Government Motors

Why Should The Taxpayers' Chrysler Dowry Go To Fiat?
Logan Robinson, 04.27.09, 3:00 PM ET

Absent a last-minute consensual restructuring, the once-great Chrysler will file for bankruptcy protection this week. The government has correctly decided that Chrysler is too small and needs a partner, but has then too quickly concluded that the right partner should be foreign.

Chrysler, gravely wounded in its recent foreign alliance with Daimler, will now somehow be "saved" by its new one with Fiat. The primary rationale advanced for this is that Fiat has small, fuel-efficient cars. Daimler does too, but its tiny Smart cars have never caught on here, and Fiat's might not either.

Sergio Marchionne, Fiat's CEO, has been consistent and clear that Fiat will put no money into Chrysler in return for 20% of the company, saying such demands are "unjustifiable." The government has offered $6 billion of U.S. taxpayer funds for a successful deal with Fiat, either outside or inside bankruptcy.

In addition, as The Detroit News reports, the government has just sweetened its offer, promising an additional $1.5 billion in loans and a 5% equity contribution into Chrysler as Fiat hits milestones and increases its ownership to 35%. Given the two-plus years it will take to redesign small Fiats to meet U.S. crash tests, more taxpayer funds will be required. This has become not so much a sale of Chrysler to Fiat as it is a bequest.

While the Fiat deal will probably save some U.S. jobs at the factory level, the engineering, design and managerial talent now in the U.S. will no longer be needed, as these functions will be consolidated at the parent company in Turin. This is both to create the "synergies" (cost-reductions) to justify the deal, and because new owners always believe that their team can do a better job. Daimler, for example, quickly cut Chrysler executives in the U.S. and brought in German top management, but, try as they might, Chrysler's market share never recovered to its 1998 pre-merger level when the Americans were in charge.

There is nothing wrong with a foreign acquisition of a U.S. company, even an iconic one like Chrysler, part of the "emblem of the American spirit," as President Obama has said. But why the U.S. taxpayer should finance this sale is hard to understand. If the roles were reversed, could anyone imagine Silvio Berlusconi, the Italian prime minister, having the Italian taxpayer underwrite the sale of Fiat to a U.S. car company? There would be a vote of "no confidence" faster than you could bolt down your espresso.

In the meantime, Fiat's financial position continues to slide. Its debt has been downgraded, and its fiscal first-quarter results came in at a $531 million loss, worse than analysts expected.

Now everything has changed. The government, without owning one share of stock, forced out Wagoner, appointed a new CEO (Henderson), a new chairman (Kresa) and announced the replacement of a majority of GM's board. GM is now run by a permanent delegation of the president's automotive task force. Although a travesty of corporate governance, the taxpayer's money has given the government total control.

Logan Robinson is a professor of law at the University of Detroit Mercy. He is the former general counsel of ITT Automotive, Delphi and Metaldyne and the former head commercial and international lawyer for Chrysler.