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U.S. Taxpayer Dollars for Italian Automaker?

Posted By Nicolas Loris On January 22, 2009 @ 11:54 am In Economics | Comments Disabled

Will the United States government fund Italy’s Fiat’s attempt to own a majority stake in Chrysler? While most people were following other news on Tuesday, Chrysler and Fiat quietly agreed to a deal that would give Fiat a 35% stake in the Chrysler. For this, Fiat would provide Chrysler with technology and vehicles to sell in the U.S. But there’s a condition [1]:

“[T]he deal becomes binding only if Chrysler gets $3 billion more in financial help from Washington, said the people familiar with the terms of the agreement. Chrysler nearly ran out of money before the U.S. Treasury agreed to loan Chrysler $4 billion last month. To meet the Treasury’s terms for loans, and to qualify for an additional $3 billion in aid, Chrysler needs to devise a plan by Feb. 17 that shows how it intends to return to profitability.”

There’s more. Fiat has been given three of the seven seats on Chryler’s board. Furthermore [1],

If Fiat meets goals for improving Chrysler’s operations within 12 months of the agreement, Fiat would have the option of buying an additional 20% of Chrysler for about $25 million.”

So Fiat won’t pour any of its own money into Chrysler but will allow U.S. taxpayers to fork over $3 billion to keep it around a little longer. Then, they’ll buy an additional 20% of Chrysler, giving Fiat majority stake in the company, for a mere $25 million – less than 1% of the U.S. federal government loan.

Also, couldn’t this be done without taxpayer dollars, say, through bankruptcy? In Chapter 11 bankruptcy, debts are reduced or cancelled and contracts terminated or renegotiated, allowing firms to get a fresh start. And if a firm still cannot be made viable, bankruptcy also provides for an orderly and clear process for getting assets–including plants and equipment–back into productive use by others. Why couldn’t those others be Fiat?

Even the worst-case scenario—A Chapter 7 bankruptcy of liquidation–does not mean vaporization. The assets of a firm do not vanish. Rather, they are resold to others more able to make productive use of them. Why couldn’t they be resold to Fiat? All without the help of the federal government.

Maybe taxpayers are willing to pay to keep Chrysler’s name on some cars sold in the U.S. and abroad. Or maybe they just want reliable vehicles and they don’t care who makes them, as evidenced by Toyota overtaking GM [2]in global sales in 2008.

In reality, the bailout of Detroit a few months ago infuriated the majority of Americans [3]. I wonder how they’ll feel about this.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/01/22/us-taxpayer-dollars-for-italian-automaker/

URLs in this post:

[1] condition: http://online.wsj.com/article/SB123245224622497573.html

[2] Toyota overtaking GM : http://www.washingtonpost.com/wp-dyn/content/article/2009/01/21/AR2009012101216.html?hpid=topnews

[3] infuriated the majority of Americans: http://www.cnn.com/2008/POLITICS/12/03/auto.poll/index.html

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