Friday, May 1, 2009

Michigan Metal (Washington and Wall Street Madness)


While in the escape world of NASCAR competition, a Dodge (Chrysler) stands in number one and Chevrolets (GM) occupy the next three positions before Toyotas and Fords show up, in the real world the story is quite the opposite. While Toyota has become the world's most powerful automaker and Ford is the one stable American company, General Motors gave a glimpse of its future with Pontiac, Saturn, Hummer, and Saabs going the way of the Oldsmobile and Plymouth. Even more earthshaking, Chrysler has filed for bankruptcy. If it will survive, the new Chrysler Corporation will be 55% owned by the UAW (United Auto Workers UNION!!!) and 35% by Fiat, the Italian automaker of small cheap cars. The remaining ownership state is mostly the United States government and 2% the Canadian government.
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While the news media and Obama administration single out unyielding lenders who refused to cave in to the terms of the suggested bailout agreement for Chrysler, the truth of the matter of how it came to the Chapter 11 filing is an entirely different matter. We'll examine the development of Chrysler's downfall since its golden days of the 1960's. Meanwhile, we object in the strongest terms to the demonizing aimed at the lenders who held their ground in this matter. While the president accused these lenders including the Oppenheimer fund of seeking an "unjustified taxpayer-funded bailout" reality for those firms is quite different. Oppenheimer indicated they were "unfairly asked our fund shareholders to make financial sacrifices greater than the sacrifices being made by unsecured creditors."
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The cold hard facts are that the investment funds holding Chrysler debt determined they stand to get a greater return for their investment under bankruptcy terms than the amount they could get under the terms of the bailout plan. Offering more specifics, these bond holders issued the following statement in the Wall Street Journal:

"Under long recognized legal and business principles, junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full. Nevertheless, to facilitate Chrysler's rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100% recoveries, while even GM's unsecured bondholders are receiving a far better recovery than we are as Chrysler's first lien secured lenders,"
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While being cast as the ultimate symbols of fat cat greed, the investment funds not accepting the Chrysler plan represent pension funds and many 401k investments. Their fiduciary responsibility is to look out for their interests not Chrysler's. They are in the business to make sure their investors, not wealthy business tycoons but average Americans providing for their retirement, get the maximum return for their investment in a financial climate where almost all investments have lost value. They are not charities who are morally committed to Chrysler's fate.
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While Barack Obama attempts to make it sound like these lenders have a moral or patriotic duty to comply with his administration sponsored agreement, to sell out their stakeholders for the sake of political pressure would be dead wrong.
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What this mess reveals once again is Barack Obama's totally inability to understand the workings of a for profit economy, how businesses operate, and what their corporate responsibilities are. While the loss of jobs at Chrysler, its dealers, and suppliers is a worthwhile venture, political motivation cannot be denied. Obama's cozy relationship and powerful support of organized labor is unprecedented.
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In the Capitalist system, success is rewarded and failure has consequences. The recent history of Chrysler and the heavy handed interference has rendered them a weak player against strong competition. With runaway gas prices and the recession that followed, Chrysler no longer had high volume profitable vehicles in its offerings. Their most desirable vehicles are niche products like Jeeps, upscale minivans, and the luxury sedan, Chrysler 300. Their products to compete against Chevrolet Impalas, Toyota Camry's, and Honda Accords just don't match up. The cold hard truth is documented by recent J.D. Power ratings of mid sized sedans. Citing the "overall quality" ratings, the Chevy Malibu and Ford Fusion both achieve 5 star ratings, the highest in the industry while the Toyota Camry rates 4 stars. Rock bottom on the list with 2 stars are the two Chrysler products, the Dodge Avenger and Chrysler Sebring.
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The sad news for Chrysler is clearly General Motors has something to save with its top rated Malibu. Bailouts alone can't substitute when their product is inferior to all its competitors. Chrysler products are also the lowest rated among full sized cars, large pickups, and compacts. The one bright spot, mid-sized SUV's where the Dodge Durango achieved the highest distinction.
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Does Chrysler have a future worth saving? Sadly, Kurt Busch leading the Sprint Cup standings and the Dodge Durango's ratings are tiny little blips on a line pointing straight down to extinction.
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If only the old myth of win on Sunday, sell on Monday were still true, Dodge and Chevrolet would be leading customers into the salesroom boosting Chrysler and GM into the winner's circle.



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