Tuesday, April 21, 2009

Chicken game

Considering the shape that Chrysler is in, it would be amusing, if it weren't so contemptible, that the company opted for expensive private financing in lieu of cheaper bailout financing, in order to avoid limits on executive compensation.

I read some speculation that this was to make it easier for Chrysler to conclude the Fiat deal - although Fiat presumably doesn't care about current Chrysler executives' compensation levels (so the argument would have to be about people it brings in). But I would guess the Chrysler execs are simply gambling that the more they keep over-paying themselves, even if they needlessly increase the company's financial burdens (which are not their problem any more), the more they will end up taking home in the end given U.S. government reluctance to pull the plug and let them go. They are playing a chicken game with the federal government, and I would guess they're winning.

Moral hazard indeed.

This is the most "it figures, business as usual" story I've seen since FASB, responding to Congressional bullying, eased the mark-to-market rules for financial institutions in a manner that invites abuse of discretion, evidently reasoning that the markets have simply been plagued by too much transparency lately. (Yes, I know the argument for the change, but don't like either the short-term effects on rightfully skittish investors' confidence or the long-term effects on financial statements' reliability.)

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