11/12/2008

Dead, Just Not Broke

What's the basic argument for government assistance to GM/Ford and Chrysler? As I understand it, a big chunk of Federal largess will keep those companies from imminent collapse. Upon collapse, it's a high probability that:
  1. The spillover will transform a nasty recession into a bona fide depression.
  2. The United States will irrevocably lose the anchor of its industrial base.
  3. The only American organizations that can plausibly mass produce an alternative to the combustion engine automobile will, also, irrevocably disappear.
Alternatively, sufficient cash will buy enough time for the industry to:
  1. Transition into profitable manufacturers of low-cost no/low emission consumer vehicles.
  2. Honor its financial commitment to its current and former labor force.
  3. Provide a healthy return to its financier, the United States Treasury.
  4. Attract fresh, rent-seeking capital to replace said financier.
Does that about sum it up?

Having only worked in small, entrepreneurial environments, I can't comment intelligently about how large organizations turn themselves around quickly. I'm highly skeptical it can happen while that organization is in the public eye and is run on behalf of stakeholders (instead of customers). Believing that stakeholders will temper their interests in a barely breathing company all for the greater good is, well, a figment in the imagination of those who don't believe in the profit motive. With each positive step the industry makes someone will agitate to monetize those small gains TODAY. The U.S. Treasury will want out, or the UAW will want to fund member benefits, or private shareholders will want a dividend, or management will want a bonus pool or, or, or, or. It took decades of denial, co-dependency and bloodless competition to get the industry where it is today: dead, just not broke (and if you work in business you know the difference). Dead, just not broke is exactly why there's still so much interest.

The politicians who'll drive (pun not intended) a bailout package are often derided as ignorant, crass opportunists, which is of course entirely true (I think Kissinger said it's the 90% of politicians that give the other 10% a bad name). Some are smart, most are dumb but they, like you and me, respond to incentives. They want to keep their jobs and not be hung in effigy or burned at the stake. Nobody who's in a position to stop it is going to allow these companies to collapse over night. The political and human fallout will be staggering and won't correct in the adult lifetime of anyone reading this.

So, what's a better option? First, dear readers, acknowledge that a bailout of some kind will happen. Acknowledge that it will have politically pleasing constraints on executive pay and shareholder disbursements. Acknowledge that it won't target the real cause: a cost structure designed for when the industry did make your father's Oldsmobile. Attacking the root cause is, politically speaking, the same as tossing people out on the street. Acknowledge that it's mostly just a transfer from the U.S. Treasury to the industry's retirees (and in fairness, would you like to be the one to cut them off?). There will be moving speeches about the future but there's just too much interest in keeping these companies on life support to allow room for innovation.

A serious plan would force a brutal restructuring and use government funds to alleviate the pain of transitionees who either didn't cause this or are too old/poor to absorb it (even in a recession the U.S. is plenty rich enough to afford it). A serious plan understands that nostalgia for a less complicated time isn't a worthwhile aspiration.

7 comments:

Steven L. Baerson said...
This comment has been removed by the author.
Steven L. Baerson said...

I, of course, would have no problem being the one to cut them off!

viachicago said...

As Ronald Reagan famously said:

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Lou said...

A serious plan would force a brutal restructuring and use government funds to alleviate the pain of transitionees who either didn't cause this or are too old/poor to absorb it (even in a recession the U.S. is plenty rich enough to afford it). A serious plan understands that nostalgia for a less complicated time isn't a worthwhile aspiration.

I agree, but the problem is who is going to create a "serious plan"? The government? Rick Waggoner and the GM Board of Directors? The Union?.....LOL...They all want to maintain the status quo, and unfortunately that ain't going to fix the problem.

They need to tear it down and start over. Everything. The disfunctional management/union relationship, the bloated self-sustaining corporate culture, the inefficiency in product line management, the outdated manufacturing plants. Unfortunately, the likelyhood of that happening is remote.

viachicago said...

Lou, I may have to make you a contributor!

Rational said...

As I commented on your post yesterday, the assumption that the industry will collapse is a false one. Chapter 11 bankruptcy is not a death sentence. It is designed to allow the continued operation of a business while affording protection from its creditors. The reason chapter 11 presents a problem for Ford and GM (hereinafter referred to as "the clowns")is that in this current environment, there is simply no one to provide DIP financing to the industry. This is where the government could step in. Rather than bailing the clowns out pre bankruptcy, providing zero leverage for management to do what it needs to do with respect to the cost structure of its labor force, better to have the US gov't act as the DIP lender thereby affording the clowns the restructuring flexibility they need to restructure. Look, the Tier I and II suppliers will not stop doing business with the clowns. They represent the only customers most of those suppliers have. The added benefit of having the government act as the DIP lender is that the government gets its money back before anyone else. Isn't this the way is SHOULD work? I can't be the first to have thought of this...I'm just not that smart or creative. So why would this type of solution not work? Okay, DIP lenders typically are not as patient as equity. But should we, the taxpayers be so patient? Certainly we could craft some sort of long-term DIP financing that woud provide time to get things going on the restructuring front. Of course, as I mentioned yesterday, there IS the union problem. This solution is very inconvenient to the unions, making it VERY inconvenient to those in power in Washington.

Lou said...

Funny story....back in '84, my freshmen year at U of M, my room mate's parents visited.

I had to listen to a very uncomfortable argument between my room mate and his father. Apparently my buddy went and sold his GM stock, and his father was quite upset by that. His father said something to the effect that that "GM stock is the best long term investment you have". My room mate scoffed and replied "It has zero long-term potential".
Funny how things worked out :)