White House Driving Chrysler to the Junk Yard

May 4, 2009 by  
Filed under Fools of Finance

fiat_chryslerLet’s review the fantastic Chrysler re-structuring deal pushed through by White House finance thugs this past week.

Chrysler Ownership – Whom Do We Trust?

The UAW will own 55% of Chrysler. Fiat will own 35%. The remaining 10% of the company will be owned by taxpayers and bondholders.

Please – where do I sign up to buy the first new UFylser designed and built by that mess?

Do we think that the UAW will divert company cash into developing and implementing new vehicle technologies? Are you kidding? Job one for the UAW will be “preservation of union benefits.” Job two for the UAW will be “increase union benefits.” Job three will be …. uh –  well – the UAW will have to get back to us on if there will be a job three.

Perhaps Fiat will carry the ball on new car design and quality. To ease our concerns in that area,  let’s summarize Fiat’s historical success in the U.S. car market:


Oh, sure, Fiat sold cars here until it pulled out in 1987. Those cars were junk. They made the Chevy Vega (one of the worst U.S. cars ever built) seem rust-free and reliable by comparison. Mr. ToughMoneyLove is ashamed to admit that I actually owned a Chevy Vega. (Actually, it owned me.)

According to recent surveys of European car owners, the Fiat reputation for reliability quality is still poor. Italians don’t even like Fiat.

Re-Branding in the U.S. Market

The Chrysler/Fiat business model apparently is that existing Fiat small car designs will be built and sold in the U.S. using Chrysler’s excess manufacturing capacity. That’s been tried before on many occasions, mostly with spectacular failures. For example:

Pontiac Vibe (which was actually a Toyota Matrix)
Chevy Nova and  Geo Prizm (Toyota Corolla)
Mitsubishi Raider pickup ( Dodge Dakota)
Suzuki Equator ( Nissan Frontier
Geo Metro ( Suzuki Swift)
Eagle Talon (Mitsubishi Eclipse)
Dodge Raider (Mitsubishi Montero)
Geo Tracker ( Suzuki Sidekick)
Ford Festiva (Kia Pride)
Ford Aspire ( Kia Avella)
Geo Storm and Geo Spectrum (Isuzu Impulse)

Anyone encouraged by that list?

Well, maybe Tim Geithner at the U.S. Treasury will stand up for taxpayers and make sure that Chrysler builds and sells cars that consumers will want. Except that Geithner is kind of busy playing catch-up learning about tax laws and trivial stuff like that.

About the White House Finance Thugs

Speaking of junk and Fiat, Standard & Poor’s recently financially downgraded Fiat to junk-bond status.  Thank you White House for such a clever strategy – moving Chrysler into the welcoming arms of both junk cars and junk bonds.

Yes, I did refer to the White House arm-twisters as “finance thugs.” That opinion is based on reports from bondholders at the Chrysler restructuring negotiating table. Apparently, some bondholders (e.g., hedge funds that managed pension assets) were willing to take a 50% haircut on what they were owed, in exchange for a larger ownership stake in the surviving entity. (Keep in mind that by contract, bondholders are generally first in line in any bankruptcy.)

Apparently, the White House didn’t like that attitude. So it threatened to bring the full-force of a Presidential PR attack on those bondholders so as to ruin their reputation. (Source:  WJR radio interview)  Some bondholders capitulated (those that need TARP funds) and the favored UAW maintained its majority shareholder position.

Everyone who plans on buying a UFylser, please tell us in a comment.

Photo credit: Seth W.

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19 Responses to “White House Driving Chrysler to the Junk Yard”
  1. Jim says:

    Ah yes, FIAT quality.

    Recently my 1963 Fiat 600D packed up. I didn’t expect that, not after 45 years of reliable service. But, I’m rebuilding the engine. Should get another 45 years out of it which will outlast me. Parts are hard to come by, though.


  2. Rick Beagle says:

    It is possible that the new regime at Chevy will do worse than the previous management, but that would take some doing. Its a nice relatively cheap bone to the UAW, and puts GM and Ford on notice (we will wreck you).

    Rick Beagle

  3. mike says:

    Now isn’t this the same UAW who is now the proud owner of a car company that will also have to renegotiate labor contracts with their competitors? Can you say “conflict of interest”?

  4. kitty says:

    What bugs me about this whole thing is the outright theft of money from senior bond holders in favor of junior bond holders in total violation of existing contracts – of course, we all know that current administration doesn’t care much about contracts. Then Obama goes on TV and vilifies senior bond holders for daring to try and stand up for the rights of their investors – including retired teachers and probably some 401K funds. As Buffet said today in an interview – and he actually supported Obama – it’s the same as denying a bank that holds a lien on a house money received from the house’ sale in favor of credit card debt. The fact that the government can re-write the rules shows that contracts mean nothing – of course, we’ve known this already. Every one of us will end up paying for it in future as this will translate in higher interest rates on secured debt as lenders will have to price in this risk into interest rates. Talking about bonds — how many private investors are going to be willing to buy Chrysler bonds (or any US automakers’ bonds), even secured bonds after this? Anybody?

    Jim – as the doctors and epidemiologists say “plural of anecdotes isn’t data”. Your individual experience shows that yes, it’s possible to get a great FIAT just as it’s possible to get a bad Toyota. BTW – once upon a time my mother had a great Chevy Nova. But it’s still more likely to get a great Toyota or Honda than a great FIAT.

  5. Rick Beagle says:

    I know this is off topic, but I am really excited to see what you folks think of closing the off-shore/tax haven loopholes/laws?

  6. TMN says:

    thugs? they didn’t have to coontribute more bailout money… seems like a lot of whining about payouts but i’m guessing nobody doing the whining wanted to turn down the government funds.

  7. MasterPo says:

    I see this as a great communist experiment. Really.

    The manifesto calls for the workers to own the means of production. In this case, the UAW owns 55% of the company.

    Let’s see if the workers (i.e. UAW) can design a car people want (features, etc), build a quality product, offer it at a price people are willing to pay, and support the car after the sales (repairs etc)…

    All the while being generous with their own pay, overtime, benefits, pensions, time off, etc etc etc – all the things they cried that the “rich” executives and other white collar managers were cutting in favor of their own pay and bennies.

    Unfortunately, this is a grand experiment that impacts thousands of people and a huge sector of our economy. Not something you want to screw with.

    ps- I agree with Kitty.

  8. cjbr549 says:

    I am sad to see the whole mess going down. I was a Chrystler guy way back, had some neat cars. I almost wish they would just to a chaper 11 and liquidate the company. Maybe someone else would pick up the Dodge brand and run with the Challenger and thier trucks. It would allow all the automakers to renegotiate thier labor contracts, and if the brand, tech data and tooling could be bought fairly cheaply, it could be made profitable in the long run, I think. But it just makes me sad when I see things that I consider American institutions being run into the ground and bought up by a third rate Italian car company. Why not Ferrari? It wasn’t even this embarassing when the Germans owned it. Maybe I can still pick GM up for a buck.

  9. MasterPo says:

    Chrystler, GM etc. it won’t matter. Not when there’s also Toyota, Hyundi, Honda, Nissan, BMW, Kia, etc.

    My family hasn’t owned an American made car in over 35 years and have no plans to change. Even if I was *forced* to buy an electric or hybrid for my next car I’d get a Toyota, maybe a Hyundi. But definately not a GM et al.

    And I’m not alone.

  10. kitty says:

    @TMN: “seems like a lot of whining about payouts but i’m guessing nobody doing the whining wanted to turn down the government funds.”

    I don’t understand what you mean. Hedge funds that are as you call it “whining” have NOT received any government money. Banks that received money went along with Obama’s plan without complaining. This is actually one of the reason the bond holders that have NOT received any government money are complaining.

    Under this plan the bond holders with secured senior debt were offered 3 times less value on their money than UAW with unsecured debt. Do you understand what secured debt means? It means that it is secured by Chrysler assets and is first to be paid in bankruptcy. If Chrysler defaults, these lenders are legally first in line to be paid after the assets are sold.

    So these “greedy hedge fund maangers” dared to ask for 50 cents on a dollar for their investors – who by the way include teacher’s unions, major pension and retirement funds and school endowments – instead of 29 cents on a dollar that Obama offered. In response Obama vilified them on national TV as “greedy speculators” who are unwilling to take a haircut that everyone else agreed on. Don’t you think this total disregard for the laws sets a dangerous precedent? Before we know it, America will turn into some kind of a banana republic when the government can violate laws as it pleases.

    What about your 401K? Any bond funds there?

  11. MasterPo says:

    Hedge fund? What about the mutual funds that hold auto maker bonds and money market instruments?!

  12. TStrump says:

    I wouldn’t touch a Chrysler car with a ten-foot pole.
    It’s about time they’re going broke after producing years of ugly, unreliable cars. A friend of mine owned a brand-new Chrysler a few years back and his door fell off! From a brand new car!?
    Instead, I’ll just go to the original company where Chrysler borrowed their cars from (ie. Toyota to get a Matrix)

  13. Rick Beagle says:

    This is kind of sad, not a single person here really has a high opinion of Chrysler. Irrespective of this current deal, the vast majority of us here think that the cars were garbage (and they were/are). The question I have is not who is going to buy their cars, but who was buying their cars in the first place?

    Honestly, I was kind of pulling for the little Volt, but now that Tesla has that sedan (for close to the same amount of money)….

  14. MasterPo says:

    Rick – Electrics will be a flop or a tyranical (yes, I mean it!) mandate from Obama.

    Where are we going to get the electricity for let’s say 50,000 electric cars in NYC or on Long Island plugging in every night to charge?!

    Especially in light of how Obama is slamming the coal and nuclear energy industry. (Please don’t respond with solar or wind.)

  15. Rick Beagle says:

    Perhaps, but not everyone in this country lives in or around NYC. I can plug my car into my garage quite nicely and I have the solar panels on my house (not directly in general because more recharging is at night), wind farm down the street (down the street a LOT, but you get my drift), hydroelectric, or nuclear power charge it up. It will work quite nicely for me and my situation, and if that puts me in the minority, then fine.

    And besides, the Tesla sedan is sexy (youtube has a dave letterman reveal). Did I mention my love for gadgets in the article a few days back? Gadgets that save me money over the long term and help the planet is just icing on the cake….


    Rick Beagle

  16. kitty says:

    Love my Honda Civic… Toyota Corolla was nice too, too bad I totaled it after only 3 years. Nice check from insurance though, very small loss in value, way more than I would’ve gotten had it been a Chrysler.

    No plans for new car for a while (hopefully), have only driven my Honda for 3 years. With any luck, there’ll be some nice new technology available by the time I need a new car.

  17. MasterPo says:

    Rick – The majority of Americans do in fact live in or near the major cities. And all those cities are facing SIGNIFICANT electric supply issues as is. Throw in several thousand additional cars to be charged every day and it only multiplies the problem.

    Then there is also the literal freedom issue. I can get in my car and as long as I can buy gas I can go anywhere at any time pretty much non-stop. Can’t do that with an electric. What’s the max range? 40 miles? 50? Let’s say even 100. Then how many hours do I have to wait to recharge – that’s if I can even find someplace to plug in!

    ps- Regarding your solar panels, how much electric does it produce in the winter when we have shorter days?

  18. Rick Beagle says:

    I live in the Portland, OR area, and to be honest, the panels were just an experiment (my mind wanders, and they were a result of a Popular Mechanics article – damn them)…. You are right in that they work pretty well in the Summer, but during the rainy season (cough) they are pretty much worthless (I still like them though, as the whole setup is pretty fun to play with and my kids love them). There is something magical about selling energy back to the grid that I just can’t explain, just too bad I can’t get that 365. Given our rain fall (we get a LOT), sometimes I think hooking up my gutters with their own generators would be far more effective (lol… maybe next weekend).

    I am well aware of the shortages to which you speak, but part of the new smart grid initiatives is to address that problem. If you believe the specs on the Tesla, 45 minutes to recharge and 300 mile range. I’m not sure that I believe all of the claims, but it makes me hopeful for the future. Exciting stuff!

    Rick Beagle
    PS – I’m thinking about setting up my garden next year based on the hydroponics model provided by a group in your neck of the woods! If I find the article from which I printed this info, I will link it. Very cool stuff….

  19. MasterPo says:

    BTW, I thought this whole bail out of the auto industry wasn’t a handout but an “investment” by the American people via proxy of the federal gov? I thought we the people were going to make a boat load of $$$ from this investment in the next couple of years thereby not only paying off the bailout but making a profit too!

    What happened to all that talk????

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