Friday, December 19, 2008

Bailing Out GM and Chrysler

Over at the Guardian, I have posted a quick rundown of Bush's use of the Troubled Asset Relief Programme (to use the British spelling) to provide some short term financing to GM and Chrysler. While we have heard a great deal about the need to exact some concessions from workers, today's announcement includes some pain for creditors:
The deal also pushes the automakers to swap debt for equity, which may be more palatable for shareholders staring down the barrel at bankruptcy, which even if orderly or prepackaged, would have left shareholders with next to nothing. A share of stock, by definition, entitles its holder to what's left after all of the company's other obligations have been satisfied. Faced with the prospect of holding the bag when nothing was left, dilution of their shares doesn't look all that bad after all.
It's another sign that the era of easy debt is over. The binge of easy money has sunk US corporations to their lowest valuations in years. Only when this bad debt is either digested or regurgitated, will companies be in a position to rebuild their inventories and restock their shelves. Cererbus Capital Management, which owns a controlling share of Chrysler, was happy to load the company down with debt, but has been unwilling to pump more of its capital into the automaker. Now it will be forced to see its stake diluted as the price of solvency.
If it makes sense for workers, suppliers and dealerships to take a hit, creditors and shareholders have to absorb some pain as well. I closed the piece by noting that the help came too late for some:
George Bush may feel like he acted in the nick of time - but it comes too late for the workers at Chrysler's plant in Newark, Delaware, my home state. The plant, which produced more than 8.2m vehicles over the last 57 years, is closing for good at the end of today's shift.


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