Will Fiat/Chrysler Need Another Bailout?

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NLPC Associate Fellow Mark Modica was interviewed Wednesday by David Asman on the Fox Business Network on Moody's credit downgrade of Fiat. The Italian automaker, which owns Chrysler, is facing financial difficulties, even as President Obama is ballyhooing the "success" of the auto bailout. Here's a transcript:

David Asman: Even though Chrysler is now owned by an Italian car company, President Obama continues to refer to it as a successful bail out of an American car company. By now Chrysler's parent, Fiat is in real trouble. Moody's just lowered its credit rating to junk status. So are taxpayers about to get hit up for yet another bail out of an Italian car company? Let's ask Mark Modica who has been following the bailout since it began at the National Legal and Policy Center.  Good to see you again Mark. Thanks for coming in.

Mark Modica: Hi David.

Davis Asman: This downgrade by the way affects about fifteen billion dollars worth of debt that Fiat has out there outstanding. What is wrong with Fiat?

Mark Modica: Well, Europe is still a mess. Of course as you said, Fiat is the parent company of Chrysler. So it is a little worrying for Chrysler here. But what happened was the auto industry is not as healthy as it is made out to be. It is very political when you hear about how healthy the auto industry has been. Europe is just still a mess. It is slow. Manufacturers over there are just having trouble making money because it is very competitive and labor costs are very high.

David Asman:  Now here is the thing that worries me - this scenario. First of all Fiat was given forty percent of Chrysler in the beginning of the bailouts by the Administration. I mean just give them forty percent. I think it was an exchange for technical knowledge or know how that Fiat had. And then they eventually bought in and took a controlling interest of it.  Is it conceivable, was there any way that because of the fact that Chrysler is still endowed with a lot of U.S. taxpayer dollars, that Fiat could dig in to that pile of cash that Chrysler has in order to pay off its debts because of what is happening in Europe?

Mark Modica: Well yeah, they are Chrysler so anything that effects Fiat effects Chrysler. But I think this all comes back to how this was structured in the beginning. Bankruptcy experts were consulted instead of auto industry experts. The main goal was to protect the UAW and politically favoured groups. This wasn't done based on what was best economically for the auto industry. It was done to protect cronies and taxpayer money was dished out and now we are in situation where it turns out things are not as great as they would have appeared to be. You can also look at Peugeot too. They were also downgraded by Moodys. And General Motors invested, I think it was four hundred million dollars. There was no reason for that. So yeah, taxpayer money can definitely go into these European companies. I don't know why, but there are a lot of questions as to why things were as they were.

David Asman: There are certain fire walls that supposedly were put in to make sure that cash that could be identified as U.S cash remains untouchable in order to pay off European debts. However, as we know money is fungible and people can move it around in all kinds of ways. Now, as for a bailout, I don't think it is conceivable that there could be another U.S. bailout of an Italian car company. The European Union has sanctions against that kind of a bailout, but as we have seen in the past couple of months with the European Central Bank they have changed the rules as they have gone along, so could there be a European bail out of Fiat?

Mark Modica: You know, after what I saw here in America, the way contract law was just trampled with the GM bankruptcy and Chrysler bankruptcies, anything is possible. I think it could to depend a lot on what Administration is in power as to how much America gets involved. Europe does not have the bankruptcy laws that we have here where you can just kind of manipulate a process and come out of it and pick winners and losers as to how creditors get paid off and then come back as a healthy company with loads of taxpayer money as GM did. So anything is possible.

David Asman: Mark, is it conceivable that you can make a case that the bailout was successful when it turns out that we, the U.S. government gave forty percent of an American car company to an Italian car company that is now rated as junk.

Mark Modica: I see no way that it is conceivable but the politicians who are campaigning on the issue are obviously saying that it is successful. I don't believe that. It is designed to fool those people who haven't paid close attention and don't realize how many billions of taxpayer dollars have been wasted and how little this has really done for America. You know, the auto industry would have survived without such drastic measures. This could have been done in a different way without billions of taxpayer dollars being thrown at them. If auto industry experts had been consulted instead of bankruptcy experts and hedge fund guys like Steven Ratner who has headed up the task force. He was followed by Ron Bloom who was a union guy. So you can see how this was directed. We would be in a lot better shape if they had done this based on what was best economically for the industry not based on protecting UAW interests.

David Asman: Mark we have got to go, but we will be following this story closely - the future of Fiat. Please come back and see us again. Mark Modica, Associate Fellow with the National Legal and Policy Center.