Obama is telling Americans that the Chrysler bankruptcy will make the company stronger and it will be an “Orderly Bankruptcy.” Therefore, this bankruptcy will be quick, down and dirty and will only last a few months. It will allow the company to restructure itself, which is critical to Chrysler’s survival.
Chrysler is now in Chapter 11 bankruptcy court and a judge will decide what percentage creditors would get, while the company continues to operate. As part of the deal, Chrysler would sign a partnership with the Italian company Fiat.
The government will be an investor in the deal, and will use 8 billion in taxpayer money to help restructure the nation’s third largest automaker. The government will also appoint a new board of directors. Chrysler Financial, the arm of the company that makes loans to buyers and dealers will be merged into General Motors Corporation’s financial arm. The new GMAC will get government support and financial assistance.
The Treasury has reached a deal with four banks that will hold the majority of Chrysler’s debt in return for 2 billion in cash. Forty hedge funds hold 30 percent of Chrysler’s debt, and the administration needs to agree on a deal in order to go through with the bankruptcy. The administration wants to give them 2 billion dollars to satisfy Chrysler’s financial obligation.
This arrangement does not significantly cover the hedge funds investment, and they would prefer to liquidate some of Chrysler’s assets on the market. They feel the government is using their leverage and influence to force the hedge funds into a deal.
The Chrysler bankruptcy looks more like a bailout than a bankruptcy. Chrysler has already received 4 billion from the taxpayers, and now to keep Chrysler operating they will need 8 billion. This 8 billion does not include the money, that the government will give the banks and the hedge funds.
This is only the initial phase of the “Orderly Bankruptcy” because there are always problems, which are not anticipated. There is always hidden cost that could force the initial figure to double. The thinking of the Obama administration is if we throw enough money at a bad situation, it will get better.
The partnership with Fiat is a bad decision, with both companies struggling for sales and market penetration. Fiat’s operating performance around the world has been weak, and there has been a lower demand for cars and trucks. Both companies need a lifeline and merging, may force our government to interject more money into a dying company.
Unlike GM, Chrysler is not too big to fail of the three major automakers. The suppliers’ network could withstand the ripple effect of one major company not in the mix. The other automakers including the foreign transplants would improve their sales, because it would solve the overcapacity problem with too many cars produced.
Chrysler could position itself to sell off its minivans and pick up lines, and cut its losses on the remaining underperformers. It may decide to keep the jeep division and collaborate with another profitable company. Liquidation gives the company various options, and streamlines the operation.
By getting rid of the bad divisions in the company, it may be able to keep some of its employees. It would be devastating to loss 55,000 employees, but with liquidation, there is a need to cut the employee base.
Putting billions of dollars in a struggling company will not keep it from eventually dying. Chrysler is the weakest of the three giant automakers. Letting Chrysler fail will make the industry stronger and more competitive.
Government intervention in every industry will may the economy weaker. The market and brand will determine which companies and divisions will survive. Companies tend to waste the money, when they know that a bailout exists.
When Chrysler knows that the well has gone dry, their business decisions will be determined on integrity, market demands, and credibility. Their corporate strategy and survival will be depended on accurate numbers and realistic projections.
Bankruptcy is never orderly and there should never be an unlimited financial entity available, which will continue to finance the operation. Bailouts are the only system where you can spend all your money without any transparency and accountability, and then ask and receive more.
Bailouts are the only system where you can do a bad job, and get rewarded with more money.
