For those of you who follow this blog, you know where I stand with respect to aid for GM versus aid for Chrysler. For GM, I have not opposed some form of aid – be it before, or after, bankruptcy (see Pre-packaged Bankruptcy for GM Unlikely). However, I support aid to GM only on the condition that ample taxpayer protection is in place. I wrote:
I have been adamant that whatever aid the taxpayer provides comes with properly structured terms, with properly structured incentives, and at a hefty price to current shareholders, creditors, and management.
In particular, in the case of GM, conditions for the receipt of aid could include:
- The ousting of current top management
- A moratorium on mergers and acquisitions
- A renegotiation of employment terms with the UAW, …with all options on the table
- The rationalization of brands – for GM my suggestion would be to keep only Chevrolet, Cadillac, Opel, and potentially, Buick (given its standing in the China market)
- A shutdown of all plants tied to brands that GM will no longer manufacture, and a consolidation of the remaining brands into a few, select plants
- Incentives (in the form of tax credits) to produce smaller, more fuel-efficient automobiles
Although these terms seem fairly onerous, such terms (or variants thereof) provide the only reasonable chance left to derive some value from GM.
I have been an advocate for aid to GM because of its systemic importance to the U.S. economy (see Preventing Moral Hazard in the Auto Industry). I wrote:
Ford and GM are on stronger footing than Chrysler in terms of design, quality, operations, global footprint, and so on. Therefore, the plight of GM and Ford bear greater resemblance to a liquidity problem. By providing capital to those two firms, we are making an investment in firms whose products are more fundamentally sound, but that find themselves temporally underfunded. The money would therefore help tide them over until the crisis abates.
By contrast, Chrysler is closer to insolvency than its larger brethren (see Is the End Nigh for Chrysler for details). Any money invested in Chrysler is therefore likely only to delay the inevitable. Moreover, Chrysler is less systemically important than either Ford or GM. It is not even 1/3rd the size of Ford. It’s owners are not dispersed individuals and institutions to which many American pensions are tied. Rather, it is owned by Cerberus, a private investment firm. This raises another issue – whether the use of taxpayer money to bail out Cerberus, a private investment company that was the poster-boy for excess during the credit-fueled private equity binge, is justified in the first place.
For these reasons, I do not support the use of taxpayer funds for Chrysler, which has requested $7 Billion in initial aid (see Chrysler seeks $7 Billion).
As far as I am concerned, Cerberus should be left to reap what it has sown. If it wants money to invest in Chrysler, it should do so itself, or find private sources of external funding.
Sure enough, Cerberus has engaged in its own method of crying for capital. First, Cerberus offered to forego profit on its investment should the U.S. government inject capital into Chrysler (see A Benevolent Cerberus). Next, Cerberus tried to assign blame for Chrysler’s fiasco to Daimler (see Cerberus Claims It was Misled, …hat tip Tom). According to the Connecticut Post:
Relations between Chrysler’s current and former owners turned ugly Wednesday when private equity firm Cerberus Capital Management LP accused Daimler AG of “intentionally and materially” misleading Cerberus before the German automaker sold Chrysler last year.
These tactics are not only transparent, but reek of desperation. They attempt to mask the true, underlying problem: Cerberus made a lousy investment in a severely troubled auto manufacturer.
In my opinion therefore, before the taxpayer seriously considers an injection of capital into Chrysler, Cerberus’s investment ought to be completely wiped out. That would only happen in bankruptcy. Then, and only then, might the U.S. taxpayer reconsider.
Until that happens, the answer to Chrysler should be an unequivocal, and steadfast, “NO!”