There is an arcane rule in the Federal Reserve charter that allows it to provide funding to organizations outside the banking system. It is buried under dust and cob webs somewhere in the basement of the banking agency’s headquarters, but the sleuths from GM (GM) have found it.
Word hit the street today that the largest US car company does not have the capital to complete a merger with Chrysler. Apparently the smaller company is close to broke as well, or at least too close for comfort.
According to The Wall Street Journal, the management of the two companies have been hitting up possible lenders. "That pitch touts a combined GM-Chrysler as delivering cost savings of up to $10 billion, an immediate boost in revenue and an increase in cash available to the merged firm," the paper reports.
Unfortunately, the firms do not have the money to pay severance for as many as 50,000 people.To make the deal work, all of those souls need to depart.
It would make sense for the two auto firms to turn to the Fed. There is plenty of money there. The circumstances are extraordinany. An entire pillar of America’s industrial base is at risk.
The Fed faces more than one issue, more than one challenge, in taking a decision to put money into the car merger.
Bernanke would need to decide that he would be the agent which would allow 50,000 people to be put out of work. That seems to be an odd role for the federal government during an economic downturn. Congressmen from Michigan might take exception to it.
Another problem is that the car industry might actually be better off with fewer companies. Having three US car firms when they had 80% of the market made economic sense. With their piece of the pie at less than half, that no longer holds true.
The Fed may decide to help the auto industry the way Treasury is helping the banks. It may seem to be the right thing to do at this time. But, banks are not in trouble because of foreign competition. They have come close to failure because of stupidity that reached into the system across borders.
The failures of GM, Ford (F), and Chrysler are uniquely American. The Fed is being asked to solve a free market problem and not a systemic problem. If car companies get the deal so should beer companies up against German ale.
Douglas A. McIntyre