No Runny Eggs

News out today that Fiat has obtained a 35% interest in Chrysler.   They have an option to increase their stake to 55% although those terms weren’t disclosed.

Anyone buying a 35% in a rapidly failing company in a flailing industry is news.   Obtaining a 35% interest in a company while providing no cash remarkable.   Why would Chrysler give up 35% of what admittedly is a company that has nearly zero worth, for an agreement that brought no cash?

According to the published reports, the marriage makes sense for both companies.   Fiat has wanted to reenter the US market.   Via Chrysler, they have access to a dealer network and a lot of unused production capacity.   Chrysler is supposed to get access to Fiats design work which is supposed to be particularly good in mid and compact cars.   While the arguments for the combination make some sense, I saw a nearly throw away comment in the article that caught my eye:

“However,” he warned, “the deal does not provide Chrysler with any new liquidity commitments from Fiat, which could reflect a desire by Fiat to protect its investment under future downside scenarios for Chrysler.”

This is another lesson in the unintended consequences of government activity.

I have no doubt that both parties see benefits in their arrangement.       However, it’s clear from the statement in the article that the only real reason this relationship exists is because the government has provided $4 billion with the promise of much more to come.     That last bit is why Chrysler is willing to give away 35% of itself for little more than nothing.

Chrysler must present a plan to the Auto Czar by May 1st.   This plan needs to show how they will satisfy the shrill calls for greater fuel efficiency and make a profit.    How credible the plan is will weigh on the Czar’s decision not only to advance more funds, but  whether the already advanced $4 billion should be yanked backed.     Chrysler has ranked near the bottom of fleet fuel efficiency and have no magic beans to quickly grow something saleable in the efficiency market.   Additionally, Chrysler is sitting on a ton of excess capacity.   Capacity/overhead costs, that  will be a substantial drain on their ability to show profitability in any reasonable time.   Fiat provides answer to both of those questions.  

It’s pretty clear that Fiat has no interest in supporting Chrysler if they get no additional government funding.   If the government cuts Chrysler off, Fiat will just rip up their otherwise worthless contracts and look for another alternative, maybe even pick up some of the bankrupted assets on the cheap.

While you’ll hear lots of reports in the papers and even during follow up hearings, as the automakers beg for more money, about how much Fiat ♥ Chrysler, don’t be fooled.   There wouldn’t and won’t be any marriage if the government is holding a shotgun paid for by taxpayers money!

Update 1/21 – Dad29 pointed out that reports out this morning are saying that Fiat only   ♥ Chrysler if Chrysler brings an additiona $3 billion dowery.   Being right so often is a burden I gladly bear for NRE’s readers :)

As reported by the Agency who shall not be named and others, Hamas supporters spent the day celebrating the fact that even though they suffered numerous casualties and destruction, they weren’t wiped off the face of the earth.

I’m wondering if we should be taking notes.

The Hill.com is reporting today that a “stimulus bill” of $1 trillion is not even enough for some Democrats:

"Some of us are saying we need a stimulus of 1.2 or 1.3 or 1.4 trillion to prevent a depression, rather than just slow our descent into a depression," said Rep. Jerrold Nadler (D-N.Y.).

Hamas is partying after losing and suffering economic damage of a paltry $2 billion.   Think of how big our party will be after Congress flushes $4 trillion ($2 trillion Treasury won’t tell what they spent it on, $700 Billion TARP and the stimulus plan), and have nothing more to show for it than “We aren’t dead yet!”  

Now that I think of it, wouldn’t we all have a lot more fun and probably stimulate the economy just as much,  if instead of waiting until the $4 trillion is spent, we take it and put it all towards a party now?