– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Could Italy’s cash-strapped Fiat, Europe’s sixth auto maker, build a workable alliance with Chrysler and Opel to become be a profitable global player? Or would it be a marriage of losers, doomed to fail?

Fiat CEO Sergio Marchionne has made clear that his interest in Opel, the European arm of ailing General Motors, is more than just a well-timed tactic to get better terms in the alliance he is negotiating with troubled U.S. number three Chrysler. Chrysler faces likely bankruptcy if a deal is not clinched by April 30.

The troubleshooter who turned around the Italian group seems to want both deals. “It is quite possible for Fiat to engage in both of those transactions and to execute them properly,” he said on Thursday. Marchionne sees a wave of consolidation coming in the automobile sector and is determined to gain critical mass to survive. But his strategy looks over-ambitious.

Fiat has little cash and 4.8 billion euros in debt to repay this year, so Marchionne needs deals that cost little or nothing. That means he has to target companies in a weaker position than his.

Fiat would not take on any of Chrysler’s debts, and GM seems willing to give away a 51 percent stake in Opel free to anyone who will invest in it as a going concern, with the U.S. auto maker keeping a minority holding. GM needs Opel’s technology to produce the smaller, greener cars which are the condition for a U.S. government lifeline.

But even if the financials were to add up, which is a big “if”, the challenge for Fiat of turning such an alliance into a viable, profitable group looks daunting.

Germany’s richer, fitter Daimler bought Chrysler in better times and failed to turn the Detroit dinosaur around despite sending in its best managers and engineers, which also had the effect of causing Mercedes’ quality to decline at home.

Marchionne has made clear Fiat would need German state aid to restructure Opel. Since the two firms have lots of overlap in small and mid-range cars, it would have to close plants and lay off thousands of workers, with pain in both Germany and Italy. But Berlin would want guarantees on jobs and production sites in return for its aid, crimping Fiat’s room to make synergies.

Making all this work is a tall order, even for a turnaround maestro like Marchionne, and could be a dangerous distraction from Fiat’s own recovery, as Daimler found with Chrysler. Fiat’s controlling Agnelli family, which brought him in in 2004 to rescue Fiat, should be having an anxiety attack at his strategy.

(Editing David Evans)

– James Saft is a Reuters columnist. The opinions expressed are his own –

There is one law, it appears, for failing U.S. automakers but sadly quite another for similarly failing banks.

The Obama administration has decided to play hardball with auto firms; rejecting recovery plans from General Motors and Chrysler LLC (GM.N) and warning they could be thrown into bankruptcy. Chrysler, which is controlled by Cerberus Capital Management CBS.UL, has 30 days to complete an alliance with Italy’s Fiat SpA (FIA.MI) or face losing its government funding. GM chief executive Rick Wagoner is out at government request, as will be most of his board of directors in coming months.

This is painful and risky but probably for the best; the auto industry has far too much capacity and both firms have blundered repeatedly, avoiding making hard decisions to improve their competitiveness and products. In short, this is what is supposed to happen in capitalism when you fail.

It is also a huge contrast to what is being done for U.S. banks, where management has generally remained entrenched and where Treasury Secretary Geithner and his predecessor have thrown cheap money and other subsidies at doubtful banks in ever more complicated forms. Most recently, going as far as cutting hedge funds and other investors into the deal under the public private partnership in order to create the illusion of a return to market forces.

If the U.S. administration thinks the auto tough love will make them look like they are taking a hard line with highly compensated executives, they could not be more wrong. If anything it will increase the perception of the divide between how Main Street and Wall Street are treated when they come begging at the public trough.

To be fair, the case against the automakers is pretty airtight. Even given a recovery, which is by no means a sure thing, they may not be viable. The best counterargument, that bankruptcy causes rolling failures among suppliers and that consumers will shun automakers which are in bankruptcy. Those possibilities are hard to measure, and even if true, probably not enough to justify keeping the two on life support for what could be an indefinite period.

IT’S DIFFERENT FOR BIG BANKS IN TROUBLE

So what accounts for the difference in treatment, given that many banks, large and small, are both insolvent and dependent upon government support for their continued existence?

There are some legitimate reasons but they quickly bleed into special pleading and moral hazard. The entire economy is dependent in substantial part on the health of the financial system which intermediates capital, theoretically allocating it (insert ironical remark here) where it will make the best return.

That makes it harder for policy makers to simply allow banks to fail and for the industry to find its right size, the damage in the meantime would be too great. That gives large overleveraged banks a strong negotiating position with government, even in their weakness. That’s unacceptable and needs to be dealt with now, by treating them on their merits, rather than later through regulation to control the size and leverage of institutions.

There is a real risk that we get the worst of all worlds; the banks are kept alive and make it through with management in place and are able to use their obvious influence and might to deflect legislation. We then have a system with moral hazard at its heart and another larger crisis heading our way after the next bubble.

It is striking that the guy leading the enquiry into the viability of the automakers is former media investment banker, financier and private equity investor Steven Rattner rather than an auto person. Quite right too, someone who has lived and breathed this stuff is conflicted and won’t have the proper perspective.

But what a contrast with the number of once and future investment bankers (former Goldman Sachsite’s Neel Kashkari being exhibit A) involved in the government side of the banking bailout. After all, who else could understand this stuff? Don’t Trouble Your Pretty Little Head about that, as they used to say down south.

There is an alternative, after all. Rather than constructing a bank bailout which is essentially the Resolution Trust Corporation but missing out all that messy stuff about banks failing and executives getting canned, why not simply impose tough capital limits, fail the banks and executives that fail and come up with a reasonable timetable for selling on what you are left holding?

It has two great advantages; it has worked, both in the U.S. and around the world, and it is fair and easy to understand as fair.

Rescuing the economy and the banking system, as opposed to the banks, is going to require more government money. The favorable treatment of banking executives and shareholders may make that money very difficult politically for the administration to get.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –

– Louis E. Lataif is dean of the Boston University School of Management and a former Ford executive. The views expressed are his own. —

The federal government now wants to shore up ailing auto suppliers with a $5 billion bailout, despite a rising chorus of criticism against more government bailouts. The public is beginning to see bailouts as “transfusions,” rather than a closing of the wound, and is losing patience with them. The “wound” is falling housing values and toxic mortgage-backed securities which have paralyzed financial markets – not the auto industry.

The hastily approved $787 billion “stimulus package,” including aggressive spending programs unrelated to declining home values or the constricted capital markets, is tantamount to administering repeated, expensive blood transfusions rather than stopping the bleeding. Of course, if the blood flow at the wound eventually coagulates (one day the economy will rebound) then the transfusions can be claimed to have worked. But the delayed cure would have come at a crippling cost to the next generations of taxpayers.

Concerning help for “Detroit,” there may be no manufacturing industry more fundamental to the U.S. economy than the auto industry, accounting as it does for more than 10 percent of American jobs. Detroit is not without fault, but it has been dealt a lethal blow by the consumer credit crunch which it did not create. At a nine million-plus vehicle annual selling rate (three million below the scrappage rate), no auto company, American or foreign, can survive. But bailouts, a few billion dollars at a time, first to the auto manufacturers and now to suppliers, are both a political and business nightmare.

If the federal government is willing to spend trillions to “right the economy,” then it should reasonably serve as lender of last resort for critical industries. It should grant interest-bearing bridge loans to the ailing auto manufacturers — probably $150 billion for 18 months. The pent-up auto demand in 2010-2013 would be enormous. The companies could then be required to repay the loans with interest, making the taxpayers whole.

If these companies are “bridged” until auto demand recovers, their supply base will survive without separate bailouts. To let auto manufacturers fail, in this environment, will create untold collateral damage; the already weakened supply base, so intertwined among all the manufacturers, could shut down the entire industry. An auto bankruptcy would seriously deepen and lengthen the recession for us all.

But bailing out the industry a month or two at a time and a sector at a time is slow torture and an ineffective alternative to proper, interest-bearing bridge loans. If, in a normal economy, one or more auto companies can’t make it, so be it. But in this most abnormal economy, it would be a shame to lose the U.S. auto industry to poor, unrelated decisions made in the financial markets.

We can hope that the depressed stock markets and waning consumer confidence will re-focus Washington’s attention on collapsed housing values and constrained credit markets. We should avoid dangerously expensive transfusions unrelated to the root problem; instead we should close the wound. The normal market will then right itself. It always does.

– Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. The views expressed are his own. –

General Motors and Chrysler are on the anvil of history. United Auto Workers President Ron Gettelfinger holds the hammer and will determine whether they emerge more competitive or shattered in pieces and sold to foreign investors.

In December, George W. Bush granted $17.4 billion in temporary loans on the condition those firms convert two-thirds of their debt into equity. Another condition was to persuade the UAW to accept stock for one half of what these companies owe to fund retiree health care and align wages, benefits and work rules with those of the Japanese automakers operating in the United States.

GM and Chrysler must complete these negotiations by March 31 or repay the money and face bankruptcy.

At U.S.-based Toyota factories, workers receive about $25 dollars an hour and good health care benefits. But they don’t retire at 50 after 30 years or get as much time off and huge severance packages. Toyota does not endure the medieval work rules and job classifications imposed by UAW contracts.

Most other Americans would be happy to get Toyota pay, benefits and working conditions. If Gettelfinger continues stubborn resistance to a better package than most Americans enjoy, then Detroit automakers will continue to require government subsidies or not have enough profits to invest and compete in hybrid and other new technologies that will transform personal transportation over the next decade.

Eventually, Washington will tire of their begging, they will march through bankruptcy, and their factories will be sold off to Japanese, Korean, European and Chinese automakers.

If Gettelfinger takes the Toyota package, then Washington should take a hard look at policies that can promote U.S. automaking as effectively as do industrial policies abroad.

This would include addressing undervalued currencies in Asia — currencies kept cheap in foreign exchange markets by government intervention in Japan, China and elsewhere.

Over the last two decades, Japan has kept the yen at least 30 percent undervalued against the dollar, and this provided Toyota with an average subsidy of at least $2,000 on every car it sold in the United States.

Through 2004, the Bank of Japan directly purchased dollars in currency markets to keep the yen undervalued, and since, it accomplished the same by keeping Japanese interest rates very low. This encouraged the so-called “carry trade,” where private investors borrow yen, use those to purchase dollars and then invest in short-term U.S. securities to exploit higher U.S. interest rates.

Now, the Federal Reserve has dramatically reduced U.S. interest rates, and the yen has risen closer to its true market value against the dollar. Japanese officials appear poised to again intervene directly in currency markets to restore Toyota’s unfair advantage, and Washington should take whatever steps are necessary to head off such Japanese protectionism.

In addition, Washington should take assertive steps to encourage production of fuel-efficient vehicles in the U.S. and create a strong export industry.

Washington could offer incentives to car buyers to trade in gas guzzlers for more fuel-efficient vehicles — the newer and the bigger the clunker and the more fuel-efficient the replacement, the more dollars the car buyer would receive if the guzzler is destroyed. This would raise the price carmakers receive from selling more fuel-efficient vehicles and boost car sales.

Washington could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter include Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at a reasonable cost with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.

Such smart industrial policies would contribute to national efforts to reduce CO2 emissions and reduce oil imports.

Finally, individual Americans should open their minds. Many are considering trading in trucks and SUVs for sedans and are naturally attracted to the Toyota Camry and similar import brands. Visit a Ford or Chevy showroom and test drive a Fusion or Malibu and be pleasantly surprised. Those are high-quality, affordable and reliable vehicles.

Washington is giving Detroit a second chance, and Americans should give its cars a second look.

As Congress debates legislation to help struggling automakers, many Americans say they are uneasy with the plan, arguing that while it may save jobs, it would reward companies for pursuing bad business practices. Some even question whether automakers will be viable, even with support.

“They need to restructure. If they get bailed out they are not going to do it,” said Eric Smith, a paint contractor interviewed in Chamblee, Georgia, on the outskirts of Atlanta.

U.S. automakers say federal aid is vital to their survival, and there could be devastating ramifications for the broader economy if the sector is not stabilized.

“This is an issue of the whole auto industry, if that becomes under severe pressure, the impact on the whole U.S. economy will be devastating,” GM Chief Executive Rick Wagoner said in an appearance on a NBC-affiliated television station in Detroit.

Retired Gen. Wesley Clark says that a rescue of U.S. automakers is important both economically and for national security. In a New York Times opinion piece, Clark wrote that the U.S. auto industry has played an important role in successive military campaigns, from World War II to today, and its ability to continue to develop new technologies is imperative for national security.

Some are calling for executive shake-ups if it would ensure congressional backing for a bailout. “If it was the difference between getting this kind of support or not, obviously the management should consider resigning,” Carl Levin, a staunch industry ally, said on NBC’s “Meet the Press.”

As Democrats finalize a rescue plan, the question remains: should U.S. automakers be bailed out?

(Pictured above: G. Richard Wagoner (R), chairman and CEO of General Motors, testifies next to Robert Nardelli (2nd R), chairman and CEO of Chrysler, Alan Mulally (2nd L), President and CEO of Ford Motor Company, and Ron Gettelfinger (L), President of the United Auto Workers union, before the Senate Banking, Housing and Urban Affairs in a hearing on “Examining the State of the Domestic Automobile Industry,” on Capitol Hill in Washington, November 18, 2008.  REUTERS/Molly Riley)

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