Posted by Marc Hodak on December 3, 2008 under Politics | 
The “Big Three” auto companies can’t make a legitimate business case for getting funds from Congress, so they must appeal to their fear.
GM says:
The way I would explain it to your constituents is it’s going to prevent the United States from entering into an economic depression in my view.
Chrysler says:
If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.
I particularly favor Rick Wagoner’s wording (the GM quote above). He’s not actually saying the failure of the auto companies would cause a depression. He’s just saying that’s what congressmen should tell their constituents in justifying a federal bailout.
In the unlikely case Congress asks my opinion, here is what I would have them tell their constituents:
GM and Chrysler have together about $200 billion in assets. In 2002, a particularly “tender environment” for our economy, the top three bankruptcies sent nearly $200 billion in assets into receivership. The federal government didn’t bail anyone out that year. The following five years were ones of significant economic expansion.
I would also note that it is highly unlikely that all three of the “Big Three” will go bankrupt if events run their course. In fact, if GM and Chrysler go into receivership, it’s likely that Ford’s odds of survival go up, not down, notwithstanding all the scare talk about an interdependent supplier network. The fundamental problem with our car companies is: they are making too many cars, and the markets consider the “Big Three” vehicles to be the most expendable. One or two fewer car makers, even if they simply reorganize around a shrunken asset base, will make it easier for the rest to survive.
If Congress feels it absolutely has to “do something” to help the auto companies, it should announce that it will pick just one of the three based on who is worthiest. It will probably pick the wrong one, but by promising to saving one, they can get some real action in terms of the turnaround plans it has requested. And by letting one or two of the others fail, it can then prolong the agony of the decrepit supply chain just long enough to allow the country to see that the Big Three, in fact, do not support the sky.
Posted by Marc Hodak on December 1, 2008 under Politics |
I was trying to imagine what the execs at GM were actually doing to prepare for the presentation in Congress later today. I’m sure the first draft prepared by some savvy junior executives included some consolidations of plants or brands, improved designs, supply chain re-engineering, cost concessions from the unions, etc.
CEO Rick Wagoner would have no doubt responded, “Are you nuts? Who the hell do you think is reviewing this plan? Institutional investors? Venture capitalists? Christ, boys, we’re talking to Congress. Do you think Henry Waxman knows what a supply chain looks like? Maxine Waters thinks P&L is a street corner in Chicago.
“Men, you’re forgetting the customer, again. We’re selling to Congress. They are in the drivers seat. They don’t know squat about ROI or lean production or anything about what makes a car company work. If they had the slightest interest in that, they would have taken a tour of Toyota’s Lexington plant. Men, they want green cars that no one will buy. They want protections for their union patrons. All we have to do is tell them that they can have those things and a turnaround. They’re looking for magic. Show me a plan where we’re delivering that.”
No one in that room would have the balls to point out that Congress also wants the CEO to accept $1 a year, so he’s not going to hear that until some snide reporter asks him on the way to the public airport.
In the end, we will be witness to the spectacle of businessmen acting like politicians (which is much less of a stretch than most would suppose), and politicians pretending to be businessmen (which is pure acting).
Consider that most taxpayers are forbidden by law from investing in private equity firms. Congress considers the average taxpayer as not sophisticated enough, and the typical P.E. partnership as too risky. Imagine, then, being asked to invest in a P.E. firm without a single principal who would qualify as a “financial expert” even by the government’s criteria. Consider, indeed, that the principals consisted almost entirely of economic illiterates. Imagine, further, that these P.E. principals did not earn their positions based on any track record of financial success, but exactly the opposite, based on their track record of squandering as much money as possible, earning negative returns that constantly require capital calls on the limited partners. Consider that this P.E. firm is not only able to solicit you as a limited partner, but compel you to invest. You would be forced to invest in some of the worst performing assets in all the land, and the capital calls that you will be subjected to, will bind your children and grandchildren for generations to come.
Welcome to Congress as your fund manager.
