The major concern among investors and business counterparties, with regards to investing along side or doing business with the U.S. government, is whether economics or politics direct policy. We have already seen government efforts to control pay, strong-arm creditors and dictate which facilities of government-rescued companies will stay open and which will be forced to close. It is this last point which is the subject of this post.


We have already seen Massachusetts Representative Barney Frank force GM to keep open an inefficient and unnecessary distribution facility located in his district. Now GM (60% owned by the U.S. Government) has decided to build its new small car (originally slated to be built in China) in Orion, Michigan. This in spite of the fact that a facility in Spring Hill Tennessee is more up-to-date. Originally, the government assured businesses, investors and municipalities that economics, not politics, would drive the decision making process. However, GM stated that carbon foot print and community would be major considerations in deciding where to build its new small car. Apparently an obsolete factory located in the middle of UAW country offers the right mix of community and carbon foot print. A healthy dose of Michigan incentives sealed the deal.

Building small cars in the U.S. is difficult (even foreign manufacturers with U.S. assembly plants build their smallest cars overseas), but building them in Michigan in a UAW plant is downright stupid, unless the government will step in. Count on it!

In previous posts I have made comparisons between the U.S. Government's involvement in the auto industry with that of the UK and the British government. There is another troubling comparison to be made. That is between Chrysler / FIAT and AMC / Renault.

In the 1980s Renault was looking for a foothold in the U.S. AMC was out of R&D money and had no small car following the second gasoline crisis of 1979. AMC and Renault decided to merge. AMC began building Renault cars in the U.S. (much like FIAT wants Chrysler to do). However, fuel prices fell and finicky French cars were out. By 1987 the jig was up and Chrysler, which had been on the ropes several years earlier, acquired AMC and its very profitable Jeep division.

Now we have a Renault redux at hand. Will American consumers buy Chrysler-built FIAT commuter cars, vehicles with performance and possibly with reliability below that of Chrysler small cars of the recent past? Maybe at first, but this does not appear to be a good fit or long-term fix. Give Chrysler an R&D budget and some Tennessee factories and it would probably fair better. However, the government does not wish to upset the UAW.


One last note outside the auto sector. I warned readers regarding the preferred to equity exchange being conducted by a certain large bank that it is unlikely that the preferreds would trade at parity with the common and that when and if the spread narrow it could be the common which takes a bath as the short squeeze diminishes. This is apparently happening. The equity markets are often not fundamentally correct.