Aid for Chrysler: Why I'm Saying NO! 9 comments
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For those of you who follow this blog, you know where I stand with respect to aid for GM (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:
1. The ousting of current top management
2. A moratorium on mergers and acquisitions
3. A renegotiation of employment terms with the UAW, …with all options on the table
4. 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)
5. 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
6. 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 forgo 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. The company is attempting 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!”
Disclosure: No positions.
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This article has 9 comments:
They are more of a financial parasite than anything else, in my opinion. John Snow goes on TV and acts like some sort of avuncular financial guru - in reality, he was and is far from that.
He was a lousy T-Sec and as far as I can tell, his job at Cerb is to "snow" the public and engage in the nefarious and corrupt game of lobbying for government money to bail out the bad investments of his firm - some of which he may have given a thumbs up to himself, assuming he was even asked to help evaluate the deal.
I doubt that Cerberus would offer to share some of the spoils of "successful" deals on which they pocketed hundreds of millions (even as some of the target companies were left in shambles) but they sure are quick to ask for help when they screw up royally, as with the old clunker Chrysler.
This is a good article, but it does highlight the depressing amount of misinformation in the media and on the net about the auto industry and the US 3 in particular. Going over your loan conditions...
1. An oversight board would make sense, but replacing Rick & co. would only set things back further. Ford brought Mullaly in to fix a dysfunctional culture which GM does not have. Cerberus replaced almost all of the top management at Chrysler and the non-Auto execs have made a number of major mistakes while trying to learn the business.
2. This is logical, and should be a requirement for the financial companies, but would unnecessarily handicap GM. They turned their acquisition of Daewoo into their small car development center & they may need to acquire or invest in a supplier to provide a solid source of batteries for the Volt & other hybrid vehicles. Also, there is no chapter 11, only chapter 7 for an Auto OEM. When Auto OEMs die they are purchased whole or in parts by other companies. While buying all of Chrysler doesn't make great sense for GM, buying their minivan business could since this is profitable and fills a hole GM has.
3. Most of this was done last year and the jobs bank was put on the table this week. The problem is not current workers, no UAW member is making $70/hr, but the cost of retirees. GM has 4 retirees for every 1 working employee. GM has tried to change this in the past but the retirees have taken them to court and won claiming that they have a contract. Also, if Congress was so great at taking entitlements away from seniors I think we would have made more progress w/Social Security & Medicare.
4. Brands are not really the issue, the issue is dealers & model diversification. Dealers, and therefore brands, used to need 3-4 models to survive. Today less than 10 models sell over 100K vehicles/year so dealers/brands need many more vehicles to meet profitable volume. Toyota now has 17 models, not counting hybrid variations or Lexus. GM & Chrysler can't have 17 models for each brand, but by combining brands into a single dealer, can achieve the same result. Killing brands requires huge payments to dealers due to state franchise laws and dealer consolidation may be the only way to solve this.
5. Sorry, but GM does not have any brand specific plants because there are no brand specific platforms. Multiple brands, when done correctly, helps build up volume to profitable levels. This is why every automaker shares platforms between brands. Killing brands will also likely reduce the volume below profitable levels on the remaining vehicles. Kill those vehicles and the brand can't compete. See how fun this gets? Take the brands out of the equation and GM is already doing this and has been working on increasing manf flexibility for the last decade.
6. GM already produces more fuel efficient vehicles than Toyota or Honda. Once they fix their cost structure they can actually start making $ on them. This is the dumbest myth that the media constantly repeats, "Detroit doesn't build small cars." GM & Ford make plenty of small cars, they just don't make much if any profit on them. Americans will not pay big $ for small vehicles, unlike Europeans and Asians, so the margins for small vehicles are very small no matter who makes them. The $2K "penalty" GM pays for retiree healthcare & pension costs wipes out any profit from these vehicles. The profit for trucks & SUVs are much higher because the sales price is much higher because Americans will pay more to get more. Europeans & Asians pay more for small cars in urban areas because big cars are not workable in Paris/London/Tokyo but also because those governments actually have an energy policy that provides incentives for consumers in the form of expensive gasoline. This is not just the US 3, if you look at the vehicles and factories that the foreign companies build in the US, all of the recent investment has been trucks & suv. The last 3 plants Toyota build in the US, including the one that is going to build the Prius, were all for full size trucks & SUVs. If the numbers were available you would see that Toyota has easliy outspent GM and/or Ford on this market segment because that was where the profit & growth in the US was until this year. Therefore, forcing GM to build more small cars, without changing energy policy, doesn't make much sense.
Chrysler is also a victim of the credit crunch, but in a different way. In a normal credit market a foreign OEM like Renault/Nissan, PSA, Fiat, Tata, or a Chinese OEM would have purchased most or all of Chrysler. Renault would make the most sense since they have a successful alliance w/Nissan, need a North American partner, & worked with AMC in the past. However, they cannot secure the credit they need for an acquisition and are waiting, like everyone else for sanity to return. Chrysler going down would take a few large suppliers with them, not as bad as GM but it could cause a similar crisis for all Auto OEMs including the Asians. The better solution is to find a suitable partner for some or all of Chrysler. Cerberus should take the bath they deserve, but no reason to take the rest of the country down with them.
I agree that the government should not financially assist Chrysler unless taxpayers are assured majority owner Cerberus will not reap any financial benefits.
What I wonder is whether Cerberus has the money to make any further investments in Chrysler or GMAC? How can we be assured that Cerberus is still financially solvent? As you say in your article, "These tactics are not only transparent, but reek of desperation. The company is attempting to mask the true, underlying problem: Cerberus made a lousy investment in a severely troubled auto manufacturer". Cerberus appears to also be facing financial challenges at paper company NewPage and Aozora Bank.
My question you you and your readers is, "are private equity firms like Cerberus suffering from the same lack of liquidity as merchants on Main Street?"