Seeking Alpha
Profile|
( followers)  

Warren Brown writes in yesterday’s Washington Post that the “Chrysler-Fiat Alliance is a gamble worth taking.” As he explains (my emphasis added):

Chrysler now is seeking an “alliance” with Italy’s Fiat SpA to fill a gaping, expensive and risky-to-fill product hole for small, fuel-efficient cars.

Fiat has the expertise and technology to fill that hole. And it has been working with Chrysler on a technology-swap proposal that would give it a 35 percent stake in the American car company.

Fiat’s proposal is based on the belief that the recession won’t last forever, but that America’s dominance of global automotive sales and its love of big trucks might be a forever thing. Chrysler is a leader in truck manufacturing in the American market.

Fiat also has floated the idea of acquiring another 20 percent of Chrysler, for the less-than-princely sum of $25 million, at a later date.

That seems to be a steal for Fiat, but a lousy deal for U.S. taxpayers who already have loaned Chrysler $4 billion — and a deal made worse now that Chrysler is seeking $5 billion more in U.S. taxpayer loans.

Fiat gets a controlling interest in Chrysler for $25 million in cash after American taxpayers invest $9 billion in the company? The math didn’t seem right…

Warren goes onto the case that Chrysler’s CEO, Robert Nardelli, makes for the wisdom of the partnership, citing the arguments Nardelli made to Chrysler employees last week:

He said the proposed partnership with Fiat could be worth as much as $10 billion, “equal to or greater than the total amount of loans we have requested from the U.S. Government.” Nardelli added that partnering with Fiat, which has authored small-car hits such as the Fiat 500, could save Chrysler up to five years in the design and development of small, fuel-efficient automobiles…

Yet Warren seems to recognize that the costs and the benefits in the potential partnership are not so mutual–or at least not so equally distributed between Chrysler and Fiat (OTCPK:FIATY):

In its talks with Chrysler, Fiat is betting that last year’s crazily fluctuating fuel prices and the U.S. sales success of some cleverly designed small models, such as the BMW-sponsored Mini Cooper and the Mercedes-Benz-sponsored Smart, have paved the way for a larger small-car market in America.

If Fiat is right, Fiat wins its bet. And Chrysler, Nardelli says, preserves or creates more than 5,000 stateside jobs. If Fiat is wrong, Fiat wins anyway, because it would have gained access to truck manufacturing technology in a market that traditionally has loved and demanded big trucks…

But Warren’s hint of uneasiness about the one-sided-bet nature of the deal from Fiat’s perspective seems to have come even before the news on Friday that Fiat, contrary to Nardelli’s claims on Thursday, would not assume any of Chrysler’s debt to the U.S. government. Warren’s column mentions nothing of this latest development in the partnership negotiations.

From a Reuters story (reporting from Fiat’s Italian home, emphasis added):

MILAN (Reuters) - Italy’s Fiat SpA on Friday said it would not assume any debt from would-be partner and troubled carmaker Chrysler LLC CBS.UL, less than two weeks before Chrysler is to meet U.S. demands for a crucial loan.

Fiat denied a statement by Chrysler that it would assume 35 percent of that company’s debt to the U.S. government.

“Fiat Group intends to make it absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness of Chrysler,” Fiat said in a statement…

…and from an AP story (reporting from Chrysler’s hometown, emphasis added):

DETROIT (NYSE:AP) — A public tiff between Italian automaker Fiat SpA and Chrysler LLC apparently ended Friday when Chrysler rescinded a statement on its Web site that Fiat would be responsible for part of Chrysler’s debt if the two companies join forces.

Chrysler, in a Web video on Thursday explaining why an alliance for the two companies would be good for Chrysler and the country, said Fiat would be responsible for 35 percent of what Chrysler owed to the U.S. government.

But Fiat on Friday denied that it would be responsible for any of Chrysler’s debt.

The two companies are talking about an alliance in which Fiat would take a 35 percent stake in Chrysler in exchange for Fiat’s small-car technology.

Chrysler, in a statement issued Friday, reversed the claim it made on the Web and said Fiat would become an equity holder.

“To clarify, this does not mean Fiat would assume responsibility for any of Chrysler LLC’s debt,” the statement said…

Hmmm….That sounds like a pretty sweet deal for Fiat, being able to claim a share of Chrysler’s profits without having to share in the burden of Chrysler’s new debt to the federal government (a debt which will help make those profits possible). Fiat will get the up-side potential with none of the down-side risks. The problem is that it’s American taxpayers (well, really future taxpayers, since we’re not paying for these loans to the automakers with any current taxes) who are taking on the risk of Chrysler’s possible demise even with the federal loans–should Chrysler still fail to turn a profit and thus find themselves unable to repay the loans.

With all the outrage about a small portion of the federal bailout of AIG going to executive bonuses, I think we need to worry about how Americans would feel about a Chrysler bailout where a much larger portion could potentially go to the profits of a foreign-owned company and the incomes of foreign executives. While Americans are probably more sympathetic to saving U.S. jobs at Chrysler and in the American auto industry more generally than in saving the jobs on Wall Street, maybe we need to think about whether the benefits of any additional loans to Chrysler (in saved jobs) will be worth the costs (including additions to the federal debt that go towards the profits of foreign corporations), and how that calculation might depend on the terms of any partnership between Chrysler and Fiat. Shouldn’t the federal government have some say in the terms of that partnership, if their loans are needed to create the profits that will accrue to both of the partners?

Am I missing something here? I mean, why shouldn’t the federal government insist that a Chrysler-Fiat partnership has to be a true one–one where both parties have a stake in both the profits and the debts?

Warren concludes his column with his plea for more federal aid for Chrysler:

Let them have the money.

The chance that they will succeed and pay it back, plus interest, is greater than any likelihood Congress will succeed in retrieving the bonuses paid to AIG’s executives.

I agree, but I’m just wondering if giving away bonuses to foreign-owned Fiat for helping “save” Chrysler is more analogous to giving away bonuses to the AIG executives (who were paid those bonuses to stay at AIG and help turn things around) than Warren recognizes. Americans have a hard enough time with federal aid to specific American industries and firms as it is–let alone aid that benefits a specific foreign firm.

Source: Would Partnership Be a Bailout for Chrysler or a Bonus for Fiat