Free Markets, Free People

Reinventing The Flat Tire – Chrysler Set To Try A Variation Of The British Leyland Model

There’s some interesting stuff out there to read about the Chrysler bankruptcy, like people asking “why wasn’t this done in the beginning”?

Simple answer – in the beginning there was no way to secure the UAW a majority stake in the company. Now, as Felix Salmon points out, that’s been accomplished:

The broad outlines of a deal are already clear: Fiat will take a 35% stake in the company and manage it; the UAW will have a 55% stake; and all the government’s TARP funds will be converted into a 10% stake. Present-day creditors do not get equity but rather get cash; the sticking point is exactly how much cash they will get. And of course present-day shareholders — Cerberus and Daimler — are wiped out, and top management will be replaced.

Of course the reason Chrysler is headed into bankruptcy is because all of its bondholders weren’t satisfied with the deal offered through taxpayers money. As you might imagine, Think Progress has the “progressive” spin on the situation:

As Bloomberg reported, “Obama’s team had first offered secured lenders $2 billion for their $6.9 billion in loans, and then raised the offer to $2.25 billion. In a game of chicken, the holdouts asked for $2.5 billion, and Obama’s patience ran out.” Steven Pearlstein put these numbers into perspective:

What you need to know about these vultures is that their idea of fairness is throwing 100,000 people out of work and denying retirees their pensions and their health benefits just so they can liquidate the company and maybe squeeze an extra 15 cents on the dollar from their Chrysler debt. Of course, to get that extra 15 cents, the hedge funds would probably have to fork over a penny or two to pay the army of $700-an-hour lawyers needed to spend two years working it through the bankruptcy process.

The greed factor here is really appalling, but bad intentions can sometimes produce a good result.

The greed factor here certainly is appalling, but not on the part of the group Think Progress would like us to believe is the problem. I mean, how dare secured lenders ask for more money than a paltry 30% of what they lent Chrysler? In the new world of what’s fair, apparently asking for 30% is unfair and greedy. And frankly with an administration which has tossed trillions around like they were beads at Mardi Gras, it seems that somehow $250 million more was just a “bridge too far” when it came to keeping the deal together.

More importantly, what in the hell is the President of the United States doing involved in this sort of process to begin with? Oh, wait, the UAW gets 55% ownership?


Salmon again:

All of this is necessary but not sufficient for Chrysler to have any hope of a long-term future. One of the more interesting things going forward will be how Chrysler manages to turn itself into a smaller, nimbler, change-oriented company while being majority owned by the UAW — which is nobody’s idea of a change agent. In general, if you need a dose of creative destruction, big unions are not the place to look.

You think? Another wonderful deal put together by the folks who want to run your health care. And yes, I know this isn’t perfectly analogous to the British Leyland situation, but it certainly has some striking similarities. A labor union will most likely have to decide between it’s previous decades of focus and producing cars that people want and can afford. And government involved in the deal up to its armpits.  In case you missed it, the government will appoint four of the nine member board and the Canadian government will appoint one.  Fiat is essentially a management entity with only 3 on the board and a 35% stake.  And while the UAW will only have one seat, it will be a seat representing 55% ownership.

Yeah, nothing can go wrong with that.


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20 Responses to Reinventing The Flat Tire – Chrysler Set To Try A Variation Of The British Leyland Model

  • So, since the UAW will now own both of Ford’s major competitors, what do you want to bet that this will be the end of the “linked” negotiating strategy that the UAW has evolved over the years.  I predict that from this point on the UAW will be shocked (SHOCKED!!!) should anyone be so bold as to suggest that the salaries it pays at its own plants have anything to do with the salaries that Ford needs to pay.

  • Sorry, that first sentence should say both of Ford’s “domestic” competitors.

  • So far I’m not seeing any downside (except to the original lenders, and the US tax payer, and Fiat).
    Now, would it have been cheaper to just write checks to the 100,000 members of the UAW special interest group?  well, yes, but….that would be WAAAAAAAAAY to obvious.

  • One point about the plan needs to be emphasized. The UAW gets a 55% stake in Chrysler that they will then attempt to peddle. The idea is they will “cash out” their 55% in order to put the money into the health trust they now own.

    Am I the only one who sees a problem with this? Given how badly the senior creditors have been vilified, and their rights traduced by President Unicorn and his myrmidons, who in their right mind would purchase shares in a recently glamorized pig? Oh, that’s right. I forgot. There’s all those banks with TARP money that will be “encouraged” to do the right thing.

    Problem solved!

  • “All of this is necessary but not sufficient for Chrysler to have any hope of a long-term future. One of the more interesting things going forward will be how Chrysler manages to turn itself into a smaller, nimbler, change-oriented company while being majority owned by the UAW — which is nobody’s idea of a change agent. In general, if you need a dose of creative destruction, big unions are not the place to look.”

    Mr. Salmon’s premise is incorrect.  There will be neither motivation nor need for Chrysler to become a ‘smaller, nimbler, change-oriented company’ since the US taxpayer will now continue to be (don’t forget the $4B sunk cost so far) committed to infusing funds as required to keep the operation running (how very Soviet).

    What the future will hold is the government directing the company to create the cars they believe are the ‘right’ cars (ie: small, green, blah, blah, blah), regardless of marketability.  This will apply to GM as well, since the government is putting the squeeze on them as well. 

    And if the market doesn’t cooperate by purchasing enough of the approved vehicles?  Well,  severe tariffs on foreign manufacturers, and severe taxes on Ford (specifically the trucks and SUV’s that are so popular) should eliminate most of the competition and protect the government investment.

    If this were a proposed merger between GM and Chrysler, the government would nix it in a heartbeat as monopolistic.  But the situation really isn’t that much different when the government decides to take control of the two companies.

    Better buy your truck/SUV/large sedan now, because soon enough there won’t be anything left but ‘Smart’ cars.

  • This will end well.

  • What will be hilarious to watch is if the thugs at the UAW, faced with the reality that they now own their own business, will start acting like (gasp!) businessmen.

    “UAW president Bugsy Mulligan annouced today that Chrysler will eliminate 5,000 jobs, almost all blue-collar assembly workers.  Citing third quarter losses of over $12 million and plumetting market share due to the failure of Chrysler’s flagship ‘Einhorn’ green car to gain a foothold in the market, Mr. Mulligan said, ‘While we regret that we have to take this step, we’ve got to look at the larger picture and consider what is best for Chrysler and the remainder of our workforce.”

    “Senator Carl Levin of Michigan reacted angrily to the news and vowed to introduce legislation in Congress making it illegal for a union to fire its own members.”

  • First, what is Fiat paying for that 35% share?

    Secondly, was Obama prepared to bail out the creditors of Chrysler who lost 70% of their assets?

    Third, any halfway honest bankruptcy court will not be bound by this agreement.

  • I seriously don’t understand why Fiat would want to be a part of this deal…

    • Just because the UAW owns 55% of the stock, doesn’t necessarily mean they have access to voting with it.  Most, not all, of the stock could be in a Fund of which the UAW owns shares.  This Fund could essentially automatically abstain to all decisions.  This would give FIAT enough control to run the company.  There is also a pathway where FIAT eventually becomes a 51% owner.  At which time they will have complete control. 

      I suspect they’ll shutdown or sell what remains after looting the few assets that Daimler didn’t loot for itself, primarily Jeep, and toss in some government cash.

    • Fiat are past masters at milking Italian government subsidies and are exploiting an opportunity to expand on the profitability of this core competency (and they make small cars). 

  • For our left-center people…a question.

    What happens to Ford now? Will the UAW strike them under or will the competition regulate them under?

    Why should the one company that didn’t take tax payer money have to compete with the unlimited presses of the government?

  • I should say Ford lost me when they went to sealed bearings. I want grease certs on mine.

    • I know what you mean.  It’s discomfiting not to be able to add grease to the joints.

  • I love the discussion of “fairness” from Think Progress and Salmon’s disregard for the senior creditors because of their crass desires to maximize their return (read the rest of his article and his other writings on the subject).  I still don’t understand why they think it is the role of the senior creditors to finance Obama’s payoff to the UAW.

    • I once read a lefty claim that the principle role of a company is to provide jobs.  When challenged on this boneheaded assertion, he and other libs stoutly defended the idea.  This was actually an eye-opening experience for me, because it demonstrated very clearly that libs really, really DON’T understand free market economics.  It helps me to understand many of the stupid things they do.

      Libs are mad at Chrysler’s creditors because, once again, they don’t understand what a creditor is and, more importantly, WHY they do what they do.  Simply put, libs do not understand the profit motive or, if they do, are as disgusted by it as conservatives are of communism.  In their twisted minds, the creditors should be willing to sacrifice their profits – even to the point of bankruptcy – in the interests of the social “good” of keeping (union) workers in jobs.  That at least some of the creditors don’t want to do something so foolish and irresponsible is outrageous to them.  Indeed, the idea that a company would act to maximize its profits rather than throw money away to support the lib agenda (which they very naturally think of as “good for society”) is “foolish and irresponsible”.  And what do we do when we see people acting in a foolish and irresponsible manner?  Why, we take things away from them so they can’t do it any more!


  • It is remarkable how all the hedge fund support and investment in Obama’s campaign is really paying off for them. Soon, he will take their excessive salaries, cars, vacation homes, boats and investment portfolios. Greed will not be tolerated. Serves them right for ignoring the warnings.

    “I am Obama, Destroyer of Worlds.”

  • Question: What do you call a corporation that’s 55% owned by their own workers’ union? 

    Answer: A corporation.

    I can tell already: the left’s coming re-intoduction to the laws of supply and demand is going to be hee-sterical. 

  • This will be amusing, even though I doubt it will result in cars worth buying.