blog from automotive news

GM needs cash, not Chrysler

October 31, 2008 - 2:49 pm ET


General Motors doesn't need Chrysler to survive. It needs cash reserves.

GM must pay attention if it wants to make a deal to survive.

And U.S. Treasury officials halting negotiations with GM is a clear sign. It
says: nobody outside the executive suites of GM and Chrysler majority owner
Cerberus Capital Management thinks giving GM $10 billion to dismantle
Chrysler and fire tens of thousands of people is a good idea. Maybe there's
a better approach.

For the moment, ignore the logic of the deal and consider a basic premise of
deal making: What does the other party want?

GM has been shopping this idea around all fall. It has sought funding
everywhere. Every source of capital -- banks, private equity, dealmakers,
the UAW, Detroit employee pension funds -- said no. That leaves the federal
government.

Hey, GM brass must have reasoned, Treasury has $700 billion. If we slip this
in before the Nov. 4 election, maybe they'll go for it.

Yes, the Bush administration does have $700 billion. But what is Treasury's
mandate?

To stimulate economic recovery.

The view from Washington

From Washington's viewpoint, here's GM's pitch: Give us $10 billion. We'll
buy and kill a national icon, fire 30,000 or 40,000 people directly, and
dump dealers in every Congressional district in the country. We and Cerberus
get healthy and the total job loss would be under 200,000.

Wow, the Treasury guys must have said, what a fabulous way to jump start the
economy. Then they said what every other potential investor has so far: We
pass.

When you keep pitching a deal and people always say no, maybe the deal is
the problem.

And this one is mystifying.

It's easy to understand GM is burning cash. GM, like Ford and Chrysler, sold
a lot of assets to build a rainy-day fund. Now it needs a monsoon fund. We
all get it.

But why does Chrysler have to die for GM to live?

Both GM and Chrysler have too many brands, too many dealers and a shrinking
market share. From the outside, the primary attraction for GM is Chrysler's
presumed $11 billion cash hoard.

But even if that exists, the upfront cash costs of laying off tens of
thousands of employees, compensating suppliers for aborted parts contracts
and buying out dealers pretty much uses up any Chrysler cash hoard.

The deal smells of desperation.

It's like a bad movie. Two cowboys surrounded by wolves are running out of
ammo. One says, "What's our plan?" The other says, "I'm gonna shoot you,
pick your pockets, throw your body to the wolves and run." Quite a likeable
character, huh?

Suppose GM finds the cash to close this deal. Then what? Who will buy a
vehicle from Chrysler's killer? Will GM executives be focused on recovery,
or bogged down in the details of butchering Chrysler's corpse?

GM's current credit rating doesn't help either. If GM and finance arm GMAC
can't find funding to make secured loans to car buyers with
better-than-average credit, who wants to fund this deal instead?

Back to my original point: GM needs cash. Treasury has some.

Why not be honest?

How about this GM pitch: We need cash. We slashed costs and sold everything
to raise cash for this storm, but the energy spike and credit crunch is
worse than we expected. We can stand alone by 2010 but we need more cash to
get there. Your $10 billion can save hundreds of thousands of U.S. jobs.

The feds might buy that one.

That wouldn't save Chrysler. But Cerberus executives said they knew what
they were getting into when they bought 80 percent of Chrysler last year.
It's time for them to knuckle up to being in the auto business.