GM and Chrysler Near an Agreement??
October 29th, 2008Reuters is reporting that GM and Chrysler are close to striking a deal (see Major Issues Resolved, hat tip Calculated Risk). All that’s left is seemingly the amount by which you and I (the American taxpayer) will be participating, and how (i.e., the capital structure – whether via debt, equity, or some combination of the two).
According to Reuters:
General Motors Corp and Cerberus Capital Management have resolved the major issues in a proposed GM-Chrysler merger but the final form of any deal will depend on the financing and government support available, sources familiar with the talks said on Wednesday.
As GM seeks some $10 billion in U.S. government aid to support the deal, Chrysler owner Cerberus is in its own set of intense discussions with banks to refinance $9 billion of Chrysler debt, the sources said.
As I have pointed out in prior posts (see More GM and Chrysler Shenanigans, A Disastrous Deal and GM + Chrysler = Ugh!), I do not view a combination of GM and Chrysler as a welcome development. In fact, turning these two struggling companies with weak balance sheets into one solid company with a strong balance sheet would require so much reorganization that the amount of layoffs, plant closures, and product/brand rationalizations required to achieve that end would effectively eliminate a company the size of Chrysler from the marketplace.
Instead, I believe that money would be better spent on GM alone. My counter-proposal, therefore, was to pump $10B directly into GM (in exchange for warrants or shares) to help it weather the crisis.
My belief is that we will get more bang for our buck from an investment in GM alone than we would from an investment in a combined GM and Chrysler. GM is more systemically important than Chrysler and it is in a much better operational position looking forward. There is no need to invest spend $10B on a complicated and messy merger, coupled with an expensive post-merger integration. Moreover, as a US taxpayer, I object to the use of my money to bail out Cerberus, a private investment company that was the poster-boy for excess during the credit-fueled private equity binge.
From here, the only route left to go is to take these directly objections to our representatives, …which is exactly what I plan to do.
October 30th, 2008 at 10:25 am
I have a better idea. How about we spend $0 on them? What’s the logic for subsidizing GM? We’re only bailing out shareholders, creditors, & management. The apparent hope is that the benefits “trickle down” to workers and communities. How’s that worked so far? Better to save the money to help workers and communities affected by the inevitable plant closures that will have to happen regardless of who owns those firms.
Besides, it’s not as if bankruptcy means these companies go up in a puff of smoke. Look at all the airlines that have gone bankrupt and never even missed a flight. More importantly, bankruptcy would bring about a desperately needed change in management at GM. Forgive me for not wanting to write Rick Wagoner a love letter with $10B tucked inside.
More broadly, what’s the public policy rationale for bailing out private firms? Does Circuit City deserve a bailout? Does my dry cleaner? If the economy needs to be stimulated, let’s have a stimulus plan. If we want to preserve manufacturing jobs then lets devise a policy for doing that. What we definitely need to STOP doing is throwing money at the people who created this mess.
October 30th, 2008 at 11:43 am
You raise some valid points Anonymouse. I have struggled with this myself. In the end (unfortunately), I am inclined to believe that GM is too systemically important at this point to allow to fail. And it’s not just about the managers, shareholders, and/or employees of GM, but also about the upstream auto supply chain, and the supporting businesses that service GM as a client. There are scores of companies such as those.
Ordinarily, I would agree with you about allowing GM to go into bankruptcy and then restructure. I am a staunch advocate for “free” markets. Unfortunately, I believe the situation is so dire that it would be incredibly difficult to find anyone right now with the capital to allow them to restructure. The airlines continued to fly because there were private creditors/investors willing to come in and allow them to restructure. With GM, if they went into bankruptcy, it is unclear that there are folks with the capital available to facilitate it, …so it would end up in the government’s lap anyway at a higher price tag (or completely extinct barring government aid once in bankruptcy).
…just one man’s opinion.
May 18th, 2009 at 9:43 am
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