Two Sinking Ships Want a Bailout to Rescue One Another
Like I said a couple weeks ago, two sinking ships cannot rescue one another. The proverbial sinking ships, General Motors (GM) and Chrysler, seem to have finally come to this conclusion in the course of their earnest and horribly misguided merger talks. The problem is that, instead of quietly sulking away into Chapter 11 bankruptcy for one or both automakers, they now want to enlist Mommy Government’s help (and thus, your help) in sealing the deal. That’s right, GM and Cerberus Capital Management (Chrysler’s owner) want the United States government to hand them $10 billion so that they can merge.
I am absolutely aghast.
What would the government and—by extension—you and I get in return? Well, $3 billion of that money would buy a chunk of GM/Chrysler’s ‘equity’. Of course, when the combined firm goes under anyway because of the UAW, mismanagement, and other problems that ‘equity’ will be worthless. Another $3 billion would go to taking over GM and Chrysler pension obligations, and the rest would apparently just be free money. This is not a gamble investors will take, so why should the government take it?
Not to mention that it was only a month ago that the U.S. government gave these same automakers $25 billion in loan guarantees—for a running total of $35 billion that you and I are on the hook for if the American auto industry bankrupts itself. Anybody else feel a bit ill?
Update: Hours after I wrote this, I came upon an opinion piece by Steven Pearlstein in the Washington Post who says the same thing, but with a well thought-out alternative solution. Kudos to Pearlstein; I sure hope GM, Chrysler, and Congress are listening.
Update 11/3/2008: The International Herald Tribune reports that the Bush Administration will not be negotiating this new $10 billion bailout with GM. Finally, the government makes a smart economic decision.