No, it’s not welfare. It’s a little bit insurance mixed with an old-fashioned helping hand that ought to be extended with a little discipline to Detroit’s rump. Bailouts, subsidies, tax breaks and other sundry government instruments to influence the economy are recurrent and mainstream in American history. Less here than most countries, but nevertheless persistent. So let’s not pretend the program to assist Detroit, or the banks, or brokerages, etc., are new. We have an economy with gross annual activity valued over $14 trillion dollars. The absolute numbers bandied about today are big; the proportional representation is more modest. $25B, $50B, $75B are barely a bump.

Still, in a free market country, new initiatives are controversial. On the one hand, purists root for creative destruction, but those minded like economists persistently miss the politics of the situation and the reality of keeping a vast nation functioning. Others, eager for socio-economic activism want to put a floor under the common man, but they often miss the inter-generational consequences of temporally-restricted decisions made today. They also usually lose sight of the bureaucratic permanence of temporary measures.

It takes both caution and daring to overcome both blind spots. Otherwise, the free marketers are like cranks in the neighborhood, who oppose anti-foreclosure measures and then lament the decay instigated by the boarded-up houses, brown lawns and squatters suddenly surrounding them. Detroit’s problem is your problem and mine, too.

I haven’t a shadow of doubt that the total labor pool in the American automotive manufacturing industry feels more than a little abandoned by the coasts. The vocal coastal intelligentsia isn’t sympathetic and Michigan, being in flyover country, gets little love. From management to the plant floor, the coasts are heaping disdain, but the “coasts” represent a psycho-graphic, not a geographic. “The Coast” is sometimes located in a landlocked place. People have to begin caring outside their immediate radius of relevance.

Buying American wherever possible isn’t a patriotic act; it’s born of self-interest. It’s also communitarian and improves an economy’s balance. The United States has gotten the world it wanted and worked very hard to get. After two World Wars and during a long ideological struggle, we willfully engineered both a subsidy and mindshare grab to put the world back on its feet. Direct contribution such as the Marshall Plan and far disproportionate funding & manning of the free world’s security requirements were central. But we also consciously funded rising opportunity throughout the globe by opening our markets more widely than any other major nation.

We recognized that poverty breeds gigantic trouble, particularly in countries with developed populations and modern technical and industrial capability. We wanted a wealthier world and we got it. Others seized the opportunity, not least Japan and China, and generated wealth for themselves far beyond what we anticipated we were inciting. Now here we are, competing in a world we instigated, and properly so. We *intended* to reduce our proportional presence in the global economy relative to 1945, by ensuring others would quickly grow.

In 1980, the US was still the world’s largest creditor nation. In less than three years we gave that up in a dramatic reversal that put us instead in the top debtor position. Only a portion of this was the government’s doing. Everyone today complaining about bailouts has helped to fuel this through insatiable appetite for imported goods exceeding our exports. This is not permanently sustainable, though the US has far exceeded most ideologues’ view of how long we could carry the load.

We gave up consumer electronics, including the valuable TV industry. Yes, domestic brands seeded their demise through their insularity and intransigence. The origins of the Sony Trinitron picture tube were American, but RCA, GE, Sylvania, Westinghouse, et al, did not see the value. However, in just over a decade, RCA for one was making domestic production TVs with tubes that were a product of US R&D, that had superior visual fidelity to Sony’s. But alas, it became uncool to buy domestic and no amount of product improvement could save them.

Sure, as the TV industry in the US was dying, minicomputers were in full swing and the ubiquitous personal computing was being born. But they could have co-existed, and with an American display industry in tandem with its computing industry, sector value could have been much greater, especially since both led to consumer HD.

This is where consumer responsibility for the economy we have kicks in, and it is what frustrates Americans in the domestic industry. There remain uncompetitive cars from the D3. But there are many competitive models that evaluated objectively ought to be selling much better. If you worked on the Malibu, how could you not feel like your fellow Americans aren’t with you when Camry’s still far outsell it. The Camry is a mashed potato of a car, devoid of differentiating appeal and by standards of touch, driveability, handling, appearance, space utilization, general quality of execution is inferior to the current Malibu. The Accord has gotten fat and soft. People scream for reliability and yet VW still sells Passats and Audis. Old Malibu? Sure. But this one’s *good*.

We all banter here about the anecdotal reasons to hold a grudge against any or all of the D3. But that is just an excuse. The reality is that Americans can save their own auto industry, right now, next year, in 2010 and beyond. All they have to do is to buy Detroit’s good, reject the bad, and let the government fund the “bridge loan” to restored confidence. Not doing so ensures one thing: YOU WILL PAY anyway. You will pay in social erosion and corrosion, higher social program and “safety net” costs, reduced confidence, reduced common interest, increased polarity between haves and have-nots and the opportunity costs of careers not moving forward.

Meanwhile, the Feds should wise up and link governance and management changes to availability of aid. Ford is a public company that must be untied from Ford family defacto control. GM’s executive team had their chance. They came into the millenium with a fat pile of cash and a plurality of the domestic market’s customers. As finance professionals often do when miscast as CEOs, they managed to the stock price until the price of the stock completely slipped from their grasp. Chrysler has been taken private and by comparison the team is relatively new. They have less claim to aid, but also less to answer for, for now.

We *can* let Detroit die. It’s just that we *shouldn’t*. It is true that Detroit will recover faster than pundits think, if the industry is allowed to fail. I saw Pittsburgh lose its place in the industrial realm in a dramatic five year crash between 1975 – 1980. Pundits, including many serious economists, warned that Pittsburgh wouldn’t “come back” for 50 years. By 1985, Pittsburgh was in resurgence and much cleaner, though smaller, and began showing up on lists of America’s best cities to live in due to the combination of low prices, economic diversification, cleaner air and water, and family orientation.

However, there’s no doubt that our national economy would be stronger if we had held onto much more of the steel industry, and it would be environmentally better to be making and shipping steel in and around North America rather than shipping it in from other continents on high-pollution cargo ships. With a stronger hand on the part of the Fed, the domestic steel industry could have retained a more robust position in the global market.

We need the Feds to be thinking bigger. Not nationalization, no. But the states cannot bail out Detroit, so as the holder of the funds, the Federal government should override state laws to provide shore-to-shore market consistency. And hit the reset button on labor/employer relations. It should place observers on boards, require election of new directors, with no incumbents, and force competitive search for new CEOs, with any CEO incumbents required to re-apply for their jobs if they still want them.

There should be agreed milestones for both further aid and lifting of Federal oversight. But all of this will be moot if large numbers of Americans stand back with folded arms, chanting need to see how current competitive cars fare in five years before they’ll try and buy. No marketing campaign should try to persuade us to buy domestically. Certainly, no legal structure should be erected to coerce us to do so. No appeal to patriotism is warranted.

Instead, the balance between the dynamism of individual freedom and considering social context is communitarian action. No one should have to tell you or convince you that there is intrinsic virtue and self-interest to buying American if your needs and even wants can be met by a competitive domestic product. It is, or should be, self-evident. We used to have this in greater measure in the United States, and certainly the Japanese understand this. No, transplants are not 1:1 replacements for domestics, in economic value. Americans are self-interested in the viability of the D3. They represent a huge economic presence, the demise of which will ripple into the furthest economic corners of the country.

Communitarian economic action relies on individual initiative to consider and use his or her buying power to help shape their world. People who use their buying power to advance Green practices without the zeal of enforcement are acting in a communitarian fashion, as are people who choose to shop locally rather than at Wal-Mart, or get their coffee from a local cafe rather than Starbucks. An economic communitarian will put aside small differences and prioritize social leverage, but retain the right to punish serious shortfalls in quality, execution and appeal.

A communitarian realizes that individual responsibility does not negate me in Los Angeles, for example, seeing Michigan’s problems as also my own. In the past 25 years, I have been continuously able to buy and drive engaging, entertaining, reliable, affordable American cars made by the D3. I avoided plenty that could not have performed. There’s nothing special about me. Anyone can do it. Starting right now.

Paul Ingrassia’s essay in The Wall Street Journal takes a stab at a question which has preoccupied me for years. How the hell did the American automotive industry, which once was the model of industrial might for the world, become a sickly embarrassment? Generally, blame is apportioned amongst these areas: management, labor unions, government, customers and bad luck. Ingrassia comes down pretty hard on management, with a supporting role for the unions.

Ingrassia opens by pointing out the scant media attention paid to the opening of Honda’s new 200k-Civics-per-year factory. The Indiana opening stands in stark contrast to Motown automakers’ seemingly endless factory closings and layoffs (i.e. paying union workers not to work).

“This situation doesn’t stem from the recent meltdown in banking and the markets. GM, Ford and Chrysler have been losing billions since 2005, when the U.S. economy was still healthy. The financial crisis does, however, greatly exacerbate Detroit’s woes. As car sales plunge — both in the U.S. and in Detroit’s once-booming overseas markets — it’s becoming nearly impossible for the companies to cut costs fast enough to keep pace with the evaporation of their revenue. All three companies, once the very symbol of American economic might, need new capital, but their options for raising it are limited.”

But how did we get here? Product is the key. Ingrassia provides a good list of American post-war hits including the GTO, Caravan, Taurus and Explorer. All were segment busters– and not a one of them was created in the last 17 years. The Explorer launch of 1991 was Detroit’s last breakthrough product. But why?

“In all this lies a tale of hubris, missed opportunities, disastrous decisions and flawed leadership of almost biblical proportions. In fact, for the last 30 years Detroit has gone astray, repented, gone astray and repented again in a cycle not unlike the Israelites in the Book of Exodus.”

Ingrassia gives the transplants props for making allies out of their US workers. In the 1970s, it was still popular to blame the quality problems of American cars on the workers who built them. Honda tiptoed into these scary waters in 1979, opening of a small motorcycle assembly plant in Ohio. Workers were initially frustrated by their task of building a few motorcycles and then taking them back apart to evaluate quality and figure out how to make it better. But they learned the Japanese way. Motorcycle manufacturing proved to Honda that American workers were not the problem.

By 1982, Honda Ohio was cranking-out new Accords. And they never looked back. Two years later, Toyota opened NUMMI joint venture plant in Fremont, California, which still builds Corollas, Tacomas and Pontiac Vibes.

“Meanwhile, in the same year that Honda started building cars in Ohio, General Motors asked the UAW for wage concessions to help ease the company’s financial straits. But on the same day that UAW members voted approval, GM Chairman Roger B. Smith unveiled a new formula that made it easier for him and other executives to earn bonuses. It was a historic blunder.”

Amen to that. Even so, those hit products of the late 1980s and the truck boom of the 1990s allowed Detroit to prosper. But only if you measure success in terms of profits, rather than share. Slowly, calmly, inexorably, the transplants continued eating Detroit’s lunch. By the beginning of the new millennium, Detroit was oblivious to the enemy within its gates. Motown was flush with cash, embarking on a global buying spree.

“In June 2000, GM’s confident new CEO, Rick Wagoner, invited journalists to a resort in Italy’s Alpine lakes to describe a corporate future of ‘fewer cars, more trucks,’ as the Detroit Free Press wrote. Ford’s CEO Jacques Nasser upgraded the décor on the corporate jets and removed the company’s blue-oval logo from the outside of corporate headquarters while the Ford Taurus — once the best-selling car in America — was falling further behind the Toyota Camry and the Honda Accord.”

Easy money in trucks hid the rot within. Who cared that the Taurus had gone from #1 retail vehicle to rental car hell? One Lincoln Navigator made the profits of twenty or more Tauri. But just a few short years later, Katrina sparked the first fuel price run-up in decades. Not much later, the combined forces of growing demand and commodities market shenanigans sent fuel prices in a steep climb which has only recently started to turn around.

Suddenly, the truck boom went bust. The Emperors of Detroit were revealed in all their naked glory. (Well, at least to those outside the gates.) Now, with gas prices are coming down, credit markets have imploded. In these tough time, a Detroit management has long played badly with suppliers, employees and customers suddenly needs all the help it can find. BUT you have to build strong partnerships in the good times to tap into them when the going gets tough. Oops. All those management bonuses for cost-cutting related profits and “hard-headed negotiating techniques” [irony alert] don’t look so good anymore.

What now? Ingrassia gives a slight edge to Ford in the question of who has the best chances to make it out of the nightmare alive; Chrysler is toast already. GM is nearly out of cash. Unfortunately, no one told the feds that only fools rush in.

The dramatic denouement of this sad saga– David Halberstram’s long-predicted Reckoning, will be postponed for the forseeable future. But no matter who– if anyone– emerges from Detroit’s penultimate debacle, the simple truth is that Detroit has no one to blame for their plight but themselves.

[Click here to read Ingrasia’s essay]

After the initial media support for a potential GM – Chrysler hookup (e.g. Jalopnik.com’s Ray Wert), the bandwagon began to roll like a snowball down the proverbial mixed metaphor hill, and everybody soured on the deal. We even charted how individual commentators changed their positions and eventually “threw Chrysler to the Wolves.” In Monday’s New York Times, Andrew Ross Sorkin said that GM CEO Rick Wagoner’s continued employment is a “minor miracle.” But the commentatorati are still behind the curve re: the government’s rumored $10b “intervention” in the GM – Chrysler merger. In the main, they have’t even acknowledged that the bailout is happening. That, and the critical fact that it’s structurally designed to fail.

Let’s start with the likely government strings. This is after all, common sense. If the merged GM/Chrysler is going to enjoy the benefits of our largess, they should be held accountable for what happens next. He who owns the gold makes the rules. At least in theory. In theory, you and I might demand that the entire executive floor of the Renaissance Center be fired. But the U.S. government doesn’t see it that way. All indications are that the men who’ve gutted GM will keep their jobs and eviscerate what’s left of the American automaker(s).

But it gets worse. One of the politically-fueled requirements of this politically-fueled bailout: Chrysler-GM must keep as many jobs intact for as long as possible. That’s 97k union jobs that someone’s duly elected officials want to protect. But any analyst with a high school diploma or better knows that both GM and Chrysler are currently too big to survive; too many managers, brands, factories, dealers and workers. Unless the new entity makes job cuts, merging the two automakers makes no sense whatsoever. How do you achieve any benefits if you can’t replace two jobs with one?

At this point, the bailout request from GM and Chrysler is a $10b package (in addition to the $25b previously allocated for plant retooling for more fuel-efficient cars). The combined debt of GM and Chrysler is $52b. GM alone is burning through $1b per month, just to keep the lights on. Even if their collective debt vanished or could be put on hold (a process we once referred to as bankruptcy), bailout number two only provides enough cash to keep GM-Chrysler (a.k.a. American Leyland) rolling for another two years– at best.

The automotive business runs on a five-year cycle. From a product perspective (remember products?), General Motors and Chrysler can’t do anything significant during those two federally-subsidized years. We know exactly what will be on the showroom floor in two years’ time. GM’s “great hopes” were the Chevy Cruze and Volt. While the Volt’s feasibility is debatable, the Cruze (a much easier to build conventional car) is slated to go on sale as a 2011 model some time in 2010. That’s it. Time’s up for GM. Giving them money without restructuring is like heading into the bottom of the ninth, losing, and insisting the other team takes its turn at bat.

So why will the government attempt the bailout anyway? Because “something must be done.” GM and Cerberus (Chrysler’s owner) have powerful friends in Washington. The United Auto Workers may be a shadow of its former self, but it still knows how to deliver votes. And American government officials have always loved dumping cash into the economy right before an election (see Edward Tufte’s 1978 book Political Control of the Economy). Second, class warfare. This bailout makes up for the first “thief in the the night” raid on the public purse for Wall Street fat cats. This one’s about protecting “real jobs” for “middle class working stiffs” who “build stuff,” thus protecting our “industrial base.”

If GM filed for bankruptcy and the government sat back and watched, people would be angry at the “failure to respond.” So they will take a futile action instead, with $10b or more, lots more, to make the problem a little less grave (or at least look that way). It’s a cover-your-ass play on an epic, tragic scale.

As a result, it’s unlikely anyone in Congress or the lame-duck White House will oppose a bailout. Nobody wants to be the first to oppose the bailout when their election opponents are in favor of it. Nor does anyone have a strong desire to go toe-to-toe with the UAW weeks before a local, state and presidential election.

From any rational perspective, it makes far more sense for the government to do something else with the money headed for Detroit. The feds could simple hand every blue collar at GM and Chrysler worker a $100k tax-free check. They put it into schools; provide health care for a pile of people. Or give the American people a tax break. Or simply not spend money they don’t have.

The average American has no idea that GM is run by a bunch of nimrods. And even if they knew about the Machiavellian machinations behind the automakers’ recent struggle for survival– including hiring a raft of ex-treasury officials to lobby their former employer for tens of billions of GM bailout bucks– they wouldn’t care. That’s all Inside Baseball stuff. Joe the Public has enough on their proverbial plate just running the kids to school, keeping food on the table and putting a roof overhead. But when it comes to buying a new car, well, that’s a horsepower of a different color.

As they should, American car buyers have acted– and will continue to act– in their own automotive self-interest. You can debate about the “perception gap” between GM and its rivals’ products until you’re blue in the state, but the bottom line remains: consumers prefer transplants’ products. It is this sharp end decision that has effectively (if not legally) bankrupted GM. And there’s no indication whatsoever that General Motors has the weaponry needed to reverse this trend.

In fact, there’s little reason to suspect that GM will EVER have the products needed to sustain the 20 percent plus market share it needs to justify its existence. I repeat: no matter how many tens of billions GM– or GM-Chrysler– sucks from the federal taxpayer, it has no chance of staunching the wounds that are draining its lifeblood. Too big too fail or not, taking money from American taxpayers who have exercised their freedom to buy what they want to sustain a company who cannot produce what they want to buy is a special kind of madness; on a scale that dwarfs even the UK’s British Leyland debacle.

Morality, ethics, principles and pragmatism aside, there’s history here as well. GM’s decision to marry its fate with Chrysler to stay afloat is pregnant with irony and foreboding. If Chrysler hadn’t suckled on the federal tit back in ’79, and then paid back its loan guarantees, GM’s current plea for federal assistance may have lacked sufficient credibility to succeed. Thanks to Snoop Dog’s golfing buddy, GM can point to Chrysler as a successful model of government intervention in the U.S. automobile industry.

It’s a simple idea that resonates well even (especially?) with an uniformed public: you did it before; you can do it again! Hell, you guys even made a profit from the Chrysler bailout– uh, guarantees! Yes, well, one small problem: Chrysler’s about to go away. Assuming GM merges with Chrysler– hoovering any remaining ChryCo cash and releasing 2 Big 2 Fail’s song “Obama’s Yo Mama”– the argument that Chrysler is a template for recovery kinda sorta disappears. In other words, the deal transforms the success of the last bailout– uh, loan guarantees– into an abject failure.

Sure, GM won’t touch Chrysler initially– for that very reason. But the media ain’t dopes. They’ve already picked-up the scent of the story that gives them an instant, persistent info-stiffie: job losses. As TTAC commentator thalter points out, “spending government money to facilitate layoffs is not going to sit well with the American people.” That’s doubly true if and when GM’s monumental management compensation and Cerberus’ deep pockets come to light.

GM is counting on speed and stealth to get their bailout bucks before the truth hits the public consciousness (a.k.a. public hearings). CEO Rick Wagoner and his minions know they’re already behind the eight ball from a PR perspective; the average American reckons all this trouble is Detroit’s own fault, for building gas-sucking SUVs rather than… something else. As sure as eggs is eggs, bailout fatigue, a genuine conservative backlash and the post-election diminution of Michigan’s political power are all coming down the pike.

And just like the $700b bailout bill, the chances are good that GM will sneak under the wire and get their money. But here’s the thing: it will be a Pyrrhic victory. The attendant publicity may paint GM as a victim, but it will also paint a big ass L (for loser) on every single one of its 1,274 products. Even as GM makes its case to reporters (under the guise of anonymous sources), wooing the politicos and Powers That be, they’re stigmatizing their products to the only people who really matter: car buyers.

Zoom back into the micro-level, and this soon-to-be highly publicized bailout will hand American consumers yet another reason not to buy a GM product. Protect American jobs? Of course. But… If, indeed, no one wants to buy a vehicle from a bankrupt automaker, it’s also true that not everyone wants to buy a car from a “troubled” one. Not to put too fine a point on it, when it comes to family finances, there’s no such thing as a sympathy fuck.

Well, it’s official. The Wall Street Journal reports that GM pleaded its case to U.S. Treasury Secretary Henry Paulson. The General’s looking for a mere $10b in “continuation” money to fund its Chrysler “absorption.” That’s a nice cover story for saying that GM cannot muster any other spin on “crying uncle.” Regardless of what Hank “the Hammer” Paulson answers, it’s a safe bet that we’ll be seeing an epic amount of taxpayer money flow into the RenCen’s silos of despondency in the near future. Mark my words: at the end of this, we’ll be saying that never have so many paid so much to so few for so little.

TTAC has chronicled the inevitable slide of the financial train wreck called General Motors. Maybe we’ve had greater foresight than Wall Street. Or maybe we’re just smart enough to see through the “all’s well” smokescreen created by GM’s masterful spinmeisters. Truth be told, it’s neither. The American public has voted for a long time on GM, and that vote marched out the door towards non-domestic brands. And for certain, they’ve never looked at an income statement or balance sheet in a 10K. I’ll say it here: the great unwashed mass of American car buyers know better than we can scribe in 800 words.

So let’s put aside any misconceptions here. There’s zero chance of GM (with its Chrysler sibling) ever again achieving past glories in market share or sales. In fact, the two companies together won’t achieve 30 percent market share. It will be much less, especially as GM simply rebadges more of its own vehicles at Chrysler, Dodges or Jeeps going forward. It didn’t work before (bye bye Oldsmobile) and ain’t gonna work in the future.

Any interested taxpayer has to ask: why should the Federal Government bail out General Motors to preserve the status quo? Why keep this monstrous hulk that gave us more than three decades of shoddy product, misguided investment adventures, and lousy managements? Sure, there were some glimpses of brilliance, and maybe some of GM’s cars and trucks today might be better than ever. Still, it doesn’t seem like Consumer Reports or the buying public thinks its vehicles rank higher than most of the Asian competition. The days of adventurism still haven’t ended with the Chrysler deal. And management-– well how the heck does a CEO who presided over the biggest evaporation of-– name a metric, any metric-– keep his job?

Yes, we certainly feel for the people that will lose their jobs. The suppliers that will disappear. The dealers forced to shutter their stores (well, some of them deserve their fate). They’ve all been given a lousy hand of cards, fed by years of pretending that “the next great vehicle from GM is coming.” It’s time to stop the music and deal with reality.

Any taxpayer monies that go to General Motors must have some very tight terms and conditions. The Feds cannot buy into the story that it’s just a matter of the economic climate today; sunshine is just beyond the next cloud. No way. It’s time for a radical restructuring of GM so that it can emerge as a self-sustaining and profitable enterprise in North America.

The terms should be as follows:

Board of Directors – Completely replaced by an independent group answerable only to the taxpayers – not the shareholders, not the management – no one but us. GM should have split the Chairman’s job from the CEO many years ago – but didn’t. Rick Wagoner answered to himself, surrounded by his handpicked failures, especially lead outside director George Fisher. Kick all of them out. No one from management sits on the new Board.

Management – Hire a new CEO. Find someone like Alan Mulally, an outsider with industrial experience but who has loyalties to no one inside of GM. Make GM’s new leader a czar. Corporations aren’t democracies. GM needs a firm and heavy hand to break down its internal fiefdoms. The new boss answers to no stakeholders save the new Board.

Financial Creditors – Force a cram-down on them. Painful but necessary. The balance sheet cannot remain as structured today regardless of how many dollars the government feeds into the beast. In return, make the creditors the new shareholders of GM, in return for debt foregiveness.

Shareholders – Tough luck, pennies for you. Especially the institutional shareholders that failed to force more action from the Board years ago.

Salaried Employees – The days of guaranteed career growth and job advancement will come to an end. No more buffoons promoted upwards. In fact, thinner and leaner management will now be the “in style” at the Ren Cen.

Organized Labor – We commend your wisdom on the VEBA deal. But you get a cram-down on that too. Retirees will have to take a generic plan versus a gold-plated deal. Everyone has to give. Their “contracts” are being broken. Yours too.

Dealers – If you’re not a Caddy or Chevy dealer, be prepared to wither on the vine. Just like Isuzu did to its dealers. Starve those weak brands of product. They’ll get the hint that their days are numbered.

Maybe this can be construed as “tough love.” But I’ll be damned if my taxpayer dollars go to save the status quo. Ethics aside, a no-strings attached Detroit “continuation” bailout will only continue the misery for all those who depend on GM for their living.

General Motors will soon be a ward of the United States federal government. Make no mistake about it. Without some kind of massive financial injection– not a mere few billion dollars but tens of billions– there’s no real solution to the problems of GM’s legacy of epic, chronic mismanagement. We know that day of a government bailout will come-– and much sooner than even Wall Street wants to believe. In fact, it’s almost upon us.

The Chrysler “absorption” only proves that when you confront normally sane men (though maybe not that smart) with death and destruction, they will resort to a nuclear option, even if it defies their own best interests. Kind of like saying “if we’re going down, everyone else is going with us.” And that makes government intervention inevitable.

When Congress faces the bomb lobbed by GM, it will react in predictable fashion: by making sure that every group gets a shot at the bailout dough. First, labor. Got to protect jobs, especially high paying union jobs. That’s the street cred of the Democratic party. Second, the huge Midwest industrial base of suppliers. They’re vital to keeping the behemoth going. Third, dealers. Can’t throw them out on the street; every state has too many GM dealers already and most of them donate significantly to their respective state and federal politicians to keep their franchises safe from greedy automakers. Finally, all of the associated vendors that now pray every month that GM pays their bills. Well, they can’t be ignored either.

GM’s got a ton of allies in this fight. Besides the aforementioned groups, the biggest supporter of a massive government bailout may turn out to be the national and local media. GM spends upwards of three billion dollars on advertising in the United States every year. Its dealers spend god-knows-how-much additional millions on local TV, radio and print every wee. If that money disappears, there’s gonna be a world of hurt applied. So, sure enough, media owners (think Gannett, Viacom, GE-Universal, Comcast, your local newspaper, etc.) will lobby hard to make sure GM stays in business as is.

Keeping General Motors afloat with government dollars (i.e. your tax dollars) will be done in a manner that keeps the status quo. Same brands, same dealers and few job losses.

Of course, that’s exactly the wrong way to do it. Nothing will change. And while GM might make it through the short term, everything that’s wrong with the company today will merely continue on into the future: too many brands, excess dealers and a labor force that lives by entitlements. And let’s not forget about an executive management team that got us here in the first place. They’ll stay too.

There is an alternative.

The feds should arrange a pre-packaged bankruptcy of General Motors, whereby the Federal Government provides 100 percent of the Debtor-in-Possession financing. No one else can participate. Not private equity (think Appaloosa with Delphi), not the money center banks, and definitely not any investment banks (oh wait, they’re already gone).

GM must shed its excesses that have become unmanageable. TTAC and others have talked about this ad nauseam. Without a bankruptcy, there’s no way to rearrange GM’s balance sheet (without a nasty cram down of the current lenders, and that takes time and politics), wipe out the existing equity (not much left there), and simply get rid of the unnecessary brands and dealers. The laws can’t change just to accommodate General Motors and accomplish any of this if the corporation and its North American subsidiary remain intact and out of bankruptcy.

With a prepackaged bankruptcy-– overseen by a governmental administrator with an independent Board of Overseers-– GM can quickly emerge as a viable, but smaller company. Jobs will be lost. Factories shuttered. Suppliers and dealers will disappear, but not all. (Dealer franchise contracts are deemed executory contracts and can be terminated in a bankruptcy without compensation.)

The key point here: none of the existing GM stakeholders today would have an alternative option under this bankruptcy scenario. There simply aren’t any other lenders willing to provide GM any financing while in bankruptcy, and that would lead to a liquidation for which stakeholders wouldn’t get much. Hence, the government can and should dictate the terms everyone gets if it provides the debtor-in-possession funding.

This plan would cost less to the government (that’s you and me) than a politically-crafted bailout to keep General Motors afloat “as is.” A reorganization exit plan would also bring in new equity and debt to replace all government advances. GM would emerge as a living and breathing entity, not as a dead-corpse walking, as in any other government plan.

And that’s how the nuclear genie at GM can best be contained. Now, if only Washington DC would listen.

The Wall Street Journal’s Business World by Holman W. Jenkins Jr. exemplifies the dangers of always looking at the course through the same binoculars. His “Uncle Sam Goes Car Crazy” (WJS Oct. 22, 2008) rant is an attempt to view Detroit’s troubles through Government is Bad glasses, filtering out all other reasons for the slide. He’s wrong, and in a dangerous way.

We can start where we agree: The American automotive industry is cart wheeling into the stands, parts are flying off and people are scared. Jenkins and I part ways mid-tumble. He believes Detroit has “accrued an almost incalculable baggage of government intervention, which explains why more intervention is needed today.” A traditional free-market loyalist, when there’s trouble, Jenkins’ finger points to big government first, automatically and without much input from rest of the body, it would seem.

First, Jenkins blames GM, Chrysler and Ford’s labor inflexibility on the Prohibition-era Wagner Act, claiming the Government makes automakers dole-out higher compensation than the market dictates. I’ll crack open a 70-year-old bottle of rye and toast laws that never change. Salut.

Labor contracts over the last few years have actually added second and third tier employees, mitigating the effect of Wagner. Not that it should have mattered. The labor laws in Germany are even more stringent and their Big 3 seem to be surviving. (Not that any car maker is raking it in a the moment, but Porsche/Volkswagen, BMW and Mercedes are nowhere near putting their respective bellies up.)

Second, Jenkins bemoans the 50s franchising laws, which certainly add to Detroit’s problems, but wouldn’t if they were moving vehicles, which they’re not. Ironically, if The Big 2.8 had not fended off the government’s attempts to raise fuel efficiency standards for a generation, dealers might have more competitive products to push right now. They’d all be selling more cars and trucks. The number of outlets matters, but to a lesser extent.

Next up, off-shoring vehicle construction, as in Detroit doesn’t do enough. I’m not entirely sure whose job Jenkins is trying to save with this argument; it’s not Joe the Tool and Die guy. Jenkins believes that saving American car manufactures means making cars someplace else. I just assume buy an American made truck, despite the Toyota badge on the tail, but that implies the tack is valid in the first place. Anyway, The Big 2.8 build plenty of cars in other countries. Fuel and safety dictates haven’t hampered that effort in the slightest. In fact, due to a limpid dollar, building in good ‘ole US of A hasn’t been this attractive in years.

Lastly, Jenkins states that American companies build better cars overseas and can’t bring them here, again because of an ignorant, intrusive federal government. I’m gathering he’s never been to a Saturn lot. Maybe he’s still confused by the fact that his Ford Focus doesn’t corner like the one he rented in Glasgow. A choice Ford made all on it’s own.

Yes, there are differences in standards from nation to nation. The differences, themselves, do not prevent a world car. The European Ford Focus is built on the Mazda 3 – Volvo 30, 40, 50 platform, that runs nicely on American highways. Its one of the many things Allan Mullaly noticed when he took charge of Ford. He’s been trying to slim and unify ever since. AND he’s not breaking any laws in the process.

Strangely enough, Jenkins misses the Big Kahuna:  mandatory health care. GM, Chrysler and Ford have to offer it to their workers, and It costs them a fortune, adding thousands of dollars to the cost of every Trailblazer, Explorer and Durango rusting on the lot. And, you know, helping people survive cancer, heart disease and other ailments along the way.

A national, single-payer health care system would alleviate these costs and level the field Americans play on against Japan, Germany and Korea, as the Chinese stretch out on the side lines. “Socialized Medicine” is beyond Jenkins’ scope, though, regardless of how good it looks as applied to this industry. Government is never the answer in Business World.

“The only thing wrong with corporate longevity,’ Jenkins writes, “are the legal encrustations that accumulate.” To which I say: build better cars and customers will buy them.

There are times when you’ve got to put the binoculars down and take in the full course. Even when you may not like what you see. Laissez faire is a fine ideology; it should never be confining. There are times when other strategies need apply, like… now (for example). One of the world’s foremost authorities on business issues got it wrong four out of four. I expect better of the Journal. With industry leaders getting this kind of advice through their headsets, it’s no wonder the American automotive industry’s spinning off the track.

Ford CEO Alan Mulally goes to bed every night and prays that GM does a deal for Chrysler. In the morning, Big Al digests his corporate PR brief looking for missives from automotive and Wall Street scribes praising the combination of dumb and dumber. Every afternoon, he reviews Ford’s daily sales figures and wonders when the pain will stop.  And soon, he’ll be rewarded with news he wants: his two Motown rivals will be bedding down together. “Thank you God, baby Jesus, and Fritz Henderson,” he’ll whisper to his wife. “Redemption is mine.”

In whatever form it eventually takes, the combination of GM and Chrysler will make Mulally’s job leading Ford out of the wilderness of despair that much easier. If only for one reason (among many): the combination of the first and third North American domestic automakers won’t lead to additive sales of two weaklings together. Ford will gain sales at the expense of its sole remaining domestic rival. And in this market, every incremental unit sold translates into good news, no matter how bad sales stink.

Strange to say, the idea of a GM – Chrysler merger predates the recent carpocalypse. GM’s President and COO Fritz Henderson has been pushing for a combination of the two companies since Daimler first offered it for sale. Fritz reckoned then, and now, that GM will gain additional revenues from selling vehicles with no incremental costs. He’ll merely gut Chrysler’s departments which overlap with those of GM (as in all of them) and reap the savings. Kind of the same as getting more units of production out of a fixed asset base; it does wonders for profits and cash generation. So yes, even with three additional brands, overlapping products (save for minivans and the Jeep Wrangler), little downside exists. The deal pencils. We can do this and save the Goodship GM.

Whether intentionally or not, Fritz has forgotten that any synergies from a Chrysler merger will take years to manifest, if ever. Laying off the bulk of Chrysler’s white collar workforce can’t be done immediately. Those folks at Chrysler know how to operate its systems and support the products and dealers. It might take a year or more to migrate ChryCo ops to GM protocols. In the meantime, parallel systems will have to be maintained. And then it’ll cost a bomb to integrate. So no real savings there from the get-go.

And what about Chrysler’s current product line? How will GM save money there when it controls Chrysler? Are we going to see more rebadged products throughout all eleven brands (or ten if Hummer goes away)? Will GM stores sell Chrysler minivans? How much confusion can exist within the combined brand structure? And how does GM expect to shoehorn GM’s powertrains and parts into existing Chrysler products? Oh wait, we’ll say we can do this but in reality we can’t. So no savings there either.

So we’ll save money on advertising, marketing and PR! Why have two departments at both companies when we can condense them into one? Sure, we’ll buy national advertising promoting our new “Financing Available for Everyone” program at eleven different brands! Maybe we can buy office suppliers cheaper? Oh, and now that we’re so large, we can really browbeat parts suppliers for even more savings! And since Chrysler has little engineering staff left anyways, we’ll get our engineers to work on their products. Except they won’t; talk about a dead end for one’s career within GM!

So as GM absorbs Chrysler– and looks for cost savings, synergies, or other things for a player to be named later– the company will experience an organizational meltdown. Chrysler for certain will go into a tailspin, while GM’s bureaucracy leaps at the opportunity to enlarge fiefdoms and impose its will on the remaining and hapless Chrysler people.

But it also means that the total sales for the combined companies will fall. And that’s the window of opportunity for Ford, its only domestic competitor, currently mired in an even deeper trench of confusion and lack of focus. GM’s capabilities to move even faster on a product rationalization plan and cost savings are now hampered by internal infighting over turf control. No one inside of the new GM can make decisions within the new structure– an already big mess just became even bigger!

Meanwhile, Ford continues on its steady path of resurrecting The Blue Oval. Nothing radical; just continuing its focus on product and marketing. Build the best new truck for real users. Bring over superbly-crafted European designs for the small car market to compete with the Asians. Rethink the SUV/CUV. Work on finding cost savings that don’t cheapen the product. Eliminate internal fiefdoms and make it one Ford. Basic blocking and tackling.

If Ford’s corporate cash can last and keep the lights on long enough, domestic car buyers and maybe even some import buyers will consider Ford for the first time. They’ve got everything they need except time. Meanwhile, it sure helps when your biggest competitor decides to do something really dumb.

The mainstream media suffers from “opinion inertia.’ Once the press corps adopts a certain angle on a story, its superglue city, facts be damned. To wit: TTAC’s been slamming Chrysler for horrendous product quality, bizarre model choices, asinine marketing and a bloated, piss-poor dealer network since… ever. Meanwhile, our colleagues have been playing the underdog American automaker meme. Post Cerberus purchase, they’ve been ignoring Chrysler’s failed products and telltale gaffes, such as CEO Bob Nardelli’s infamous “operationally bankrupt” admission. But now that rumors of a GM – Chrysler merger have surfaced, the media’s woken up. And the fangs are out.

Detroit News contributing author Alisa Priddle normally puts her keyboard to use for Car and Driver’s blog, where she’s more PR repeater than news reporter. In September, she parroted “Chrysler shows it has a slew of electric vehicles in the pipeline, including a Chevy Volt competitor, and they’re coming to a road near you soon.” Not only was this blatant press release regurgitation, it was also patently false. “They” weren’t going into production; a fact that Priddle acknowledges later in the article (only one, at best, would be produced).

And now, Priddle pens “Chrysler, GM deal confronts obstacles,” which would better be titled, “WTF are these asshats thinking?” “Statements that Cerberus bought Chrysler for the long haul are falling on deaf ears,” Priddle writes. “Especially with the financial tiff that has broken out between GMAC (which is 51 percent owned by Cerberus) and GM, which is now paying dealers an incentive for sales financed outside GMAC.” Well, someone’s ears are open, now.

Co-writer David Shepardson is also a recent convert to the growing “Chrysler’s up excrement creek” camp.

In an August 6, 2007 column called “Controversial CEO,” Shep responded to CEO Nardelli’s critics. “But Nardelli improved the company [Home Depot] by several measures. Sales jumped from $46 billion to $91 billion in 2006, while profits doubled to $5.8 billion.” Shep quoted the usual (anonymous) sources, happily reporting that “A person close to the situation said Cerberus was deeply impressed with his financial performance. ‘If we get anywhere near what he has accomplished previously, we’ll be delighted,’ the person said.”

Now Shep’s taken off his rose-colored glasses and begun chronicling the folly of the mix ‘n match “too big too fail” theme. “Among the hurdles to any deal is whether Congress would agree to provide financing to help a merger. Congressional aides said any kind of money would likely include strings.”

Detroit News columnist Daniel Howes is also showing his ability to eviscerate a hometown hero. His October 2007 column “As Toyota falls, Detroit Big 3 rise” gives way to today’s “GM hasn’t learned bigger isn’t better.” “Forget the back-channel spin from those with self-interested agendas rationalizing the boss’s current negotiating position. Would this mega-deal, another stunning blow to Michigan’s wobbly economy, make sense to Joe the Autoworker and others not drinking the Kool-Aid of the moment?

In yesterday’s post on the Wall Street Journal blog, Heidi N. Moore asked “What If the U.S. Auto Makers Don’t Survive?” That’s a sharp turn from her June 10, 2007 post on Chrysler’s rosy prospects: “The honeymoon at Chrysler clearly isn’t over: Chrysler CEO Robert Nardelli couldn’t be happier about Chrysler getting rid of Daimler and public shareholders in one fell swoop.”

Clearly, the press has “reassessed the Chrysler situation,” working their way towards acknowledging Former CEO of American Motors Corp and current professor at University of Michigan Gerald Meyers’ assertion that “there is no economic justification for the existence of the Chrysler Corp.”

And now that press is beginning to face that uncomfortable reality, they’re showing remarkable insensitivity towards their former champion, newfound object of ire.

The current media group-think is, simply put, Chrysler’s going away. Get used to it. Whether through a merger or a sell-off, tens of thousands of jobs, hundreds of suppliers, thousands of dealers and tens of thousands of customers will soon be S.O.L. Chrysler’s presumed recovery has become Chrysler’s presumed oblivion. But is that necessarily true?

Even before day one, TTAC warned that Cerberus bought Chrysler to strip and flip the company. But before Chrysler is laid waste, someone in the media should stop for a moment to consider an alternative. Assuming the U.S. government is going to bailout GM, perhaps they should start by practicing on Chrysler. Where’s the talk of a Chrysler “intervention?”

The fact that a Chapter 11 reorganization isn’t part of the mainstream media discussion about Chrysler’s fate shows that the wolf pack press shares the same ADD and lack of imagination as Chrysler’s protagonists. In that sense, just like voters and their politicians, a story gets the coverage it deserves. We here at TTAC will continue to think independently, even as Chrysler is dismembered by greed, arrogance and indifference, on all sides of the story.

A Chrysler – GM merger is a mind-boggling prospect on many levels. But the over-arching question is simple enough. Why? Why in the world would General Motors want to combine with Chrysler? Given their respective balance sheets and future prospects, the analogies pretty much suggest themselves. My favorite: the Titanic rescuing the Lusitania. But if you want to understand the logic behind this merger deal, such as it is, we’ve got to explore a different metaphor: “changing horses mid-stream.”

First, it’s important to realize who’s holding the reins at Chrysler. While Cerberus Capital is ChryCo’s listed owner, the private equity group used OPM (Other People’s Money) to bankroll their purchase. Reports at the time of sale indicated that Cerberus owner Steven Feinberg used his [then] bulletproof rep to sweet-talk his “partners” into the deal without due diligence. Be that as it may, JP Morgan-Chase are now in the saddle, to the tune of $6b dollars.

Imagine the Chrysler horse trying to cross a river to get to an equine sale on the other side. The rider thought the river was just a trickle. But it turned into a raging torrent, dragging the horse sideways towards a killer waterfall. And there, right next to the Chrysler horse: a steed named GM. Yes, GM’s also being dragged towards the abyss. But GM’s a bigger beast with more friends ready, willing and, uh, ready to attempt a rescue. So the banks decide to switch horses.

OK, enough with the analogies. Let’s talk turkey. I mean, business.

JP Morgan-Chase reckon Chrysler’s going down, taking their six bil with them. So they’d rather have their money in GM, which will, no doubt, receive a federal bailout (the latest rumors have Uncle Sam purchasing an equity stake, I shit you not). For its part, Cerberus [still] has its eyes on GM’s 49 percent share of lender GMAC. Cerberus is also counting on a federal bailout to save that particular piece of bacon, via the Troubled Asset Relief Program (TARP). So the banks get out of Chrysler, Cerberus gets out of Chrysler AND gets GMAC (which it can then, finally, combine with Chrysler Financial).

Fine. So what the Hell does GM want with Chrysler? Cash. As we’ve reported here many times, General Motors is running on fumes. While the aforementioned bailout is a virtual cert, it all takes time. And time equals money. And GM doesn’t have the money to wait until President Obama gets his team together and cuts a deal to save the United Auto Workers American jobs. Their time horizon is the next six months, they’ve sold all their assets and nobody in their right mind will loan GM a plug nickel.

I know it’s a completely counter-intuitive idea: GM getting the cash in needs for its short-term survival by “absorbing” Chrysler. But there it is. Supposedly, Chrysler has amassed a $11b cash hoard, accumulated through the laborious process of not spending it on future products. And then there’s JP Morgan-Chase, who could do what banks do when they have nothing else to do: throw good money after bad. In other words, they’re good for at least a couple more billion.

So GM merges with Chrysler and lives. Of course, the result is The Mother of All Clusterfucks: a gigantic American automaker with 11 weak brands, well over 100 products (many of which overlap), thousands upon thousands of unnecessary dealers, excess workers and plants and facilities, a completely unworkable bureaucratic structure stuffed with managers (who’ve already proven their abject inability to make money building and selling cars) and incompatible software (for all we know).

On the positive side, GM is headed by a man whose only appreciable professional talent is cutting costs and selling things– and God know there would be a lot of THAT to keep him occupied until the cavalry arrives. Obviously enough, the end result would be the same: a large car company that still doesn’t know how to make a profit. Even worse, if the rumors are right, it would be a large car company that doesn’t know how to make a profit partially owned by the U.S. taxpayer.

Many of our Best and Brightest have labeled this deal “America Leyland,” referring to the disaster that was the combination, nationalization and eventual extinction of Britain’s car industry. Spot on. Should this deal down, that’s EXACTLY where this is heading. But it should be remembered that Leyland took more than a decade to take a dirt nap. GM’s management, as always, is thinking about next week. This is, of course, the reason for their demise.

So those of you who said “see you at Death Watch 567” may well be right. While this prediction may now prove to be accurate, I can hardly imagine a worse scenario for American industry, the American auto industry and all the people who depend on it for their livelihoods.

The auto news biz is abuzz with rumors of Chrysler’s endgame. Even a quick scan reveals that there are more potential scenarios and pitfalls than Operation Eagle Claw, America’s ill-fated attempt to rescue its hostages from Iran. Cerberus trades Chrysler to GM for GM’s remaining share of GMAC. Chrysler sells Jeep to Renault and the rest to GM. Chrysler parts out the company and THEN declares Chapter 11. But no matter how this plays out, foot soldiers will be sacrificed, the American auto industry will remain bound and gagged and the generals will get off Scott free.

Let’s start with what we know. Cerberus never intended to run Chrysler as an automaker. As Ken Elias pointed-out in his GM Death Watch, right from the git-go, the automaker’s most recent owners have starved Chrysler of all the investment necessary to run Chrysler as a going concern. In that sense, they lied to union workers, white collar employees, suppliers, dealers and customers. And the media bought their lies like a teenager purchasing a pack of condom with a knowing cock tease by his side. Hey baby, are you into EVs?

Now that Cerberus has been unmasked by the rest of the media (TTAC called the finance company’s play a strip and flip even before the sale was complete), we also know that Cerberus wants the Hell out of Chrysler, and soon. When Chrysler CEO Bob Nardelli famously pronounced that his employer was “operationally bankrupt,” he wasn’t kidding. The automaker’s truck business is dead, their car business is deader and the finance part of the program is the deaderer (apologies to Andrew). There is no there, there; and the red ink won’t stop spurting until Chrysler bleeds out.

So, assuming Cerberus hates carmaking and wants out now, what to do, what to do? There are three likely scenarios.

First, sell it to a sucker. I break with Mr. Elias’ view that GM will “absorb” Chrysler to ensure a prime position at the federal bailout trough. As PCH101 points out, GM is already too big to fail. In terms of public perception, the idea that GM is “healthy enough” to buy Chrysler (a dumbing-down of the concept, but there you go) would undermine its claims against the public purse. So who else? Renault? No. A Chinese automaker? Nope. In this market, no one. So fuhgeddaboutit.

Second option: Cerberus toughs it out. It keeps Chrysler until the industry shakes out and picks-up, and then sells it to whoever is left for whatever it can get. At this point, Chrysler would need federal “assistance” to stay in the game. The fact that ChryCo offered the media some cod-electric vehicles– pitching for part of the existing $25b federal loan program– shows that the company is ready, able and willing to steal borrow money from Uncle Sam.

I also disagree with Ken’s contention that the feds couldn’t loan bailout billions to Chrysler because it’s a private equity firm. If AIG execs can receive federal “intervention,” spend $1m on company pedicures and not be strung-up from a light pole, why should the fact that a guy who skis in Gstaad owns Chrysler make any difference to bailout boosters? As twisted as it sounds, a Chrysler bailout also sounds fair. If we give a loan to GM, why NOT Chrysler? Chrysler’s got history. “We made the feds a PROFIT the last time ‘round. And, lest we forget, Cerberus has plenty of good friends down in D.C.

If, however, Cerberus needs or wants a right now solution to their problems, bankruptcy is it. Or Chapter 7. Either way, option three is the fastest, cleanest and, possibly, cheapest option.

I know: I predicted a ChryCo C11 for late July. But unlike GM’s point-of-view, bankruptcy protection is ALWAYS on the table for Cerberus. Cerberus bought a controlling stake in Houston-based mortgage lender in 1998. Aegis ceased operations in August 2007. When Mervyn’s department-store chain (part-owned by Cerberus) hit the skids this summer, Cerberus pulled the plug and filed for C11. This very day, Mervyn’s filed for Chapter 7.

So which option is Cerberus pursuing? I reckon it’s all three at the same time. The big news here: Reuters reports that Cerberus is negotiating with Daimler to buy back the German automaker’s share of the American company. ALL of these exit strategies depend on Cerberus owning 100 percent of Chrysler.

No matter how you look at it, Chrysler is attempting to kill itself. Of course, there are some big winners in all this: JPMorgan and Citigroup (representing Cerberus) and Morgan Stanley and Evercore Partners (representing GM). The fees involved in keeping Cerberus’ options open must be astro-friggin’-nomical (and the meter’s already running). Another winner: the transplants. Chrysler’s slow bleed lets them gradually increase their share of the American without anyone noticing. How sad is that?

General Motors is on the brink of a financial disaster. It’s managed to keep out of the abyss through asset sales, hocking the company store, and yes, cost cutting. CEO Rick Wagoner’s “plan” might have worked had the economic winds blown more favorably. But they didn’t. The automaker is months away from a liquidity meltdown. Everyone who supplies GM knows it. The rating agencies know it. And yes, Rick Wagoner knows it. GM has to secure new funding or face a bankruptcy judge in Lower Manhattan. So now let’s talk about Chrysler…

Chrysler Motors LLC is owned by private equity fund Cerberus (save a small chunk retained by Daimler). Since purchasing the automaker, Chrysler has amassed an $11b cash trove. In the main, they assembled their hoard by not spending any money on capital expenditure, R&D, engineering or other necessary essentials to carry on as a car company—to the point where the product well is dry.

No surprise there. Cerberus’ real goal in all this: merge GMAC and Chrysler Financial into a global finance company and exit from manufacturing. It believed that Chrysler Motors could survive with rehash of its existing products and as a distributor of other OEMs’ products for a while– until it could find some sucker to buy it.

Like everyone else, Cerberus never expected the meltdown in the auto or credit markets either. So now the Hades Dog is stuck with a manufacturer with no future. And it still has all the liabilities. A Chapter filing would wipe clean Cerberus’ equity investment; maybe five billion dollars gone. So why not follow GM to the federal bailout trough and wait for better days?

Simply put, it’s not politically feasible to provide loan guarantees to a company owned by private equity. First, it would rescue “Wall Street” guys who pay themselves millions of dollars year. Steve Feinberg’s net worth might still be measured in the billions. Second, even if loan guarantees were provided, Chrysler is nothing more than a shell of company anyways. It would be good money after bad.

Meanwhile, GM needs cash STAT. Washington’s printing press already faces a meltdown, as a voters’ bailout fatigue threatens a political backlash. Given the private equity angle, the feds would look to save GM (and Ford) but let Chrysler go.

Only that won’t work either. It’s simply not equitable to have the government make those kind of decisions when voters (e.g. the UAW, suppliers, dealers, etc.) involved with Chrysler are spread across almost all political districts. Imagine the phones ringing in Congressional offices. Washington would be in a bind– save Steve Feinberg and take the wrath of voters everywhere, or let Chrysler go and just save GM and hear about the inequity of the “playing favorites.”

The best case – and this is how it’s playing out – is to let GM “absorb” Chrysler Motors and give Cerberus an equity piece in GM. No doubt, Cerberus will take a writedown, but something is better than nothing. OR – trade Chrysler Motors for the rest of GMAC. Hmmm. Either way, both Cerberus and GM come out ahead. In theory, the new GM controls 30 percent of US auto sales in market share, 50k more workers (soon to be eliminated but we’re not going to tell anyone), additional plants, and 3k more dealers. But most importantly, it has a larger political footprint.

And so GM will acquire Chrysler. A deal that has nothing to do with synergies, cost savings or parts sharing. Nope, it’s all about guaranteeing that Washington saddles-up to the loan giveaway bar for Detroit. Billions and billions of dollars for guarantees or direct loans, all paid for the American taxpayers– who buy more than 50 percent of cars from foreign auto makers. All justified in saving a great American icon of industrial might, a driver of new automotive technology (Volt anyone?) and preserving jobs in the heartland.

But you won’t hear the truth from the auto execs at GM, or analysts or the automotive scribes. Wall Street will celebrate the deal (deal fees in a lackluster M&A market). The automotive media will herald the “bold stroke of genius” and “the next 100 years of GM” or something to that effect, and the auto execs will point to synergies, efficiencies, and other BS.

Everyone else will simply ask WTF? And we just told you the truth: it’s a deal designed to absolutely, positively insure that Washington provides a massive bailout to GM in early 2009. (Ford will follow along on the gravy train too… but that’s another story.)

So there it is – the real reason this deal will go down. Washington will have to rescue GM now, it has no choice. The private equity guys are out of the picture (and off the hook for Chrysler’s liabilities too). The political dilemma solved. Could you script a better scenario?

GMAC will go bankrupt. The U.S lending giant is cut off from all lending sources. Smart depositors will flee its small bank (relative to GMAC itself). And its majority owner, Cerberus, won’t save it. It’s a pure liquidation play now– with the bank going into FDIC receivership, maybe as soon as this Friday. Whether or not all Hell will break loose is an open question, with many answers…

Let’s start with this: GM’s dealers have been hoodwinked by GM execs. The corporate mothership failed to provide their franchisees with fair warning that GMAC was going to pull the plug on all retail lending– never mind removing itself from the leasing business. Yes, GMAC says it will fund prime customers– with a 700+ FICO. And rates now 75 basis points higher (unless subsidized by GM).

Uh, wait a second – GMAC’s regular lending rates were already non-competitive. Now they’re just stratospheric. And again. that’s for good customers. Non-prime customers– those who buy Aveos, Cobalts, HHRs, G5, G6, entry-level Malibus, Saturns and, well ,mostly everything else GM offers other than Cadillacs, Saabs, and high end big SUVs and Hummers– are now mostly shut out of financing altogether, from any source. If you wonder why car sales are tanking, look no further than the lack of credit availability for this group of buyers.

So GMAC’s out of the market. We know that. GM has even announced an incentive program to spiff dealers who get customers financed with anyone else besides GMAC. Meanwhile, GM still owns 49 percent of a soon-to-be bankrupt GMAC. The only saving grace here: GM’s managers won’t have to blame themselves. If you didn’t know that unloading GMAC was a desperate play for cash/time, and most people don’t, they look smart for unloading half of GMAC to the wizards of Wall Street.

Here’s the crux of the matter. GMAC– formerly known as GM’s captive finance arm– used to gush cash. GM founded the subsidiary in 1919 as a means to finance both dealers and customers, so GM wouldn’t have to rely on finicky banks at the time. GMAC became a model copied by every other automaker of size. The early business model was simple: aggregation of loans written at rates higher than the cost of funding. A basic interest rate spread business. When you start writing billions of dollars of loans, the interest rate spread produces big dollars.

Later, captives found an even cheaper source of funds through securitization of receivables (i.e. bypass the banks and go direct to institutional securities buyers). And if that works for auto loans, it also works for mortgages. Soon enough, GMAC became a huge entity that provided a steady stream of profits and dividends for its owner.

There’s one problem with the model. When the music stops, the gig is over. If GMAC can’t borrow from lenders or sell its securities, it can’t make new loans. In a nutshell, that’s where it’s at today. No one in a sane mindset– given the current credit crisis-– would loan money to this finance company.

Bottom line: GMAC now has $173b of debt against $140b of income producing assets (loans and leases), and some of those assets aren’t worth the paper they’re written on. If GMAC liquidated the loans and leases, it couldn’t pay back all of its debt. If you add GMAC Bank’s $17b in deposits (a liability), the situation only gets worse. No point looking at the rating agencies to tell you there’s a problem here. Good thing the FDIC required higher capital ratios for GMAC Bank; it might survive on its own with its higher quality assets. But everyone else is on their own.

By its own admission in an internal memo to employees this week, GMAC says that it has no access to funding. That means more layoffs. No Christmas bonuses. And probably telegraphing the message that the company could go under. Only the government can rescue GMAC now, adding to that to the pile of bigger rescues going on elsewhere. And any rescue can’t be seen benefiting private equity. So Cerberus will get wiped out. GM will have to write down its investment in GMAC, thus taking another enormous hit to its shaky balance sheet. And there will be further downgrades to its credit rating.

GMAC’s collapse may not be the final death blow for GM, but it’s sure gonna leave a mark. GMAC says they’ll still support wholesale floorplan. But one has to wonder for how long that will last? Given that 80 percent of GM’s dealers use GMAC for floorplan, what happens when that song stops playing? How many dealers will go under? Worse, what will happen to GM itself if even a fraction of its dealers cannot replace GMAC with suitable alternatives? To be continued…

There are winners in every financial disaster. There are always a few folks– heroes or scoundrels depending on how they make their profits– who understand that the Chinese symbol for danger and opportunity are one and the same. GM’s impending bankruptcy (and likely Ford as well) will produce some winners. But not without serious financial and psychological risk to those who seek their fortune from misfortune. For those of you with a robust constitution, here’s one potential game plan for GM’s C11. First, some background for those uninitiated in the ways of the American automobile business…

The new car business has always been a boom or bust industry. There’s no such thing as steady growth; sales go up or down in multi-year cycles. During the last decade, Detroit’s fobbed-off excess production on rental car companies, commercial fleets and retail buyers. The strategy helped maintain cash flow. But it distorted sales levels and became a pattern of value destruction. Worse, the automotive sales cycle is now at new lows, with as many as four million units sliced off a “false” peak of nearly 17 million units just a few years ago.

The car business depends on the availability of credit at every level. GM will have to obtain new financing– either from the government or private debt/equity–- to remain in business in North America. Its dealers will need floorplan and buyers of retail paper. It’s a chicken or egg scenario. No one will lend to GM-brand dealers and customers if there’s any question of whether the parent company can stay in business.  Even then, it’s still riskier than lending to Toyota dealers and customers. The only variable will be product pricing; GM’s vehicles will have to be priced accordingly to make up for the extra cost of the financing and bankruptcy risk.

And that’s the opportunity. Buy Chevrolet and Cadillac (and Ford) dealerships now and into 2009 at fire sale prices from distraught dealers. It’s the bottom of the sales cycle and credit is not available. A firestorm of distress that will pass. One just needs the capital to survive the first few months after the filing. New car sales will still be depressed overall, and even worse for GM and Ford due to consumer and lender uncertainty. But that’s temporary– especially if GM follows the previously predicted prescription and launches a series of massive TV advertising and cut-rate pricing (like distress sale levels). Honor the warranty. Keep the flag raised – don’t surrender.

Within eighteen months or so, the recession will end. Banks will again lend and get greedy to find new revenue streams. GM will still be around, producing fewer cars only for its two remaining brands. But those brands will have the best vehicles from across the entire GM lineup.

Chevy will offer the following: Aveo, Cruze, Malibu, Impala, Lucerne (nee Buick), Camaro and Corvette. And maybe a Volt or two. Its Traverse, Tahoe, Avalanche, and Suburban models also remain. But the truck business– that’s where GM will still score (as will Ford) big profits. The housing business drives the pick up truck market and it still belongs to the domestic brands. Housing will come back and so will the truck market. Chrysler will no longer be alive to bother anyone. Chevy will still fight with Ford for light pickups, but at least GMC down the street will be boarded-up and closed.

Likewise, Cadillac will remain as a luxury brand incorporating the best in engineering and design from Detroit. No corners are scrimped, no more Cimmaron mistakes. Rededicated to its roots as the “Standard of the World,” GM’s ability to reshape its mark will continue, especially free from the distraction of the GM dysfunctional brand family.

The surviving GM dealers will have two brands offering complete and distinct vehicles without suffering from internecine warfare. GM, under new executive management and with new owners (maybe even private equity players) will be smaller in North America. But they’ll have products that meet or beat the foreign competition. And with its restructuring, GM can again be profitable at smaller volumes.

It’s a classic “buy low, sell high” strategy. There will be no shortage of Chevrolet and Cadillac stores for sale soon, most for real estate value only or less. Better stores, within markets having significant units in operation already, have a base of customers needing warranty work and service that can keep a store alive. And the used car business, when run right, provides a stream of profits as well.

Assuming GM it makes it through Chapter 11, avoiding Chapter 7 liquidation, the value of remaining Chevrolet and Cadillac stores will soar. Easy money– if you know how to run a car dealership and can stomach the risk. Anyone ready to bankroll me?

Whatever the qualifications and diplomas accumulated by auto executives, it’s a pretty safe bet that they failed mythology. Automobile names are a silly subject already, bring in some of the poorer choices, and you have the makings of high comedy.The assorted Zodiac names are harmless, if a bit silly. I’ll accept that no one at Chevy realized that Cobalt is a poisonous metal named for a demonic imp. But really, who green-lighted “Gremlin” back in the day? Odyssey is a cool-sounding name, but really, shouldn’t it be some sort of mid-life-crisis car? Well, maybe it’s a car for a “homer”. What would Oedipus drive? That’s easy: a black 300 with tinted windows cause he’s one baaad.. OK, I’ll stop. But mentioning the poster boy for tragic screw-ups reminds us of something that does have relevance for today’s auto market, the riddle of the Sphinx.

Just as man has three ages, you can easily divide a car’s age into three: New (just out of the factory), middle-aged (when it is “sold on” for the first time), and old age (when it enters beater-hood). Interestingly, the age of the customer tends to work in reverse. This is both helpful and worrisome for the domestics.

There’s no doubt that Detroit sees new car sales as the purpose of their business. While overall quality is still a bit… worrisome, “off the lot” quality has improved dramatically from the nadir (Nader?) of the 70s and 80s. The only remaining lagging part of the off-the-shelf equation: interior appointments, which are still bad enough to make poking your eyes out sound like a plan. Memo to Detroit, the owner sees a LOT more of the inside than the outside.

While interior quality and option packages are still a negative factor, on price “actually paid,” the domestics are in the ballpark. The real issue is too much “empty” volume, cars that won’t see a “real” owner until their next stage. Like many of their owners, cars can also have mid-life crisis. The dynamics of domestic “new” cars, quite often see their customers passing like ships in the night.

Even at their most arrogant, no domestic honcho will claim quality “parity” after three to five years. Truth be told, it’s usually not that bad. Aside from Toyota, Honda and perhaps Subaru, GM and Ford can claim at least parity with the competition (and parts are usually much cheaper). Given those facts, the re-sale value of the domestics (especially cars) comes as a shock.

The culprit is all those “extra” sales, especially the rentals. This lack of “trade-in” power could well be the single largest factor in the domestics’ failure to retain their customers. Horror stories make better copy, but they are comparatively rare. The bright flip side of this “problem:” the domestics can attract quite a few “value” shoppers, who are much more forgiving of “issues;” they didn’t (wouldn’t and can’t) pay full price.

Unfortunately, for these sorts of customers, upgrading them to a “new” version of their favorite grocery-getter is a BIG step. Buying “off the lot” can mean paying twice or even three times what their old vehicle cost.

By comparison, the Dai-sans’ high retained value keeps buyers in. To combat sticker shock on the old whips, they have emphasized “certified used” programs (Honda’s trailed only Jaguar’s in one satisfaction survey). While it may be harder to sell a 50k mile car with only 25 percent savings, it’s a much shorter step to get such a buyer into a brand-new one later.

If the early stage is full of promise that leads to the conflicts at mid-life, the end-life of the domestics raises a good deal of hope. When you enter the realms of “beaterdom,” one of the most important factors is the cost to keep it running. As our Steven Lang has said many times, the domestics’ relatively simple mechanicals, long model runs (can you say “pick and pull?”) and cheap parts make them compelling proposition.

The Dai-san depend on robustness to offset their more expensive parts. Most of the remaining competition may come cheap, but often becomes a “money pit.” Buying an old Merc/Volvo isn’t too hard, it’s the parts’ cost that kills. This is important because “beater” drivers often move on to something better, especially the teens.

Whether they get them hand-me down, direct from their folks, or purchased with the receipts of some job they’d rather forget, teens are the customers of tomorrow. The single biggest issue for “converting” teen drivers is the disconnect between your father’s old wheels and what is likely to be available when you have a real job.

The real answer to the riddle of ages is: The Big 2.8 will always be creating new customers. It’s keeping them past their first trade-in that’s the problem.