Detroit Outsider: Perspective on the Chrysler/GM bridge loans

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This agreement is basically a punt to Obama – and that’s exactly what was appropriate and prudent. Doing nothing wasn’t an option, and a broad, sweeping long-term agreement with no foresight into the complexity and dynamism of the industry’s future would have been premature and would tie the next president’s hands – in short, exactly what you’d expect from the current president. His record suggests that he would be more likely to take his ball and go home, or to deflate it and shred it, rather than punt. To be realistic, this is exactly what was best for W, because it makes him the short-term hero at little political or economic cost, and he also holds no responsibility for future failure (which is highly probable). Even this self-interest represents some deft strategic thinking, and that is as unexpected as anything. The Detroit Outsider will go out on a limb and say this is George W. Bush’s finest hour.

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Then there are the aspects that are both good and bad:

Threat of Chapter 11: It’s good that the government isn’t ruling out a forced bankruptcy at the end of March 2009 because it pressures all the players into making concessions. If they know that they might end up with nothing, they’re more likely to make the sacrifices necessary for long-term viability. The specter of bankruptcy is also bad, though. For one thing, these companies need private investment. They can’t become viable on taxpayer money and restructuring alone. GM’s investment prospects rise along with federal support. If it appears that the government is committed to keeping the company afloat, investors will see GM as a safer bet. As structured, the agreement is equivocal, to say the least. Then there’s the issue of time and resources. Given a finite loan, Chrysler and GM are being asked to devote resources both toward becoming viable and toward planning for possible bankruptcy protection. Can you do both?

Chrysler is included in the loan: On the downside, Chrysler is a privately owned company with the least assets and the most questionable future, which makes this assistance – though it’s only a loan – even more extraordinary in a capitalist system. On the upside, it once again supports the argument that this is about protecting the industry and thus the economy. The collapse of a U.S. automaker, private or public, would have the same consequences.

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What this boils down to is that important decisions will be made by the Obama administration as this saga unfolds. Obama doesn’t seem to shy away from complexity, which is a good sign, but whether you’re an Obama supporter or not, what he and the industry will now enjoy is more time, and you can’t overestimate the value in situations like this. For perspective, the loan granted to Chrysler in the ’70s came together over the course of 10 months. That was one loan to one company in a much healthier economic climate. That loan was repaid, with dividends. Though it’s frustrating that Bush and Treasury didn’t act immediately, which they could have done (avoiding the Congressional circus), in the interim many questions were asked, Congress educated itself and economic and employment conditions worsened, illustrating to everyone, including reticent taxpayers, why this action is necessary. If the new plan’s $17.4 sounds like a king’s ransom, the three months is a pot of gold. Now the automakers have time, under pressure, to make their case for future viability. If they prove it, the bankruptcy threat may be softened or lifted, inspiring the necessary private investment. The plan is actually very well thought out.

http://detroitoutsider.blogspot.com/2008/12/perspective-on-chryslergm-bridge-loans.html