Why Do GM and Chrysler Need Uncle Sam's Help?

In addition to bailing out Detroit, U.S. taxpayers may be asked to foot the bill for a GM-Chrysler merger

By David Kiley and David Welch

Taxpayers are already being asked to bail out Detroit. Do they also have to play investment banker for a GM-Chrysler merger—as well as help out a private equity giant?

General Motors (GM) since September has been talking to Chrysler's majority owner, Cerberus Capital Management, about acquiring Chrysler (BusinessWeek.com, 10/17/08). GM management is convinced that acquiring Chrysler's $11 billion in cash, and then gutting the company of redundant jobs, will provide it with the revenue, cash flow, and cash reserves it needs to make it through 2009 and into 2010. Moody's Investor Service (MCO) this week downgraded GM's debt, and reiterated what other rating agencies have said: that GM will run out of operating cash next year without new sources of capital.

Pols Back Away from Funding Merger

GM, which lost $18.8 billion in the first six months of the year and still hasn't reported its third-quarter losses, is looking for quick help from the government. Sources familiar with the negotiations between the carmaker and the White House say GM is seeking $10 billion in the form of loans, which it claims it needs to acquire Chrysler. In exchange, GM, according to industry sources, has dangled the possibility of the government taking an equity stake in the new enterprise, as well as specifics on protecting a number of future jobs.

Even though the Treasury Dept.'s decision to spend $250 billion to buy stakes in small banks and other financial institutions received general approval from members of Congress, the idea of the government owning a stake in GM is not popular. "I haven't studied it," says Representative Barney Frank (D-Mass.) who is chairman of the House Financial Services Committee, adding that, "We'd all be skeptical of taking equity."

And overtly helping GM close a deal to take over Chrysler doesn't have a lot of cheerleaders either. Even Michigan's Democratic congressional delegation, which can be counted on to defend and promote the Big Three automakers, and who are not at all vulnerable in next week's election, are keen to structure a rescue package so that it is not seen to help the job-killing merger take place.

Dennis Fitzgibbons, chief of staff on the House Energy & Commerce Committee, which is headed by Representative John Dingell (D-Mich.), says his boss has never favored directly assisting GM to acquire Chrysler. "The congressman favors additional help to the industry, such as an expansion of the loan package to help offset advanced technology investments they have to make," says Fitzgibbons.

At a debate last week, Michigan's senior Democratic Senator, Carl Levin, was initially quoted as supporting a plan where the government helped the companies merge. But his office quickly issued a correction saying he was misquoted. Levin also supports expanded loans to offset technology investments being made by GM, Ford (F) and Chrysler to comply with tougher fuel economy standards.

UAW Support Is Crucial

Congress is looking to help all three auto companies, but, as one Capitol Hill staffer puts it: "The package is going to have to look right and smell right, and it is going to have to have the support of the UAW [United Auto Workers]."

The biggest sticking point is the almost guaranteed loss of some 35,000 jobs as a result of a GM-Chrysler merger. GM, says the same Hill staffer, is working out some promises on protecting a certain number of blue-collar jobs, though most of Chrysler's white-collar jobs would be lost.

UAW President Ron Gettelfinger has voiced his opposition both to a GM acquisition of Chrysler and to renegotiating the terms of the last labor contract, which resulted in the UAW taking over management of its own health care in exchange for GM funding the Voluntary Employee Beneficiary Association that would manage auto workers' health plans (BusinessWeek.com, 9/26/07).