(Editor's note: The following is an edited version of an Op-Ed that appeared in The Detroit News on June 5, 2009.)
The restructuring of Chrysler is likely to fail because it does not address two of the company's shortcomings. First, Chrysler LLC has a surplus of labor and a shortage of customers. Second, Chrysler will need new investment. The Obama administration's bailout terms are vague as to how the company will develop marketable cars, and border on vicious in the treatment of investors, but bend over backwards to protect the interests of labor — which gets the Chrysler hierarchy of needs in reverse.
That the deal is generous to organized labor is clear. The Economist estimates that the UAW will receive 43 cents on the dollar from Chrysler for its $11 billion stake in the company, in the form of a majority of the company's stock. Shikha Dalmia, a senior analyst at the Reason Foundation, estimates that when federal guarantees for pensions and health care are added in, the UAW and its members could receive 60 cents or more for their claims against the automaker.
This would make sense if worker retention were a problem. But it isn't; if anything Chrysler has too many assembly workers producing too many cars that it can't sell, which is why the company is shutting down its assembly lines for the duration of bankruptcy proceedings.
Holders of the company's bonds, however, are expected to receive somewhere around 30 cents for every dollar that Chrysler owes them. In order to see why this is a problem, one must be ready to set aside the sympathies one might have for workers over bankers — or at least recognize that even more workers will lose their jobs if this plan doesn't work.
The basic fact is Chrysler will need investors to finance the development of a new line of vehicles, upgrade facilities and buy materials. But the new Chrysler will be a risky investment — lenders will still be turning money over to a company that is on its second bailout. One way companies reassure lenders that they will be repaid is to offer them what is called a secured claim — meaning that the lender will have title to certain company property in the event that the company is unable to pay its debts. This a floor on what lenders might lose if the company fails.
In the case of Chrysler, the bondholders had secured claims that took precedence over those of the UAW and its members. Bankruptcy courts are expected to respect secured claims, but in this case, lenders with secured claims are being forced to take a back seat to the UAW. The message for lenders is: don't bother asking for security from Chrysler, it won't do you any good. This will make it more difficult for Chrysler to get large loans at low interest rates.
All this is a prelude to joining Chrysler with Fiat, a company with little proven ability to sell cars in the United States. Chrysler has already frustrated the designs of Daimler Motors, a company that as Mercedes has had success selling and building cars here. Just four years ago, GM paid $2 billion to break away from buying Fiat. Advocates of the new plan have yet to identify what might have changed since then to make Fiat a good partner for Chrysler now. Chrysler also missed an opportunity to use bankruptcy to rationalize its distribution system, instead terminating less than a quarter of its dealerships.
Hence the irony: Chrysler bondholders still may come out of the deal better than autoworkers who might end up holding worthless stock in a company searching for another bailout, in large part because the administration went out of its way to protect the UAW and shortchange investors.
Paul Kersey is director of labor policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.