Tuesday, October 21, 2008

Bailout Behind the Curtain

Why would GM buy Chrysler? Vehicle manufacturing has long been plagued by overcapacity, and GM in particular suffers from high inventory and slumping sales (and hasn't yet flogged its failing Hummer brand). Then there's GM's legacy worker healthcare costs.

Chrysler's struggling with overcapacity too, plus being over-committed to fuel-guzzling SUVs, trucks and mini-vans, which aren't selling at current pump prices for any automaker. The Chrysler line most worthy of preserving is Jeep. But closing most remaining Chrysler and Dodge lines would cost; in addition to employee payouts, according to the Economist, "most of Chrysler’s 3,500-strong dealer network would, under American law, have to be bought out at a total cost of well over $1 billion."

Which prompts Robert Farago at The Truth About Cars to repeat:
Why? Why in the world would General Motors want to combine with Chrysler? Given their respective balance sheets and future prospects, the analogies pretty much suggest themselves. My favorite: the Titanic rescuing the Lusitania.
But seriously now, folks, this week's Economist supplies an odd answer:
The real prize for GM might, however, be something much more tangible. In August Cerberus claimed that Chrysler still had $11 billion in cash from loans raised earlier. There is speculation that it might be willing to throw that in, and add some more, in exchange for a stake in the merged entity. GM, which is currently burning through more than $1 billion a month, had access to $21 billion in cash and $5 billion in credit at the end of June. Brian Johnson, an analyst at Barclays Capital, thinks that the carmaker needs a further $10.3 billion to get it through to the end of next year, when cost savings and recovering demand should start to kick in. As one of GM’s rivals observed this week: "We think it’s cash that’s driving this pony."
Farago agrees, and adds an even wilder non-market reason:
JP Morgan-Chase reckon Chrysler’s going down, taking their six bil [invested with Cerberus in Chrysler] with them. So they’d rather have their money in GM, which will, no doubt, receive a federal bailout (the latest rumors have Uncle Sam purchasing an equity stake, I shit you not). For its part, Cerberus [still] has its eyes on GM’s 49 percent share of lender GMAC. Cerberus is also counting on a federal bailout to save that particular piece of bacon, via the Troubled Asset Relief Program (TARP). So the banks get out of Chrysler, Cerberus gets out of Chrysler AND gets GMAC (which it can then, finally, combine with Chrysler Financial).
Conclusion: Now you know. GM's desperate for Chrysler's cash, and willing to pay loan-shark rates (in employee and dealer buy-outs) to get it, counting on taxpayers picking up the tab, as The Truth About Cars' Ken Elias summarizes:
[S]o GM will acquire Chrysler. A deal that has nothing to do with synergies, cost savings or parts sharing. Nope, it’s all about guaranteeing that Washington saddles-up to the loan giveaway bar for Detroit. Billions and billions of dollars for guarantees or direct loans, all paid for the American taxpayers--who buy more than 50 percent of cars from foreign auto makers. All justified in saving a great American icon of industrial might, a driver of new automotive technology (Volt anyone?) and preserving jobs in the heartland.

But you won’t hear the truth from the auto execs at GM, or analysts or the automotive scribes. Wall Street will celebrate the deal (deal fees in a lackluster M&A market). The automotive media will herald the "bold stroke of genius" and "the next 100 years of GM" or something to that effect, and the auto execs will point to synergies, efficiencies, and other BS.

Everyone else will simply ask WTF? And we just told you the truth: it’s a deal designed to absolutely, positively insure that Washington provides a massive bailout to GM in early 2009. (Ford will follow along on the gravy train too . . . but that’s another story.)

So there it is -- the real reason this deal will go down. Washington will have to rescue GM now, it has no choice. The private equity guys are out of the picture (and off the hook for Chrysler’s liabilities too). The political dilemma solved. Could you script a better scenario?
Uh, how about plain-old Chapter 7 liquidation? Or another chorus of Tom Paxton?

(via Instapundit)


Anonymous said...


Certain aspects of the plan to acquire Chrysler Corporation to finance the company’s manufacturing operations will be reviewed by the Securities and Exchange Commission to ensure compliance with regulatory and legal requirements. Failure to comply with existing or future applicable requirements may lead to civil penalties or other liabilities and may subject the company to significant indemnification liability against its shareholders for any such failure to comply. In addition, new or revised regulations may impose additional costly burdens on the company, which may affect its revenues and cause delays in its growth or even a downright death spiral before, like two Hummers colliding head on at 12 mpg, it crashes and burns in a fiery inferno that would rival Dante’s. The prospect of a federal, state or local government bailout would be exceptionally sweet, especially to its chief executive officers who might otherwise freefall without a parachute into the slammer, but is an ad populum assumption. Past performance is not a guarantee of future results.


Anonymous said...

Yeah, let's just keep bailing out the banks and private corporations and let the poor and middle class taxpayers pick up the tab. That's a good way to keep their kids out of college so we can keep their lifetime wages low.

Is this a good time for unions to come back into power or does the word "union" frighten you? What about the concept of empowering the workforce of the USA to produce real products and services instead of the "derivatives" and other paper products that seem to be destroying capitalism?