Marc, Megan and the Chrysler BK

Marc Ambinder asked Megan McArdle about the Chrysler situation, and then adds his own two cents. You can read Megan's blessed response in it's pointed snark here.

I happen to be in agreement with Megan on this issue. From a business perspective, it is really hard to see where a net benefit can be derived from the way the Obama administration handled the situation.

Chrysler now has an "alliance" with Fiat, yet no obligation from Fiat to inject cash into the deal. In fact, Fiat can walk away without forgoing anything other than some good will (good will in a market that wasn't providing anything to Fiat's balance sheet, at that.)

Chrysler's sales are down, there is only so much room for sales growth in a bad economy, retooling to the Fiat models (if that is how the plan is to work) will be expensive, and they still have payroll to meet. They are receiving some loans from the federal government - and billions of dollars seems like a lot - but remember how quickly they ran through the first government loans.

Also, keep in mind that the recent projections from the administration on the economy as a whole, and the auto manufacturers own projections in specific, have been far off the mark. Chrysler could very well be in danger again in early 2010.

If they are in danger again, the only thing they will have to trade for cash is the UAW's equity - which given how the most recent equity and bond holders were treated - would have to be traded with a substantial risk premium (read: discount). So the UAW may get shorted in the end anyways (if you are thinking that Fiat will inject cash, remember: they have no skin in - it would make more sense for them to walk).

It seems from my reading of Marc's statement that he has spoken to people in the administration that acknowledge that Chrysler is likely to fail in the future anyways:

My best sense of the administration's argument is that of a very sick patient who needs, among other things, his gall bladder removed. Better to let that patient recover before the surgery, as it's never a good thing to operate on a guy whose immune system is challenged. Translated: Chrysler's probably gonna fail at some point.

If so, this a looks like an elaborate and costly strategy to kick the can down the road:

• They have spent/will spend over 10 billion taxpayer dollars trying to revive Chrysler.
  
• They have riled the financials to no end (I work in a business where over 90% of transactions are financed, and the financials definitely keep score).
• They have interfered in Bankruptcy law. These cases do not occur in a vacuum, and can be applied as precedent to other cases.
• In anonymous statements to the press, leaders of the financials have made it clear that this sort of activity has hindered the ability of the of the government to recruit for PPIP (and isn't Chrysler really a form of PPIP? Look how that turned out for the private investers).

While the monetary costs are large, the biggest cast may be the discount now being applied against the full faith and credit of the United States Treasury. Remember when PPIP was unvieled, and many said it was too much of a giveaway to investors? The Treasury guarantee's were too broad? Given the level of participation to date, it is clear that investors are discounting the Treasury guarantee's. The guarantee of the United States Treasury used to be the gold standard in the finance world. Now, not so much.

Were these costs really worth what the government accomplished? Now some may say that there would be a multiplier if Chrysler shut down, and we had to save jobs. Not true. People were not going to stop buying cars if Chrysler shut down - they were just going to buy cars that were not Chrysler's. And since the majority of the cars sold in the US share the same suppliers (yes, Honda, Toyota and the little three share the same suppliers), the pieces were just going to be moved around the board, rather than coming off the board.

Ultimately, the UAW gains in the short term. And that is important to Obama and the Democrats. Even in a year where everything broke their way, they would have had a tough time being competitive with out the $400 million + that labor spent on the elections.

But the UAW was going to get a huge chunk of equity anyways (the difference between the end amount the UAW got and a reduced amount of equity that would have made the senior lein holders whole was percentage points). So why would it make sense to roll the senior lein holders?

Gamesmanship.

To show that Obama's getting over.