In a GM Merger, Half of Chrysler's Plants Could Close

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Turning GMAC into a Bank

The Federal Reserve can also help Detroit quite a bit. GMAC Financial Services, the lender that's 51% owned by private equity firm Cerberus Capital Management (which is also Chrysler's majority owner) and 49% by GM, has applied for status as a bank holding company. That would give it access to the Federal Reserve's discount window and allow it to sell bad loans to the central bank. As a bank holding company, GMAC would also qualify for the Preferred Stock Repurchase Program, which would give the government a stake in GMAC in exchange for capital. GMAC would also be eligible to issue debt guaranteed by the Federal Deposit Insurance Corp. That would give the combined GMAC and, if merged together, Chrysler Financial access to capital at rates far below what they would pay right now, says Thomas J. Delaney, partner in the finance practice of Washington law firm Mayer Brown.

Congress may be willing to help GMAC if the lender needs a change in status or exemptions under various banking rules to gain access to more funds. Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said that if the automakers' captive finance arms need a change in status within U.S. banking rules, the government might be willing to help. "The auto industry is important," Frank said. "If there needs to be flexibility, we'll look at it."

Still, lawmakers from the Midwest are increasingly worried about the employment fallout if one of Detroit's automakers is forced into bankruptcy. "If one or the other company [GM or Chrysler] were to fail, we would face a much bigger calamity—the collapse of the North American supply base and the potential endangerment of all three Detroit automakers and many businesses that depend on them," says Kimberly Rodriguez, a principal at auto industry consultant Grant Thornton in Southfield, Mich.

Indeed, Rodriguez says the bankruptcy of one automaker could force several companies, which also supply the other two Detroit automakers, into bankruptcy, thus throwing the industry into chaotic conditions.

A coalition of six of the nation's state governors sent a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on Oct. 29 requesting immediate action to address the liquidity crisis in the U.S. auto industry. The letter, signed by the governors of Michigan, Delaware, Kentucky, New York, Ohio, and South Dakota, calls on the government officials to work under the provisions of the recently enacted EESA to aid the auto industry. A similar letter was sent to Paulson and Bernanke last week from a bipartisan congressional delegation in Michigan.

Job Losses No Matter What

Grant Thornton estimates that GM's acquisition of Chrysler would result in the loss of 30,000 to 40,000 jobs. But allowing one or the other to go bankrupt could easily result in the loss of 100,000 to 200,000 jobs. "It's hard to dimension accurately, because the fallout would be so great at suppliers, transportation companies, etc.," says Rodriguez.

Levin was careful to say that he is not advocating an acquisition of Chrysler by GM, but he said it could be an effect of a government loan program. "I've got to tell you that it is likely that not merging these companies will cost more jobs than merging them," Levin said.

Grant Thornton issued a report on Oct. 30 spelling out what a GM-Chrysler merger would look like after the combined company was restructured. Half of Chrysler's 14 assembly plants would close; 12,000 plant jobs and 12,000 white-collar jobs would be lost; 50,000 auto-supplier jobs would vanish; and all but seven of Chrysler's 26 models would be eliminated.

Sources close to the talks say GM would keep Chrysler's lineup intact until the company finds out what is profitable and what isn't. Nothing would disappear initially. The profitable cars would later be worked into GM's product plan and be reengineered using GM's hardware.

GM and Chrysler combined have about 11,000 dealer franchises in the U.S. Earl Hesterberg, CEO of Group 1 Automotive in Houston, which owns eight Chrysler dealerships, speculates that the Chrysler brand will be quickly designated for the scrap heap. "GM will have to move fast to start cutting costs and complexity out of the combined company," Hesterberg says.

That would leave a network of Dodge-Jeep dealers, and Grant Thornton's Rodriguez notes that the seven remaining vehicles in Chrysler's lineup she would expect GM to keep are either new or will be new by 2010—Chrysler minivan, Dodge Ram, Dodge Charger, Dodge Journey, Dodge Caliber, Jeep Grand Cherokee, and Jeep Wrangler.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau, and Welch is chief of the bureau .