Several news sources are reporting that GM and Chrysler are getting closer to a deal (see GM, Chrysler Merger Talks Accelerating or GM and Chrysler Step Up Talks).

For reasons that I detailed in my previous post (see A Disastrous Deal), this does not strike me as a sound strategic merger. Again, I’m  not a big fan of combining two failing firms in the hopes of creating one healthy one. All you end up with is one larger bad firm instead of two smaller bad firms.

What’s more, the aforementioned news sources are both reporting that GM and Chrysler creditors are supporting the union. For example,

JP Morgan Chase, a big holder of Chrysler bank debt, is also pushing for the deal…

…the two sides are seeing strong support from banks and other potential lenders that are eager to see a deal done… (quote via Calculated Risk)

Of course lenders are supporting this deal. Any deal decreases the chances of default – not because the combined entity will have a stronger balance sheet and/or a stronger business model, but simply because it creates an entity that the government will likely deem “Too Big to Fail”!!

I find it sad that preferential treatment of this sort may be motivating this deal.