Chrysler Deal

Washington Post business columnist Steven Pearlstein was online Wednesday, May 16 at 11 a.m. ET to discuss DaimlerChrysler's agreement to sell Chrysler to Cerberus Capital Management.

Read today's column: It's Hard to See What Sale Will Solve. and related articles: Daimler to Split With Chrysler, At a Cost; Cerberus's Sharp-Toothed Ways.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here.

The transcript follows.

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Rockville, Md.: The USA has made an industry out of selling assets to other nationals then buying them back for much less. How do we manage this?

Steven Pearlstein: We manage it because investors in other countries tend to be even more herdlike than American investors, and so are susceptible to overpaying in the late stages of asset bubble. In fact, it is so predictable that big foreign takeovers are a pretty good indication of a market top.

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Austin, Tex.: What will it mean for Chrysler's Employees' Retirement Fund that Chrysler is now a private company?

Steven Pearlstein: Right now, Chrysler's pension plan is overfunded (that doesn't include retiree health, which on an actuarial basis is probably a $18 billion liability). Which makes this a good time for the UAW to demand that those assets and liabilities get transferred to a voluntary employee beneefit association, veba, that the union controls. After that, the union should negotiate a fixed annual contribution to the fund, sort of alike a collective defined contribution plan, for both pension and health benefits. That won't be as good as a fully funded defined benefit plan for all employees, pension and health, no doubt about it. But it will be more secure. And it will allow the company making those annual payments to compete, thrive and survive. To compensate for the lower contribution, the union might also demand that the fund be given some preferred stock so that when Chrysler is having a good year, or if it is sold again or taken public, the pension plan gets a fair share of the success.

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Mt. Lebanon, Pa.: Do I recall correctly that after the new Team Chrysler was announced, the company announced a $2B loss? If true, that was for the last quarter (Jan-Mar)?

So.. given that, what kind of financial genius wants to buy a distressed firesale company WITHOUT stripping out the assets, letting the federal government pay for or secure the pension payouts, and walking off with the cash? Must have some HighDef crystal ball, 'eh?

Or is this just another in a long series of old fashioned LBOs with the American taxpayer being the guest of honor at the swindle?

Thanks much. Political Atheist

Steven Pearlstein: Cerberus is on the hook to put $6 billion into the company, so any strategy to take it through bankruptcy will involve losing that capital. It may come to that, but I doubt that is their going in strategy. I suspect they are planning to make a big score on the auto finance division, which they will combine with GMAC, which they just bought. Easier to make money on car loans than cars, ironically enough. The longer term strategy is probably to reduce Chrysler to a smaller, profitable company and sell it to another foreign automaker like Hyundai or a Chinese firm that wants a toehold in the American market.

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New York City: Forgive my ignorance, but what is the "retiree health care" that seems so important to this deal? Don't retirees get Medicare? Is this something beyond Medicare? Or is it just for the period between when a worker retires and when he starts getting Medicare? I am having a hard time understanding why this cost is so large for the auto companies.

Steven Pearlstein: It is a good question, actually, and one we journalists throw off with shorthand without explaining. Yes, auto retirees get Medicare when they hit 65. But you will remember that tens of thousands have taken early retirement, and could be in their 50s. They are covered. And even for those on Medicare, the auto plans provide the supplemental policies and out of pocket costs, which can be considerable. That's one reason the Medicare drug benefit was such a boon to the auto companies, because previously they were paying for their retirees drug costs.

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State College, Pa.: Will this sale have any impact on the timetable, production and distribution of the smart 2008 car produced for USA, in France by Daimler(Mercedes), to be distributed by Penske?? Thanks, GIFF

Steven Pearlstein: Can't say, but those kind of plans are probably doing to proceed. That is one reason why Daimler kept a 20 percent stake in the new Chrysler, to insure the continuing of a number of collaborative projects.

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New York, N.Y.: Steve, I was wondering if you had any thoughts about what's wrong with the auto industry. Enormous pension and health care obligations don't explain why GM/Ford/Chrysler can't build a car like a Toyota/Honda which runs well and is built to last.

I feel terrible for the workers who are in trouble, but why should I buy a lousy car to keep a lousy company in business? I grew up driving an enormous Oldsmobile Delta 88, but right now, I couldn't conceive of buying an American car. Thanks!!!

Steven Pearlstein: Obviously, quality of product and efficiency of production (exclusive of retiree costs) are a big factor, although the companies wouldn't be in the trouble they are in now if those were the only problems. In fact, you could make an argument that the reason the Big Three have such lopsided portfolios of product offerings, tilted so much toward SUVs and trucks, is that it was the business model that fit best with its financial obligations. In any case, improving the product line is always part of the solution, although the industry record on that is very uneven. I'd say part of the problem is cultural -- they are all in Detroit, in the Midwest, where the aesthetic and priorities are different than on the coasts. The other observation I'd make is that Toyotas and Nissans aren't particularly sexy cars: they are reliable and competitively priced. And on those two criteria, the Big Three cars have gotten a lot better.

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Freising, Germany: By what merit did Cerberus actually win the bid for Chrysler? After reading about the offer from Magna, together with a Russian billionaire, I was really wondering if America was ready for Russian investment in one of its core industries. In which segments have Russian oligarchs made major investments in the U.S.?

Steven Pearlstein: The way our system works here, there is only one way the country as a whole could block the sale of Chrysler if Daimler had wanted to sell it to an oligarch. That is through a national security review process. And it is doubtful Chrysler raises those kind of issues. So no, that was probably not a factor, other than the fact that Daimler probably wanted to put it in the hands of a reliable owner, and Russian oligarchs, as the business extensions of the Kremlin, probably don't fit in that category.

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Crossville, Tenn.: I assume it is too early to tell, but will the retired employees retain their health and pension benefits? If the country eventually goes under what happens to them then? It seems the company made a contract with the employees to provide a retirement and health benefits, and an alarming trend these days is that what you thought you had is not necessarily what you get. Two sides to the coin, but if I had worked 30 years and was told I had retirement income and health insurance and later found I didn't that would be tragic.

Steven Pearlstein: I think tragic is a bit overstated, but it is that kind of language that distorts this debate. Retirees will still get their pensions -- the federal government guarantees those and the pension plan is overfunded right now. Retirees will qualify for Medicare. And retirees will surely get some help in supplementing Medicare. Yes, the company may be forced to alter the benefits so they require more co-payments and deductibles and premiums. And that may add up to a couple of thousand dollars a year. Unfortunate, a big unfair, but not the end of the world. The union should have understood this risk when it negotiated those benefits, often trading away wage gains today for long term benefits. The union should have also seen that loading up these benefit liabilities would weaken their companies ability to compete. But the union decided to ignore those risks because many of its members and leaders are stuck in a outdated mentality that presumes the company has lots of money and their role is simply to push to get as much of it as possible.

That's what I was really driving at in today's column. That the union is always reacting late in the game, when its ability to maneuver and think creatively is limited and it is usually facing some sort of crisis. It should have long ago tried to get ahead of this wave by being pro-active.

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Laurel: By reputation, both the American auto industry and Europe in general is saddled with excessive legacy retirement costs. Is Daimler any better off without Chrysler in this respect?

Steven Pearlstein: Europeans socialize most of these retiree costs with government run programs, so they are not directly a burden on companies. They are indirectly, through higher taxes, although some of those taxes (VAT) are rebated for exports. Given that, along with the higher cost (and inefficiency) of our private health system, having to carry these higher retiree costs, particularly with so many early retirees, turns out to be a big competitive burden. You can see it here in America, between the cost structure of a Ford plan versus a Toyota plant, where the direct wages and benefits are only slightly higher at the Ford plant, but the retiree costs work out to a couple of thousand dollars per car. That's a lot.

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Tampa, Fla.: Could Cerebrus use bankruptcy to void its dealer contracts without having to buy out the dealers as state laws require? One of Chrysler's problems is a bloated dealership network--too many selling too few vehicles. But state laws require buying out these dealers, which is why GM had to pay $2 billion to its Olds dealers as the price of ending their franchises. Of course, the autoworkers in the assembly plants have no such protection, and Chrysler could easily use bankruptcy to dump its pension obligations on the US taxpayer. But could they similarly use bankruptcy to walk away from its dealers?

Steven Pearlstein: I think bankruptcy might allow abrogation of contractual relationships with dealers, yes, although that is a bit dicey because you are dealing with state laws. I'm not a legal expert. But I'm glad you brought this up, because it is a big problem for the Big Three, these dealer protection statutes, which are grossly-anti-competitive. The auto companies would love to get free of these arrangements, but the dealers have a political lock on state legislatures. This is another example of people milking an arrangement too long, not seeing the theat and not getting ahead of the curve. If the Chrylser dealers want to insure they will have Chryslers to sell, they should get together and find a way to allow the company to buy out non-performing dealerships at a reasonable price, with the survivors throwing in some money to help pay for it. They would all be better off in the end if they did that.

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Princeton, N.J.: Steve, the fact remains that for many years US auto makers were in a race to see who could build the biggest, most macho, most wasteful vehicle. Why weren't they in a race to build the safest, most efficient, most useful one? You can say they built what we wanted, but if that were the case, why are they so bad off now?

Steven Pearlstein: Well, consumers can be fickle, first of all. And the companies just weren't foresightful enough, and didn't hedge their bets enough. They were making too much money with muscle cars and trucks, which didn't have much foreign competition.

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Washington, D.C.: Do you think there is a chance that Cerberus would rather declare bankruptcy and that the pension liability would end up with the Pension Benefit Guarantee Corp., which I know pays out a fraction of what the original pension. I am not sure my question makes sense but I have a very personal interest in this given my father worked for Chrysler (when it was only Chrysler) for 38 years and is now in his early 80s. And if bankruptcy is declared, what happens to health benefits. My hope is that your answer to this is that this scenario is very unlikely.

Steven Pearlstein: Your father's pension will be fully insured by the government. There is a cap on how much of a pension is insured -- I think it is $70,000 a year range. But that shouldn't affect most autoworkers from your father's generation.

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New York, N.Y.: Steve, It seems that the general way of the business world is that pensions and retiree health care benefits are being significantly cut back. Do you think this will have any spillover effects to employees of municipal, state and federal government? Aren't all of these facing big shortfalls in pension and retiree health care plans like Chrysler?

Steven Pearlstein: Big, big problem, retiree costs for all levels of government. It is a hidden fiscal time bomb.

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Generational Dynamic: This is a great example of the generational divide: I'm self-employed in my 40s, and I'll be working until I'm 80, partly to pay for health insurance--which I can't afford for myself--for people from Michigan who retired at 50. Have you read "Boomsday" by Chris Buckley?

Steven Pearlstein: Haven't read it yet, but you make a good point. Its not fair, and the boomers should start to take some responsibility for fixing it by agreeing to slightly less generous benefits.

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D.C.: Steve, so many things I want to say about workers and unions in this mess. The companies agreed to the trading of wage gains for long-term benefits. And surely they benefited from this. You talk about an 18 billion dollar actuarial liability for health benefits. Over what period of time? Didn't the companies have actuaries who advised them to put money away for future liabilities?

Steven Pearlstein: I think that is net present value of the liabilities involving any current or past worker. That's how the accountants and actuaries think about it.

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Arlington, Va.: Boy, where's Lee Iacocca when you need him?

Steven Pearlstein: Lee was just what was needed back in the 80s. Not sure we've found the next generation Iacocca.

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Pension funds: But isn't the fact that a pension fund is overfunded in and of itself an attraction for an acquirer? Can't that money be diverted for other purposes? It happened in steel and I hear some discussion that Chrysler may have had $10 billion pre-Daimler that no one seems to know where it went.

Steven Pearlstein: Yes, under some circumstances. But I doubt that was a reason for the purchase.

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Boston, Mass.: Will Chrysler be forced to create its own car platforms, or will they still borrow Mercedes parts (Crossfire, etc)?

Steven Pearlstein: Not sure, but again I'd point to Chrysler's continuing 20 percent interest.

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Charlottesville...: Steve: I'm only a recent convert to your columns and I have to say I have enjoyed every one of your pieces across the last several months. Thank you again.

I just have one question: the amount of economic influence that hedge funds and private equity firms have has significantly increased in the past decade. I find this very troubling, particularly since there is not much, if any, regulatory oversight. Can you envision any type of scenario where more regulatory control is imposed on these private firms?

Steven Pearlstein: I'm not one of those people who believe that any business activity that is unregulated is dangerous. We have always had a vibrant sector of privately owned companies that have to pay taxes and abide by all sorts of operating regulations, federal and state. And private equity funds have to make certain disclosures to their investors and abide by all securities laws, and can be investigated by regulators for violations. So I don't see a particular role for government. Hedge funds are a slightly different matter because of all their fancy financial maneuvers and the risks they pose to the financial system and regulated banks.

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Falls Church, Va.: Earlier you mentioned how the Europeans socialize their retiree costs, but then you compared Ford's retiree costs to Toyota's. That's a whole different comparison, isn't it? Japan really has very little social safety-net at all, either through companies or the Government, right? So the Japanese companies don't have to face those costs, and American companies can't really compete on that point, since we're societally not as willing as the Japanese to leave retirees with no care at all.

Steven Pearlstein: I was talking about Toyota plants right here in the U.S.

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Something Chrysler Has Done Right: I rent a lot of cars on business travel, and as a rule, the Fords and GM's you get are the cheapest possible version of a Taurus or whatever. The Chryslers--mainly the 300 and the Pacifica--that I've rented have been nice enough that it's like taking an extended test drive. I'm actually considering a Chrysler for my next car, coming from a good VW experience.

Steven Pearlstein: Well, there you go. A satisfied customer!

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Seattle, Wash.: Does anybody else think this is good news? Mercedes may have great engineering, but they are boring. Chrysler has some of the most fun designs on the road: the Viper, PT Cruiser, Prowler, 300 were all aesthetically pleasing and I hope the new owners turn the designers loose.

Steven Pearlstein: And another....

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Atlanta: Is it possible for Cerberus, a capital management, to solve the Chrysler's problems about management, strategy, and new skills?

Steven Pearlstein: Possible, yes.

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Steven Pearlstein: Good discussion today folks. Thanks. See you next week.

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