MOE, LARRY, AND SOCRATES?

12/5/08

As I have said on numerous occasions in the past, one cannot take the “Big 3” as some monolithic, homogeneous group of industrial monoliths. These are three very different companies. I pointed out some of those differences in my last post, and want to bring up a few more, especially as they relate the bailout.

First, Ford is in the best position of the Big 3. The conventional wisdom is that it is in the best shape because it has enough cash to last it well into 2009 and perhaps beyond, largely because it, wisely anticipating trouble, mortgaged everything in order to raise a cash horde to see it through what it knew would be hard times. I think that, while the conventional wisdom has it partially right, F is also in good shape because it has made more advances than its Detroit colleagues in platform sharing and leveraging its overseas resources to meet growing demand in the U.S. market for fuel efficient cars. As I am in most of my beliefs, I am probably in the minority in this contention, but, as is also not at all unusual, I am probably right.

But let us get back to the point about F mortgaging its assets to raise a cash horde. F did so at rates that, while looking absurdly low at this stage, were considered very rich (for it, the issuer) at the time and that required some sacrifice and a lot of intestinal fortitude. Neither GM nor Chrysler made such moves. Admittedly, Chrysler could not do because it was leveraged to the hilt in order to finance its “unleveraged” takeover by Cerberus, but that is another story. But if the Big 3 do indeed get bailed out, F will need only a line of credit because of its financial foresight. GM and Chrysler will need money yesterday because they were not so financially prescient. So wouldn’t a bailout be rewarding the relatively careless financial stewardship of GM and Chrysler while punishing, in a sense, F’s financial foresight if the bailout involves cheap financing? After all, had F not mortgaged itself at comparatively high rates, wouldn’t it be accessing the comparatively cheap financing that the bailout, if it takes shape, will provide to GM and Chrysler?

Second, if Chrysler does get in on the bailout cash (and it is hard to see how it won’t, though denial of Chrysler while saving the other two is one scenario being mooted), won’t the taxpayers just be dressing it up in order to allow Cerberus to cut its losses on the poorly conceived and incredibly shortsighted deal to buy Chrysler in the first place? Would the U.S. taxpayer just be helping Cerberus tee up Chrysler for a few more billion? One could think of much better uses for taxpayer money.