May 22nd, 2009 • by David Zatz
Let’s do some quick reality checks on the hysteria surrounding the automakers.
1) Chrysler warranties: the company is not going to be in bankruptcy forever. It seems reasonable to assume that the warranties will go back into full force as soon as Chrysler Group buys the main assets of Chrysler LLC. What’s more, when Chrysler said they might not be able to honor a widespread defect, I suspect that has a lot to do with their inability to buy parts or run their plants.
2) Nobody is “twisting” bankruptcy law here. Bankruptcies are always like this — a big morass where most people lose their shirts, but lawyers and executives tend to come out with millions. And, no, it is not unheard of for retirees to keep part of their pensions.
3) Obama is not forcing Chrysler or GM to slash its dealer count. They intended to do that before and made numerous public statements about it. It’s all in back issues of Automotive News.
4) Obama is not, as far as I know, behind every little action of GM and Chrysler, nor would he probably want to be. I’m pretty sure he knows that his knowledge of the industry is minimal. On the other hand, I think he knows he can’t trust auto executives, either. There needs to be a balance of oversight and independence, and I’m pretty sure Obama knows this and respects it. Decisions made by his team have so far been minimal, as far as outsiders can tell. The only cases where people are positive there has been Obama influence was cutting the Chrysler ad budget in half (which seems to have been a sensible move, given that the ads are still running on a saturation schedule), asking for Rick Wagoner’s resignation (by no means a bad move), and being a party in union and lender negotiations.
5) For all the flaws of Obama’s participation, the alternative was the Chapter 7 liquidation advocated by some politicians, or the unlikely long-term Chapter 11 proceedings advocated by other politicians. Nobody came forward with a better idea – one that would let the United States retain a key industry and a huge number of jobs.
6) Which is not to say that I approve of everything Obama or Judge Gonzalez has done.
7) The media seems to give a lot of credence to that law firm which has been harassing Obama through Chrysler. Their statements, though, are laughable as legal documents. While legal arguments tend to be rational and clear, White & Case meander around, throwing accusations at the White House and government, and making legal points almost as an aside. Looking at their filings, I have to wonder whether their primary goal is to serve their clients or see Barack Obama lose his next election. I also have to wonder about anyone, pension funds included, who would use White & Case after reading their past work.
8) Fiat will not, according to current plans, own a majority of Chrysler.
9) The UAW will not control Chrysler. People have been reporting this even though they know better. The UAW gets no voice. The VEBA, which is accepting less “cents on the dollar” for its debts than the secured vendors, will end up with 55% ownership but no control other than a single board member. That ownership is worth roughly $1 billion by my seat of the pants valuation, and is meant to substitute for over $10 billion. Do you still think the UAW is being put “above” the secured creditors, who got $2 billion plus some ownership in exchange for $7 billion in debts? And were you aware that many of those creditors appear to have purchased the debt at a substantial discount?
10) The Treasury plans to hand off Chrysler as soon as it can. By 2012, I would not expect the U.S. government to have any ownership.
Is this socialism? I frankly don’t care. My life is not ruled by intractable dogma or names. I like social security because it has made a vast difference in one of America’s great humiliations – poor, homeless war heros begging in the streets and dying of exposure in the winter. I have no problem with contributing my share, which is probably double what yours is, since I’m self-employed and pay both sides. I am perfectly happy to pay for medicare. (I would prefer not to pay unemployment insurance, though, since I have only very rarely been eligible to collect it. Why do they collect unemployment from part-time and self employed people, anyway?)
The fact is, you can’t run a nation on dogma alone. If we had done so, we’d never have gotten started. We’d have split up before the Revolution because of the “all men are created equal” dogma. I don’t mean to countenance slavery here, but from the very start we’ve had a nation of compromise. We tried having an extreme states’-rights country, and it fell apart quickly. So we replaced it with a stronger Federal government. In World War II, to keep things together, the government took over whole industries and infringed on property rights in a way which, today, would be considered heretical to the free market which we have made our religion. But a totally free market doesn’t work; Adam Smith himself said as much. A free market ends up being consolidated into a set of monopolies or oligarchies, as we found out in the 19th and 20th centuries. So we started regulating it. Is that socialism? Does it matter?
There is a balance we have to walk, between government control and anarchy, between capitalism and socialism, between regulation and deregulation. It’s a balance corporations have been walking between centralization and decentralization, control and worker autonomy. If you go to either extreme, you suffer. Finding the right balance is far harder than picking an extreme view and sticking to it, but it’s the only way.
This leads me to –
11) I’m tired of people calling the Chrysler deal socialism. Many of these people also call Social Security socialism. Most don’t complain about the Federal highway system, which is as socialist as it gets. They don’t complain that the FCC lets them get sound on any radio they buy, without worrying about whether the Sony will pick up Z-FM or whether the Panasonic will get X-FM2, and whether either of them will cause their garage door to open or their pacemaker to stop. But you know, the FCC is a great example of government interfering with private industry. So is the FDA, demanding that the drugs we take for arthritis won’t cause strokes. Or demanding that baby formula is actually made with nutrients rather than water and soap. (Does anyone remember the Nestle or Beech-Nut scandals? They didn’t use water and soap, but they showed that corporations can’t be trusted with babies.)
So, in short, I take it for granted that sometimes government will interfere with private industry. That’s a balance, and anyone who says this deal is wrong because the twain are meeting needs a history lesson. If this is bad, I need a pragmatic reason why it’s bad.
Now, since we need a dozen:
12) Chrysler will have vehicles to sell before the Fiats come in. What’s more, they ARE cars people want to buy. A lot of people, if not any snooty pundits. One of my neighbors got a Sebring Convertible, and now my other neighbor wants a Sebring sedan. There are still people interested in the PT despite Daimler’s 2006 cheapening. Lots of people are still lusting after the 2009 Ram, recently ranked above the Ford, Toyota, and GM pickups in not one but two comparisons. I could go on but I don’t need to, because I have one word for you: CHALLENGER.
13) (Baker’s Dozen) Fiat is unlikely to ride Chrysler like Daimler did. Fiat’s approach seems to be far more decentralized; at worst I’d expect them to do to Chrysler what Chrysler did to SIMCA, which is to rationalize their product line a little, lend and borrow technology and vehicles, and lead them to success.
14) (Bad Arithmetic Dozen) Some are calling for Chrysler to extend the length of time dealers will have to stop selling their cars. The reason they set the date they did, was because the next day, they’re likely to be out of bankruptcy. The more time the dealers get, the longer Chrysler has to stay in bankruptcy to avoid penalties.
Chrysler is poised for recovery, if it gets the chance. A lot of pundits and politicians, for various reasons, don’t want it to get that chance. Don’t be one of the people holding them back.
Addendum: #15. There’s nothing like a paranoid spin machine to make something out of nothing. Perhaps we should not pay attention to people who refer to the President as Prince Obama or Lord Obama, any more than we paid attention to people who referred to King George.
Chrysler will terminate 789 dealerships; they are claiming that 83% of the dealers losing their franchise sell more used cars than new cars, and 44% hold other companies’ franchises (e.g. Kia). 80% of the remaining dealerships will sell all three brands; this will allow Chrysler to drop overlapping models (e.g. Jeep Compass vs Dodge Caliber). President Obama has been charged with forcing the closure of Chrysler dealers who contributed to the Republican Party, even though the chairman of the new Chrysler Group was a member of G.W. Bush’s election organization and has consistently contributed to Republicans running for Congress and the White House.
Nate Silver studied the numbers and found that 92% of dealerships remaining open also contributed to the Republicans. Past Automotive News polls have shown that an overwhelming majority of car dealer owners are Republican. No analysis has examined the politics of the dealers who remain open vs those who are closing. Chrysler did post the rationale, along with supporting facts, such as the fact that the closed dealers, as a group, account for a very small proportion of the company’s new car sales. Steve Landry of Chrysler stated that the dealers were evaluated using a “thorough, rigorous process that used a data-driven metric.” Factors included new car sales (with a minimum that eliminated some dealers known for their good service ); local share; customer satisfaction with sales and service; the facility itself (capacity and meeting new standards); location; and being paired with a competitor. Before the government got involved with Chrysler, the company had already discussed the need to reduce the number of dealers and was pressuring dealers to sell all three brands. This would have resulted in a high degree of overlap in some areas, particularly those where Chrysler, Dodge, and Jeep dealers with different owners were in close proximity.
