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.