More Help for the Auto Industry? Just Say No

Nicolas Loris / October 29, 2008

General Motors wants to merge with Chrysler. Doesn’t sound so bad, right? Turning Detroit’s Big Three into the Big Two might be just the remedy for an ailing U.S. auto industry. Maybe not. But that’s not the problem. The problem is how GM is proposing to merge with Chrysler — asking me and you to pay for it.

Chief Executive Officer Rick Wagoner is leading the plea to Congress and the Treasury for $10 billion to complete the merger with Cerberus Capital Management, the owner of Chrysler, that would assist in integrating their operations and help shut down plants, and pay laid off workers and pension plans. This is on top of the provision of $25 billion in federal loans for automobile manufacturers to develop more efficient and cleaner vehicles The Energy Independence and Security Act of 2007, signed into law by President Bush last December.

The Wall Street Journal reports:

GMAC LLC, the big lender co-owned by General Motors Corp. and investor group Cerberus Capital Management LP, is seeking to become a bank holding company, a move that would allow it to gain access to a piece of the government’s $700 billion financial rescue plan, according to people familiar with the talks.

As part of those discussions, Cerberus, which also controls auto maker Chrysler LLC, has sought to swap most of its Chrysler holdings for a larger share of GMAC, the home and auto lender. Cerberus now controls 51% of GMAC to GM’s 49%.

It now appears the GM-Chrysler talks are being structured specifically to ensure Cerberus and GM can take advantage of financial bailout programs offered by the Treasury Department and the Federal Reserve, those people said.”

This screams ridiculous. Yes, the auto industry is struggling – GM reported net losses of $15.5 billion for the second quarter with the third quarter not looking much better. U.S. Sen. Charles Schumer (D-NY) said, “Nobody wants to see the auto industry go under.”

This is true; nobody wants to see any industry fail. Yet, profits and losses tell are very telling for businesses. To put it simply, it informs businesses of what works and what does not work. Over the years Detroit’s made a number of good business decisions but they have been overshadowed by the bad ones.

Detroit’s dependence on big, non-fuel efficient vehicles was its own doing. Downsizing is also difficult for Detroit’s big three. Taxpayers shouldn’t be responsible for Detroit’s bad decisions.

Furthermore, a number of companies today could make the case that their respective industry is vital for the economy and begin requesting billions of dollars in federal handouts for mergers and bailouts. If the U.S. economy is headed toward a recession, it is likely that a number of businesses will struggle and possibly fail. Having the government step in to prop up these businesses distorts the market and will inevitably lead to more handouts, more bad policy, and more bad business decisions.