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George Bush just spent $13.4 billion of your money to kick the automaker mess into the Obama Administration. Funny how easily so many billions slip through our fingers these days.
Seemingly unable to decide whether to let Chrysler and GM reorganize in bankruptcy or engineer a full-blown government bailout of the deeply troubled automakers, President Bush tried to split the difference. He is offering a $17.4 billion loan--$13.4 billion upfront and another $4 billion in February. The deal is filled with demands for cosmetic concessions such as limits on executive comp and corporate jets—none of which are financially meaningful in any way. The White House calls this a loan, but don’t count on a dime ever being repaid.
This plan is supposed to give the automakers time to restructure themselves. It won’t. In truth, besides getting Bush out from under the mess, this plan won’t accomplish a thing. Bush says it would be dangerous for the auto companies to fail while the economy is in crisis. Does he think things will be any better in three months? Unless the economy miraculously turns around in the first quarter of 2009, Detroit’s collapse won’t be any easier to take.
As far as Chrysler is concerned, its majority owner, the private equity firm Cerberus Capital Management, has reportedly refused to put up any additional cash to help save its own investment. The Cerberus investors understand better than anyone the futility of doubling down now. But they are perfectly happy to let taxpayers do it for them. Chrysler is a goner. It will either be acquired (for little more than the value of its access to a government loan) or it will die.
GM may survive, but only as vastly restructured and downsized company. That will mean throwing tens of thousands of employees out of work and drastically cutting the wages of those who stay. It will require the company to offload dozens of underperforming lines and cut loose hundreds of dealers. Bush insists that plans for all of this be in place in 90 days. He, of course, will be gone in 30.
GMs loudest objection to bankruptcy has been its claim that consumers won’t buy cars from a company in Chapter 11. But why would they be any more likely to purchase from a producer living hand-to-mouth on a short-term government loan, with bankruptcy still far from foreclosed. Bush is only prolonging the uncertainty.
It was not surprising that GM stock rose on the Bush announcement. This is the new game for speculators: betting on whether or not Obama will let these companies go. In the end, shareholders, who would presumably lose everything in a bankruptcy but not in a government rescue, may be the only winners in this game.
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