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Jared Hamilton
From: Jared Hamilton
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Jared Hamilton

Jared Hamilton Founder - CEO

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The Chrysler Bankruptcy is pushing private creditors into a head on collision with the government and the government backed companies. What plays out in New York's bankruptcy court will largly determine the direction General Motors, and our industry heads.  Will the government keep the playing field level and let the markets rebuild themselves naturally from here, or force their hand to achieve some predefined objective?

President Obama delivered a great speech when he announced that Chrysler would seek Chapter 11 protection.  Despite announcing some really bad news, he kept things very positive and encouraged the public to buy American.  The largest problem facing Chrysler has been, and still is, a steep decline in consumer confidence. The president should be commended for attacking that head on.  However, he ripped a small group of Chrysler creditors for not settling their debt according to the government’s recommendation and thus laying balme on them for forcing Chrysler into Bankruptcy. The media has picked up on that and kept the public beating going, claiming these groups were actng selfishly and even in an "unamerican" way.  Is their condemnation justified?

The creditors being slammed were part of a group of secured creditors owed 6.9 billion, meaning in the event of a BK they are legally to be paid out first.  The government offered them about 30 cents on the dollar to walk away.  Yet the UAW, an unsecured creditor owed 10.6 billion, was given a 55% ownership stake in the new Chrysler and a payout over time of almost half their debt.  People are crying foul; saying that the government is favoring the UAW, a huge supporter of the administration, by illegally moving them to the front of the line and giving them more than their fair share.  Is the UAW being given special treatment?  Perhaps the bigger question is how can we expect the government be a fair moderator and do what is best for our industry when they have converging political and economic interests based on the outcome of the negotiation? 

To further complicate matters, these condemned creditors are also arguing they have been kept out of the government discussion because they are the only party that isn’t tied to the government.  The situation is not as simple as the creditors vs. the UAW fighting for Chryslers assets with the government in he middle.  Sure, the government is playing moderator in the middle, but are they really in the middle? In addition to playing moderator the government is also a direct creditor, Chrysler shareholder, they have political interests to protect the UAW, and have substantial funds (90 billion to be exact) invested in the other banks that have outstanding debt to Chrysler.  Given their broad involvement in the situation, which of their many conflicting motivations will prevail and again, what is best for our industry?

Here are a couple other messy situations:

With the UAW becoming the largest shareholder in Chrysler and selecting one or two of its board members, will they do what is in the best interest for their workers or for the company as a whole?  Sometimes it is in the best interest of the company to cut workforce, use outsourcing or leverage technology to make the company more scalable, all things the union hates.  How will a Union who has proven their sole motive is to benefit its workers even at the cost of the company, help run Chrysler any better?  Who will the union blame now when they have a problem? Themselves?  Would Chrysler be better off without the unions like the imports?

With GM under government control, the fate of Saturn's employees and dealers are resting in their hands. Will the government be willing to save the jobs by letting a foreign competitor like Renault take over the Saturn brand even if it means creating a GM competitor in the process? On one hand they want to preserve American jobs, but on the other hand they want to protect their newly acquired company.  Cliff Banks of Wards Auto wrote a great article on this conundrum.

It appears as though the free fall in our economy has stopped, and the government has played a big role in that.  However, is the current situation set up to create the most innovative and robust industry going forward?  I'm not sure it is.  

Could you imagine being an NFL quarterback playing in the Super Bowl against a government backed team, with a government referee and with some of your own teammates on government payroll?  The competitive spirit is dampened when it feels like the outcome is decided ahead of time; and unfortunately it’s the competitive spirit that produces the real MVPs.

 

Jay Campbell
Hi Jared! Great blog. Let me point out a couple of errors in your thinking. The "free fall" in our economy hasn't even begun to stop. I don't know where you base that comment, but unemployment is continuing to skyrocket in most major cities in North America. The equity markets are fools gold as greed, short squeezes and hype are continuing to drive the last 7 weeks. It won't last much longer. And if it does, the turndown will be CATASTROPHIC. Also the Shadow Home inventory being held by the Lenders who were forced to avoid foreclosures when the OBAMA GOVT put a moratorium on them is not slowly flooding the market again further depressing home values. Expect another 10-15% decline across the board. Especially in areas least hit so far. The collapse of the 3rd party part suppliers ecosystem coming from the GM and Chrysler BK will shock our Govt into another stimulus package before the year is over. Obama and this govt are on a dead sprint to Socialism. It's best we all understand and accept it. Unless you want to move to Costa Rica and open a bar with me? ;) Seriously nothing good is going to come from the Domestics shutting their factories and plants for 2-3 months. Many-many people will go under including Domestic and Import dealers whose list of problems is just starting. The biggest problem areas will the major Metro's who are "over dealered" and not saavy enough to figure out what works from a media perspective. It appears all but the biggest names will suffer and and even the biggest names are already suffering. We gonna have to ride this out and by that I mean prepare for 2010. Consumer confidence and spending won't return until then. I should have posted a blog instead of a comment. Whoops. On the positive side, Driving Sales is still growing by leaps and bounds. Congrats my brother!
Jared Hamilton
thanks Jay, yes DrivingSales is growing quite rapidly. I appreciate the support from all the thought leaders like yourself who participate making this a good place for industry pros to connect with information. As far as my comment about the "free fall" - i was referring to the Banking crisis. When the subprime mortgage bubble first broke, it sent our whole banking industry into a major tail spin in institutional investors where losses mounted, values dropped, margins were called prompting more selling and the cycle was in a straight downward free fall. The govt pumped so much money into the banking industry they were able to stop that fall from being more catastrophic. We risk inflation in the long run, but in the short run they put the breaks on that issue that would have caused severe systemic risk to our entire banking system. Many banks, while still in a fragile state, are showing signs of recovery. My economic belief is quite hands off, let the markets correct themselves. I dont know what would have happened had the govt let it be, but I do know they kept the short term situation much better by taking the action they did and flooding the market with cash. I hope they can execute in the long run and avoid the rush of inflation that we are now at risk of. Its a tought situation to be in! That being said, i completely agree with you that the system is still very frail and still has corrections coming in many areas (real estate and our industry being some of those places where corrections are still happening) - no doubt we have not recovered and could slip worse at any given moment. One of the best things we can do as an industry is realize that the 16-17 m sales volumes we have achieved was over inflated due to wide open lending. Dont plan on it going back anytime soon and use innovative ways to be successful even in today's environment. The pain to correct hurts, but we will emerge a stronger industry and need to be sure to not repeat what happened. Costa Rica? I hear the beaches are great!
Eric Miltsch
Nice post to stimulate deeper thinking about the entire situation. Regardless of one's political alignment or beliefs, this is our situation now and all we can do is plow ahead to the best our abilities. Car dealers, parts suppliers and service related businesses - among other businesses - definitely need to look at how they had to alter their plan of attack to stay in business and, most importantly, remain profitable. If Chrysler filed while being $19 Billion in the hole - isn't it wise to play a game of "who moved my cheese" for your business, considering GM is $80 Billion+ in the hole as well? Why react later - when you may be able to do something innovative now?

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