U.S. Government takeover of the auto industry? Who's next?

http://online.wsj.com/article/SB124109550079373043.html

Chrysler LLC will file for Chapter 11 bankruptcy protection Thursday, President Barack Obama said, kicking off what the administration predicts will be a 30- to 60-day restructuring of the third-largest U.S. auto maker.

At the same time, Chrysler entered into a partnership with Italian auto maker Fiat SpA, Mr. Obama said in a noon address. Mr. Obama said the partnership would not only let Chrysler survive "but to thrive."
[Chrysler to File for Chapter 11] Reuters

The U.S. government will provide up to an additional $8 billion in aid, including up to $3.5 billion in so-called debtor-in-possession financing, to ensure Chrysler survives the historic reorganization process.

The administration had hoped to keep the car maker out of court but decided it was the only option after a deal to cut the company's debt was rejected late Wednesday by several of the company's lenders, a senior administration official said.

President Obama said that Chrysler has been "a pillar" of the industrial economy but that the company moved too slowly to adapt to a changing market.

An administration official said Thursday a "stronger" Chrysler would emerge "with a balance sheet and a set of liabilities that are sustainable."

"Our goal is to have this bankruptcy be short and completed quickly," with a stronger Chrysler emerging, the official said. "The court in New York has a vast amount of experience in this area and we felt that that would be the most effective."

In exchange for the aid, the U.S. government will take a "small equity" stake in the new company, which will be partly owned by Fiat. According to a White House fact sheet, the U.S. Treasury will hold 8% of the reorganized company, while Fiat would hold 20% and the governments of Canada and Ontario would receive 2%.

The U.S. government would have the power to appoint board members at the new company but would not get involved in day-to-day operations, the administration official said.

This is exactly what I was talking about in my earlier post.
http://winduprubberfinger.com/blog1.php/2009/02/16/obama-creating-lstrikegauto-industryl-st
As I predicted the measures by Chrysler did not live up to the expectations of the administration's auto taskforce. The administration's answer; Chrysler must file for bankrupcy, and the government needs to control who sits on the board of directors for Chrysler. Now there is a government apointed board of directors for a private company? This constitutes direct government intervention in the private sector.

The new government loans include between $3 billion to $3.5 billion in so-called debtor-in-possession financing and an additional $4.5 billion once the company emerges from court, administration officials said Thursday morning.

Earlier Thursday an administration official said the restructuring of Chrysler will go forward even though a handful of hedge funds have refused to accept the Treasury Department's offer to cut the auto maker's debt.

The administration's auto task force tried to get all 46 of Chrysler's secured lenders to agree to a debt-reduction deal until talks broke down late Wednesday.

http://www.bloomberg.com/apps/news?pid=20601087&sid=al.LvMtoEItY&refer=worldwide

“I don’t stand with those who held out when everyone else is making sacrifices,” Obama said today in Washington where he announced that Chrysler would proceed with a Chapter 11 bankruptcy filing to reorganize into a more viable carmaker in a partnership with Italy’s Fiat SpA.

Obama said that while many of the stakeholders worked constructively, others did not. “In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout,” he said.

“They were hoping that everybody else would make sacrifices and they would have to make none,” Obama said. “Some demanded twice the return that other lenders were getting.”

There is more when it comes to the deals brokered with Chrysler. You will have a hard time finding the information in the U.S. press corps.

http://news.bbc.co.uk/2/hi/business/8028427.stm

The carmaker hopes to sell its core assets, including the Chrysler, Jeep and Dodge brands, into a new company that would be owned by the US government, Fiat, and the company's workers.

The group of 20 lenders have said in a joint statement they were being criticised for trying to protect the interests of their investors, including unions, teachers' credit unions, college endowments, and pension and retirement plans.

Tom Lauria, a bankruptcy attorney representing a group of secured lenders, has said Chrysler's proposed plan "inverts" the usual priority scheme, whereby senior secured creditors are paid in full first, followed by junior lenders, administrative claims, unsecured lenders and equity holders.

Creditors object to the way the restructuring benefits the United Auto Workers union, which is an unsecured creditor, for the $10.6bn Chrysler owes to its retiree healthcare fund.

The lenders said in a statement on Thursday that they had been "systematically precluded" from negotiations with the government.

They said they had not been allocated funds from the Tarp programme, but that Chrysler's four main banks - JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup - had received about $90bn in government bail-out cash.

The four banks, holding 70% of Chrysler's debt, have agreed to a deal that would give them $2bn.

The Treasury Department offered to reduce Chrysler's debt. Chrysler's debt is owed to its lenders. Why would the lenders agree to take less money from Chrysler? After all Chrysler borrowed the money; lenders lend as an investment. It is assumed that when something is borrowed, it will one day be returned, or returned with interest.

This gets to a deeper question. Chrysler's debt needs to be reduced so the Treasury won't have to pick up such a large tab. Why is the Treasury Department involved with Chrysler in the first place? Why is the federal government involved in the operation of a private company? I thought that in the United States the government was not involved in the direct control of private industry? I thought that direct government intervention in private industry was reserved for socialist centrally planned countries?

Again this administration's lack of specificity is a tool. The administration never defines what it means by "viable". With no clearly specified goal, the government can never be held accountable. There is no clear set of goals by which to measure progress, or failure.

The United States Government is going to make sure that the United Auto Workers get paid before the actual shareholders do. The four banks which hold the largest stake in Chrysler all received bailout money. These banks are quick to reduce the amount of money they wish to collect from Chrysler. These banks are happy to reduce debt, and loose money at the request of the Obama administration.

In the real world there are more economic varialbles than any government can effectively control. Chrysler's failing is a perfect example. The Obama administration said that they were going to "fix" the auto makers; make sure that they are viable. Bankruptcy is not indicative of a viable company. The government failed misserably to maintain Chrysler's viablility. Obama touts this is a good thing.

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