Sunday, October 26, 2008

Dinosaur Bailouts Prolong Our Malaise

GM wasn't satisfied with the $25B of our money it got last month to keep it on life support. Now they want more of our tax money to fund their corporate development strategy:

Treasury Secretary Henry Paulson would prefer any assistance to come from the $25 billion low-interest loan plan for the auto industry to build more fuel-efficient vehicles, not the $700 billion bailout of the banking system, said the people, who asked not to be identified because the talks are private.

The requested $10B, presumably from Treasury's TARP, will go directly to Cerberus Capital Management. That's some compensation for about one year's worth of supervising a losing business that they bought for a song:

Cerberus's secretive chief, Stephen Feinberg, essentially paid nothing to DaimlerChrysler AG (now Daimler AG) for an 80.1% stake in Chrysler. He agreed to put $5 billion into Chrysler, and $1 billion into its financing unit. Cerberus secured $10 billion from investors to pull off the deal. Mr. Feinberg's goal was to spiff up the company and sell it or list its shares for a huge profit -- a feat Cerberus had pulled off many times before.

A return of $10B in one year on a $10B original investment will certainly make Cerberus' investors whole. This ROI of 0% would be accompanied by the unfortunate moral hazard of backstopping the private equity business model. Excuse me, aren't LBOs supposed to be high-risk/high-reward propositions?

We can draw several conclusions from this tomfoolery. First, the stated reasons for giving bailout money to corporations with broken business models mean nothing because the rules can be changed at will. GM was supposed to use its part of the $25B loan plan to retool, but now it appears it may use it for M+A adventurism. Second, government agencies will throw good money after bad with little consideration. AIG needs more money too. Finally, piling more money into malinvestment will prolong America's emergence from Great Depression 2.0 and make our industries less competitive when they do emerge.

My solution: No more bailouts for automakers and their private equity enablers. Let failed U.S. carmakers go bust or be bought by healthier foreign firms like Toyota (or even India's Tata Motors). But no one asked me for my input, so that probably means the new loan to GM/Chrysler/Cerberus will be approved. Bummer.

Hey, is that a dinosaur over there? Oh, wait, that's just GM's latest goverment-subsidized showroom model.

Nota bene: Anthony J. Alfidi does not hold a position in GM at the time this commentary was published. He does, however, currently own a Ford Mustang.