CNBC is reporting that the US Treasury is working on a plan to aid GM and Chrylser merge (see US Treasury Working on Aid). Great, just what we need, to throw away put taxpayer dollars at risk work in the auto industry.

According to CNBC:

The U.S. Treasury Department is considering how to best provide financial assistance to facilitate a possible merger between General Motors and Chrysler, a source familiar with the government’s thinking told Reuters on Monday.

The Treasury Department is considering aid of at least $5 billion, which could include direct capital injections and government purchases of auto loans, the source said, speaking on condition of anonymity. A decision on the government aid could come as early as this week…

GM has been lobbying the Bush administration for substantial help as it seeks to merge with Chrysler, which is owned by Cerberus Capital Management.

GM chief executive Rick Wagoner was in Washington last week to press for help after congressional allies, in an urgent plea, urged the Treasury to provide immediate and direct liquidity for Detroit.

For reasons that I’ve explained on this blog, a combination of GM and Chrysler does not make much sense (see A Disastrous Deal and GM + Chrysler = Ugh!). As I explained:

I’m  not a big fan of combining two failing firms in the hopes of creating one healthy one.

According to the WSJ, GM expects $10B in benefits by combining with Chrysler (see GM had Talks with Chrysler).

Pray, do tell, how?

Unless GM is expecting to shut Chrysler down and pocket their nearly $11B in cash reserves, $10B in benefits seems improbable to me.

Their best bet would be to get rid of half the products of the combined GM-Chrysler, keeping only the best-in-class product from each firm (e.g., the Jeep brand for SUV’s and the Chevy brand for the mass market). Their product portfolios overlap almost exactly, so the thinking has to be that by rationalizing operations, GM-Chrysler would be able to do so while effectively combining Chrysler’s 11% U.S. market share with GM’s 24% market share.

So in order to make this deal work, GM/Chrysler would have to rationalize the combined operations by shutting down plants, eliminating redundant management posts, and purging overlapping brands. In essence, it’s the same as shutting down an operation more or less the size of Chrysler. In return, GM would receive access to $10B in cash from Chrysler to help see it through this crisis.

If this is what it would take to make such a merger work, why would the goverment – we taxpayers – want to aid here? Anyway you look at it, the end result will be plant closures and mass layoffs.

If the government feels compelled to step in, here’s my alternative: Provide money directly to GM (in the form of warrants or shares) to help it survive the crisis.

Why make things more difficult by forcing a complicated merger and a messy integration?

I can see the rationale for wanting to save GM. It was on the verge of turning a corner, it has some products that have potential (Volt, etc.), and had the financial environment been different, it might even have survived on its own. Besides, it is a publicly owned and traded company with 265,000 employees. Therefore, it is systemically important and there is much at stake.

Chrysler, by contrast, is a private company owned by Cerberus. Chrysler has, by my estimate, somewhere in the neighborhood of 70,000 employees. In addition, its products are dated, and its pipeline is weak. For these reasons, Chrysler is less systemically important than GM. Moreover, on principle alone, why should taxpayer money be used to bail out Cerberus, a privately run investment company that represents the epitome of credit excess (see my posts Private Equity: The End of an Era and Stupid Money Chasing Stupid Deals for background)??

If the government is going to come to the aid here – which I hoped it would not have to, but if it must – why not put that aid to where it can be best used – directly into GM, …but only on the condition that it NOT pursue an ill-advised, and messy, merger with Chrysler.

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