GM, Chrysler Hit Taxpayers Up for $10 Billion

This post first appeared on Minyanville.

There’s a disturbing pattern emerging in Washington’s merry-go-round of bailouts:

1. Congress pleads with taxpayers to support bailing out a troubled industry;

2. Taxpayers rightly demand to know what their hard-earned money will be used for;

3. Congress chooses expenditures that are palatable to constituents (new lending, protecting deposits, investing in renewable energy, etc.);

4. Congress doles out money, neglects to describe rationale to taxpayers.

In recent weeks, it’s become evident that the $125 billion being invested in banks isn’t likely to jump-start lending anytime soon, as we were told it would. Instead, it’s paying for mergers and executive bonuses.

Now, the $25 billion earmarked for low-interest loans to the auto industry for renewable energy projects is likewise being diverted from its proposed goal.

According to the Wall Street Journal, General Motors (GM) and Chrysler LLC are lobbying the Bush administration to siphon off a portion of the bailout money to help fund their proposed merger. Chrysler, which is majority-owned by hedge fund Cerberus Capital Management, would end up being gobbled up by GM in a complex deal that would require about $10 billion to cover integration expenses.

Integration expenses, translated into layman’s terms, means layoffs and plant closures.

To be sure, neither firm is exactly flush with cash, nor are they in terribly good standing with their creditors; the deal would help shore up the financial position of both.

Monday, Moody’s Investors Services (MCO), the ratings agency Professor Jeff Macke colorfully described as “a bunch of sub-par analysts with the ability to make press releases and the power to kill any company in America,” lowered its ratings on both GM and Chrysler. Moody’s fears liquidity will continue to deteriorate, and that both firms could face cash crunches next year.

Ford (F), the third of Detroit's 3 troubled auto-makers, has seen its debt fall well into "junk" territory, and is on review for further possible downgrades.

Chrysler, for its part, is no stranger to the government dole. In 1979, the company petitioned Washington for over $1 billion in government-backed loans to prevent bankruptcy. Touted as a success, the bailout resulted in massive losses for creditors and layoffs of around 50% of its workforce. It did, however, keep the company alive…so it could go on to build millions of gas-guzzling SUVs.

Unfortunately, economic conditions in both the auto and financial industries have deteriorated such that, without government assistance, both would be doomed to collapse. Even with government funding, however, the result may not be much different.