Today I returned from Thanksgiving break to learn that Tanta had passed (see Remembering Tanta or Sad News). The news certainly made me sad.

Tanta was an incredible blogger. She was insightul, funny, and sharp as a whip. It is no exaggeration to say that I received a heck of an education from Tanta. She (among others) inspired me to start blogging.

In this time of reflection and giving thanks, there is much for which I am thankful. One of those is for the privilege of having been able to read Tanta’s blog posts. And while I am thankful for her posts, I wish I didn’t feel compelled to write about them today, because it stands as a reminder that she, and they, will be no more.

I didn’t know Tanta personally, but that does not mean I will not miss her. Unfortunately, to simply say that she will be missed is an understatement.

My deepest sympathies go out to her family.

Over the past several weeks, one solution that has been floated to fix GM’s ills is a prepackaged bankruptcy (see Obama Team Said to Explore Prepack). According to Bloomberg:

President-Elect Barack Obama’s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.

In a pre-packaged bankruptcy, interested stakeholders (creditors, unions, shareholders, suppliers, etc.) come together to reach an ex ante agreement on how to share costs and burdens, and how to reorganize operations so as to make the ex post process less disruptive, and less likely to end up in liquidation.

Which brings me to Saturday evening…

On Saturday evening I was having dinner with some friends when the conversation quickly turned to GM. One of those in attendance at the dinner has been in the reorganization, restructuring, and turnaround business for more than 25 years. He has even served as the interim CEO of various large corporations. Another at the dinner was a Managing Director at one of the large (still existing) investment banks.

We agreed on one specific issue: The chances of a pre-packaged bankruptcy for GM are remote. The issue with GM is that the interests of the disparate stakeholders are so far apart that it is hard to envision them reaching any meaningful agreement on how to share the costs associated with the reorganization. In addition, they will likely find it difficult to agree ex ante on what exact steps GM needs to take to right its ship.

For example, the UAW is interested in maximizing wages and employment while creditors are interested in decreasing GM’s cost structure and paring down its lines of business. But even among creditors there are groups with different interests, with those with the greatest rights in favor of moving more quickly to Chapter 11 without any pre-packaged arrangement.

For this reason, I believe that the most likely arrangement is one of the following:

1. Aid provided to GM by the government to avert bankruptcy
2. Aid provided to GM by the government after it has declared bankruptcy

In the first scenario (aid provided before bankruptcy), the government would provide aid in the form of debt, equity, or both, with the right/intent to use those capital injections to exert influence. This would require the government to sign off on a restructuring plan for GM in advance. In the second scenario (aid provided after bankruptcy), the government acts as the DIP financier of only resort (after all, who in the private sector has the means, or the interest, to provide financing to GM on that scale, and in this credit environment). After providing the DIP financing, the government can then cram a restructuring plan down GM’s throat.

The nice thing about the latter approach is that it allows greater flexibility when it comes to replacing management, renegotiating contracts, shutting dealerships, and streamlining operations. The nice thing about the former is that it provides aid in a context that does not risk the meltdown scenario in which buyers and suppliers refuse to do business with GM, however remote that outcome.

I have detailed why I believe that it is not imprudent to provide aid for GM (see Preventing Moral Hazard and Aid for the Automakers for greater detail). However, I have been adamant that whatever aid the taxpayer provides comes with properly structured terms, with properly structured incentives, and at a hefty price to current shareholders, creditors, and management.

In particular, in the case of GM, conditions for the receipt of aid could include:

1. The ousting of current top management
2. A moratorium on mergers and acquisitions
3. A renegotiation of employment terms with the UAW, …with all options on the table
4. The rationalization of brands - for GM my suggestion would be to keep only Chevrolet, Cadillac, Opel, and potentially, Buick (given its standing in the China market)
5. A shutdown of all plants tied to brands that GM will no longer manufacture, and a consolidation of the remaining brands into a few, select plants
6. Incentives (in the form of tax credits) to produce smaller, more fuel-efficient automobiles

Although these terms seem fairly onerous, such terms (or variants thereof) provide the only reasonable chance left to derive some value from GM.

For those of you who have been following this blog, you know where I stand on the proposed aid package for US automakers (see Preventing Moral Hazard in the Auto Industry for background). I am not opposed to aid for GM and Ford, provided that aid come with strict terms:

1. A moratorium on acquisitions (whether with Chrysler, or otherwise)
2. A rationalization of operations - a reduction in the number of brands/models coupled with plant closures
3. A renegotiation of employment terms with the UAW to make the US automakers more competitive with global competitors
4. Strong incentives to build more fuel-efficient automobiles

Although I support some form of aid for GM and Ford, I have been staunchly opposed to providing any aid to Chrysler given its current ownership structure (see A Benevolent Cerberus or Is the End Nigh for Chrysler).

Rather than re-hash my ideas, for this post I thought I’d put forth some recent arguments that have been made on either side of the debate and let you decide.

ARGUMENTS FOR THE BAILOUT:

A short, GM-produced video being distributed by Weber Shandwick, GM’s PR firm (it arrived in my inbox from them on Sunday).

ARGUMENTS AGAINST THE BAILOUT:

Mike Shedlock (Mish) details his opposition to the bailout in a letter penned to his representatives, and published on his blog (see Second Push to Stop Auto Bailout). Although his comments were specific to GM, you can apply similar reasoning to Chrysler and Ford. Mish writes:

GM CEO Wagoner and other auto executives are now pleading for more cash.

Wagoner stated “We’ve moved aggressively in recent years to position GM for long-term success, and we were well on the road to turning our North American business around before the economic crisis.”

The reality is that Wagoner is in fantasy land.

• GM continued to build massive numbers of SUVs and trucks long after consumers turned their backs on them.
• GM continued to pay a dividend long after it was prudent to do so.
• GM had a golden opportunity to sell all of GMAC and failed to do so.
• GM got involved in subprime mortgages with Ditech at the worst possible time.
• On April 2, 2008 GM sales analyst Mike DiGiovanni, speaking to reporters and analysts on a conference call, said he saw “early signs” that the U.S. market was steadying. That shows you just how far in fantasy land GM is.
• GM is a company that makes mistake after mistake after mistake.

GM cannot build cars that people want at a price people can afford. That is the bottom line.

From GM’s latest 10-Q

Short-term borrowings and current portion of long-term debt.
September 2008: $7.21 Billion
September 2007: $5.26 Billion

In one year’s time, short term borrowing and interest on long term debt has gone up by $2 billion per quarter, $8 billion per year!

If Congress loans GM money, interest on its debt will rise yet again.

GM has $36 billion in long term debt and has a negative net worth of $60 billion.

Is $25 Billion The Beginning Or The End?

One look at the above numbers answers the question “Is a $25 billion bailout the end, or just the beginning?”

Stop The Madness!

Consumers are tapped out. They are not going to buy autos no matter how much money Congress throws at the sector.

World Will Not End If GM Goes Bankrupt

The very best thing that can happen to GM and Ford is they go bankrupt. The sooner the better. Congress will then see that the world will not end. Both companies will reorganize. Both companies will keep making cars.

Bankruptcy is the best option for the Auto industry. If the union disagrees, let it pledge its pension money as collateral, and let Wagoner pledge his personal wealth as collateral for a loan.

SOME MIDDLE-GROUND:

Finally, I suggest reading an interesting, and thought-provoking, alternative proposed by Andrew Ross Sorkin of the New York Times (see US Should Guide GM in a Chapter 11). Andrew writes:

“The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan,” Mr. Cervone [spokesman for GM] said this weekend to The Detroit Free Press.

To him, G.M. is merely in a temporary bind. If the government — that is, taxpayers — were just willing to spot G.M. some cash to get it over this little rough patch, everything would be just fine.

Mr. Cervone’s comment reflects what’s wrong with the mind-set in Detroit.

G.M is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized.

But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington. It makes a lot of sense.

Here’s how it could work:

First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.

So, first, the government would force G.M into a prepackaged bankruptcy now — even before policy makers may think it needs to be.

…the government should come in with what’s known as debtor-in-possession financing to help the company through the bankruptcy process. Ideally, the government would be a “seed investor” and others would join it….The goal should not be to keep these companies from filing Chapter 11, but from filing for Chapter 7 — which would mean liquidation.

With the debt market virtually closed, this is the time the government can come in and try to help. But to jump in front of the train now, without the requisite changes made to the industry first — which we all know can’t be done without Chapter 11 — would be foolish.

I agree with many of those who oppose a bailout on the type of restructuring that needs to take place to right the ships of GM, Ford, and Chrysler. However, for me, the debate hinges on whether Chapter 11 is a viable path for the automakers to restructure. I am inclined to believe that it is not a viable path because it would be difficult to raise DIP financing (critical for any reorganization) from private sources in the current credit environment. Therefore, the government would be forced to become the DIP financier of last resort to avoid Chapter 7 liquidation.

Andrew Ross Sorkin suggests that the government do just that. And maybe he’s onto something.

Given all sides of the argument, I have sided with those who advocate for some kind of government aid - whether it come before or after bankruptcy. But either way, in order to work, that aid MUST come with strict provisions, and at a cost to shareholders, debtholders, and management.

What say ye?

This summer I wrote about what I saw as a particularly grim job market for the business school graduates of 2009 (see Job Market Update and Job Prospects for B-school Grads). Back then I wrote:

The students who will really, truly feel this recession are the graduates of 2009 (and maybe even the graduates of 2010). I expect the job market moving forward to be abysmal, and for the hiring season of 2008-2009 to largely be a bust.

There is now growing evidence that this is the case (see Crisis Hits the Business Schools). Alison Damast of BusinessWeek writes:

Second-year students…without job offers appear to be in the most precarious position. According to a survey by the umbrella group MBA Career Services Council, about 70% of the 77 schools surveyed said they saw a downturn in full-time recruiting opportunities in financial services in October. Meanwhile, about half of the schools said overall full-time job postings and on-campus recruiting this fall was either flat or down 5% during the same period, with some indicating it has fallen as much as 10%.

In the coming year, the job market for MBAs may begin to bear a striking similarity to the period following the dot-com bust when some banks and consulting firms rescinded or renegotiated job offers they had extended to second-year students. That hasn’t happened this time around—yet.

As bad as that may sound, I think that those are rosy numbers. The worst is yet to come, and this job market will turn out to be far worse than that of the dot-com bust. This economic recession is far deeper and more broad-based than that of 2001-2002. In fact, I have been hearing anecdotally from sources (both internal and external to my university) that while recruiters have continued to visit and interview, there are increasingly fewer and fewer offers.

So I still anticipate an extremely difficult year for MBA grads looking for jobs. And unfortunately, I have had to revise my estimates for the next academic year. It is starting to look like it will be worse for the class of 2010.

I sincerely hope I am wrong.

Bloomberg is reporting that Cerberus has agreed to forego any profits on their Chrysler investment if the U.S. government were to provide aid to the ailing auto manufacturer (see Cerberus would Cede Profit).

Cerberus Capital Management LP, the buyout firm that owns Chrysler LLC, would forgo any profit from a future sale of the automaker should it receive federal financial aid.

Chrysler also expects the U.S. government to take a stake in the company in any bailout, Chief Executive Officer Robert Nardelli said today at a conference in Palm Desert, California.

Cerberus founder Stephen Feinberg “has basically gone on record saying he would forfeit” profit on a Chrysler sale in those circumstances, Nardelli said. “This would not be supporting a private-equity company with government funds.”

The no-profit pledge may help ease political opposition in Washington to an industry rescue, because Chrysler is the only one of the three U.S. automakers that isn’t publicly traded. Cerberus bought 80.1 percent of Auburn Hills, Michigan-based Chrysler from Daimler AG in 2007 for a $7.4 billion investment.

I have been among those who have questioned the logic of providing U.S. taxpayer money to bailout Chrysler, and by extension, Cerberus (see Preventing Moral Hazard and More GM and Chrysler Shenanigans).

Now while it is oh so very generous (note the sarcasm) of Cerberus to offer up this concession, there remain several unresolved issues:

1. If Cerberus is not to gain on any eventual sale of Chrysler, do they also expect not to lose? Do they expect to recoup their $7.4B investment?
2. Does forfeiting profit on the sale of Chrysler also imply forfeiting future operating profit should the bailout work? That is, does Cerberus deserve to be able to earn income (and pay itself dividends) should Chrysler eventually become profitable?
3. Since it’s almost a certainty that Chrysler would go bankrupt without government backing (see Is the End Nigh for Chrysler), is Cerberus’ new found religion really just a manifestation of its incentive to hedge potential losses?

In my opinion, any investment that the U.S. government makes in Chrysler should include a “severe” penalty for Cerberus. After all, why should Cerberus expect to receive anything more than one penny of return on in exchange for its $7.4B investment in Chrysler? And since Cerberus would lose all of its investment in Chrysler in the event of bankruptcy, the government could just happily wait for Chrysler to go belly up and then immediately step in to pick up the scraps.

So c’mon, who does Cerberus think it is kidding? While the offer appears benevolent, the motivation is all too transparent, …and a little disturbing.

It looks almost certain that the U.S. Government will provide aid to the Big Three automakers, and as early as next week (see Frank’s Plan Gives Ford, GM, Chrysler $25 Billion). Although I am ordinarily opposed to government involvement in the private sector, I am willing to concede that these are anything but “ordinary” times. Therefore, I would not oppose some form of aid to auto manufacturers.

In fact, in earlier posts I suggested that the government should provide funding directly to General Motors instead of providing funds to support a GM-Chrysler merger (see GM and Chrysler Near and Agreement, More GM and Chrysler Shenanigans, A Disastrous Deal, and GM + Chrysler = Ugh! for background). I argued that direct capital injections into GM would accomplish far more than funding an unwise merger with Chrysler. I wrote:

I do not view a combination of GM and Chrysler as a welcome development. In fact, turning these two struggling companies with weak balance sheets into one solid company with a strong balance sheet would require so much reorganization that the amount of layoffs, plant closures, and product/brand rationalizations required to achieve that end would effectively eliminate a company the size of Chrysler from the marketplace.

Instead, I believe that money would be better spent on GM alone. My counter-proposal, therefore, was to pump $10B directly into GM (in exchange for warrants or shares) to help it weather the crisis.

My belief is that we will get more bang for our buck from an investment in GM alone than we would from an investment in a combined GM and Chrysler. GM is more systemically important than Chrysler and it is in a much better operational position looking forward.

Although I am not opposed to the idea of providing aid to the auto manufacturers, there is a difference between an investment and an expense. Injecting capital into GM and Ford represents more of an investment. An injection of capital into Chrysler would represent nothing more than an expense.

Ford and GM are on stronger footing than Chrysler in terms of design, quality, operations, global footprint, and so on. Therefore, the plight of GM and Ford bear greater resemblance to a liquidity problem. By providing capital to those two firms, we are making an investment in firms whose products are more fundamentally sound, but that find themselves temporally underfunded. The money would therefore help tide them over until the crisis abates.

By contrast, Chrysler is closer to insolvency than its larger brethren (see Is the End Nigh for Chrysler for details). Any money invested in Chrysler is therefore likely only to delay the inevitable. Moreover, Chrysler is less systemically important than either Ford or GM. It is not even 1/3rd the size of Ford. It’s owners are not dispersed individuals and institutions to which many American pensions are tied. Rather, it is owned by Cerberus, a private investment firm. This raises another issue - whether the use of taxpayer money to bail out Cerberus, a private investment company that was the poster-boy for excess during the credit-fueled private equity binge, is justified in the first place.

For all these reasons (and more), the U.S. taxpayer would be better served making an investment in GM and Ford, and leaving Chrysler to its own devices.

But now the question becomes: How do we best structure the terms that go along with the capital infusion to insure that GM and Ford don’t become serial beggars?

For the capital injections to work, they must contain provisions that provide GM and Ford incentives to right their respective ships. This means a moratorium on any acquisitions (whether with Chrysler, or otherwise). This means rationalizing operations. Both automakers need to reduce the number of brands and models it offers. Both automakers need to retrench, and shut down a variety of plants. Both automakers also need to restructure relationships with the UAW to make them more competitive vis-a-vis their global competitors. Incentives should be provided to build more fuel efficient automobiles. Finally, the GM and Ford should be explicitly encouraged to divest themselves of marginal brands (e.g., Saab, Volvo).

In addition to the operational covenants that I have proposed, the U.S. taxpayers should receive additional protection through the deal’s capital structure (either via senior debt, or some kind of super-senior preferred equity).

In sum, any capital provided to automakers should come with provisions that incentivize them to see through important operational changes, and that impose sufficiently painful investment terms. It is only by imposing discipline of this sort that we improve the chances of achieving a return on our investment, and insure that we do not see these borrowers several months from now begging for more.

In mid-August I predicted that “major” bankruptcies for 2008 would reach 225 (see my post Bankruptcy Update). There had been 120 such bankruptcies at the time. The 120 bankruptcies as of August 15th implied a pace of about 195 bankruptcies, well shy of my prediction. But much has changed since mid-August, so let’s revisit that prediction.

According to Bankrupctydata.com, there have been 172 “major” bankruptcies through October. If we assume that bankruptcies continue to accumulate at 17 per month for the rest of the year (the monthly average), the implied total for 2008 would be 206. However, we know that the bankruptcy pace has quickened since August. In fact, since mid-August, bankruptcies have been averaging about 21 per month. If we use 21 per month instead of 17 per month, the implied total for 2008 would equal 214, …still shy of 225.

That said, I expect the pace to quicken even further. So I stick by my call of 225, which would mean that the pace would have to increase to around 26-27 per month to be consistent with my call. Given the current credit environment, 225 might even turn out to be a bit of an underestimate, …but not by much.

As I mentioned in a previous post, 225 bankruptcies would fall far short of the 289 bankruptcies in 2000 and 383 in 2001 (the dotcom bust). We will not reach 289 bankruptcies this year. However, I would not be surprised to see 2009 challenge the 383 mark from 2001 (or about 32 bankruptcies per month). In fact, if we believe the predictions of my colleague Edward Altman, we should not be surprised to see the number of bankruptcies exceed 32 per month (see NYU’s Altman Sees 2009 Default Rate Doubling). Obviously default is not the same thing as bankruptcy; however, they trend together.

Nevertheless, below you can find an updated list of what I see as the “noteworthy” bankruptcies of 2008 (as reported by Bankrupctydata.com). New additions since mid-August appear in RED (please note that this is not an exhaustive list):

• AIG (insurance)****
• Aloha Airlines (airline)
• American Color Graphics (newspaper)
• Ascendia Brands (retail)
  
• ATA (airline)
• Bear Stearns (banking)****
• Bill Heard Enterprises (auto)
  
• Bluepoint RE (insurance)
  
• Blue Water Holdings (auto)
• Boscov’s (retail)
• Brooke Corporation (insurance)
  
• Buffets Holdings (restaurants)
• Ciena Capital (real estate)
• Comfort Co. (bedding)
  
• Dynamic Leisure (travel)
  
• Education Resource Institute (insurance)
• Empire Land (real estate)
• Eos Airlines (airline)
• Fashion House Holdings (retail)
• Fortunoff (retail)
• Friedman’s Jewelers (retail)
• Fred Leighton Holdings (retail)
• Fremont General (banking)
  
• Frontier Airlines (airline)
• Gainey Corporation (trucking)
  
• Gemini Air Cargo (air delivery/freight)
  
• Goody’s (retail)
• Greatwide Logistics (trucking)
  
• Greektown Holdings (casino)
• Hospital Partners of America (healthcare)
• HRP Myrtle Beach Holdings (entertainment)
• Indymac (banking)
• Integra Hospital Plano, LLC (healthcare)
  
• Integrity Bancshares, Inc. (banking)
  
• JHT Holdings (trucking/transportation)
• Laketown Wharf (real estate)
• Land Resource, LLC (real estate)
  
• Landsource (real estate)
  
• Legends Gaming (casino)
• Lehman Brothers (banking)
  
• Lillian Vernon (retail)
• Linens n’ Things (retail)
• Luminent Mortgage Capital (banking)
  
• Kimball Hill (real estate)
• Landsource Community Development (real estate)
• Matrix Development Corporation (real estate)
• Mervyn’s (retail)
• Mortgages Ltd. (banking)
• Motorcoach Industries International (transportation)
• MPF Corp. (transportation)
• Mrs. Fields Famous Brands (food services)
  
• Pierre Foods (food services)
• Pope & Talbot, Inc. (pulp/wood products)
  
• PRC LLC (business services consulting)
• Propext (textiles)
• Quebecor World (USA), Inc. (office services/printing)
• Red Envelope (retail)
• Sharper Image (retail)
• Silverjet Airlines (airline)
• Sirva (moving services)
• Skybus (airline)
• STA Restaurants - Bennigan’s (restaurants)
  
• Steakhouse Partners (restaurants)
• Steve and Barry’s (retail)
• Syntax-Brillian - Olevia (electronics)
• Taro Properties (real estate)
• Tropicana (casinos)
• Vail Plaza Development (real estate)
• Value City Department Stores (retail)
• VeraSun Energy (alternative energy)
• Vicorp (restaurants)
• Washington Mutual (banking)
  
• WCI (real estate)
• Whitehall Jewelers (jewelry)
  
• Wickes Furniture (retail)
• Woodside Group (real estate)
• WorldSpace, Inc. (satellite broadcasting)
  
• Ziff Davis (media)

Bankruptcies continue to be concentrated in industries that are close to the struggling consumer. That is no surprise. I expect bankruptcies to become more broad-based as this recession continues to spillover to the broader economy.

With the U.S. government refusing to put taxpayer capital behind the GM/Chrysler merger (see GM, Chrysler on Hold as Aid Hopes Fade), the question now turns to whether, and how long, Chrysler can survive on its own.

As reported by CNBC:

A deal to merge General Motors and Chrysler has hit an impasse after the Bush administration ruled out funding for it, putting any merger on hold until after the U.S. presidential election, three people with direct knowledge of the talks said on Thursday.

My Comment: Finally a logical response to what would have been a disastrous combination (see GM and Chrysler Near and Agreement, More GM and Chrysler Shenanigans, A Disastrous Deal, and GM + Chrysler = Ugh! for background on my views).

The article continues…

The development adds a new element of uncertainty for the embattled U.S. auto industry as Detroit’s political allies warn the sector faces a deepening financial crisis that threatens tens of thousands of jobs.

It also opens the door for Cerberus Capital Management, which owns Chrysler, to restart talks with the Nissan-Renault alliance, one of the sources said. The private equity firm had seen the alliance as a backstop to its talks about an outright acquisition of Chrysler by GM one of the sources said.

My comment: I do not see a combination of Nissan-Renault with Chrysler as viable either given Chrysler’s balance sheet. Who in their right mind wants to inherit Chrysler’s problems, …especially in the current environment? To me therefore, the only element of uncertainty that remains is how long Chrysler can survive before it must seek bankruptcy protection.

Look no further than Daimler for evidence that Chrysler is on the precipice. Daimler recently wrote-down the value of its 19.9% stake in Chrysler to zero (see Daimler: Chrysler Stake Now Valued at Zero). After all, who has better information about the value of Chrysler than its former owner? And that former owner is now signaling that Chrysler equity is worthless.

In normal times, Chapter 11 would be an option for a firm in Chrysler’s position. It could continue to operate out of bankruptcy in the hopes of reorganizing the firm and restructuring its debt. However, given the current economic environment, DIP financing from private investors is likely unavailable. This would suggest that a speedy liquidation of Chrysler’s assets might not be too far off.

Reuters is reporting that GM and Chrysler are close to striking a deal (see Major Issues Resolved, hat tip Calculated Risk). All that’s left is seemingly the amount by which you and I (the American taxpayer) will be participating, and how (i.e., the capital structure - whether via debt, equity, or some combination of the two).

According to Reuters:

General Motors Corp and Cerberus Capital Management have resolved the major issues in a proposed GM-Chrysler merger but the final form of any deal will depend on the financing and government support available, sources familiar with the talks said on Wednesday.

As GM seeks some $10 billion in U.S. government aid to support the deal, Chrysler owner Cerberus is in its own set of intense discussions with banks to refinance $9 billion of Chrysler debt, the sources said.

As I have pointed out in prior posts (see More GM and Chrysler Shenanigans, A Disastrous Deal and GM + Chrysler = Ugh!), I do not view a combination of GM and Chrysler as a welcome development. In fact, turning these two struggling companies with weak balance sheets into one solid company with a strong balance sheet would require so much reorganization that the amount of layoffs, plant closures, and product/brand rationalizations required to achieve that end would effectively eliminate a company the size of Chrysler from the marketplace.

Instead, I believe that money would be better spent on GM alone. My counter-proposal, therefore, was to pump $10B directly into GM (in exchange for warrants or shares) to help it weather the crisis.

My belief is that we will get more bang for our buck from an investment in GM alone than we would from an investment in a combined GM and Chrysler. GM is more systemically important than Chrysler and it is in a much better operational position looking forward. There is no need to invest spend $10B on a complicated and messy merger, coupled with an expensive post-merger integration. Moreover, as a US taxpayer, I object to the use of my money to bail out Cerberus, a private investment company that was the poster-boy for excess during the credit-fueled private equity binge.

From here, the only route left to go is to take these directly objections to our representatives, …which is exactly what I plan to do.

CNBC is reporting that the US Treasury is working on a plan to aid GM and Chrylser merge (see US Treasury Working on Aid). Great, just what we need, to throw away put taxpayer dollars at risk work in the auto industry.

According to CNBC:

The U.S. Treasury Department is considering how to best provide financial assistance to facilitate a possible merger between General Motors and Chrysler, a source familiar with the government’s thinking told Reuters on Monday.

The Treasury Department is considering aid of at least $5 billion, which could include direct capital injections and government purchases of auto loans, the source said, speaking on condition of anonymity. A decision on the government aid could come as early as this week…

GM has been lobbying the Bush administration for substantial help as it seeks to merge with Chrysler, which is owned by Cerberus Capital Management.

GM chief executive Rick Wagoner was in Washington last week to press for help after congressional allies, in an urgent plea, urged the Treasury to provide immediate and direct liquidity for Detroit.

For reasons that I’ve explained on this blog, a combination of GM and Chrysler does not make much sense (see A Disastrous Deal and GM + Chrysler = Ugh!). As I explained:

I’m  not a big fan of combining two failing firms in the hopes of creating one healthy one.

According to the WSJ, GM expects $10B in benefits by combining with Chrysler (see GM had Talks with Chrysler).

Pray, do tell, how?

Unless GM is expecting to shut Chrysler down and pocket their nearly $11B in cash reserves, $10B in benefits seems improbable to me.

Their best bet would be to get rid of half the products of the combined GM-Chrysler, keeping only the best-in-class product from each firm (e.g., the Jeep brand for SUV’s and the Chevy brand for the mass market). Their product portfolios overlap almost exactly, so the thinking has to be that by rationalizing operations, GM-Chrysler would be able to do so while effectively combining Chrysler’s 11% U.S. market share with GM’s 24% market share.

So in order to make this deal work, GM/Chrysler would have to rationalize the combined operations by shutting down plants, eliminating redundant management posts, and purging overlapping brands. In essence, it’s the same as shutting down an operation more or less the size of Chrysler. In return, GM would receive access to $10B in cash from Chrysler to help see it through this crisis.

If this is what it would take to make such a merger work, why would the goverment - we taxpayers - want to aid here? Anyway you look at it, the end result will be plant closures and mass layoffs.

If the government feels compelled to step in, here’s my alternative: Provide money directly to GM (in the form of warrants or shares) to help it survive the crisis.

Why make things more difficult by forcing a complicated merger and a messy integration?

I can see the rationale for wanting to save GM. It was on the verge of turning a corner, it has some products that have potential (Volt, etc.), and had the financial environment been different, it might even have survived on its own. Besides, it is a publicly owned and traded company with 265,000 employees. Therefore, it is systemically important and there is much at stake.

Chrysler, by contrast, is a private company owned by Cerberus. Chrysler has, by my estimate, somewhere in the neighborhood of 70,000 employees. In addition, its products are dated, and its pipeline is weak. For these reasons, Chrysler is less systemically important than GM. Moreover, on principle alone, why should taxpayer money be used to bail out Cerberus, a privately run investment company that represents the epitome of credit excess (see my posts Private Equity: The End of an Era and Stupid Money Chasing Stupid Deals for background)??

If the government is going to come to the aid here - which I hoped it would not have to, but if it must - why not put that aid to where it can be best used - directly into GM, …but only on the condition that it NOT pursue an ill-advised, and messy, merger with Chrysler.