In pressuring Chrysler to opt for a “surgical short bankruptcy” under Chapter 11, President Obama could well have taken a leaf out of the government of India’s book. On grounds of political expediency, the deal for the smallest of the Detroit “Big Three” automobile manufacturers cannot be faulted. On sheer commercial grounds, however, the deal is open to questions that a section of Chrysler’s debtors rightly raised before they withdrew on the realistic assessment that they lacked the strength to sustain their opposition.
Under the deal, Fiat of Italy will take a 20 per cent stake in Chrysler, possibly rising to 51 per cent by 2016 if specific performance targets are met and loans repaid. The US treasury will acquire 8 per cent of Chrysler’s equity and the governments of Canada and Ontario a combined 2 per cent. Cerberus and Daimler will forfeit their 80 and 19.9 per cent stakes, respectively. The government will pump in $8 billion as aid to facilitate the merger with Fiat, and the bankruptcy is expected to last between 30 and 60 days.
The controversial elements of the deal are, first, that a union-run trust fund gets to acquire a whopping 55 per cent of the car maker and, second, Chrysler bond-holders will receive $2 billion in cash in exchange for forgiving their $6.9 billion debt. Small wonder, then, that a group of hedge funds, which hold almost 30 per cent of the automobile maker’s debt, strongly opposed the deal (though the big banks fell in line). Mr Obama has accused them of being unwilling to make sacrifices when everybody else was doing so. He was, however, only partly correct in making that assertion. Haircuts are inevitable when times are bad, so bond-holders should not be an exception. Still, Mr Obama has not explained the basis on which a workers’ trust gets more than half Chrysler’s shareholding, nor why its claims should supersede those of bond-holders who assume their loans are secure.
Fiat’s shareholding, which it gets for free, is predicated on the assumption that it will help Chrysler develop a small, fuel-efficient car that will reverse the company’s fortunes. Given the formidable head-start by the Japanese, it is difficult to claim this as a certainty. Also, the deal avoids the kind of hard decisions that Chrysler sorely needs—such as downsizing a clearly bloated workforce. Under the bankruptcy filing, workers of the eight plants that are to be closed will be absorbed in the new Chrysler. Now that a workers’ union is to control the majority of the company’s shares, it is difficult to see it take decisions that will impact its own constituency.
In protecting workers’ interests above all else, Mr Obama could be making a virtue out of a necessity. With scant signs of an economic turnaround, growing joblessness and the absence of a state social security system, there is a strong case for providing Chrysler’s workforce with a taxpayer-financed safety net. Also, public opinion is unlikely to favour hedge funds of any hue, given their role in the sub-prime crisis that brought the US economy to its knees. Still, as India’s government discovered with the scores of ailing companies it acquired in the 1970s, there are dangers to populist welfare when it overrides commercial interests and considerations. Chrysler—and Mr Obama—may discover that truth in the years to come.
