As my readers know, in my previous recent posts on this subject, I have very mixed feelings about the appropriateness of a federal bailout, but believe that a highly conditional loan based bailout is inevitable, given the clear support of the majority of members in Congress, the Bush Administration, and Obama's transition team. From a pragmatic perspective, I think it's a reasonable option under present circumstances. I want to make several more points that I think are called for at this point.
1. The three U. S. auto companies (GM, Ford, and Chrysler) don't deserve a bailout of any kind, certainly not the management team, the board of directors, or the stockholders. One can argue that the non-management employees deserve some government help. The industry's problems are not really their fault. It's a question of whether bankruptcies or properly structured loan packages best serve the interests of the country and the needs of our national economy, given our worsening recession and fast increasing unemployment numbers.
2. In my view Chrysler should preferably be required to be rescued by its controlling shareholder, Cerberus Capital Management, or to be acquired by Ford or GM, given its much smaller size and more urgent and serious problems. That would eliminate the need to look at CEO Nardelli's request for a $7 billion loan by the end of the month and probably another request next spring. It would also provide an opportunity to remove excess overhead expenses from the industry.
3. Our senior government spokespersons supporting a conditional bailout should remind the public and their critics in government that what's being considered is not a grant or an equity infusion, but a loan and/or line of credit with interest that is expected to be repaid within several years.
4. In event that Chrysler is not initially rescued by Cerberus or acquired by Ford or GM, Cerberus should be required to inject new cash equity of at least $1 billion into Chrysler, reducing the company's need to no more than $6 billion, and should find acceptable private sector guarantors for any loan by the government for the remainder. This might convince Cerberus that a sale to Ford or GM might be preferable.
5. I was not impressed with CEO Wagoner's statement in presenting his plan to Congress that GM may trim its lineup of cars and trucks from 60 models to 40. I would think a much smaller number of models, say 20 or 25, would be much more sensible in terms of improving manufacturing efficiencies and minimizing overhead.
6. Government bailout financing should be collateralized by acceptable assets to at least 50% of the credit commitments made to reduce the risk. Interest rates and commitment fees should be similar to what a major bank would charge for similar risk. The loans and lines of credit should be senior obligations repayable before any other loans or bonded indebtedness. The financing should also be subject to a formal credit agreement like any bank would require.