Friday, May 01, 2009

Fiat Accompli


The following article from the Wall Street Journal sums up the mess at Chrysler. The last sentence sums up Fiat's proposed contribution... and why I'm so skeptical about the success of this new relationship. After all, if Mercedes couldn't pull it off with Chrysler, what makes anyone think that Fiat can do better?

These are desperate times at Chrysler and one is left with the impression that Fiat is the last grasping at straws. I hope there is more to it than the obvious.

President Barack Obama pledged to give Chrysler LLC "a new lease on life" by ushering the storied auto maker into a bankruptcy reorganization that will empower its union and put Italy's Fiat SpA in charge while elbowing aside its creditors.

Administration officials said the bankruptcy could last a relatively short two months and lead to a healthier Chrysler. But the intervention Thursday to preserve the 84-year-old company is far from certain and could stall in court, especially if aggrieved parties such as creditors and dealers mount a legal challenge.

Associated Press

Gina Russo, second from left, and her father Gus, third from left, the owners of Lochmoor Chrysler Jeep in Detroit, watched President Obama announce Chrysler's bankruptcy filing.

The move also could disrupt the country's already-fragile automotive suppliers and scare away Chrysler's already-scarce customers.

The plan envisions a partnership between Fiat and the United Auto Workers union, one of the more peculiar ownership structures in Chrysler's tortured history. The filing may pave a path for General Motors Corp., whose own U.S.-imposed deadline for reorganization is a month away.

Chrysler's Chapter 11 filing -- the sixth-largest ever -- is designed to arrest the decline of a company that popularized the Jeep and the minivan. It marks the latest in a series of government interventions. Earlier, Washington took stakes in troubled banks and insurance giant American International Group Inc.

The administration is determined to protect UAW jobs and salvage the third-largest domestic auto maker, even at the expense of Chrysler's secured lenders. Critics among the lender group charged that the deal would upend established bankruptcy practice by putting junior creditors on par with secured ones.

The filing, made in New York's Southern District, was the culmination of months of wrangling that started last year when Chrysler and GM appealed to Washington for a bailout. It ended with an agreement that eventually could see Fiat taking over Chrysler, a new union pact covering about 150,000 workers and retirees, and a contentious, multibillion-dollar debt-for-cash swap.

The Treasury will contribute $3.3 billion to the plan: $2 billion to pay off Chrysler's lenders and the rest to pay the company's bills during bankruptcy. It said it is prepared to pitch in $4.76 billion more to keep Chrysler running for several years. That's on top of $4 billion the government lent Chrysler in previous months, a debt forgiven as part of negotiations with the UAW and lenders.

President Obama, in a noon speech at the White House, had to explain why he planned to save Chrysler and its workers by forcing the company into bankruptcy. A partnership with Fiat, he said, would give Chrysler "a chance not only to survive, but to thrive in a global auto industry."

Mr. Obama and his auto task force had long seen the merits of washing away some of Chrysler's liabilities through bankruptcy. Fiat can now pick the operations it desires while more easily shedding hundreds of dealer franchise agreements and other obligations it doesn't want.

At the same time, in an echo of the tensions that have run high between Washington and Wall Street, the president and his aides blamed the filing squarely on about 20 smaller investment firms and hedge funds. This group voted against the government's last offer to eliminate $6.9 billion in debt owed them.

They "decided to hold out for the prospect of an unjustified, taxpayer-funded bailout," Mr. Obama charged. Rep. John Dingell, a Michigan Democrat, called the holdouts "rogue hedge funds" and "vultures" and said in a statement that they "will now be dealt with accordingly in court."

The smaller lenders and funds pose some threat to the process of restructuring Chrysler, said attorneys and bankers involved in the matter. They'll likely argue in court the U.S. is overriding contract law, bankruptcy law and constitutional protections against the seizure of private property.

The group, calling itself the "non-TARP lenders," a reference to the Troubled Asset Relief Program that's aided banks, said in a statement that it has "a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us." The most compliant of Chrysler's big creditors -- among them J.P. Morgan Chase & Co and Citigroup Inc. -- have received hundreds of billions of dollars in TARP aid.

Fiat will contribute no money to the alliance. It has committed what it says are billions of dollars in technologies and designs for fuel-efficient vehicles.

This is Fiat's latest mini-car "winner." I see a very small market for this in the U.S. [pardon the pun].


Chrysler is capable of making good, small vehicles. That may be the market envisioned by the Obama regime, but it represents the far left of the U.S. consumer tastes in automobiles. Given the choice of that and this small vehicle that Ford is bringing out soon, you pick which one will find more consumer favor.

Let's hope that Chrysler designers can make a silk purse out of Fiat's ugly sow's ear.


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)