Amerika The Beautiful

It's official, the bulk of Chrysler's assets will go to FIAT. The UAW is safe..... for now. The Supreme Court decided that a group of Indiana pension funds did not have a strong enough legal argument to warrant a full review in front of the court. Although I wish it was different, the court was probably correct. After all, the vast majority of Chrysler's secured lenders had already agreed to the government sponsored bankruptcy and reorganization. What irks me and many others on both Wall Street and Main Street is how the agreement was reached with Chrysler's secured lenders.

On April 30th, 2009 President Obama and his "auto czar" Steven Rattner strong armed the majority of Chrysler's secured lenders, most of whom were TARP banks to agree to give up their VERY senior places on the capital structure to accept a 29 cents on the dollar recovery while the UAW (which has the most subordinate equity claim) is awarded 55% ownership of Chrysler. This feels like Soviet Union, but different. Chrysler will be run like a quasi-workers collective. Wait, it gets better.

Chrysler is being forced into the arms of FIAT for (ha, ha) modern small car technology. Isn't FIAT the company that was a bust for GM? Isn't FIAT the company that had to leave the U.S. market because it's quality was lower than that of the Detroit Three in the early 80s? Isn't FIAT the company known disparagingly in automotive circles as being an acronym for Fix It Again Tony? You bet it is. Chrysler WAS the domestic small car leader. Starting with the L platform Omnis (which pre-date the K-car), Chrysler matched the imports in mechanical reliability (but not in fit and finish) with domestically designed and built four cylinder engines (which were also among the most powerful small displacement engines on the market at the time). After struggling for a while, Chrysler rebounded with the cab-forward Dodge Intrepid / Chrysler Concorde and the Dodge Neon (the last domestic small car to turn a profit). What happened then was classic Detroit.

By the mid 90s Chrysler was considered the most efficient automaker in bringing designs from the drawing board to the production line (including imports). Former Marine Bob Lutz had Ma Mopar humming. Then fat Detroit came back. Executives paid themselves bonuses. The UAW wanted its share as well. The money for these payouts came from the R&D budget. By 1998 Chrysler was in trouble.

Chrysler engaged in a so-called merger of equals with Daimler (there is no such thing as a merger of equals). Although then Daimler chairman Juergen Schrempf did not understand Chrysler's market, he did understand Chrysler's cost structure and attempted to take the company upscale. Unfortunately, leather-clad $40,000 mini vans were not hot sellers. New chairman Dieter Zetsche understood both Chrysler's market and its cost structure. His lineup of V8-powered cars and trucks were a hit, until fuel prices rose due to a weak dollar. The die was cast. Chrysler was in trouble. Daimler couldn't wait to unload Chrysler and basically gave it away to private equity firm Cerberus, even guarantying all Chrysler bonds.

Now the government is propping up both Chrysler and GM as it struggles to maintain UAW and other union jobs. Perish the thought that GM and Chrysler build cars in non-union plants in the American South. Meanwhile Ford tries to go it without government help, but will likely need loans (to develop fuel-efficient vehicles) and needs its Ford Motor Credit unit to become an industrial bank to receive cheap government financing.


Speaking of cheap government financing, the government is permitting 10 banks to repay their TARP money. The 10 banks are: JP Morgan, Morgan Stanley, Goldman Sachs, American Express, U.S. Bancorp, Northern Trust, BB&T, State Street, Capital One and Bank of New York Mellon. Two large banks were conspicuously absent. One is so dysfunctional that I do not expect that we will see it repay TARP now or ever, at least not in its current form (see today's Wall Street Journal editorial entitled "Making Failure an Option".

Bank management knows that it must get as far away from the government to be successful. Investors should take the same approach. Stay far away from companies which have government equity ownership. Profit and investor value is not the government's goal.