24/7 Wall St.: Should Chrysler Have Been Liquidated?

The government was successful when it warned that if the Supreme Court delayed the Chapter 11 process of Chrysler more than a few days, the No.3 US car company might be forced into liquidation. It is not clear that liquidation would have been a bad result.

Fiat, which will be part of the group taking over the best of Chrysler's assets and will become the de facto operating partner wrote to the court that "If the sale transaction is not completed soon, there can be no assurance that a replacement transaction could be structured and agreed that would preserve any aspect of Chrysler as a going concern." The Justice Department said in its filing that delaying the Chapter 11 process would not be in the best interests of either debtors or the public interest. It is not entirely clear why that was true.

The arguments for keeping Chrysler on its present path through Chapter 11 have been based, at least in part, on the premise that the car company's best assets are not worth very much. That is entirely untrue. The company sold more than 79,000 vehicles last month. That was down 47% from the previous year. Chrysler sold over 60,000 trucks for the month.

Chrysler still has roughly 10% of the domestic market. VW, the largest car company in Europe has coveted more market share in the US. The Koreans have been aggressively working on raising American sales. Hyundai certainly has the capital to buy a piece of Chrysler. It would have to keep open many dealers, keep and perhaps improve factories, and would certainly continue to employ thousands of Chrysler workers.

A liquidation of Chrysler may well have been bad for some creditors who might have gotten less than the $.29 per dollar of secured debt that they will receive under the current arrangement. Liquidation may not favor the UAW's interests. That does not mean selling the company off in parts would have been an unmitigated disaster.

The Treasury has been operating under the impression and has given the public the impression that the failure of the banks and the demise of GM and Chrysler are clearly against the best interests of taxpayers who are having the pleasure, currently, of putting hundreds of billions of dollars into these failing operations, money that they might otherwise keep for paying debts or putting into savings. The other option that taxpayers might like to have is to see the national deficit brought down because the government is not pouring capital into troubled enterprises.

Chrysler is, by many accounts, losing $100 million in cash a day. The taxpayers may want to walk away from the privilege of covering those costs and others like it at struggling American.

One of the arguments that the Administration makes for putting money into the car and financial industries is that it saves jobs. A look at the number of auto workers who will be fired, the number of dealers that will be closed and the number of bank employees who have already lost their jobs due to restructurings and consolidations begs the question of how many more positions are at risk. A bank in trouble is still a bank that may be purchased or at least have its assets purchased. Banks need employees. They cannot be run by machines. The same, in most cases, is true of car operations.

It is more certain that tax revenues will be lower than expected this year than that every single worker at Chrysler will lose his or her job. It is more certain that the deficit will be much higher than forecast and that America will have to borrow more money than expected. It may not be until next year or the year after when federal taxes will need to be raised to pay for the honor of being a US citizen. All the money being borrowed will push up interest rates. Taxpayers will have the chance to thank their government for that as well.

The country is close to a year into the federal government's great restructuring of its financial and industrial base. It has not gone as planned, and it has not gone as well as planned. Most signs point to the fact that the money being given to the Detroit will not be enough. The jury is out on whether banks will require more capital.

Americans will be able to say that they own a part of two large car companies and some of the world's largest banks. That and $3 worth of gas will allow them to drive about 20 miles before the tank reads "empty."