Bailing Out Chrysler
The headlines today say Chrysler has asked Congress for a bridge loan of $7 billion on top of the $8.5 billion it already requested to subsidize development of fuel efficient cars. But it is not exactly Chrysler that is asking for the money. Rather it is its majority shareholder: the private equity firm Cerberus Capital Management. Thus I cannot help but wonder whether the true beneficiaries of this transaction will be Cerberus and its partners rather than Chrysler’s workers, suppliers, and dealers.
Here is my concern: Few believe the automaker will actually survive this financial calamity. Instead, one real, though usually unstated, purpose of the taxpayer bailout is to buy time. That is, keep Chrysler operating until Cerberus can unload it, mostly likely to a foreign buyer. But this $15 billion will do something else: If it is transferrable to the new owners, it will likely enhance the sales price, thus producing a windfall for Cerberus. In effect, the buyer would be acquiring the rights to billions in taxpayer money, making a seemingly sour acquisition much more attractive and, in turn, pricier.
It is impossible to learn much from the bailout proposal Chrysler presented to Congress on Dec. 2. The document Chrysler has shown to the public is just 14 pages long and includes no audited financial statement. Keep in mind that, since Cerberus is privately held, there is no SEC disclosure to supplement this request. The appeal includes little data beyond a brief table labeled “operating assumptions,” accompanied by a brief sensitivity analysis. Imagine Warren Buffett parceling out $15 billion on the basis of 14 pages. Due diligence, anyone?
The document does report that Chrysler will have shed 32,000 workers by the end of 2008, leaving only 55,000 hourly and salaried employees. Whether the company survives or not, even more will get pink slips over the next year. If the firm is acquired, expect still greater job losses.
While the industry claims that interlocking supplier relationships link the fate of one automaker to another, I remain skeptical. How is it that the demise of, say, Chrysler is a bad thing for its competitor Ford? In a functioning market, the survivor would rejoice. Something is very wrong here.
As a result, the more I look at this situation, the more I think that it makes little economic sense for Congress to think about Detroit as a monolith. Ford, GM, and Chrysler are very different companies in quite disparate situations. Ford appears to be the healthiest of the three and thus may have the best case for the taxpayer line of credit it is requesting. GM is undoubtedly in extremis, as well. But it can at least make the too-big-to-fail argument. I see no legitimate claim for Chrysler, especially if taxpayer dollars do little more than generate a windfall for an undisclosed group of imprudent investors. No amount of clever PR, whether it is CEO Bob Nardelli driving a hybrid to Capitol Hill or agreeing to take $1-a-year, can change that.