Detroit's Predictable Failure

GM and Chrysler tomorrow reach the March 31 deadline, presented to them last December when they received many billions of dollars of taxpayer funds, for having a plan for viability.  As was entirely predictable on the day they got the money, they have failed to do so.  Here's one cheer for the Obama administration (who inherited this deal from their predecessors): they have at least recognized reality and admitted that GM and Chrysler are, to use the technical business jargon, totally hosed.

Nothing fundamental about their situation has changed since last fall, and the best course of action remains the same: allow them to be reorganized under bankruptcy, or some similar process with another name.

We live in an imperfect world.  Given this, and based on a quick read, the Obama administration's statements about what they intend to do aren't that bad.  In regard to Chrysler, they've said they will provide operational financing for 30 days, plus a $6 billion loan to support a merger or quasi-merger with FIAT.  If Chrysler has not made a deal with FIAT by the end of April, they will have no more government support, and presumably be reorganized.  (How bad must it suck to be the Chrysler guys negotiating across the table from FIAT on that deal with a gun like that being held to your head?)  In regard to GM, the government will provide 60 days of operating financing, and give them another shot at developing a plan for viability.  In effect, they get a two month stay of execution.  If the administration lives up to these words, we would have a temporary intervention, but get out of the awful business of managing commercial enterprises via government quickly.

The crunch, of course, will come upon the expiration of these new deadlines.  The current administration can get away with punting on tomorrow's deadline without losing all negotiating credibility because they didn't make the initial deal.  But if they let these companies off the hook again, it's hard to imagine management, unions or bondholders taking any future threats to let the companies go under very seriously.

I assume that it is not accidental that the Chrysler deadline will be reached prior to the GM deadline, and therefore further assume that the administration is actually either confident that they can make the deal work with FIAT, or failing that, that they really will let Chrysler go under.  Chrysler may have to play Lehman to GM's Citigroup.  (Awareness of this Chrysler-GM timing dynamic by all parties, of course, makes it even more fun for Chrysler to negotiate with FIAT).

In a couple of months we'll know a lot more about whether the administration intends to execute industrial policy for the auto industry, and if so, how.

Presented by

Jim Manzi

Jim Manzi is Founder and Chairman of Applied Predictive Technologies (APT), an applied artificial intelligence software company. He is In also a Senior Fellow at the Manhattan Institute and a Contributing Editor of National Review, where he writes frequently for both the print and online editions on topics related to science, technology, business and economics.

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