The Obama Administration Got It Right

Salomon: Auto Task Force Gives Chrysler, GM Incentive to Make Hard, Necessary Choices

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Robert Salomon
Robert Salomon
I applaud the courage displayed by the Obama administration in meting out onerous terms to both GM and Chrysler. Its plan prescribes tough but necessary medicine. Moreover, it represents the most sensible approach to resolving the ills that plague the American auto industry.

The administration rightly treats GM and Chrysler differently. The Auto Task Force recognizes that GM and Chrysler are not on equal footing and therefore require plans tailored to their unique situations. The companies differ in their importance to the broader economy: GM is the more systemically important of the two. They also differ in their future prospects: GM's product portfolio is far superior. For these reasons, the Obama administration has committed, in one way or another, to seeing GM through this crisis. Chrysler, by contrast, is largely on its own.


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The Obama administration has, in principle, agreed to provide additional aid for GM, provided it receives substantial concessions from its creditors and the United Auto Workers within the next 60 days. In the absence of a meaningful agreement (an outcome that is not entirely unlikely), the government, at the very least, has committed to act as GM's debtor-in-possession financier. That way the government explicitly guarantees GM's existence through bankruptcy and restructuring. The threat of bankruptcy, if credible, should be enough to elicit greater concessions from creditors and the United Auto Workers.

By contrast, the administration has told Chrysler that it has 30 days to strike a deal with Fiat or it will not receive any additional public funds. If Chrysler is able to reach an agreement with Fiat, the government will inject $6 billion into the alliance. That creates a dilemma for Chrysler. It needs Fiat to survive, but Fiat needs the U.S. government to commit a significant amount of capital before it agrees to any deal. After all, Fiat has said it does not intend to inject capital into Chrysler, and according to the Auto Task Force, Chrysler needs more to survive than the $6 billion the government has promised. The likelihood that the government will continue to throw money at Chrysler, in excess of the $6 billion promised, is remote. And Fiat knows that. So the chances of Chrysler striking a workable deal with Fiat are remote as well.

Robert Salomon is associate professor of management in the Department of Management and Organizations at the Stern School of Business, New York University. For more information, visit his website or his blog.
For Chrysler there is also no guarantee, as with GM, that the government will provide aid in the event of bankruptcy. Therefore, the administration's stance likely spells the beginning of the end for Chrysler.

Should Chrysler go bankrupt (a likely outcome), the government would have a stronger hand to play against GM. Allowing Chrysler to go bankrupt likely would be enough to wake up GM's creditors and the United Auto Workers to the reality that U.S. taxpayers will not support them indefinitely.

But the question remains: Why is the route chosen by the Obama administration, and advocated by the Auto Task Force, better than the alternatives?

The Obama administration could have simply committed the requested funds to GM and Chrysler in a determined effort not to let either fail. The problem with that approach is it would have provided little incentive to GM or Chrysler to make the tough choices necessary to address their ills once and for all. It ultimately would have resulted in zombie wardens of the state, repeatedly in need of handouts to feed ever-increasing shortfalls. That is not a recipe for a healthy, competitive U.S. auto industry. Rather, it is a recipe for creating inefficient companies and a failed industry.

The other alternative would have been to force Chrysler and GM into bankruptcy immediately. In fact, some pundits have argued that if bankruptcy is going to be the endgame anyway, why not just do it now and get it over with? Although admittedly bankruptcy might represent the best way to restructure both firms, I think the reason the Obama administration did not go that route is because of the shock that would have reverberated throughout the market. A sudden bankruptcy would have caused panic among stakeholders of all stripes -- customers, suppliers, creditors, employees and shareholders.

In handling the situation as it has, the government has been able to signal to the market that the bankruptcy of one, if not both, of the automakers is quite possible. This way, market participants can adequately prepare themselves for a slow, orderly unwind, followed by a long and arduous, though necessary, restructuring.

So kudos to the Auto Task Force and the Obama administration for doing their best not only by the American taxpayer but also for the future of the U.S. auto industry.

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