After partnering up with newly bankrupt Chrysler LLC, Italian automaker Fiat SpA is now interested in acquiring the Opel unit of General Motors Corporation (NYSE: GM). In fact, according to German Economics Minister Karl-Theodor zu Guttenberg, Fiat is seeking to integrate its recent and future auto acquisitions into a new global car alliance.

After meeting with Fiat CEO Sergio Marchionne, zu Guttenberg told reporters that the Italian firm would need estimated bridge financing of 5 billion to 7 billion euros to facilitate its planned partnership with GM Europe. The Opel unit, combined with Fiat's own operations and its stake in Chrysler LLC, would form the new alliance.

Early this morning, the Associated Press reported that talks between Chrysler's lenders and the Treasury Department had "disintegrated." The parties were trying to lower Chrysler's $6.9 billion in secured debt, a move that many hoped would stave off bankruptcy.

It appears that the hedge funds (roughly 40 of them) that hold roughly 30% of Chrysler's debt are looking for a deal better than the one struck between the banks and the government. The four banks that hold 70% of the automaker's debt agreed to erase that debt for $2 billion -- the hedge funds want more.

Senator Chris Dodd (D-CT) wants General Motors Corp. (NYSE: GM) CEO out and thinks a merger between Chrysler and GM makes sense. I am happy to hear him say that because I suggested those ideas as part of my six point restructuring plan for the auto industry. The difference is that when Dodd says this, he actually has some power to make it happen.

This morning on Face the Nation, Dodd said, "You've got to consider new leadership. [Wagoner] has to move on." Moreover, when asked if a change in leadership should be a condition of a bailout, Dodd said, "I think it is going to have to be part of it." Dodd also said, "Chrysler, is, I think, basically gone, probably ought to be merged."

This sounds like progress to me. If only Congress could push the auto industry to follow the other four parts of the restructuring plan, that would be great. However, my plan left out an important point -- even if the industry cuts unprofitable products and the related dealerships and reduces pay and benefits it will still need to agree on how much of a haircut the bondholders will need to take in a restructuring.

Nevertheless, Dodd's comments on Face the Nation represent good progress.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

It looks like all that auto CEO driving has paid off. With a little help from the worst job report since 1974 (533,000 lost jobs in November), Congress and The White House have agreed on a way to fork over $14 billion worth of taxpayer money to General Motors Corp. (NYSE: GM) and Chrysler. The plan is to take that $14 billion from the $25 billion that the Energy Department has already approved to help the auto companies develop fuel efficient cars. Then next year, the new government will use financial bailout money to replace the Energy Department funds.

Will the U.S. taxpayer get anything in return for that $14 billion? Of course not. But GM and Chrysler claim it will keep them going until the end of March. This week, an economist testifying before Congress estimated that it could cost $125 billion in taxpayer money to keep these zombie auto firms afloat. So if we start to give them taxpayer money, we'll keep doing it for years. And the $9.3 billion that would be lost if the Treasury exercised the warrants it took after putting our money into 51 of the 53 banks suggests that government rescue plans just destroy more taxpayer wealth.

I think GM and Chrysler need to do more heavy lifting -- by putting together a real restructuring plan before taking taxpayer money. If there is a profitable business buried inside GM and Chrysler, the two companies should dig it up. As I've posted, a merger between GM and Chrysler could be a good start -- it's one part of a six-step restructuring plan I discussed. But there needs to be more -- particularly an agreement with bondholders about how much of a haircut they would take in a prepackaged bankruptcy.

If executives from General Motors Corp. (NYSE: GM), Ford (NYSE: F) and Chrysler can make it from Detroit to Washington in their hybrid vehicles by tomorrow, they'll plead for $34 billion -- up $9 billion from two weeks ago. You should not give them what they want. Instead, I recommend you let GM and Chrysler merge -- if you can convince Nissan CEO, Carlos Ghosn, to run the combined company. Ford will be fine on its own -- you should grant it the line of credit it requests.

A few weeks ago, I proposed a six step restructuring plan that would save $16 billion and help a combined GM and Chrysler to survive. To put that plan into effect, there is no question that the managers of GM and Chrysler must be replaced by an auto executive with a track record for turning around an ailing competitor. That's what Ghosn did when he took over Nissan after it merged with Renault in 1999, where he was a VP. Ghosn won many small victories against an entrenched Nissan bureaucracy to revive the Japanese automaker. Ghosn is just what GM/Chrysler needs.

Make no mistake, this is not an industry to which it makes economic sense to lend money. Bankers need to get repaid from the cash flow that a business generates either from operations or by selling assets. With sales plunging -- GM's fell 41.3%, Ford's tumbled 30.5%, and Chrysler's crashed 47.1% -- there is no operating profit likely here. And demand for purchasing their assets -- such as GM's Saab or Ford's Volvo -- appears to be weak.

About 29 years ago -- in August 1979 -- Chrysler was at death's door. It made gas guzzlers that nobody wanted to buy and it asked for $1 billion to keep itself going until a fleet of more fuel efficient cars could take up the sales slack. If it failed, a Congressional Budget Office study said that 360,000 jobs would be lost.

The U.S. turned down Chrysler's request and offered loan guarantees to encourage banks to make Chrysler the loans it needed to cover its $100 million a month operating expenses until the new car line could hit the dealer floors. That story had a happy ending -- and offers some lessons for the current situation.

Except for the much smaller numbers this story sounds much like the plight of General Motors (NYSE: GM) . As I posted, GM is trying to convince the Congress that it will fail without a $25 billion bailout and that such a failure would cost 2.5 million jobs and $125 billion in lost economic activity. It remains to be seen whether the U.S. will come through with the money that GM wants.

General Motors Co. (NYSE: GM) Chief Executive Rick Wagoner, the longest serving head of an automaker, is personally lobbying members of Congress to back a federal bailout of the struggling automaker, which wants to merge with its much weaker rival Chrysler LLC.

Bloomberg News, which broke the story, reported that Wagoner's "involvement includes attending meetings, such as one with Treasury Department officials last week in Washington." You can bet that Michigan's powerful senior member of Congress, John Dingell, is attending many of the same meetings as Wagoner. GM no doubt is employing an army of lobbyists -- both Republicans and Democrats -- to press its case. The company, which for now may be the largest, has little choice.

GM and Chrysler would need between $10 billion and $12 billion to integrate their operations, according to a Citigroup note cited by Bloomberg. Combining the two fading industrial behemoths would be a logistical nightmare. Imagine trying to combine disparate systems for everything from personnel to purchasing to accounting. Let's not forget the byzantine IT systems at both companies as well.

Economically, it's hard to justify bailing out GM. Decades of incompetent management at the Big Three resulted in the industry drowning in billions of debt. The problem with telling the industry "no" is political. Dingell is a 1,000-pound gorilla in Congress. The auto industry continues to have considerable clout in Washington as well. Their argument is simple: if Wall Street fatcats can get a federal bailout, why not us?

The problem with rescuing Wall Street is that lots of struggling industries are going to pass the hat in Congress. What about the airlines? The retail sector? Pharmaceuticals? When does it end?

If you break the cycle of short-and-no-cover, you can win.

I know that wasn't the purpose of the Anglo-French plan that we were dragged into, but it will be the effect, and the effect will be electric.

Let's just take an obvious example: State Street (NYSE:STT). This is a longtime conservative trust bank that is an important custodian for life savings and for mutual funds. For a year now it has been under assault as an institution that has too much leverage in hard-to-value asset-backed instruments. The idea that a custodian could fall apart is something that shakes every money manager to his core and causes him to take his money out of cash and put it in T-bills. That's been going on for ages now, and I know money managers who are scared to death to keep their money "in the system," which is State Street, something that instills panic across the board.

When you hear that and you are a short-seller you know what to do: You plunk down $25 million to buy credit default swaps to wager against the firm's debt, then you buy position limit puts and then you short the stock along with all of the other like-minded souls you talk to every day. You get the stock rolling downhill, then you buy a second set of swaps, paying double the price -- doesn't matter what the vig is when you know you are going to win -- and then you call the media and you tell them that everyone's pulling their money out of State Street and the credit default swaps are spiking huge and then the media goes out and reports on it. The company is helpless to refute it as the problem is being caused by the sellers because it is pretty much business as usual in a very tough time, and the stock gets hit again. Other hedge funds get wind, they short it down further, longs panic and then the credit agencies put the company on notice because where there is smoke there must be fire. Then the clients pull as much money out as possible and voila, the end of State Street.

We have seen this run several times. Frankly, I don't know how State Street stayed in business.

Until this morning, the only policy that had been put in place to stop this destruction of capital by the shorts -- and I fully concede that State Street may have made mistakes, but I will not concede that those mistakes should have made it be wiped out -- was an out-and-out short-selling ban. That was ludicrous, but what do you expect from this SEC that eliminated the uptick rule right in the teeth of the greatest bull market and allowed naked shorting to go on illegally?

U.S. stocks may continue their record rally from Monday as investors' confidence was buoyed by Treasury Secretary Henry Paulson's plan to invest $125 billion in the nine largest financial institutions. Japan Nikkei 225 Index had its biggest jump in its 59-year history. Benchmarks in 16 out of 17 Western European countries also advanced, according to Bloomberg News.

``The market is saluting the bailout plan,'' said Chicuong Dang, an analyst at KBL Richelieu Gestion in Paris, in an interview with Bloomberg.

Under the Bush Administration's plan, the government will buy preferred shares in nine of the largest financial firms including Goldman Sachs Group Inc. (NYSE: GS), Morgan Stanley (NYSE: MS) and Bank of America Corp. (NYSE: BAC). The money is coming from the recently enacted $700 billion rescue of Wall Street.

Here is a look at other news that may move markets:

• Big-shot hedge fund managers Paul Tudor Jones and Stephen A. Cohen have been forced to sell assets amid tightening credit markets and falling stock prices, according to Bloomberg.
• Morgan Stanley is "in a much stronger position" because of the $9 billion investment its received from Japan's Mitsubishi UFJ Financial Group Inc., Chief Executive John Mack told The Wall Street Journal.
• Google Inc. (NASDAQ: GOOG) and Yahoo Inc. (NASDAQ: YHOO) are in talks with the Justice Department to avoid an antitrust lawsuit on their advertising deal, the Journal said
• Media mogul Sumner Redstone has been forced to sell off large chunks of his holdings in CBS Corp (NYSE: CBS) and Viacom Inc. (NYSE: VIA). the Journal said.
• Commodity prices are falling, putting money into the pockets of consumers when they need it most, the New York Times reported.
• The General Motors Corp. (NYSE: GM) -- Chrysler LLC buyout talks are at a critical juncture. The company and Chrysler's owner Cerberus Capital Management are discussing how much cash the buyout firm will contribut to the joint venture and how much stock it will get in return, the Tiimes said.

U.S. stock futures were set to rise Monday morning after a Federal Reserve official pledge that the central bank would "consider every option" to restore consumer confidence, according to a report in Bloomberg News. The market was further bolstered by comments from European governments to prevent banks on the continent from failing.

On the other hand, Bloomberg News is reporting that the world's economy may be headed for its worst recession in 25 year -- if it's lucky. `The hope is that it won't become the worst unemployment business cycle since the Great Depression," economist Bradford DeLong told Bloomberg.


Here is a look at other news of interest to the markets:

• Paul Krugman -- The New York Times columnist and Princeton University professor won the Nobel Prize in economics.
• Sovreign Bancorp -- Spain's Banco Santander SA is near a deal to buy troubled Philadelphia-based Sovreign Bancorp Inc. (NYSE: SOV) according to the Wall Street Journal.
• Morgan Stanley (NYSE: MS) -- Mitsubishi UFG closed on its $9 billion investment in the Wall Street bank which gave it a 21 percent stake.
  
• Bailout -- The Treasury Department is providing some details about its $700 billion rescue, naming law firm Simpson Thatcher as an advisor.
• GM -- General Motors Corp.'s (NYSE: GM) board was cool to the idea of a merger with Chrysler LLC., according to the Journal. Meanwhile. U.S. auto sales are expected to be near a 20-year low.
• Gulf States -- Saudi Arabia and the United Arab Emerties unveiled plans to bolster their domestic banks.
• Wachovia -- Analysts expect Wells Fargo & Co. (NYSE: WFC) to sell or cut back Wachovia Corp. (NYSE: WB) investment-banking business, Bloomberg says

MAJOR PAPERS:

• Steven Spielberg and his DreamWorks Animation SKG Inc (NYSE: DWA) partners are close to signing a deal with India's Reliance ADA Group for between $500M and $600M that would provide financing to the company as it prepares to leave Viacom Inc's (NYSE: VIA) Paramount Pictures this year, the Wall Street Journal reported. DreamWorks will seek to obtain an additional $500M in debt financing to make about six new films a year.
• The Wall Street Journal also reported that at an investor update yesterday, The Hershey Company (NYSE: HSY) CEO David West said the chocolate-bar maker would boost spending on marketing about 20% this year and next, and slightly increased the company's long-term annual sales targets. West offered little detail on how Hershey will address its reliance on the U.S. market for revenue.

OTHER PAPERS:

• The Economic Times reported that India's Maneesh Pharmaceuticals, a mid-sized company, bought a 51% stake in U.S.-based Synovics Pharmaceuticals Inc (OTC: SYVC). The terms of the deal were not disclosed.
• The Economic Times also reported that General Electric Company's (NYSE: GE) GE Money Financial Services, which was seeking a parter for its personal and home loan portfolios, may have called off the process after it was unable to get the right valuation.
• Bob Nardelli, the chairman and CEO of Chrysler LLC, sent a memo to employees warning them of worsening U.S. sales, the Detroit News reported. The e-mail did not indicate the auto maker would look to soon further cut production or lay off staff, a person familiar with the matter said.

When the United Auto Workers went on strike today against Chrysler LLC, experts predicted that it wouldn't last long. They probably didn't figure it would end in six hours.

As Labor actions go, this wasn't much. As the New York Times pointed out, the strike didn't include five plants that were already temporarily shut down and workers were told not to walk off the job without being instructed to so by the union..

The days of long labor strikes may be over, particularly in the beleaguered auto industry. Details of the agreement weren't immediately available but it's similar to the UAW's recent historic agreement with General Motors Co. (NYSE: GM) in which the automaker got rid of about $50 billion in future health care obligations. Of course, there will be job cuts, about 1,500 of them.

Ford Motor Co. (NYSE: F) is next up. UAW head Ron Gettlefinger is good buddies with Ford Chairman Bill Ford Jr. Their friendship is about to be put to the test.

Bob Nardelli's old boss Jack Welch seems to be one of the few people who think his appointment as the new Chrysler CEO is a good idea.

"This is an absolutely perfect fit,'' the former General Electric Co. (NYSE: GE) chief executive told Bloomberg News. ``They've got to get cost, efficiency, service -- all those things in line. He's the best in the world at that."

Neutron Jack goes even further saying his relationship with GE's unions were fabulous and that Chrysler has "got to have straightforward, no-baloney, on-the-table relationships with the unions there. And Bob is perfect for that.''

As I've argued before, Nardelli was a success at General Electric. Then again, he wasn't the boss either. When he got to Home Depot Inc. (NYSE: HD), he quickly became an imperial CEO who seemed to care little what shareholders, employees or the media thought of him.

Chrysler needs someone who isn't out to win any popularity contests. Tough decisions have to be made. But leaders also need to be good listeners and willing to compromise, two qualities that Nardelli just doesn't seem to have.

Cerberus Capital has made a huge mistake in hiring disgraced former Home Depot Inc. (NYSE: HD) CEO Robert Nardelli to run Chrysler LLC. which it officially acquired Friday for $7.3 billion.

For one thing, he has no experience in the auto industry. Moreover, he was a horrible CEO at Home Depot, whose arrogance was matched by a lack of operational skills. The Atlanta-based retailer is in the process of selling off its HD Supply Division, which Nardelli built, to a private equity group lead by Bain Capital for $10.3 billion. Home Depot also lost market share to Lowes Cos. (NYSE: LOW) and saw its stock price fall about 8% under Nardelli's leadership.

The reasons and justifications for the appointment make no sense. The New York Times reported that Nardelli was hired for his "turnaround expertise" and won't be paid if the automaker "does not improve." I'm not quite sure what that means.

Nardelli was highly regarded when he worked for General Electric Co. (NYSE: GE) and was one of the candidates to succeed Jack Welch when he retired. That reputation got him the job at Home Depot, where he earned an outrageous compensation package and the ire of shareholders. Maybe Cerberus thinks that Nardelli can bring the GE touch to Chrysler.

Unlike Home Depot, the workforce at Chrysler is unionized. Nardelli better keep his considerable ego in check during the current round of contract negotiations, otherwise he's going to have huge problems. Though considerably weakened, the UAW will probably be as ornery to deal with as any Wall Street investor.

Nardelli has got an incentive to keep his ego in check. If he can turn Chrysler around, he may get an ownership stake in the company that will make him far wealthier than he is today. Of course, he'll still be plenty rich if he fails too.

That's one of the perks of being a failed CEO.