as a top adviser to the United Steelworkers union. When Mr. Bloom’s aging 1997 Ford Taurus conked out a few weeks ago, he traded it for a green Mustang with 50,000 miles on the clock.

Several team members, such as Brian Deese, a 31-year-old former Obama campaign aide, are on loan from the White House’s National Economic Council. Three others specialize in climate change. The rest come from agencies such as the Energy and Labor departments. Backing them up are about 30 accountants and advisers.

The newest advisory addition was Matthew Feldman, a bankruptcy lawyer from the business reorganization and restructuring department at New York law firm Willkie Farr & Gallagher LLP.

According to Rattner, this hodgepodge of anything *but* auto industry savvy types aren’t “…trying to run car companies…”. Instead he defends their relevance by stressing that this is an investment decision, similar to what they face daily.

Yet I have to ask, how can anyone with no knowledge of the business make an investment decision with merely a few weeks crash course of exposure? (They did not get up and running until the last week in February, yet Obama promises the release of their findings… and his new approach to the auto industry in a matter of days.)

Then again, logic has never been a forte of politicians and government.

What we do have inkling of thus far is some changes that the TOTUS/POTUS himself describes as “pretty drastic”. Terms will be offered in a “take it, or leave it” proposition, with little opening for negotiation.

“We will provide them some help,” Obama said. “I know that it is not popular to provide help to auto workers _ or to auto companies. But my job is to measure the costs of allowing these auto companies just to collapse versus us figuring out _ can they come up with a viable plan?”

He added: “If they’re not willing to make the changes and the restructurings that are necessary, then I’m not willing to have taxpayer money chase after bad money.”


“Everybody is going to have to give a little bit _ shareholders, workers, creditors, suppliers, dealers _ everybody is going to have to recognize that the current model, economic model, of the U.S. auto industry is unsustainable,” Obama said.


“A lot of it’s going to depend on their willingness to make some pretty drastic changes. And some of those are still going to be painful,” he said.

Terms of the loan are going to demand that banks and/or bondholders, holding the debt for the companies, accept equity instead for what amounts to 2/3rds of the debt held. This is not making the bondholders happy, saying they are being asked to sacrifice more than others. This debt for equity arrangement reduces pressure to repay the bondholders.

The unions are also having to make concessions, swapping equity in the companies for 50% of the companies’ cash contributions into a union-run trust fund for retiree health care. In addition, they must agree to work rule changes and reducing hourly labor costs to be competitive with the US facilities of the Japanese auto manufacturers.

Those the “task force” met with during their crash course training found it somewhat disconcerting that they seemed to be all-consumed with second guessing when the auto sales may rebound…. focusing narrowly on the short term results. According to Daniel Roos, an automotive expert at the Massachusetts Institute of Technology, ” “They are absolutely concerned with the short-term, so it’s hard to see them grasping the medium or longer-term issues.”

More details on the “drastic changes”? Guess we’ll have to stay tuned to YouTube for more info early next week. This is not an administration that has the apples in place before they decide to bake a pie.

Tag Team Member #2:
Congressional mandates.. from fuel standards to FFVs

While Obama’s novice auto czars work to “restructure” an industry about which they know nothing, Congress is already piling on legislation and fuel standards to micromanage all products made by the US auto manufacturers, and any imports that can be sold in the States.

The Obama admin plans to, yet again, advance fuel efficiency standards for new cars and trucks in the 2011 model year.

Under the changes, new passenger cars will need to meet 30.2 mpg for the 2011 model year and pickup trucks, sport utility vehicles, and minivans will need to reach 24.1 mpg, according to the official, who spoke on condition of anonymity because the person was not authorized to speak in advance of the announcement.

But even more onerous is HR 1476, introduced Mar 12 in the House… sponsored by Rep. Eliot Engel [D-NY], and co-sponsored by Rep. Roscoe Bartlett [R-MD], Rep. Steve Israel [D-NY], and Rep. Bob Inglis [R-SC]. The bill requires automobile manufacturers to ensure that not less that 80 percent of the cars made, or sold, in the US by each such manufacturer are Flex-Fuel Vehicles (FFVs) that can operate on E85 biofuels…. and compounds a problem that has been festering since the passage of EPAct in 1992, post the Gulf War.

While several manufacturers already offer the E85 option for many of their models for the same price as a gasolene combustion engine, the FFV scenario has been plagued with the “Field of Dreams” connundrum… ala if you build it, they [E85 fuel stations and refining] will come.

Such has not been the case. And in the meantime, these FFVs have been sucking up more fuel because they are less efficient. Even were all operating on E85 biofuels, Consumer Reports states the FFVs get 27% less fuel economy than their gasolene counterparts.

Then, of course, there’s the rise in food prices resulting from biofuel sources.

Talk about shooting yourself in your environmental toe…

A WaPo article by Kimberly Kindy and Dan Keating last November documents the problems plaguing US FFVs.

The federal government has invested billions of dollars over the past 16 years, building a fleet of 112,000 alternative-fuel vehicles to serve as a model for a national movement away from fossil fuels.

But the costly effort to put more workers into vehicles powered by ethanol and other fuel alternatives has been fraught with problems, many of them caused by buying vehicles before fuel stations were in place to support them, a Washington Post analysis of federal records shows.


Under a mandate from Congress, federal agencies have gradually increased their fleets of alternative-fuel vehicles, a majority of them “flex-fuel,” capable of running on either gasoline or ethanol-based E85 fuel. But many of the vehicles were sent to locations hundreds of miles from any alternative fueling sites, the analysis shows.

As a result, more than 92 percent of the fuel used in the government’s alternative-fuel fleet continues to be standard gasoline. A 2005 law — meant to align the vehicles with alternative-fuel stations — now requires agencies to seek waivers when a vehicle is more than five miles or 15 minutes from an ethanol pump.


Sixty-one percent of the fleet — more than 67,000 vehicles — received waivers for 2008-2009, the second year data were reported.

Another problem with came from the reality that a larger engine had to be used to meet the Congressional mandates.

The vehicles that would allow the agency to meet federal mandates were available in six- and eight-cylinder models — not the four-cylinder variety it traditionally purchased. Alternative fuel was used less than 1 percent of the time in 2007-2008.

The US Post Office, one of the only agencies that used to be financially successful, is a perfect example of an agency that has been strapped into higher fuel overhead because of the mandates. It’s 37,000 FFVs consumed an additional 1.5 million additional gallons of gas in fiscal year 2007 alone because of the larger engine designs.

How ironic it would be indeed if we found out a main contribution to the USPO’s financial struggles had to do with increased fuel overhead. Especially considering they had ended fiscal year 2005 – prior to consuming that additional 1.5 million gallons of gasin the black and debt free.

It would not be a stretch to ponder, was the FFV instrumental in the USPO’s financial demise? As the NYTs reported just days ago, fuel prices are instrumental in their financial health.

The high fuel prices of last year also sapped money from the post office, which operates more than 200,000 vehicles. Every one-cent increase in the price of fuel costs the post office $8 million.

What we have here is another “Gitmo moment”… the promise to make a change, with no feasible plan laid to implement the intended results of the change.

Fact is, there are not enough E85 fueling stations to service even the minimal fleet in the US now, let alone 80% of all vehicles that travel the US transportation grid. In September of 2008, less than 1% of all US gas stations offered E85 fuel to consumers. Despite a government incentive of $30K grants to install E85 pumps, only 1900 stations in the US offer ethanol fuel, while another source places the number at 2200.

I can hear it now… “so build more? what’s the problem?”

The answer is, quite simply, minimal supply, and expense of distribution. Currently most biofuel production is located in the heart of flyover, corn-country US… the midwest. Transportation depends upon rail and trucks… presumably the diesel sort, to boot. The additional costs drive up the base costs to the fuel stations themselves, discouraging investors. (from the WaPo article linked above…)

“I have to be able to justify it economically. I need a business plan that shows it’s worth the investment for my costs of getting the fuel there and putting in a station. The best data every time is where the federal fleet is located,” said Curtis Donaldson, president of Texas-based CleanFuel USA, which builds propane and E85 stations.

So how about a pipeline? Well… yup… that’s in the works. In fact, a $3 bil pipeline been in “the works” since Feb of 2008. In a stellar example of the speed of lightning of bureaucracy, it’s now March 2009, and the break thru towards an actual pipeline has now advanced to a joint venture to continue “discussing” it’s feasibility.

And how do alternative energy advocates feel about FFVs? One blog in particular, Alternative Energy blog, wrote a scathing criticism of FFVs back on 2006, calling E85 fuel “a distraction, a diversion, a red herring.”

The average flex-fuel vehicle is a guzzling truck (because they get the biggest CAFE preference from it). If those trucks get 13 MPG on E85, and they drive the national average of 13,000 miles/year, those 6 million vehicles would consume 5.1 billion gallons of ethanol. That’s roughly the same as the total production capacity of the nation.

But logic has never interfered with bunch of elected lawyers, making knee jerk decisions for the nation in the interest of “saving the planet”.

So here we are… with a tag team assault to control not only GM and Chrysler finances by clueless auto czars, but equally clueless elected officials mandating 80% of cars be FFVs with no way to provide them with fuel, and no benefits for doing so.

What a world…


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