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  1. Wealth
May 5, 2009

Detroit pile-up: many lost

By Spear's

The problem with is there is not a lot worth saving, apart from a strange name that rhymes with stodge.

The fact that Chrysler was bound to hit the crash barrier was forecast here over a year ago, and GM, which has already announced the closure of its Pontiac Division and a summer closing of all its US plants, will most likely collide with the wreckage on 1 June.

This long foreseeable disaster began in 1974 with the first oil crisis that changed the auto market, but not Detroit’s dinosaurs. What happened was simple: auto-makers were faced after 1974 with one straightforward decision, namely how far apart to set the wheels.

I will explain. First identify the retail price bracket in the market that you want to target; that sets the answer to how far apart to set the wheels; and that determines the rest of the assembly, with some Italian designer wrapping a body around the components for looks.

The Japanese understood the new game, but Detroit didn’t, as it went on shovelling out the same old gas-guzzlers with added bells and whistles and lots of chrome, but with the wheels far too far apart for the new fuel-efficient market.

The problem with this bankruptcy is that there is not a lot that’s worth saving, apart from half the dealership network and Jeep and parts of Dodge, a strange brand name that rhymes with stodge.

Subject to what the Judge now orders, everyone looks a loser, even the obvious winner of the hour, the United Auto Workers Union, who are set to walk off with 55% of the new company, but waive their claim to half their $10.6 billion healthcare entitlements; and Uncle Sam puts up $8.0 billion, but writes off $3.3 billion up front, but might as well write the lot off now; and Cerberus, the private investment group strangely-named after the Hound from Hell, had bitten off $2.0 billion more than it could chew in this particular inferno.

Then comes the collateral damage: the suppliers who will not get much at all, along with their suppliers in turn and so on; the 2,000 dealerships which go out of business, with unsaleable stock and bank foreclosures on their redundant assets; the employees who lose their jobs and wages; and the wholesale knock-on damage across the affected communities; and the taxman, with his reduced take.

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And then there’s another, subtler loser, the markets, where trust in lenders’ and bondholders’ status in the batting order in a bankruptcy situation has been usurped by this administration’s unilateral preferment of unsecured creditors such as the UAW, ahead of the legal rights of secured and subordinate creditors.

For Obama to calculate to reward the unions that supported him in his election in this way will be an interesting, and very important, question for the judge.

There’s only one potential winner in all this, namely FIAT, who collected a $2.0 billion cash fee from GM only two years ago, when GM did not proceed with an agreed investment in FIAT.

Now FIAT returns to Detroit and takes 20% of Chrysler for no cash at all, but in exchange for supplying its fuel-efficient engine technology, with all the working capital $4.7 billion now supplied by Uncle Sam.

It’s enough to make Karl Marx laugh in his grave, the sight of a capitalist icon ending up being owned by the workers and the state, just as he had always advocated, and with a former fascista supplier poised to sweep up any crumbs of real value.

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