The Real Difference Between Bankruptcy and Bailout
When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it - called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny.
So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street's major banks and insurance giant AIG are so important to the national and global economy that they can't be allowed to fail, that doesn't mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they're taking now that taxpayers are bailing them out. But they're the ones who took the risk. We didn't.
The Treasury seems to have lost sight of its real client. Its client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.
It would be different if Main Street was getting something out of all this. But credit still isn't flowing to small businesses or distressed homeowners, and unemployment is skyrocketing.
There's more at stake for Main Street when it comes to General Motors and other automakers now teetering on the edge of bankruptcy, because two and a half million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not to pay off the automakers' creditors, shareholders, and executives, with no strings attached. Recall that when the government bailed out Chrysler in the early 1980s, a third of its employees lost their jobs.
In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.
Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.
And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy.
It's not the big guys who need rescuing. It's the small. Right now, the government has its priorities upside down.
So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street's major banks and insurance giant AIG are so important to the national and global economy that they can't be allowed to fail, that doesn't mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they're taking now that taxpayers are bailing them out. But they're the ones who took the risk. We didn't.
The Treasury seems to have lost sight of its real client. Its client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.
It would be different if Main Street was getting something out of all this. But credit still isn't flowing to small businesses or distressed homeowners, and unemployment is skyrocketing.
There's more at stake for Main Street when it comes to General Motors and other automakers now teetering on the edge of bankruptcy, because two and a half million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not to pay off the automakers' creditors, shareholders, and executives, with no strings attached. Recall that when the government bailed out Chrysler in the early 1980s, a third of its employees lost their jobs.
In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.
Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.
And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy.
It's not the big guys who need rescuing. It's the small. Right now, the government has its priorities upside down.
posted by Robert Reich | 10:02 AM
199 Comments:
I completely agree that bailouts should be effectively be accelerated bankruptcies, but have no financial benefit for stakeholders and especially for shareholders and senior executives.
I think it is high time for the U.S. Treasury and the Federal Reserve to show very unambiguous signs that they are effectively here to work for U.S. taxpayers, and not for special interest groups. Loan Collateral transparency or at least independent audit is necessary.
I think letting GM fail isn't good enough. We should break them up under antitrust laws. Let's get some real competition going. Best for the auto industry would be having 12 companies buying parts, rather than 3 (or 2).
It's pretty obvious to anyone concerned that GM, Ford, and Chrysler are not going to be competitive. The Volt would be a great idea, but when Toyota plans to have every vehicle in their fleet available in a hybrid by 2010, it's a pointless exercise.
We need a robust automotive market full of new ideas. And I don't see that happening until we get rid of the big 3.
Reading your blog, I am relieved and reassured that the President-elect is hearing from you very sound advice on ways to benefit Main Street. It is a refreshing change.
Thank you.
Over the past 10 years, Finance, Insurance, and Real Estate (FIRE) have been most of the growth in the economy. With the tax shield of borrowing, finance is more important to the economy than shareholders. Paulson, former CEO of Goldman sees only the FIRE side of industry, not the actual production side. If fire fails, so does industry
To Paulson and his friends, they are bailing out America by bailing out FIRE. Even if he does not believe this in fact, he still holds tens of millions in Goldman stocks and warrants. That level of personal involvement could cloud the judgement of almost any public servant.
The real level of FIRE hubris is to say that the 84 billion we are going to pay out in bonuses this year for a massive management failure is not the same money as the 85 billion taxpayer payments.
I am wondering if Paulson's proximity to Goldman Sachs is influencing his decisions?
Isn't it possible that he just has a pre-Copernican view of economics, where he thinks what he knows that worked to build his personal wealth is the center of the universe?
And isn't the fundamental part of the economy based on consumer confidence?
I have lost any confidence in any aspect of this unknown Federal Reserve and wonder why it still exists?
Shouldn't government be easily understood by the general population?
Isn't it possible that the bigger the bank, the less it serves the community and more it serves its annoited leadership?
I feel betrayed again, as if Iraq wasn't enough....
"And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people..."
Isn't this exactly what the Bush administration is trying to ensure?
Bush, Cheney, Paulson, Blackwater, et al. are the real financial terrorists of the twenty-first century...
These worn-out, old cold-war dinosaurs are destroying our country…
We need jobs in America, not huge global companies manufacturing oversees, organized in offshore tax shelters, with no respect for shareholders rights or corporate governance.
Corporate America has it’s first duty to the country and must balance profit motives with social responsibility.
America needs job, not mega-corporations using our protection to operate for the rich with no obligations to the country in which they operate.
BTW (1): We need a strategic national industry plan to ensure key industries and manufacturers stay onshore. We have counterfeit chips coming into the government procurement quagmire which are used in our military equipment.
BTW (2): We need national standards for imported products and new labeling requirements to protect us from all the importing of questionable products that are manufactured outside of any inspection or oversight. All those cheap vegetables coming in are from countries that don’t have an equivalent EPA… many farmers use outlawed pesticides. Our increasing rate of cancer has been following the increased food importation of our country.
Robert;
We should have listed to our grandfathers. They told us to save money and live within our means, to own land that's paid for, and that the road to hell is paved with good intentions. Your a smart guy. You know the constitution. You know how business should operate. So many smart guys have been saying this for years (Ron Paul, Jim Rogers, Peter Schiff, Marc Faber). The legal process for bankrupcy is there for everybodies protection. What we've got now is corrupt non-transparent absconding of the peoples credit line, defacing our dollar and balooning our debt. Sinking money we don't have into the abyss of failed business models that should have undergone orderly bankrupcy; Other competent businesses would then be able to take over and create new jobs, instead now everyone will suffer. AIG was the biggest and it failed. It was so called bailed out and it still failed. Now the bailout continues but it'll still fail, and they'll have to sell off the assets at a big loss (gee whiz - that could have all been done under bankrupcy without killing the US taxpayer). Robert, I think deep down, even though the people fear the failure of these companies and the resultant job losses, they know the bailout is going to make those losses seem like chump change when the 'chickens finally come home to roost'. A tally should be made of those congressman who voted against the bill twice - they are the real American Heroes.
I agree with Tim. Bailout should be conditioned on divestiture. If GM is too big to fail, break it up and make Chevrolet, Pontiac, Buick, Cadillac, and GMC separate companies, each small enough to be allowed to succeed or fail on its own merits.
I also agree with Clarelynn that it's great Obama is hearing from Dr. Reich - if indeed he is hearing.
Prof Reich, is your 2002 plan of no FICA deductions for the 1st $15,000 of wages on the table?
Or at least Barack's proposal of $8,750?
This would be a trickle up stimulus package without borrowing. Thus it will not increase the
national debt, like the last package? (eliminating the cap included)
If this were also applied to the employers, American business would become more competitive.
Dr. Reich:
Good stuff…
It is not too late for the Obama team to change direction on this republican dreamt up and mismanaged bailout. Hopefully most of the money won’t be handed out before January 20th.
The majority of us Americans voted (gave a mandate to) for Obama and team to change America and make decisions in the best long-term interest of it's people.
The dividends and bonuses being paid out by these “bailed out” firms is obscene and offensive…
The rich in this country have torn down both democracy and capitalism.
Keep the faith !!!!
These American Auto companies have been producing inferior cars for years, my first car was the small chevrolet Vega, worst car ever built. Perhaps the best thing is to let these automakers dissolve. They have not been good for the people who buy them. Let new car makers start up or since Toyota's are the best , let's go with them in the hybrid lines. American automakers have been a failure, they don't deserve our monies now.
Robert may be the best person on the TEAB. I think this criticism of the TEAB members is spot on:
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aNCFKvAMUQ6w
Why not also consult people like Shiller or Roubini, who actually saw these problems before they actually became acute?
I'd also like to know what Robert thinks of John Hussman's idea for a "property appreciation right":
"What the U.S. economy now needs most is for Congress to come around to the proper way of dealing with remaining foreclosures, which is to allow judges to reduce the principal of foreclosed homeowners in return for a “property appreciation right” (PAR) to the lender. This would reduce the burden of monthly mortgage payments for homeowners, while still making the original lenders whole, by giving them a claim on some amount of future home price appreciation. This alters the type of payments and their time profile without destroying the present value of the obligation. It allows people to stay in their homes, but without forcing further write-downs, and without debasing the entire incentive structure of the housing market. Approaches to simply reduce mortgage principal will fail miserably: if the government or banks become willing to write down mortgages that go delinquent, you can be sure that nearly every mortgage in the U.S. will suddenly go delinquent."
Yet more clear thinking from you, Mr. Reich. Let's hope that Nancy P. and the Gang hear you loud and clear.
Thank you for you fantastic blog.
While the Democratic party tends to provide a larger slice of the pie to the middle class it still is a corrupt political machine given the nature of our political funding sources.
Lets face it Robert we are going to have a smaller economy something in the 9-10 trillion range shhortly with all the consumer debt overhang,excess housing inventory and not to mention the excess auto to Harley to ATV to RV that will be roaming about various warehouses.
Unemployment will be rampant except within healthcare and Gov't
and whatever subset that can be created with various monetary stimuli boast but helping out the little guy in a deflating economy other then unemployment insurance and providing somekind of healthcare is really not an option.
Best of Luck!
dem:
Interesting but what happens when we start seeing securitized PARs being packaged and sold. Then we see the PAR default swaps cropping up?
Thank you for acknowledging this travesty. The bailouts are going to ruin the government finances and in the end only reward those who made bad choices at the expense of everyone else. I hope you can influence Obama to make the right decisions on this matter.
In fact, I think you should have included a discussion about how we are in this financial mess because everyone from top to bottom thinks they can make risky decisions, make insane money on the way up, and then get bailed out when the pyramid scheme collapses. Government intervention over tthe last 20 years is the very thing that created this mess and now the government is supplying the poison in greater and greater quantities.
The low interest rates are a perfect example. Are our leaders insane?? (insanity chas been defined as repeating the same actions and expecting a different outcome) I as a conservative saver am being punished for saving. Interest rates that are set too low lead to misallocation of capital and over the last 10 years have led to increasingly dangerous bubbles. Realistic interest rates result in smart allocation of money and fair compensation for the investment. If only we had sense in our leadership.
I do not agree that the UAW should be forced to take across the board cuts. They already did that in the last round of contract talks, and as a result the labor costs of the Big Three are not that far out of line with those of the non-union transplant sector. Except in regards health insurance. Single payer or other reformed health care system would immediately change the balance sheets of these companies.
Also, I doubt breaking up GM would work other than to create 3-4 smaller mis-managed companies that would soon fail.
Dr. Reich:
This is very disconcerting:
TEAB members is spot on:
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aNCFKvAMUQ6w
We need a better team for this administration. They sound like a team of financial thugs.
Same old shi_ and he isn't even in the White House yet.
What up ???
"the UAW should agree to some across-the-board wage and benefit cuts"
What evidence do you have that any large union has ever done this before the company goes bankrupt.
The capital of the big three isn't going to vaporize on bankruptcy. It will be put to work by more competent people and we'll all be better off for it.
I've decided to reread "Atlas Shrugged" in order to better understand the times.
TitanicExplorer
"I have lost any confidence in any aspect of this unknown Federal Reserve and wonder why it still exists?"
Jim Rogers said it perfectly when asked what Bernanke should now do: "Step 1 - resign, stet 2 - abolish the Federal Reserve"
"Shouldn't government be easily understood by the general population?"
What a simple but wonderful question. Funny how corruption really resists this concept. How to get there - abolish the reserve, end global empirialism, make the government smaller and balance the nations books. These measures would bring true prosperity to the average American and secure future entitlements.
I guess I am just too simplistic because I see the automobile industry as a spinoff of our militarization of the oil industry.
If Exxon Mobile had to pay for the services of our Navy to keep the sealanes open, and Congress didn't provide taxbreaks, then back in the 1970's alternative transportation would have been competitive.
If it costs a trillion a year now to keep the oil flowing, isn't that a backdoor bailout? Since 1952?
The feeling and word that comes to mind is bamboozled (conceal one's true motives from especially by elaborately feigning good intentions so as to gain an end).
There seems to be a conflict of interest with Paulson being the prior CEO of Goldman Sachs. There has been no backlash for his screaming fire in a crowded theater.
It appears it was easier to bamboozle Congress than bankruptcy lawyers whom require a forensic look at the financials and probably do not allow obscene salaries and bonuses in a Chapter 11 situation.
What's the stat? 45% of the workforce makes less than $50k per year. This bailout of AIG is analogous to the party grandson going to his grandmother, whom is on a fixed income, for money because he spent all of his.
How is it that no one feels empowered to stop this runaway freight train? He who has the gold makes the rules. Yes?
AIG needs to be cut off and file for bankruptcy.
Dear Dr. Reich,
I am still hoping that you will be our next Secretary of the Treasury. But, I am writing about another issue. The car industry needs a bailout. However, it is the unions that will be hurt the most. I propose that the government loan the unions money for a leveraged buyout. They can’t do any worst than the current management and they have the most at stake to bring back the companies. It seems to have worked for UPS. DHL can not compete. With Unions on the Board and both sides of the table, Management will have to answer to the employees and the employees will have to save the company.
I like the word "stake" which is what is needed for ... the hearts of vampire executives. Just fax everything you say to Change.gov. A Republican, George Romney, stated he thought executive compensation should be capped at 250K. Someone asked why a bank CEO should make more than the US President, who has many more states to oversee.
Today was the first edict on lobbyists' role in the transition; it's great to see restrictions. Keep the restrictions in place and expand them: a ten year cooling off period before a former member of Congress can become a lobbyist, no access at all to any government building in Washington, DC, and their headquarters cannot be located within 800 miles of DC.
I hope people get to stay in their homes. A house is the wholesale cost of lumber and nails; the labor has probably been provided by illegal immigrants, and there should be nobody making zillions by inflating bubbles and pushing 1s and 0s around through speculation.
Dr. Reich,
I agree with you completely ... Chapter 11 bankruptcy in select major firm financial breakdowns, rather than bailouts.
Immediate case possibilities at hand, assuming such action is too late for AIG and no other major banks need to be saved with public money, are clearly General Motors, and perhaps Chrysler.
Chapter 11 bankruptcy process should be seriously considered for both GM and Chrysler (Ford management just said its plans are not dependent on government bailout funds ... but maybe we should take this as meaning "not yet" -- as no one knows what the future will bring in this deep crisis).
I see at most only two slimmed down, recapitalized, innovative survivors as US automotive manufacturers. The government would take a 51% share ownership position for its capital infusion in a combined entity (i.e., GM/Chrysler or just one survivor of the two -- meaning the other would fail unless saved by another private company which appears unlikely).
Under the Chapter 11 approach, as you say Dr. Reich, Creditors and Shareholders as well as management would face MAJOR losses as balance sheet loans are written down substantially or entirely BEFORE taxpayer money is infused in either a GM or Chrysler or a merger of the two. If one company had no choice but failure, the government would come to the rescue of jobless personnel with extended unemployment compensation, and reeducation/training of personnel and other benefits (e.g., limited home mortgage subsidies). The costs here would be substantial but far less than ad hoc, huge pumping of taxpayer funds in a structurally severely weak firm competing in an extremely capital intensive industry and faced with superior, entrenched competition like Toyota.
The government would later sell the surviving company in whole when market/financial stability and profitability return over next 5-6 years.
New top management, perhaps under a "Car Csar" in Obama's words, would come in to steer really fast track streamlining, integration, production of fewer as well as smaller, more efficient models ... more compact and far more efficient than even the already very efficient (+65mpg) cars GM, for example, has been producing in Europe for many years.
The problem is: Where does this bailout panacea stop? What's to discourage other firms from getting in the government bailout breadline?
As some are rightly saying, the nation could end up becoming so overleveraged (as if it not already is) with bailout funds that there will be insufficient funds for critical investments in new job generating infrastructure, alternate fuels, new technologies and enterprises, etc.
I think using the Chapter 11 bankruptcy route will act as a stronger deterrent to other businesses seeking government bailout funds not involving a major government ownership after significant writedowns of debt and shareholder values ... thereby protecting the interests of taxpayers better, who are our government's TRUE CLIENT as you so rightly remind us, Dr. Reich.
The US auto industry is a critical supplier of jobs. A failure of two US manufacturers would be devastating, one would be less devastating, and a merger of two (e.g., GM and Chrysler) in competition with Ford, would appear to be the least devastating strategy.
I thought the reason AIG was bailed out rather than put under Chapter 11 so that the rest of the world wouldn't run away with its money from America.
Kudos for your insights, but my question is; Why does it seem no one at the Fed is listening?
Do you think Obama would do some of what you are suggesting? Did he contacted you to be a part of his administration. Apparently he is contacting a lot of people from Clinton's administration.
You always make me think. That's why I admitted to my cerebral crush on you in my blog yesterday --
CareerDiva
How can there be any talk about fixing the economy without discussing an across the board adjustment to the wealth distribution in this country? Every other country in the world with a Gini coefficient as bad as ours is third world dump.(not PC but true) The financial and mega-corp masters of the universe have been playing Jenga with the total wealth of the world for too long, taking from the middle and bottom, to add more to the top. Well the Jenga tower has fallen, it's time to restack the wealth with a solid even progression from bottom to top.
Here's a great article from Portfolio.com by Michael Lewis, author Liar's Poker on what a scam Wall Street is. I like his point about how many of the houses were built purely for speculators? Why was no one counting the actual head count of the US and building houses geared to the real need?
http://preview.tinyurl.com/68tdl6
The same can be said for the automobile industry: there are now more cars than people in the US. What should the auto industry be building?
Before anyone yells about communism, Rosabeth Moss Kanter, of Harvard, has written about the major corporations caucusing regularly with each other to divvy up future production.
Robert, I hope Pres.Obama listens to you, and appoints you as Treasury Secretary or Deputy. BTW, Dr. Stiglitz said tonight on PBS that Chapt.11 should be used by the auto companies.
Don't create more zombies; AIG is already one.
Our "big-3" need to fall apart and be put back together. For too long they have been prisoners of their own brands. Toyota is bigger than GM and yet Toyota has two brands (Toyota/Lexus); when are the domestic companies going to get a clue. We don't need the extra brands or dealers, nostalgia be damned. Then there's Chrysler, on a roller-coaster since the 80's and left out to rot by Daimler. Chrysler has no international standing and can't compete globally, they need to merge with a global company or they must be allowed to fail; GM is already too big, that merger should be off the table. Some form of bankruptcy is the only way to deal with GM and Ford, as you said Mr. Reich -heads need to roll. Jobs will be lost either way, and there's no sense in propping up the domestic companies where it promotes inefficiency.
Hopefully with the Obama administration we will 1. Give our domestic car companies the money for R&D to make them competitive again in a more energy efficient market 2. finally unionize the Japanese auto-plants in the US and make the industry more competitive and 3. Remove the cost burden of health care from all automobile manufactures who build cars in the US.
Tim:
Your comment (second on page) couldn't be more wrong. If we break up the big 3 none of the babies will be competitive. For one, there is an economy of scale issue (especially with research and development) and secondly each baby company would have to establish a global market share to survive (which is why Chrysler is in so much trouble now). The days of a competitive domestic-only market was lost to us long ago. The automobile market is global now and the solutions need to be as well.
What we need to do is make the big three more efficient by reducing the number of brands and ensuring that our domestic brands have the ability to compete on equal footing.
The US needs to reorganize it's economy so that families can rely on one wage earner and have a stay at home parent. We need to get prices down, and wages up to achieve this. We don't necessarily need more jobs, we need to make the jobs we have better. Our current housing situation is evidence that one income families rarely exist.
Seems to me we could rescue the big and small at the same time with the proper choice of policies.
In 2005, GM CEO Rick Wagoner claimed that health care costs for GM added $1500 to the cost of every vehicle the company makes.
Universal health care would relieve GM of those costs, helping GM weather this crisis and remain competitive.
Of course, nothing is free. GM, once it became profitable again, would likely have to pay higher taxes.
But, in the short term, while GM has nothing but losses, GM pays no taxes, and there would be no cost to the firm. In the short term, universal health care would be of enormous benefit to GM by removing one of their largest expenses and making them competitive again.
Policies like universal health care can support the big and small at the same time.
So GM cuts costs by not having to provide health care benefits?
What about people not wanting to buy GM cars? How do they legislate that?
Are you going to give a tax credit to the consumer to buy GM cars?
Life doesn't exist for GM cars.
I want a Kroger brand car.
Stop driving. That will drive the price of gas down. That boosts the bottom line in all businesses.
Stable oil prices will turn the economy around.
Stop interdictions abroad, become energy independant, decentralize energy production, hybridization, multi-source energy systems.
Scrap GM, Ford, and the rest of the 19th century technologies. Let them reinvent themselves or perish.
Foreclose on the Federal Reserve.
"Someones got to go to jail."
Problem solved.
Life will go on.
Or we can just play these bank games until Wall Street has all the currency and we are picking apart empty homes for canned goods and firearms.
Crisatunity said: "What evidence do you have that any large union has ever done this before the company goes bankrupt."
The UAW did this during the Chrysler bailout, and then more or less followed suit with GM and Ford. In fact, nearly every union in the US engaged in concessionary bargaining during the 1980s. It's a management-inspired myth that the unions are inflexible.
Right now, the last thing our economy needs is to lower wages even more. Real wages, even for auto workers, have not been going up.
So whatever happens to the equity stake of the investors in these companies, seem to me that the wages of the workers need to be protected. Otherwise, we're undermining the economy even more.
As far as the matter of who's the Treasury's client, I'll paraphrase Animal Farm: All Americans are equal clients, but some are more equal than others.
I also wonder how one can do an imagination transplant into the auto industry. There's a company in California called Left Coast Electric that converts existing cars) including the PT Cruiser) to run on batteries. Why can't Chrysler make a deal with them to build electric cars, or if Left Coast refuses, build electric PTs themselves. The evidence suggests there would need to minimal design retooling, and the car is already familiar in its gas-powered incarnation. I think it could be done before the Volt comes out, and it buys them R&D time for other hybrid vehicles. But do they do it? No. How do we get these people to think outside the box?
After they've lived in a box under a bridge for a while, they might.
Thank you Professor Reich for your words of wisdom where it applies to these far too frequent unconditional big business bailouts that are not extended to those on Main Street struggling to survive. Where is planning and accountability in exchange for excessive corporate handouts. The perception is that everytime AIG, the banks, and now the Auto Industry come knocking, the Congressional door swings open and a gravy train of taxpayer dollars are handed over. It all amounts to this newfangled philosophy that some businesses are too big to fail. I think your thoughtful ideas make perfect sense, and are very practical and organized. The sad thing is that as you said, when the auto industry wants these loans, they will not be self limiting, and jobs will still be lost no matter what the immediate or future bailout. Certainly, Obama has enough sense to start to figure out what's really happening and urge greater circumspection about how this bailout money is distributed and under what conditions and controls.
Brenda,
That restrictive "thinking deep inside the box" and not learning
from others you mention sits BURIED in the American culture. We think we know everything too emersed in our own cacoon of conventional thinking or established doctrines!
Another obvious example is how for years we haven't learned a thing from Canada's health care system (or Europe's) which covers all citizens at a much lower cost than our costly, defunct system.
Having lived and worked for over 35years in Europe, I can say that Europeans in general are always prepared to pick and choose what is working best in another society while integrating any changes within smoothly into their own unique social-cultural-economic value paradigms.
When will we also learn the benefits of exploiting internal as well as external knowhow sources to improve our private and public products and services?
GM needs to fess up as to what it did to a perfectly good electric car, the EV1, which it first built in response to a California requirement, then lobbied against the law, won, and finally took back all the leased out EV1s and crushed them despite the lessees' pleas. This is all documented in Who Killed the Electric Car? Actually, they deserve to go under from this shenanigan alone. They weren't thinking about what the people wanted or what was good for the environment. They were only thinking about their own profits. They were going to take the electric car off the road, despite its popularity, and force gas guzzlers down the throats of the American people. I suspect that GM's Board of Directors were also heavily invested in Exxon Mobil and other interlocking arrangements.
Now these cry babies want the taxpayers to bail them out after they snubbed their noses at their lessees who wanted nothing more than to keep their electric cars. Rather than comply with California's requirements for a certain percentage of its sales being emission free vehicles, GM lobbied against the law, then pulled its electric vehicles off the road and crushed them.
They don't deserve a taxpayer bailout. Let them be taken over by their own employees.
I only hope that our new President is listening to you on these matters.
We need to realign our priorities. Reform the Bankruptcy Courts and get them busy...
I for one, am ready, willing and able to purchase some of the assets, however, I will not do it unless I have a clearing house to guarantee fungibility. At this point in time, the only facility to clear this mess is in Federal Bankruptcy Court.
In the mean time, I will do my patriotic duty and exploit the opportunities in the market place for myself and the benefit of my investors.
My best regards to all,
Econolicious
This country built great economic engines starting in two eras. One wsa post Civil War and the other was post WWII. Both lasted a few generations until the financial community gained disproportionate control over the economy and wiped out much of our prosperity. Both were predicated on collective bargaining to build a burdgeoning middle class. Both times the financial community has killed off the middle class.
The Great Depression and this environment was not caused by liar loans or housing. Both were caused by the financialization of our economy.
If Obama wants to rebuild the middle class, we need high paying jobs. And, we need to end globalization in its current form. Of course, that is a done deal anyway.
If the government wants to save anything, they need to quit worrying about Wall Street and start an immediate re-industrialization program. That is what happened after the Civil War and what happened after the Great Depression.
This environment is a repudiation of historical European capitalism and a confirmation in worker-based American capitalism. That's the only way out of this mess. Period.
As McCain said, he came to change Washington, but Washington changed him.
You don't need to keep out the lobbies when your elected officials becomes a regional commander in the Bailout Brigade.
18 billion a year in pork certainly pales in comparison to the 1 trillion dollar handouts this year.
If you add the military expenditure(backdoor bailout), then the cost triples.
They clammor "rebuild our weapons systems" due to the 21st century war against war.
Bailout the Humvee industry, the hollow-point mercury-filled exploding ordinance sector, and along the way a few Spruce Goose couldn't hurt.
US military force is exactly the reason we think we are always right. Lets shock and awe them. They'll get the idea.
Bringing change to Washington is about a top down disassembling of a system so complex that the America people don't understand it.
GM built the EV1(a perfect electric car) in 1996 and then crushed all of the cars. They already know how to build them, but there is something else in the way.
It is Hummers vs EV1s, brawn vs brains.
The American consumer has shriveled into the corner with its tin cup, awaiting Uncle Sam to come to the rescue, but we can't be rescued from ourselves.
This is like a financial rerun of the Iraq war. First we are told there is a threat so grave that -- trust us on this -- we must pass a massive bailout of the financial industry. If we don't there will be a financial mushroom cloud.
Two months later, credit is still screwed up and now we have the auto industry rattling a tin cup for some of the same. Pretty soon we'll be told the only way out is a financial "surge!"
Reich is exactly right -- this is why we have Chapter 11. A few years ago the airlines saw their business and stock prices crater and they used Chapter 11 to slip the noose the old-fashioned way -- by screwing some creditors and wringing huge concessions from overpaid pilots.
Which reminds me, can anyone explain why GM is not demanding new concessions from the UAW as we speak???? Instead of whining for federal money, Wagoner ought to be locked in a room with the union boss.
By the way, if Obama truly wants change, and wants to avoid a depression greater than the last one, in addition to my last remarks, I would recommend someone with his ear read a very prescient book - The Predator State. Or, at least this article from its author.
http://tinyurl.com/qypvv
The current administration has tried to do everything it can to enrich corporate America but has done little to help the average American. Wasn't it the current president's father that called Trickle Down Economics "Voodoo Economics."
How can any party or administration profess to love America and yet seem to hold Americans in so much contempt? I think what they really love is the American dollar.
Robert Reich
You are an adviser to the president elect. I wonder why I haven’t heard you or anyone suggest using U.S. savings bonds as a vehicle for financing some of the proposed infrastructure improvements? I am old enough to remember how savings bonds financed some of the Second World War. Children were encouraged to purchase stamps, which were converted, to bonds and workers had regular deductions from their payroll checks to purchase bonds. People had a stake in the effort. Could we not do this again? Seems to me that if a savings bond drive could be put together it would be a good thing. If you don’t agree please tell me why I am wrong.
Norbert J. Yanek
817 Park Harbour Dr.
Boardman, OH 44512
330 7265920
easydoesitac@zoominternet.net
The auto industry actually has a product to sell, so why are we not looking at a solution to the crisis that involves the product? Instead of just giving the industry money, why can't the Federal government actually buy the US "made" cars?
If we take some 30 billion the Federal government could actually buy a car for every Federal employee (based on a volume discount) and give it to them instead of the cash outlays that are required for manditory pay raises and bonuses (say over three years) and the process would be almost be cash neutral.
This approach would solve so many problems (if the Unions would agree) including not having the bailout add to the national debt (since the money was going to have to be spent anyways) and it would clear out the built up inventory of the auto industry and more,
And as part of the deal, the feds could require that the industry take the money and retool for the needed cars of the 21st century rather then the same failed models that it has been producing.
It makes little sense to just give the industry cash with little return except the hope to maintain jobs (which it has not done) ... Lets at least get some value (the cars) for the cash and some added leverage as a real customer in making the industry actually change.
gyoung
Re: Bankruptcy v. Bailout in relation to the auto industry
For what's its worth, in relation to the auto industry, all bankruptcy is liquidation. The reason has to do with the auto maker's cost structures and investment cycle.
An automaker's finances are dominated by the cycle of investment in new vehicle designs, a cycle of investment that must be financed out of cash flow. The volume of investment is large enough, and its risk profile is such, that no commercial bank financing is ever feasible. What the government "bought" in the Chrysler bailout many years ago was the continuation of Chrysler's already well-advanced vehicle design cycle. Without gov't-guarantees, it would not have been possible to complete the cycle and bring out the car designs as part of a continuing business.
It is not really the rules, per se, of Chap 11 bankruptcy, which are the key problem. Chap 11 is meant to allow a viable business to survive. An automobile manufacturer's operations, whatever the balance sheet shows, is basically financed from trade credit. And the design and investment cycle is financed from cash flow. An automaker won't be in financial trouble, unless circumstances have severely truncated that cash flow. Bankruptcy under Chap 11 can reset the expectations of creditors, but there's no means available to a bankruptcy court to generate a substitute for that massive cash flow, to finance a continuing design cycle.
That's not a judgment on the advisability of an automaker bailout. It is not a judgment, either, that Lehman's bankruptcy is better or worse, as an institutional procedure, for the financial markets. It is simply a judgment that Chapter 11, whatever its nominal promises, is not an option that would allow an automaker to survive and recover.
Preserving substantial operations in the future requires preserving the design and investment cycle for at least some designs, now, and, in the absence of cash flow to finance that, a government bailout is necessary.
If the government puts money into bailing out GM and not into smaller businesses who is going to be left that can afford to buy a GM produced car?
False Arguments for Bailing Out Detroit’s Big Three
I am surprised about economist and economic consultants advocating the bailout of the three large US automakers. Not so much that they want to spend federal money but the flawed reasoning as to why.
During a recent interview with a Michigan consultancy firm, the reasoning went as follows:
Q: What will be the effect of the big three going bankrupt?
A: If the big three car companies fail, including all those from related businesses, suppliers and sellers, we will lose 2.5 million jobs.
Q: Assuming that customers will continue to buy cars and not en masse start to walk or bicycle, wouldn’t the Japanese and German can companies sell the same number of cars otherwise sold by these three failed US companies and with the same employment after a transition period?
A: Yes, the same number of cars, but there would be much fewer jobs created than there would be lost.
This is an interesting flawed reasoning, but it could be true.
Suppose it is true. Then the other carmakers together would be able to sell the additional cars the public apparently wants for a price the public apparently wants, but employing much less people while making these additional cars. That again means that the other carmakers operate more efficiently, leading to lower costs en larger profits, which on itself is the reason they remain in business while the big three are going out of business.
The flaw in the reasoning is these 2.5 million jobs will not be saved (for long) and that the consultant was actually advocating to support inefficiency, without literally saying so.
Should the taxpayer support inefficient businesses? I think not?
It is a back-handed form of protectionism (although most of the cars produced by Japanese and German car makers are actually produced for more than 80% in the US), since it will worsen the survival chances of the more efficient producers, which rightly, in a competitive market, should be allowed to grab the chance to expand market share and buy up the worthwhile remains of the their fallen competitors.
In addition and as a consequence, if this US bailout would happen, foreign governments could support their own car industries in a similar way making it even more difficult or impossible for the Detroit three to survive, even after an expensive bailout and restructuring.
Bailout is no long term solution, but a short term stop-gap measure at enormous costs, both for the US taxpayers, foreign taxpayers as well as investors in successful car companies.
That does not mean that federal help could not be spend wisely in this case.
The big three should be allowed to go bankrupt under Chapter 11, without any financial federal or state support. The federal government has already given the U.S. auto industry $25 billion in low-interest loans, which is a waste of tax payers money, since they are unlikely to survive and will default on these loans.
After bankruptcy, some parts are likely to survive as successful independent companies and without government aid (European and Far East production and development, military, etc.)
If the federal and state governments wants to give long term help, they should ease transition for these workers to work for the successful Japanese and German carmakers by inducing them with some very limited financial incentives, to take over part of the bankrupt but usable parts of these US automakers and to set up their additional production capacity in Detroit.
Especially at this time, the federal government cannot afford to waste money on a grand scale! Instead it should be used for other "investments" more likely to lead to long term employment.
Vincent Dert
S Vader:
"Shouldn't government be easily understood by the general population?"
Assume from the quote marks that this is not your original thought, but might I ask; is the failure of the general population to understand their government a failing of the complexity of government or the failing of the general population to take the time and interest in learning about their government?
We have many posters here who seem to have acquired a pretty fair handle of many of the government's operations, while, at the same time, we have many who don't seem to know anything about their government's operations.
Openness, on the part of government or quasi-government agencies, is deemed a necessary requirement but "leadership" dictates that openness must be tempered with caution to avoid creating panic. If our populace was vested with sufficient knowledge to realistically assess all information available to the government and to process that information in light of possible outcomes to various solutions we would all be better off. Alas!
Truncating Shakepeare: "The Fault, dear Brutus, lies not in our stars, but in ourselves...".
Thanks for Explaining. I can't epress just how interesting this all is.
Too many including myself, have not paid enough attention to the Economy. When the Crisis came to a hightened state of emergency in September, I had no understanding.
My brain felt like that scene in the exorsist!
Now, I am finally understanding. Your blog is of great value.
Chef Sheila
Tis' I who lacks the understanding of the complexities of the Freddie MacPaulson lobby-state.
Vader answered that corruption resists simplicity.
A disconected public is a fat and happy public.
Lean and mean will be a "trickle up" socio-economic mushroom cloud chock full of toxic assets for one, and WMD for all.
Bruce Wilder,
Bruce, I agree with your points of the capital intensive design and investment cycles of auto manufacturers (having been in the industry for 2 years with Ford).
But you go astray with assumption a Chapter 11 for GM will not provide cash necessary for design and investment cycles, but a bailout will. A Chapter 11 can be constructed to be a bailout but excluding most of the "burdensome baggage" historically supporting the failures.
A Chapter 11 process cleans away much of the Debt so creditors and Shareholders are forced to take their share of losses upfront. Then the government pumps in cash, for say a 51% ownership level, sufficient to recapitalize the firm to easily meet its design and investment cycles as well as the some of the cost of operations until profitability returns.
The difference with a bailout is obvious: in a bailout taxpayer monies are being pumped into a firm that is overloaded with Debt, grossly poor performing Management and Shareholders who took a risk on poor management. Yet all these parties to disastrous results get
-- relatively speaking - the
"golden glove treatment" under a bailout. And as I mentioned in a previous post above, bailouts encourage others to feed on the government's benovolence while Chapter 11s more effectively discourage this exploitive tendency.
Don't always agree entirely with Dr. Reich, but he's right on the money about putting Chapter 11 bankruptcy on the table -- for example, for GM (and/or Chrysler).
Then an appropriate government capital infusion can take place perhaps involving a partial ownership by
workers with worker representatives being assigned to GM's Board of Directors. Germany has implemented (for a number of firms in different industries) this policy of outsider and union or worker representatives on Boards of Directors many years ago with equitable benefits for all concerned.
Bruce Wilder:
Cogent! You apparently know much more about the economics of the auto industry than I but I agree that bankruptcy is not the answer.
My concerns are based more on logistics involved in the Chapter 11 process. First of all, it is a Vahalla for lawyers. I'm not a lawyer basher but the legal fees generated in a bankruptcy procedure, on both sides, are astronomical. Then you have the machinations the bankrupt company must go through to secure available funding from their own generated cash flow.
Usually a Banruptcy Referee will be appointed, adding to the cost and further slowing the process. The ongoing, neverending, documentation will keep lawyers and accountants in jobs, but for those preaching about efficiency, forget that. Labor contracts can be abolished, as well as any other contracts that can be established as punitive to the bankrupt company. All actions are viewed from the perspective of the welfare of creditors. Shareholders and employees can do little but argue, they have no power.
Throughout, the requirement for a reorganization plan will eat up valuable resources, though I would suggest that a plan should be required for a bailout as well. Large companies filing Chapter 11 often secure additional operating loans (always amazing to me) but day to day vendors have no ongoing protection from eventual Chapter 7 so many of them, if they're smart will force cash transactions adding further inefficiencies.
To your point, if the government is going to push Chapter 11 they have to evaluate that position from a Chapter 7 standpoint and determine if they want to live with that eventuality. Notwithstanding the specifics of the auto industry, I would guess anyone entering Chapter 11 in the current circumstances has to be considering liquidation as possibly the only end result.
A bailout is certainly no panacea and surely there is no guarantee that it will salvage the companies involved. It would be a roll of the dice. The risk might end up producing little more than a return to where we were a year ago, although one would hope lessons have been learned.
I do marvel at the few who suggest that the auto market is the sole province of whichever comapny happens to be number one. The industry has operated for years with a variety of players, generally with profits for all. Toyota operated for years being somewhere downline in market share. US auto companies can compete in the current market structure but their ultimate success will depend on operating a lot smarter, taking into consideration many of the suggestions posed on this blog. Almost all options will result in fewer jobs and lower pay. Maybe not all bad but far from all good.
Either the sky is falling or we are experiencing cracks in the glass ceiling. In either case the response from government becomes paramount. Using prevailing options, normally available in the free market system, could end up creating fissures instead of just cracks.
For those promoting leveraged buyouts by employees, you might want to look at the history of AVIS for a few lessons.
Credit Default Swap Scam 101. Players: Insurance Company, Buyers of insurance, Some Event, Taxpayers
Buyers pay $10 billion and gets $100 billion from Insurance Company if Some Event Happens. Insurance Company goes bust. Buyer of lucrative insurance contract wants to get paid. Cries to DC. DC buys these contracts. THERE IS NO ASSET. THERE IS ONLY PAYING THE INSURANCE CONTRACT. The taxpayer gets NOTHING and pays to rich Insurance holder. The original $10 billion premium already paid the insurance companies CEO salary and lavish lifestyle.
That is the SCAM.
Frank:
In your scenario Chapter 11 is an unnecessary costly step. Why not just have the government nationalize the auto manufacturers, essentially dictating to the creditors the settlements to be made.
If the creditors know that the government is going to eventually come to the rescue they will be less inclined to settle on a reorg plan that cost them big time. Granted the courts are the final determiner but creditors in Chapter 11 get great deference.
The government cannot be viewed as just any other suitor seeking fire sale prices. They have a responsibility not just to the bankrupt company but to the shareholders and creditors and employees as well. Appearing to take advantage; scaring away all the other feeders, to take over sole control of the pasture will not be considered by many as a democratic solution.
Art,
No one is talking about the government engaging in "fire sale" tactics, e.g., .25 cents on the dollar). Your assumption that past evidence supports that Creditors will see a bailout with more fear or willingness to take a hit than under a Chapter 11 process is NEWS to me. If true, I concur with the need to evalutate the option of nationalization as was done in Sweden. But, remember, that Sweden instituted a grand nationalization of banks in 1992 only AFTER Creditors and Shareholders took a very big hit.
Whatever the approach here, I agree foremost with Dr. Reich's placement of Taxpayer Interests first when analyzing a Bailout vs. Chapter 11 approach. Taxpayers did not cause the failures but end up paying for them to the detriment of their future generations.
So I'm merely saying a full airing of the pros and cons of both approaches needs to be made without preconceptions. I'm guilty, perhaps, of advocating the hardest approach to Management, Shareholders and Creditors to set a firm deterrent precedent to the incorrigibly bad management prartices that last 20 years by firms like GM and AIG.
Wow, I think you hit the nail right on the head.
Jess
http://web-anonymity.vze.com
Frank:
Valuations for a 51% interest would be determinate for whether "fire sale" prices were involved.
My creditor concern is that if they know the government is going to step in post-Chapter 11 they will feel betrayed by their government if they are expected to take a huge hit to enable the action. Am speculating but I believe many will view it that way. Keep in mind the cultural differences. In the US the private sector tends to believe that dealing with the government makes the government fair game.
Don't disagree that all of the options are fraught with potential pitfalls. I do understand the desire to set an example, and tend to agree, but my experience in problem resolution suggests that first solve the problem, then later, shoot the wounded.
Clearly it is an unhealthy situation all the way around.
Art,
Solving the problem and "shooting the wounded" (I presume you mean the culprits) need not necessarily be mutually separate, as opposed to simultaneous, happenings. You are sometimes too kind. These are dire circumstances calling for dire lessons to those directly contributing to the crisis.
I saw your interview on Hardball, where you were asked for efficient US-made cars. Next time, mention the Saturn Vue. And, according to today's NYT, there are 140 US-made models over 30 mpg. One "bailout" that makes sense to me: Pay to turn over the oldest 30% of all federal and state auto fleets to one of those 140 models. In other words, assure the auto-makers of short-term sales, but only of efficient cars.
When are we going to start fixing the problem from the source?
1. Phase out the Fed and stop it from counterfeiting money. The "legalized" counterfeiting of money by the fed creates money out of nothing and thus inflation, which is the most regressive of all possible taxes. The first receivers of the new money (usually the wealthy) profit by it, while the last to receive it are left holding the bag (the middle class and working poor).
2. Trying to control the economy is like trying to control the weather. The economy is a non-linear dynamical system, which means that small changes used to control it (usually the wrong changes) can have hugely magnified and unpredictable consequences. Correcting the consequences creating even larger disturbances. Just let the market work to correct itself rather than raping the US taxpayer to cover the gambling losses of the elite.
3. You're right, chapter 11 is the proper solution for this. It's just that the people in power don't want to go broke. The rest of us are passing our time trying to protect ourselves from the mess.
I came to your site today exactly because I wanted an expert's opinion on this, and lo and behold, there it was, and you validated exactly my gut reaction to this plunder of the US government. But what the heck can we, the people, do about it?!?!? Nothing? We just have to sit on the sidelines and sigh as they dole out this unbelievable, undeserved largesse? And if Obama's so great, then why did he vote for the bailout???
The Bailouts are private.
Bankruptcies have public records. Everyone would get to see the crimes.
Both Ron Paul & James Rogers pointed this out from the very start.
I had to do a double-take, I never thought I would agree with Robert on much. But I was wrong. How about a little tough love here.
Do not bail out mismanaged companies!
Bail out the taxpayer.
How?
A "reverse sales tax". Give a ten percent rebate on each retail sale (excluding real estate sales). The U.S. Census Bureau reports that there were about five trillion dollars in retail sales in the year 2006. Ten percent of that is about five hundred billion dollars a year. That's about forty-three billion a month. That's about half of what we pay in Iraq.
A "reverse sales tax" would give poor people a non-tax boost in income. If people don't buy goods and services they would not get any benefit. Companies that don't file U.S. tax returns would not get a benefit.
A boost in retail sales would support employment.
The IRS could handle the details. The rebate should be on a monthly basis to help small businesses. A store could offer an instant rebate in goods and services, or they could submit their monthly sales statements to the IRS and get a tax credit or cash. A customer could then submit their sales receipts the following month to get a cash rebate from the store.
A monthly cycle would mean that Congress could repeal the benefit at any time!
A reward could be offered to people who report stores who unfairly raise prices to try to take advantage of the rebate for themselves.
Who is John Gault?
> Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.
By spending American's future prosperity? Drill baby drill! Wait, how far into the future have we projected this infinite growth you appear to believe in? If there's no growth, what happens to the bail out model you endorse, whether it's top down (Paulson and friends) or bottom up (you, Pelosi, and Frank)?
The more I read from you, the more you talk me out of being a progressive. While the noose is already around our necks, you argue for another noose, so long as it fits the correct dogma.
No, we'll need something more radical than your patch-it-up solution. It starts with the indictment of Paulson and Bernanke.
Please don't accept a role in the Obama Administration. I want him to succeed, not to be the problem that is the solution.
I believe that one of your fundamental assumptions is incorrect- financial institutions do not have the option to reorganize under bankruptcy protection. Once the SIPC takes control, which is what happens for an financial institution in bankruptcy, their only option is to liquidate.
...hank paulson, alan greenspan and few savory others ought to take a long walk off a short pier.
that would be a highly constructive 'step' forward in this economic mess.
Is there anyone on this board who is planning to buy a GM product? The Chevy Vault is late to market and priced like a luxury car.
Is it time to nationalize GM and just have them supply government fleets and workers starting with Congress.
QUESTION: Why not bring back the write-off on credit card interest? Might actually help consumers buy new cars.
It truly has not taken long for Mr. Obama's credibility to go on the line: He may think he has an IOU to the UAW and sure enough he might. This is not the time to play that card however. Bailing out the auto industries is beyond absurd. Let GM, Ford and whoever else crash and burn. These companies have consistently been out of step with consumers for decades. I remember a time during the Reagan years when rather than encourage Detroit to build a better car, there were efforts to prevent Japanese imports from coming into the USA. Now that was some kind of brilliant!!! So rather than improve what we have, keep out what we know is better.
And so here we sit again~It is a shame so many employees will suffer~so many families would suffer by not bailing them out but it's delusional and cruel to lead people on as well.
I have a bad feeling about Mr. Obama's judgement on this one. Let the three big auto makers declare bankruptcy. Let them go the usual route when any company fails due to greed, lack of vision and being out of touch with it's consumers.
Wouldn't it be a sign of good faith and more beneficial for the U.S. taxpayer if large bailouts had restrictions on employing lobbyists and advertising costs? A collateral loan in the interest of society since it is financed by society sounds fair to me.
Doesn't anyone remember the lessons of Duke and Duke when they tried to corner the frozen orange juice market in "Trading Places."
All transactions are settled at the end of the day. There is no bailout, they get liquidated.
The most I have ever paid for a car was 10,000 dollars, it was a 7 year old Acura RL. Before that the most I paid was 5k for a Jetta.
I look at new car prices like these things come with bags of cocaine under the dash or something, never even considered not paying cash for a car. Never would consider spending more than 10k again either.
But my 11 year old Acura has only 100k miles, so its good for another 10 years at least. I still haven't taken it in for its first tune up.
If GM doesn't have the competance to build a car people will buy, then they will go out of business. Isn't that why America is so great?
Let them fail, not be bailed.
Frank:
"Shooting the wounded", with which any consultant should be familiar, is targeted only at the culprits but since shotguns or automatic weapons are used, invariably we catch a lot of innocents too.
My experience is that a Bankruptcy Court is highly unlikely to get involved with demanding or forcing personnel cuts, especially the CEO and other executives. A Bankruptcy Judge might freeze any bonuses and/or restrict executive pay but much of the impetus for that would come from the creditor's committee.
The creditors are not likely to push for changes to operating management during a Chapter 11 process unless they consider current management totaly inept. It is in the creditors best interests to have the company run during Chapter 11 by the best experienced hands available. Creditors will be concerned only for salvaging as much as they can in a reorganization and changing management at such a perilous time compounds the difficulties in creating a reorg plan and keeping the firm operating. Only if there are major creditors such as a Kerkorian or Icahn, both of whom love to exact pounds of flesh, would you likely see any punitive actions attempted against current management.
The failings of current management were far more related to strategic than to operational errors. Though they were losing market share in personal autos, they were still leading in truck and SUV sales before the gas crunch.
If the creditors do not expect any special settlements in lieu of an eventual government investment in the reorg'd company they are going to push for the best deal they can get which could involve a creditor buyout or, more likely a forced liquidation. I understand the argument for forcing them to Chapter 11 but you add a lot of new variables, legal and otherwise, to the dilemma. In Chapter 11, as I have stated, the creditors become much more powerful.
The current buzz is that were GM, Ford, Chrysler, all or some combination, forced into Chapter 11, a whole cascade of Chapter 11 filings from feeder industries, could commence. The US Bankruptcy Courts have limited resources and would be overwhelmed by a number of sizeable Chapter 11 filings.
In Chapter 11 the Court, though having powers under the law, generally operates as a mediator between the company and its creditors.
That said, a bailout, in the form of a loan, is almost as perilous. Any estimate of the funds needed to keep GM, et al, afloat is predicated on an estimate of the economy turning around and car sales picking up again. It's further encumbered by the fact that new, smaller, more fuel efficient cars will provide smaller profit margins which makes a changeover not only a question of timing but of ongoing profit viability as well.
Perhaps less risky, albeit maybe minimally, would be an investment via dividend yielding preferred stock, which would aid cash flow for the receiving company and would put the government in a more amenable situation should a liquidation become necessary. They would still be secondary to creditors in that eventuality but were they a creditor in a Chapter 7 proceeding, the government's size and influence could cause mayhem to the Court and the other players. The stock scenario would also suggest the possibility of gain should the troubled company turn around.
Given all this, perhaps dart boards are called for.
Art, your wise man, Henry Paulson says that the facts have changed and so now the bailout must change.
What has fundamentally changed over the last couple of weeks, and why didn't Paulson anticipate that the financial mess would completely change into a new kind of unforeseeable financial mess?
I don't see what has changed. It seems to me that if all the facts have changed, someone would be remarking on the brand new crisis.
Is perhaps the case that a new bigger and badder emergency has emerged and everyone is keeping it a secret?
Amazing. All those words add up to throwing a dart.
GM missed it's opportunity and shall fail.
I don't want all my tax dollars to go to lawyers and wordsmiths who in the end will just make matters worse.
I want the banks to fail and be liquidated and any company that can't keep up with the current of American consumption to fail as well.
I don't care how many millions of people lose their jobs. Bailouts just enabled bad business practices.
I want GM to be punished for ignoring the tide of efficiency that Toyota responded to.
LET THEM FAIL.
Try reading "Small is beautiful." EF Schumaker 1973
Economics as if people don't matter.
Robert: What is your impression of Hank Paulson's latest gambit: bailing out credit card and consumer lenders? It seems to me that consumers aren't going to borrow their way out of trouble. Borrowing generally gets them INTO trouble, doesn't it?
in my opinion, a big part of the issue is that america has lost its way on prosecuting anti-trust. if the market fundamentalists truly want to let the market work, they need to understand why it's important to pro-actively prevent companies from becoming 'too big to fail'.
break up the big financial institutions perhaps by state) because we're only more at the mercy of these larger remaining companies. then provide some kind of relief for first-time home buyers, because we shouldn't be helping 'flippers'. perhaps we could also create some special classification in the bankruptcy code to help those caught up in the craziness. then force the banks to price the remaining bad assets and account for that publicly. many will fall, but that's the breaks.
Dr. Reich, cc: Art, John
I.Auto Industry Bailout
Thomas Friedman in today's IHT makes the same argument you do for a very hard government position before providing any funds to a GM or Chrysler ... i.e., as I've also said, a pro-active, upfront agreement is a prequisite laying out terms that Management and Board must depart; Shareholders, Suppliers and other Creditors must take a big hit; any car firm that gets money must commit to fast track near-term production of compact, fuel efficient (hybrid-electric) cars. To repeat, such agreement conditions should be reached BEFORE one cent of taxpayer money is infused in any auto firm.
Healthly recapitalization of an auto firm's balance sheet can be achieved under a Chapter 11 or a Nationalization approach. BUT at all costs strict conditions cited above need to first be set to protect the interests of taxpayers who are being asked to pay for years of sloppy "brain-dead management and innovation in the auto industry" ... with GM perhaps winning first prize.
As Friedman quotes Bob Lutz, GM's vice-chaiman: Bob Lutz has been quoted as saying that hybrids like the Toyata Primus "make no economic sense." And in February, D Magazine of Dallas Mr. Lutz was quoted as saying that global warming "is a total crock of --------." As Friedman concludes, "These are the kind of guys taxpayers are being asked to bail out."
II. Alternate Fuels (Off-Subject)
My apologies for going off-subject for a minute.
In an earlier exchange with Art Layman, I described Holland's advanced research to convert Algae to oil which has unlimited possibilities and is expected to be commercially viable as a green fuel for cars and other uses within 10 years.
I forgot to mention an equally exciting development with CO2s from coal in Holland that's expected to have a highly positive effect on agricultural production by 2012. Some variation of this development may have interesting applications in the US given our exceptional abundance of coal reserves in the Northwest US and need to satisfactorily solve problem of CO2 emissions when converting coal to a liquified gas.
To summarize this development briefly: Holland is now building a 1150 mega watt plant to be up and running in 2012 that does the following with CO2s:
(1) Coal is broken down to a fine powder which is then blown into a furnace and burned.
(2) Three gases come out: CO2s, CO and NO2; the CO2s are removed and pumped into the ground.
(3) The CO2s are then subsequently sold and piped from the ground to farmers for use at night only for the vegetable plants in their huge greenhouses; the vegetable plants then remove the CO2s and emit oxygen into the greenhouse making the vegetables grow much FASTER.
(4) the COs and NO2s are an exhaust that technology sofar has not found a use for
(5) Smaller plants have been in operation to test the whole process and now the Dutch are putting on stream their first giant plant of 1150 mega watts.
American engineers may be aware of this development. Montana has huge reserves of coal ... perhaps enough to meet US needs for the next 150 years. I know that different technologies for removing, storing, and (I'm not sure) recycling the CO2s -- as has been done in Holland on a small scale to date -- are now being studied in the US. Conclusions from these various studies on what to do with the emitted CO2s from coal are expected by 2012, if I am informed correctly.
The goal is to take the potential huge supplies of purified gas to markets throughout America within next 10 years. But if an ingenious way could also be found to make the CO2s commercially viable, as Holland is undertaking to do, this might measureably reduce the cost of converting coal to a liquified gas.
SUMMARY:
Meanwhile, by 2012, Holland will have a found a way to commercially convert hazardous CO2s arising from coal processing to a positive use of sharply accelerating the production of farm products in greenhouses.
This and other ingenious farming innovations make it no small wonder that Holland (one-half the size of my home state, Maine) is
2nd in agricultural production to the entire US!
A fascinating amalgamation of energy innovations and conservation actions are going on now at full throttle in Europe (e.g., Germany on solar; Holland with wind energy, coal CO2s used for greenhouse farming and oil extracted from algae as a clean fuel source; Sweden with sewer waste converted to a green fuel source, etc.).
Cumulatively, I believe these alternate energy developments are really going to amount to something in 10-15 years time. They will ultimately replace the gaps in fossil fuels (which pollute the air) as supplies of latter decline and demand for energy rises. Hopefully, they may even reduce recourse to more nuclear power plants on this frail planet.
Hate to burst your bubble Frank but ExxonMobile runs the government.
Sure all those ideas work in Holland because they are a free economy where innovation is part of the recipe for sustainability.
In America we keep markets alive by whole-scale slaughter of mideast countries and taxcuts for military weapons producers and delivery systems.
Our nation is run by oil thugs and money-launderers. Paulson and Cheney, sitting in a tree, with night-scopes trained on their oiligarchy.
Back in the 1970s we had a taste of what was coming, but the American people were asleep at the wheel.
Now the wheel will come to a grinding halt.
Paulson has shown himself to be highly resistant to accepting bailout packages with strings attached.
I think Pelosi will get GM's bailout package pushed through, and Paulson will be successful in insuring that the deal doesn't have any restrictions on what the money will be used for.
So GM will continue as it is, while the taxpayer covers their red ink into perpetuity. At least until some other factor comes into play.
GM is a highly inefficient corporation, trying to build vehicles that aren't in high demand. They can't stay in the black without taxpayer welfare queen payments.
Perhaps it's time to do what has been down with other large entities in the past. Nationalize GM, split it into parts and sell off the non-military plants. then put the employees that would be fired on an extended unemployment program. Or just roll them over into government jobs and pay them to do nothing.
The government did nothing to help me when it paid corporations to ship my industry to India, and I was ungainfully employed for several years, leading to bankruptcy.
Should I feel pity for GM, and make sacrifices to keep it afloat while it engages in crappy business practices? Should I worry that executives will have to trim down from $500 lobster dinners to $100 T-Bone steaks?
When I couldn't find high tech work, Bush preached to me that I should go back to school and learn a new trade. Perhaps it's time for all of America to find a new way.
Evidently we're entering a new era where Americans need to find a niche that doesn't involve technology, and that Mexicans won't do?
Though Art likes to tell me that the far future is bright and that we have wise and caring men fixing our nation's financial problems, I don't see a reason to believe in it.
What the US is going through looks just like an IMF restructuring. The only nations that survived their austerity measures are Russia and Venezuela. Both did so because they had a nationalized oil industry and they used the profits to pay off their government debts.
The US has no such option. Nations that gave up everything to the banks at the IMF's behest, are still economically damaged and most have no real economy, or they are in a depression or alternate between depressions and inflationary recessions. They all ended up owing the banks, after giving the banks everything they owned, and still owe them.
Traditionally economists have assumed that the US is immune to predations from the banks, because the US was the top predator. But in the wild, when the top predators get old and slow, they are often taken down as prey.
I agree. The Bush Administration are a bunch of criminals.
I've said this before. I hope Obama appoints a tough, veteran prosecutor as Attorney General. I hope he gives that office the resources to go after most of the key criminals that created this epic Ponzi scheme.
He needs to do this because 1) it's the right thing to do, 2) the Republicans(and the MSM) are going to start blaming him for the failed economy 3) this will divert attention while he focuses on getting the economy on track and 4) you can't restore trust until you REMOVE many of the criminals who are still in charge of our financial/housing sector.
And that is the key point. Much of housing/financial/business sector has become something like organized crime-facilitated by Congress. We have become a South American style country.
I'm hoping Obama and his aides recognize this. Because if you don't, none of your solutions will work.
To all the bashers of US manufactured autos out there:
The last three cars I have owned have been an Olds 1988 Cutlass, a 1992 Pontiac Bonneville and a 2001 Buick Regal, all bought used. I have never owned a foreign manufactured car although my American cars have had many foreign parts. The Cutlass and the Bonneville, I got 250,000 miles out of with minimal major repairs and sporadic routine maintenance. I'm not real good at following routine maintenence guidelines. My Regal, I bought in January 2004 with 38,000 miles on it and I know have 170,000 miles on it. I have had it tuned up once and I change the oil every 8 or 9,000 miles, whether it needs it or not. All in all, over the 5 year history I might have put $1,500+/- in major repairs to it. None of my cars were in need of major refurbishing when I got rid of them, I merely decided that I had pushed the envelope far enough.
My point is that the hullabaloo about huge quality differences between American cars versus foreign ones is somewhat smoke and mirrors. It has become part of the American lexicon and as such has been perpetuated much the same as the "I cannot tell a lie" story. I have had friends and relatives who have owned Hondas and Accords and Volkswagons, even a few who have had Mercedes and BMWs, and they all have horror stories of one kind or another.
Letting GM or Ford or Chrysler fail is surely an option but let's be sensible in our condemnation. Their management has been short sighted strategically. No doubt they have made operational mistakes as well but am not sure those are any greater than the foreign carmakers.
I am a strong proponent of US corporations adopting more social responsibility. Of being concerend more about their communities, the employees and societal welfare in general. At the same time I favor a social responsibility on the part of US citizens to, where possible, buy American and protect our jobs and our society.
We can holler and shout about how government and business and Wall Street mavens have caused all our current problems but best we look in the mirror. We elected our government officials; we buy the goods these dastardly businesses create; we heard few complaints when the Dow was rising from 9,000 to 14,000.
We tend to be foul weather citizens. When things are going well we sit back in our recliners and watch the ball game or the latest reality show (absurd). We beseech the government to leave us alone. Don't raise taxes; no matter that 9/11 caused a huge increase in Homeland Security spending or that the wars, granted an abhorrent mix of errors and misjudgments, by the officials we elected, are costing us hundreds of billions; the government should figure out how to pay for all those without affecting ME. Cut back on Medicare; trim SS benefits; severely cut back military spending while we're at war; just don't raise my taxes.
Regulations? Damn my 401K is doing great. My mutual funds are returning great profits. Don't mess with Wall Street or the banks because they are setting the stage for all my wealth accumulation. That idiot Greenspan who held prime interest rates too low for too long, shame on him. But during that period, as 30 year fixed mortgage rates declined below 6% for the first time since the mid 1960's, we didn't hear much from the public about those indamnable low prime rates.
The lesson folks, since we are the ones suffering from the learning curve, is get engaged, stay engaged. Continue your education, not necessarily formally, but read, read from all sides of the spectrum. Until you are satisfied that a given source is reliable, view them all with a grain of salt.
With the Internet we can accomplish in an afternoon the same level of research that would have taken days in the library. The only drawback is misinformation and it pervades the world wide web. That then requires us to think, not a great American past-time. You don't have to be a college graduate to begin to read and learn via the web. Granted some who have degrees might pick up some subjects more quickly but a degree, of any kind, is not a prerequisite to learning. Besides, those of us who traverse the blogosphere, run across all sorts of well educated folks who don't have a clue.
If we continue to indulge our senses rather than our brains we will continue to be susceptible to the aura of sound bites; to suggestions that it's our money and we know best how to spend it ( when was the last time any one of us repaired a bridge?); we will continue to be drawn to election choices based on sharing a beer with rather than debating an idea with. We will continue to confuse intellect with elitism. If someone talks over our head, we want to discard them rather than try and learn enough to disagree with them.
We have become wimpy, lazy, our work ethic has all but disappeared. Those who do work very hard at two and three jobs are often the least of us. They struggle because the rest of us sit and refuse to take responsibility for the success and direction of our country. We rue the greedy, selfish CEOs who are bleeding the system, and rightfully so. In a larger sense, what are they really doing? The same as the rest of us; looking out for number one. They just have access to greater reward resources than the rest of us.
Geez! I feel I should close with a: "Hallelujah! Praise the Lord!
Art says, "No doubt they have made operational mistakes as well but am not sure those are any greater than the foreign carmakers."
Can you provide any examples of foreign car corporations making mistakes, that bankrupted them in such a short time frame?
What you say sounds pleasant, but I can't think of examples that make it true.
Art said, "We rue the greedy, selfish CEOs who are bleeding the system, and rightfully so. In a larger sense, what are they really doing? The same as the rest of us; looking out for number one. They just have access to greater reward resources than the rest of us."
And they are held to different legal standards.
They are the American Royalty. It is our duty as taxpayers to keep them wealthy, no matter how poorly they manage their finances.
Art,
You rarely make very foolish comments, but I'm afraid Weaseldog has caught you on a couple of obvious ones amidst some very downright good satire on your part!
wease:
Welcome back, you have been sorely missed. Well missed anyway.
I am astounded at the news media and their heralding this change in direction. Damn, right after the TARP was passed Paulson, et al, made the decision that buying bad assets was not the right idea. There is nothing new there, we just got an update that expressed it publicly from the horse's mouth.
This whole fiasco is moving at warp speed, driven to a great degree by paranoia. The continuing economic decline has lead us, even though a slight freeing up of commercial credit, to few customers for borrowing.
My sense is that Paulson and the others are using the stock market as the barometer for success. They are taking actions hoping they will reflect promise via the stock market and thereby lift everyone's spirits. Reasonable, though possibly foolish. The stock market is nothing if not irrational.
As for Paulson; the psychology of a turn around, which is really the necessary ingredient, would be aided better by a speaker with more salesmanship ability, perhaps a little more of a positive emotional appeal but, alas, you get what you got. I still have no problem with his intellectual capacity for addressing the issues but we know little about the "man behind the curtain". How much of what Paulson is attempting is Paulson and how much is Dumbya and his cohorts?
We are in unchartered waters here. There are parallels to the Great Depression, but the times, they've been a changin' for many years. Is he making the absolute bst decisions? Who the hell knows. Who the hell is qualified to know? Dr. Reich has good ideas, as do others, but no one has the perfect answer. All the solutions I've seen proffered have holes, some big, some smaller.
We're in the boat together, the seas are raging. We do know that making all of us Captains of the boat is not the answer. Hopefully Obama will come up with an even better manager of the effort; if we can only survive until January 20th, 2009.
Second guessing, criticizing are worthwhile endeavors. A spark here or there might start a fire to warm us. The blogs, if anyone reads them, besides we fanatics, can be helpful. What must always be in the forefront however are positive approaches. Naysaying is a valuable mechanism but unbridled it can lead to despair and despair does not tend to solve problems, only exacerbate them.
wease:
Realize you're not an English major but notice the difference between strategic and operational. Communication works best if we're on the same page.
Art, in light of your last comment, I might have to re-evaluate my impression of you as a stodgy immovable object.
It seems your position is changing.
I respect that.
wease:
Missed one of your statements. I have no doubt that those involved in solving this process are privy to more info than they are expressing. I have stated frequently that one of the first premises of leadership is akin to the Hippocratic Oath; "first, do no harm". Information that could lead to further panic if publicly expressed does not aid the situation. As with all institutional decision making, those charged with resolution responsibility, often keep some information from the masses if that information appears to be more damaging to the process.
Despite the call for urgency, there is way too much hanky-panky going on with this lame duck government to trust that sound decisions are being made.
I say wait for January 20 and if the automakers can't hold on that long then maybe they are salvageable in the first place.
On a related note, I am disgusted that the Big Three automakers have been fighting increased CAFE standards for decades and now are asking us the taxpayers to help them build more efficient cars. You reap what you sow.
wease:
You're getting way ahead of me again, dammit!
I don't know that I have changed any positions. I am taking somewhat of a devil's advocate approach to all these issues. I have ideas and possible solutions, or at least additions to presented solutions, but I'm not sure my ideas are without exception to good sense.
I am by nature, or professional experience, a naysayer. I tend to believe that is a valuable role in problem resolution but I do understand there are limits. At some point naysayers need to get out of the way and let doers take action. At that point our best retort will be "I told you so", unless we must end up saying: "You were right".
Art, I understand.
Paulson lobbied hard to set up circumstances in such a way to create this crisis.
He may not have done so intentionally, but he is one of the more public figures at fault.
Now that he's taken a crap on the dining room table, has to cover it up, and try to deflect attention away from the smell, while lobbying to get paid to clean up his own mess. But in the meantime he's smearing it around the dinign room so we can all take responsibility for it.
The turd on the table might have some sparklies, or be seasoned with cinnamon or nutmeg. We can't be sure of all the details. Only Paulson knows what he ate the night before. But I think we can agree it's still a turd.
I disagree with you that the people who made the mess are necessarily wise, thoughtful and kind, ad are the best people to clean it up. Especially since many of them have a decades long reputation as having a reverse Midas touch.
Now maybe these people can take this turd, and turn into a nice batch of brownies. Maybe. But I doubt it.
And my attitude will change nothing. Happy thoughts won't fix this. I'll give myself the liberty of cracking a smile over this fiasco when I see positive actions, resulting in positive results.
No country has solved the mess we're in, by doing what we are doing. Many have tried. I don't believe that we're so exceptional that financial disasters don't happen here, though I believe that if someone told you five years ago about where we are today, you'd laugh at them for being a pessimist.
I know this because just a few years ago, I was writing that the coming mortgage disaster would result in massive bailouts, and I was laughed at by other folks like you. After all, I'm a pessimist that thinks that history rhymes.
Paulson is doing what other failed nations did. It didn't work them, it won't work for us. It doesn't matter how many happy thoughts you hold.
Once we change course, it will still take years to recover stability in our economy. I don't believe we'll change course for at least 4-6 years.
Dr Reich I for one remember your talk to the Commonweath Club a few years ago. You answered a question about the prospects for GM. You indicated that the outlook was not good. I sold all my GM the next day. Thank you for you insight then as now. I look forward, as ever, for your thoughts.
I'm doing what I can. In the last week I have dug a 40 by 100 foot pond in the back, and am buying up as many fruit trees and berry bushes as I can find.
I know it sounds stupid, but what if none of these fixes really matter.
I will be getting guns and ammo next. Lots of ammo.
I have to admit I get lost in the details of businesses I am not familiar with. I am pretty certain, though, that everyone (including the richest people in the country) is better off when the middle class is strong. In these desperate times our government has to protect and work for the middle class --not the rich. Where are the voices in the halls of power calling for middle class values?!
Frank:
Not exactly sure which "foolish" statements you refer to but I have offered at least one retort.
No doubt I am not exempt from foolish statements but often if I make one it is more a problem of communication than of thought. In the current dialogue I see nothing that I have said that I need to take back. To wit: If a foreign car maker issues a recall, that represents an operational error; design, manufacturing, whatever. Is anyone suggesting that foreign car makers have not had to issue recalls? Fewer? Less horrendous? I have no idea. The point was that in operations on a scale of auto manufacturing errors are not uncommon. Dumb strategies far less common.
There is much haranguing here that would suggest that GM and other US car makers have not been successful in recent years. Not necessarily true. Thye could have been much more successful had they embraced an ongoing CAFE increase, on their own. They would have been better positioned had they attempted to create a market for small, fuel efficient vehicles rather than nuturing a market for gas guzzlers but that gets you to a segue away from what is cultural in American business. Not arging that it is smart or best, only that American business has operated for years on the premise that a dollar of profit in hand is worth two dollars of profit in the bush.
wease:
Well your analogy destroyed my appetite for lunch.
I have serious doubts that any of the lobbyists, Paulson and others, lobbied for eventual destruction of our whole economy, intentionally. They were making money and saw a horizon where they could continue and likely didn't see what other possibilities were out there. For those of their ilk there is never enough acquired wealth to justify killing the golden goose. Admittedly the real sin was that these are bright people and they failed to see what turned out to be a very likely possibility.
An aside and certainly not a causative factor but none of this fiasco would have been probable were it not for computers. Computers enabled the use of complex mathematical models, creating results that would take man-years to calculate by hand. The beta phases alone would have been costly enough to render them cost ineffective. Just a thought.
Can appreciate your disdain for the midwives of this dilemma but, again, the culprits are not those who took advantage but rather we, the citizens, who allowed ourselves to be taken in by a bunch of politicians who believed they had a better way. The idea of "trickle down" was always, in the vernacular, "voodoo economics". It was a shroud that would return us to a Gilded Age. As I keep repeating myself, the quest for wealth will always seek the path of least resistance. When opportunities exist for investing in pieces of paper and realizing phenominal gains, you can forget starting up businesses that involve a greater number of variables to overcome to achieve success.
As the pathway continues to acquiring wealth via the new vehicles, regulatory obstacles get in the way. It is then argued, not illogically, that we don't need these prohibitive regulations for why would anyone undertake a level of risk that could bring down the house.
Low interest rates; oh God those creatures of mass destruction. Like most things only if they are abused. By taking out second mortgages and refinancing mortgages we all entered the world of financial leverage. And we did it ignoring the fact that our wages were not keeping pace. Did we bother to look? Did we bother to assess what was really taking place? Of course not. We were too busy with our new TVs, our computers, our new cars, our kids soccer games, all made available to us by those we now want to condemn as criminals. If you knowingly take poison from a person, then you eat it and you die, whose fault is it that you died?
Many here are calling for lynching the bankers and CEOs who milked the system. For the most part they did nothing illegal. All they did was better understand the rules and then made the best of the opportunities the rules made available. Are they to be condemned for acquiring the credentials, educational or otherwise, to be a player? Once a player were they supposed to exercise a stronger allegiance to communal welfare than the rest of us were doing?
Our founders stated long ago that the success of a democracy was entirely dependent on an informed populace. We, as a populace, decided to delegate that responsibility to a handful of people. We didn't have time to be bothered. These people, these delegates are not bad people either. Many of them set about, working with the knowledge and understanding they possessed to make our world a better place for all. Sure, some of them caved in to the God of the almighty dollar. It is a human failure. Meanwhile, we went to sleep secure in the notion that we have elected daddies who will protect us in our vulnerable state. When the next election rolled around we looked and thought; hey, I've got plenty of "stuff", I've saved some money for my kids education, I've got a Parka to keep me warm. My delegate must be doing a good job; pull the lever for him again. Sometimes new politicians pop up promising a bigger golden goose and they seem rational and very likeable so let's pull the lever for them.
Meanwhile, Dr. Reich, in the company of many others, are telling us that this is the wrong road. Things are not as those guys say they are. Listen, pay attention, or there will be hell to pay. Blissfully we ignore the pleas. To engage them would require thinking, it would require us to take a hard look at our euphoria. I'll worry about that tomorrow, in our best Scarlett imitation.
Repeating again, Pogo was prescient. That does not imply that perhaps you were not. It is, however, often the case that the purveyor of doom, even though correct in predicting our fate, is not the vehicle upon which to depend to deliver us from our fate. Doomsdayers seldom look for silver linings.
Now I am not an America is infallible cheerleader. I full well know that we have botched innumerable things in my lifetime. But I am also not inclined to look around the world, especially at countries who have never achieved the successes we have, and draw linear parallels to their plights in similar circumstances. Though not necessarily the best, across the board, we are unique, and few, if any, countries around the world, can point to as many successes as we have enjoyed when faced with hard times.
Your Russian comparison is way off target, they have never had an economy or even a functioning country to compare with us. Argentina, while having had periods of a decent economy, their government structure was never as sound.
I made an art piece with an old wagon wheel and an empty gas can sitting next to a gravestone marked SUV.
In the larger course of history, we need to recognize what is obsolete and move ahead of the curve. Not just be sucked into a vortex of fear, where we cling to a past that sucks us under.
Art said, "Can appreciate your disdain for the midwives of this dilemma but, again, the culprits are not those who took advantage but rather we, the citizens, who allowed ourselves to be taken in by a bunch of politicians who believed they had a better way."
When did you get to vote on these policies? When did you get to choose the lobbyists?
Maybe you're responsible for this mess, but I was never consulted. Don't start pointing finger at me and argue that my culpability is equal to Henry Paulson's.
You may not remember it, but the USSR was a people called, a Super Power.
I know that you believe that America is immune to economic consequences of bad policy. That bad things can only happen in other countries. I often wonder, when make such arguments, do you read the papers? It seems that you have blinders on. For instance, have you seen the jobless number or foreclosure numbers for October? the tone of your argument suggests that either you haven't or you see them as a positive and optimistic development.
I don't believe that Paulson set out to destroy the US economy. I think he's a short sighted and greedy man that in concert with other short sighted and greedy men, bribed our politicians into setting up really stupid legal and financial structures.
I think that Paulson is like you. He believes that no matter how much of the foundation of the US economy you rip out, the USA's economy is so strong that it will not collapse.
So you and folks like Paulson laugh at those of us that argue that America was strong because we worked so long to keep it that way.
In a house you can't rip out the framing studs and expect the roof to hold. Likewise ripping out the policies and legislation that kept the bank system stable, must bring down our economy. Those things were what made us strong.
wease:
Keeping up is becoming a real pain.
It is not that the wealthy enjoy different legal standards, rather it may be the fact that they better understand the legal standards and just how far they can push the envelope. Hell, its the way businesses operate daily.
It is also the case that they have access to better lawyers. Most laws, those involving white collar type crimes, are not clearly delineated. They are not full of "shall nots" like the Ten Commandments. Often to prove illegal activity, proof of intent is necessary, a tall order.
We are not being asked to bail out the wealthy at this point. Many of them will benefit to a larger extent but we are being asked to bail out our economy and thusly our jobs and our own welfare. We did not create the mess but even if you did not start the fire that is engulfing your home does that mean that you want to sit back and watch it burn? During the good times we, again, sat back and enjoyed watching the game, even playing a little. Now we find out that the bus driver who brought us to the game was unlicensed and we have no way home.
Oh we pissed and moaned about excessive executive salaries but how many of us started a union movement in our plant? How many of us wrote letters to the editor at our local papers and pushed them to keep the issue in the forefront. That issue tended to ebb and flow usually around annual report time, making headlines and then disappearing until next year.
If indeed there were law violations we will see some prosecutions. Abramoff functioned for years until a case could be mounted against him. We have recently been prosecuting murderers from the Civil Rights Era. Justice can be slow.
I would doubt that we will find many who actually violated laws. Try as we might we have never outlawed stupidity.
American Royalty? Maybe. Again, when times are good we tend to hail our business leaders. We seek to emulate them. When things go sour we want to stone them. They were in charge of the keys to the vault and they lost the keys: "Off with their heads". As a society we really can be pathetic.
As usual, you said it all. I just hope Obama is listening. This has gotten crazy and I understand the concern for the automakers but since the '70s it's been clear they needed to improve fuel efficiency but they fought laws even in the states to force that. They wanted the government to stay out of it-- freeamrketplacedontchaknow. Now they want government to fix it for them. Apparently for them all, capitalism with no strings is only good until you run into trouble?
Hilarious that people are here commenting about the Fed acting responsibility to the American people. They don't have any affiliation with our government, nor any responsibility to them or us, ignorant sheeple.
wease:
Your drifting off the planet agin.
I did not vote for one policy but I had the opportunity to vote for those who favored or opposed those policies. It is also really easy in hindsight to look back and second guess decisions that were made at the time that many capable people felt were good decisions.
Politicians, as you and me and all manners of business people, are not infallible. What appears a good or impotent decision today may look horrendous tomorrow but we don't have perfect foresight.
This country has progressed, with fits and starts for many years. The little people like you and me have been instrumental and influential in that success but true success generally came from the risk takers. The Henry Fords, the Rockefellers, the Morgans, the Vanderbilts, they were the ones who set the stage for us to play on and they were as greedy and selfish and dastardly in their heydays as our business leaders of today.
You may not have voted but how many letters or emails did you send to your Congressmen, your Senators, even the President? How many phone calls did you make to them? How many townhall meetings held by your Congressman did you go to and ask questions or give arguments? Playing the role of local pessimist with your friends don't cut it. You present your arguments in such a manner that it is hard not to take you for a pessimistic fool.
I read the papers, I see the unemployment rates, I see the foreclosures. I have also seen similar statistics before. These times may be more harrowing but at this point they are not yet catastrophic, though portend they do. I am also aware that there is no magical light switch to turn back on or off. There is no magical wand to wave. Actions are needed and actions are being taken. I would agree that haste is creating a high probability of questionable actions but sitting back and watching ain't gonna help either. The curreent situation would be like trying to write a program where the inputs and desired outputs are changing as you write. There are no rules, no guidelines, that say, given a lack of trust in banking, go to subsection B.
We are replaying at this point a familiar game. The economy tightens up and employers layoff people and the economy tightens up more. To Frank's point, if unemployment benefits were much higher and therefore premiums were higher as well, the tendency to rush into layoffs might be a slower phenomenon. Yahoo, announced they were laying off, I think, 1,400 people, because their last quarter profits were only $54 million. We should all have such a problem.
The higher unemployment benefits would also keep the economy afloat, even though leaking, a little longer, allowing time for brighter views to return. Agree or not, the crux of this problem is mostly psychological. "If you believe you can or can't, you're right."
This whole problem was not necessarily a given. It is possible that the banking industry could have weathered a large number of foreclosures. But along came that brief window of unusually high gas prices and many naysayers, with credentials, suggested this was it, we'll never see gas prices below $3.50/gallon ever again. Industries around the world were losing profit margins through increased transportation costs they couldn't pass on. Trucking companies were beginning to falter. Those with contracts with independent drivers were unwilling to pay the drivers the increased costs tranferring the burden downline. Th whole mood, outlook, of the economic sector turned sour, negative, and soon everything became a self-fulfilling prophecy. All of the sudden the housing crisis took on more import and the horror stories made it seem like a year long Halloween.
As attempts are made to stem the tide the tide keeps swelling. Actions that the Fed has taken might have helped in a slower time but in the avalanche they are meaningless.
We know that I have a far differing view than you. I have learned over the years that problems are generally opportunities and perseverence with solutions has in the past saved the day. Not always without pain and times have changed but until we fail I see little reason to forecast doom.
I would certainly desire to have everything slow down until Obama gets in and Dumbya gets out but I learned long ago that I don't get to make the rules. What we need now more than anything is a strong voice for patience and calm. Dumbya couldn't calm me down even after I'd taken a bottle of Valium.
I think Uncle Sam should bailout the auto industry only after all the big three ceo's, board of directors, cfo's and all top 1/3 of management resign. Only fair, they f'd it up so the should take responsibility and fire themselves for incompetance. In addition the feds should mandate a golden parachute of only 1-year severance and token stock options of their own worthless stocks. And they should look on the bright side, at least they wouldn't be required to commit Harakiri like Japanese auto makers.
I'm glad you agree about bankruptcy instead of bailouts, Professor Reich.
To expand a little...
The whole issue of banks trusting each other and being willing to lend would be resolved if the bankruptcy process were simplified and clarified so that customers, creditors and counterparties knew that they were protected. Instead we have a bankruptcy process that ends up being a political and legal battle. Legislation should simplify and clarify it.
So far the main beneficiaries of the bailouts have been the writers of Credit Default Swaps. That's why the GSE bailout protected Agency debt, but not Preferred shareholders of Fannie and Freddie.
Derivative exposure of Wall St. banks is also the reason why an unlimited amount has been thrown at AIG.
As imaginary wealth collapses all around us, the political battles revolve around determining who will be the bag holders. Hedge Funds, the US treasury and working people have been the main victims, instead of the big firms that created all the imaginary wealth and the people who skated off with the big bonus checks along the way.
But then, they're the ones with the political power, so why would we expect any less under Supercapitalism?
This feels like the lead up to the Iraq War all over again -- a monumental mistake is happening in slow motion and some of us are powerless to stop it.
I am so sorry that you Dr. Reich have the responsibility of talking to people on CNN who are incapable of retooling their formats to ACTUALLY spend time on an issue that festered for a year while they were obsessed with horseraces, tabloid news, and whatever nonsense they think it is their sacred duty to cover.
How are we supposed to have accountability in our government when the media pumped into our homes is so idiotic?
This system is absolutely phony.
GM needs cash to continue to operate, whether it is in bankruptcy or not. And it can't get it anywhere at the moment. It is paying 30% on bonds for crying out loud.
The only solution at this point is a hefty bailout. Bite the bullet and do it.
Naturally of course you can attach any strings you want to. But why bother? Shares aren't worth anything, so you gain nothing by wiping them out. If you wipe out the bonds you just make the financial crisis worse.
Wipe out the pensions and healthcare? And pick them up on the other end when you have to recapitalize the Pension Guarantee?
Just give them a $50 billion loan. If they survive, fine. If they fail..... well, we are going to have bigger problems than losing that sort of small change.
Let the automakers go under. Small business goes under all the time without help from gov't or any other institution. Many businesses after Hurricane Katrina in NOLA went under whan they had been thriving businesses for many years, gov't did not help them. Too bad they could not see the OBVIOUS signs that Toyota could see. Too bad that their executives will be unemployed like the rest of America. Too Damn Bad. NO BAILOUT FOR THE Dumb auto companies and their rich CEO'S . Go Under. I don't care........
If you care about the Big 3 or domestic auto surviving, then you can't allow bankruptcy. Here's why.
I've talked to various marketing folks at the Big 3 and supplier over the last year in conversation that say that bankruptcy is not an option - because the perception of bankruptcy will plummet auto sales much farther than they already have. The thought is that few will want to buy a 20k+ item from a bankrupt automaker because they don't trust it'll be around to take care of them.
The thought is - and I tend to believe it with my marketing background - is that a bankrupt automaker could never emerge from bankruptcy because the showroom traffic would slow down to a drop, and suppliers, already pushed to the hilt, will simply stop sending materials to bankrupt automakers because they can't afford to any more. They're mostly on life support themselves.
Now, in reality, there needs to be restructuring that the democratic administration won't like, like elimination of the Jobs Bank, addition of co-pays like the rest of America, and other things that will hurt Obama's union base. However, it may end up being less pain than what a bankruptcy judge might do to the UAW.
wease:
The USSR certainly made great strides in science and technology. In fact, given a starting point of 1917, where basically they were a backward agrarian nation, with essentially an illiterate population, and moving forward to the 60s, 70s, 80s, one could argue that their rate of scientific advancement far exceeded the rest of the world during that time period. Granted they benefitted greatly from scientists from Germany after WWII.
They invested a great deal in their military and weapons systems, deeming it necessary to balance US hegemony. Their military might earned them the title of "Super Power". The descriptor was not in anyway related to their overall GDP or per capita consumption. We don't really have reliable economic information for the USSR for much of 20th century, but what we do have would suggest an economy far inferior to that of the US.
Given that it is silly to try and draw parallels to USSR economic dilemmas, and the attendent problem resolutions, to similar dilemmas in the US. It's not apples to oranges, it's apples to rocket ships.
You're a little closer with your Argentina comparison but to my mind only slightly.
Mike:
Bravo! Often explanatory simplicity saves the day.
The auto companies should be relieved of their pension liabilities from the years they were much bigger. Special US bonds paying 3 to 5% could be added to the trust funds. This would relieve the auto companies of onerous pension contributions and make them competitive with auto companies without large liabilities. The company could give the US stock options contingent on the redeeming of the bonds. The interest rate of the bonds, the fraction of accrued actuarial liability to fund, and the amount and terms of the stock options should be determined in the best interests of the US given that relief must be provided to the auto companies.
Dr. Reich,
The minute the government makes a bailout deal with GM -- whether by a bankruptcy proceeding, a simple infusion of loan funds, or a temporary nationalization -- the question will belatedly and obviously arise, "Why should Chrysler and Ford management and workers be treated any differently?" For the likelihood Chrysler and Ford will be eventually coming to the
"bailout breadline" is very high.
So the deal with GM will be precedent setting. Therefore the need to have agree on some stringent conditions BEFORE use of any taxpayer money is used to rescue any of the auto firms. Also a key question I raised earlier must be faced and that is: With Toyota and Honda doing fine with production and assembly operations in America, can the market absorb all three producers GM, Ford, and Chrysler? Must one fail or merge with another resulting in two US car producers for US and world markets?
Until these questions are answered, bailouts, whatever the form taken, have the real danger of becoming a continuous open/ended bottomless pit of GOOD taxpayer money chasing BAD money. Witness AIG; first the governmemt offers $89 billion and two weeks later this has been increased to almost $150 billion! What´s the next request?
The cost duplication among the three existing US producers is gigantic. Reducing these exhorbitant cost structures
by a merger of two firms, or a failure by one firm, is critical to rebuilding a viable US TWO-FIRM auto industry in America ... an industry that´s under stringent requirements, as conditions for any bailout proceeds, to: (1)remove failing Management and Boards of Directors; (2) start producing highly efficient hybrid/electric cars by 2012; (3) reduce current brands (GM has 8) by at least 65%, thereby cutting tooling costs, assembly and parts inventory costs dramatically;
(4) streamline existing assembly operations worldwide; (5) appoint a `Car Csar´ to oversee radical restructuring of industry.
The ultimate cost of this will realistically exceed at leats $350 billion, including protection of dismissed workers. Therefore, the first steps must be right. The industry´s Three-Firm survival and financial state as a whole must be assessed.
Let´s not get caught up in a `quick-fix comfort panic´ of putting out the fire but later seeing this has only created a much bigger structural and financial blaze feeding wastefully on taxpayers money.
Frank:
As usual, good thoughts, but I am struck by your decision that there should only be TWO US car manufacturers. From what mathematical model did you derive that wisdom? Or was it a crystal ball?
Japan has SEVEN major car manufacturing companies selling in the US and perhaps around the world. Notwithstanding that they are doing a better job, especially with marketing, to the best of my knowledge none of those SEVEN is in serious financial trouble.
There are issues that the US auto makers need to address and certainly changes are in order. What those changes are and in what order they should be addressed are not decisions to be made over a beer on the back of a matchbook cover. It's easy for us to sit in the comfort of the Internet and hypothesize all the cures necessary but there are huge logisitical/financial problems to all your suggestions and they are not necessarily given to quick decision making. At least if we're looking for the best, most timely decisions.
Getting rid of the current executive management and Boards serves us how? To effect the best decisions we need the expertise of those integral to the process. Bringing in an outside automotive expert, unfamiliar with the cultures and day to day operations will mean months of learning, of assimilating a long history. Japanese execs are well schooled in the manufacture and marketing of their cars but all of that knowledge doesn't translate, at least not immediately. Same is true for a "Car Czar". The union implications alone will take forever to figure out.
If you read Krugman today, and he and I happen to be in the same camp; time is now the enemy. The dollars, though not a pittance, are of far lesser concern. We don't have time to wait for learning or replacing a bunch of executives. The political process alone will eat up valuable time and then trying to find agreement on a long list of restrictions, among the Congress, then the auto makers, could see us teetering on, if not beyond, the point of no return.
Most of your points are well taken and in a less time-sensitive buyout or merger they would be considerations to be hashed out. We don't currently have that luxury. We have, or are about to, open a Pandora's Box, which will end up with the government picking some winners and losers. David Brooks article today talks to that issue. We have a looming catastrophe and we will have to shotgun some solutions. We can't worry about the future of a "free market economy" right now. We can't worry that GM gets saved and Mom and Pops grocery store doesn't. We can't get bogged down in what is the right number of companies or brands or models. We have to get out of this punitive mode and get to keeping the patients alive. Might they die anyway? Very possible. Might we have wasted some money? Highly likely. There are too many lives at stake right now for us to worry about seeking optimal solutions.
When the injured arrive at the hospital with the injuries resulting from a bar fire, it is not the time to be preaching a sermon about the sinfulness of frequenting bars. Attempts at patching the problem right now are far more important than lectures on the proper way to manage a business.
IT LOOKS AS IF THE GOVT IS CONSIDERING USING BANKRUPTCY JUDGES TO DECIDE ABOUT HOME FORECLOSURES----guess who suggested this first! YES, OUR MAN ROBERT REICH, WHO NOT ONLY HAS A HEAD ON HIS SHOULDERS, BUT A HEART IN HIS BODY. A SMART GUY AND A HUMANIST, AS WELL. WILL WONDERS NEVER CEASE!
Robert you said:
"And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy."
Now Heaven fobid I be accused of being a cynic, but isn't what you said precisely what the present fag-end Administration intends?
After all, they are already, and similarly, burying landmines under the incomer's foreign policy (sorry, War on Terror)options.
anonymous:
Are you sure you're not Dr. Reich? ;)
Robert,
Banks and insurance companies are not eligible to be debtors under the US Bankruptcy Code
Jeremiah stated: The thought is that few will want to buy a 20k+ item from a bankrupt automaker because they don't trust it'll be around to take care of them.
The cost of manufacturing a car is $800 dollars. The re$t is benefits for the automakers.
There are more cars in the US than people. Spare parts are more than easy to come by. Tata Motor Services in India and the 7 Japanese carmakers who sell in the US can easily fill the void.
My Ford has gone to the dealership exactly one time: for an ignition key assembly replacement. I'm probably certain to look up on Google and see what I can find to match it.
Auto mechanics are usually idle b/c newer models have warranties for the first x-thousand miles, so no repairs are needed, to quote one of my mechanics. Mechanics are plentiful, for now. Market saturation states that bankruptcy is the next step. See my earlier comment about Harvard Business Review publishing an article that in South Africa, it's cheaper to build a Mercedes by hand than it is to turn on the assembly line electricity.
Thank you so much for writing all this, Professor. I am extremely pleased that Barack is listening to your sage advice. He can do no better. So are we realistic in hoping that the bailout money will be used the right way? We still have a couple of months for the current administration to squander it.
openid wrote:
"... bailouts should be effectively be accelerated bankruptcies, but have no financial benefit for stakeholders and especially for shareholders and senior executives."
Considering all the companies with their hands out, looking for our cash, I think they should be worse than accelerated bankruptcies for the heads of the companies asking.
It should mean heads will roll. In the case of the car companies, maybe nationalization with an order to make green, electric cars.
Almost forgot: many years ago at my alma mater, a small liberal arts college, the language departments hosted a seminar about the importance of mastering foreign languages: at the time, all of the Japanese car salesmen in America spoke English. Few of the American car salesmen in Japan spoke Japanese
Art,
Was at a primiere performance of The Netherlands Dance Theater (our daughter, Carmen, is Company Manager) this evening, so couldn't respond timely to your post. Will offer some perhaps choppy, incomplete explanations (unsupported by data) as it's very late here now. Hope you therefore can appreciate this `rant.´
Suffice it to say, for 30 years I've followed the Big Three auto makers' steady decline and huge loss of market penetration to new comers, like Toyota. I have studied the Big Three's historical sales, market penetration, profitability, debt-equity, and productivity (sales per employee), proliferated model lines and obsession with yesterdays grossly uncompetitive car design sizes and fuel inefficiencies. This all has led me to conclude one of the Big Three is so behind and-or in need of economies of scale that either it is going to fail completely or be forced to eventually merge with another auto maker (US or foreign, although latter is unlikely).
For example, GM lost $10 billion in 2005 which was a relatively good sales year for the US car industry. Nor did Chrysler or Ford do very well in past years. Both Ford and GM, however, have done much better with their European made vehicles, thanks to excellent designs and fuel efficiencies. This may be their ultimate salvation although the financial disease starting in the US is now affecting all businesses in Europe also.
I am in no way trivializing the seriousness of the current auto industry situation, Art. ... recognizing that it's also tied in with significant funds needed for mortgage foreclosures; increases needed in unemployment compensation due to firings and credit crunch; funds required for infrastructure renewal, health care; education; and stimulation of alternate fuels; increases in 2009 Deficit due to lower tax revenues, more bailout funds for AIG, etc.
Of course we must provide some financial "breathing room" NOW to protect our already miniscule manufacturing base as represented by the Big Three. So I'm not denying the need for immediate Intensive Care to buy time to properly assess the industry´s problems and prospects. But I am recommending we get up to speed fast on the depth of the industry financial problem from at least a near-term Liquidity, Solvency, and Investment requirement standpoints until stability is restored in the market place.
The funds required for GM are considerably more than the immediate input of $29 billion being discussed now. The Big Three all require substantial funds for long-term survival. The Big Three's production facilities are geared for over 140 models most of which do relatively poorly compared to the much fewer and superior Japanese models, for example. This competitive reality will require a major overall, renewal, and closing of plants costing unknown billions. The Big Three won't likely be generating positive sufficient profits and cash flow in intermediate term (4-6years as they haven't in recent years), to pay for such considerable investments in tooling and changed assembly equipment, let alone fund losses and improve poor solvency realities. That's why, among other causal factors such as current consumption and credit crunch, not only GM but all the Big Three may be coming to the bailout breadline for larger bites in the near future.
Of our three US auto manufacturers, none come close to the efficiencies, modernizations, compact, efficient fuel designs of the two major firms assembling cars in the States, Toyota and recently Honda, plus other Asian importers.
It should not be a major problem to find out NOW what GM's real financial needs are over next 4 years to become competitive ... ditto for Chrysler and Ford. Such information will importantly effect not only how to approach the "Intensive Care" phase of funds immediately needed. More importantly, it will avoid big surprises and give a clearer idea what the true radical restructuring requirements for "Recovery" are and the cost of same. You misrepresent my thoughts when you suggest I'm seeking perfect answers in the face of an auto maker crisis that begs immediate action. My whole purpose in taking the due diligence time to expose Sweden and Japan's different approaches and results to their crisises was to dramatize the need for Prompt but Wise Action.
When Sweden and Japan had similar crisises in 1992, their yearly Deficits as a % of GDP (e.g., 10.8%for Sweden in 1993) and National Debt as a % of GDP (+-75% in 1993) were either worse or similar to the US positions today. As shown, Sweden did much, much better by taking tough actions quickly.
This also confirms Paul Krugman's point, which by the way I have also been saying for some time, that we must incur more Constructive Debt (as opposed to Destructive Debt of past years) for investments to regenerate the economy ... and we must do it as quickly as possible.
We still have some financial space to do that. But GM needs part of that space as probably do Chrysler and Ford. The simple question is, How much and How?
The Big Three financial problem is much bigger than many realize and should be addressed in a way that the space we still have to increase our annual Deficits and National Debt on Constructive infrastructure and alternate fuels investments is not seriously compromised by the huge GM (and perhaps Chrysler and Ford) financial breakdown problem that's been building up for years.
The goal is to control added bailout options more professionally and avoid throwing away taxpayer money to high risk losing causes that perhaps the market can solve more pragmatically and creatively ... especially in light of multi-faceted, substantial competing claims on government investment funds critically needed for important new industries and infrastructure as Dr. Reich is reminding everyone.
As stated, I'm quite aware of urgency of Intensive Care problem that GM is in. But Chrysler is also close to being rushed to the Emergency Room. Ford (down to $18 billion cash compared to GM's $14 billion which is fast disappearing) remains optimistic it can control the bleeding without going to the money doctor. Time will tell. But can we afford not to have a good idea of the depth of the financial problem NOW for GM as well as the Big Three? My answer remains no.
As for replacement of Management and Board members at GM with equally experienced and knowledgeable talent (perhaps from one of those 7 Japanese car exporters to America you mention, Art), I simply feel this is a sensible business condition (the timing of which is generally better if done Fast, in proportion to how desperate the situation is) especially when huge sums of taxpayer money are at stake bailing out those responsible for the mistakes of firms `too big to fail´ (as has occurred recently in some bailed out financial institutions). If in normal financial times, GM were taken over by a competing auto-maker or even a venture capital group, the chances are about 100% that there would be significant Management and Board member changes for those guilty of flagrant mismanagement actions over a long period of time.
DearDrReich, Fri, Nov 14, 2008
From the New American Century rag ..., I learned that the GOAL of the Neocons is, and get this: TO BANKRUPT THE GOV !
They began gallantly with Iraq and got a good start on the task, but this "crisis" initiated in 2004 by Paulson - why this perceived "crisis" is a gift to them from the gods, but the sheeplike response to whatever they "decide" to do is a gift 1000x greater. It is a gift from the universe !
I have only one question good Dr. Reich: Why aren't you outraged ? How can you sit comfortably in Berkley while this looting and pillage of our country is going on ?
A nation of sheep - "Step right this way" the turkey heard a few days before Thanksgiving.
To un"freeze" credit, it is necessary for the Justice Department to reserve Times Square, summon CNN, make an announcement that all other Liars, Cheaters and Theives will receive the same punishment just before Paulson, Fuld, and Bernanke are shot on camera for their crimes.
I then calculated MTTGT (mean time to global thaw). The maximum value is less than 93 seconds. Of course these criminals must be tried in court first, but who could doubt the outcome in this case ?
And there is precedent: It worked recently in China for the Pharmaceuticals industry
Diogenes' Dog
Wow,
Just because you are a Liberal midget, doesn't mean you are stupid. For once I agree with you. Please keep Obama from bailing out these Detroit morons without everyone involved experiencing severe pain and suffering.
I agree in general with this comment, but I suggest the best way to get the auto workers, management and professional employees in the auto industry to accept pay cuts is instead to impose a sharp increase in employee share of health care costs. Employees anticipating a national health plan will discount the loss as temporary in anticipation of national health insurance coming soon. In thinking actual pay cuts workers will remember how hard they had to fight to get the wages they have now and they will not want to be forced to repeat those battles in the future.
The auto workers pay far less of their own health care than almost everyone else, and that stands in the way of public sympathy for their job risks.
Everyone need to remember that even with bankruptcy most concerns remain viable enterprises, but suppliers or their payment insurer often lose enough to go bankrupt themselves causing a chain reaction of losses and lay offs. A friend of my youngest son was just let go from a job just for this reason. His now former employer expects to go bankrupt as a result of the loss of a parts contract and payments due to the bankruptcy of a major customer.
The truly best salvation for the auto industry may be to have them contract to manufacture Toyota's Prius Hybrid under Japanese supervision. The $25 billion promised for retooling could be increased and serve a useful purpose. So far from what I have heard, the American major auto makers need time to improve their hybrid designs, since they may be adding too much weight for too little gain in fuel economy based on radio commentary.
I personally have a Toyota Prius Hybrid, and in all respects it is the best designed car I have ever owned. In contrast I found the rear seating on too many American cars to be totally inadequate and not that comfortable for long trips. A dealer said that was just so the cars could qualify for lower insurance rates. America cars have improved but their time to implement improvements should be quicker.
The auto companies should also give serious thought to raising capital by selling stocks to owners of their cars. No one wants to be left with a no longer supported vehicle or suffer the related rapid value loss.
The federal government also needs to analyze the whole cost of to bail out or not to bail out. FDIC has asked for incentives to rewrite mortgages with lower rates probably out of fear of the costs of future bank failures, assessed against a relatively small fund to pay those costs.
Thank you for your blog. I'm especially impressed by your suggestion that the union take on some of the pain, since they and GM management have contributed much to the problems. Items such as a "job bank", while quite delightful for the union, is totally out of touch with what the average American worker has available and indeed what is available globally. Toyota, Honda etc. build cars in the US in plants that are generally not unionized, pay generally good wages and have been smart enough to remain profitable in the current market. No one has a crystal ball, it's simply been good management. They have done their jobs well, I have minimal sympathy for GM, Ford and the UAW.
As my father has said numerous times, we as a nation have lived high on the hog for a long time and now need to compete with the rest of the world on cost and quality. Many years ago Great Britain felt that the US was illegally using it's lower cost labor to take jobs from them, and yet that was an important component of our rise as a nation. The rest of the world sees our standard of living and wants some of that for themselves. If they can compete on price with us and improve their station in life, they have every right to do so.
Market realities are harsh, the big three, the UAW and the financial institutions should be receiving a large, bitter cup of their own hubris.
Well I am truely disappointed to read Reich comments concerning the automakers. Right now new hirees start at 14 dollars an hour, barely a living wage in this economy. Most average 27 to 32 dollars an hour with the higher wages for skilled labor. When Robert Reich could have made a difference in the Clinon administration, he dropped the ball. The storey not being told here is how the politicians both in HW Bush and Clinton years dropped the ball on crafting and enforcing free trade agreements.
I have just lost what little respect I had left for Robert, you have convinced me you are as anti worker as those before you
I don't know about bailouts. The chapter 11 pain is right on the money. However, 700 Billion dollars sounds like it would provide universal health care for all Americans for several years.
That would be a big benefit for the auto industry (and all others) since they pay heavily for health care. That reduction alone would probably be worth more then what they would get under the bailout.
After 2 years, the reinvigorated economy should pay for the cost.
BTW - Is the tightening of credit really a bad thing? Don't you think that deferring gratification and paying cash for most things is a good thing? Sure there would be a slow period while we transition back to a cash society but the benefits ...
Also companies would be forced to sell stocks to raise cash, which means they would have to have a good plan.
My question exactly. The US government has become secretive. Citizens are treated like children. They are told to buy and then punished because they do not save. When gas went up citizens were gluttons. When we used less gas prices did not fall. Why? Because that was not the big reason gas prices skyrocketed. Now the bailout as if this is the citizen's fault also. We are trampled. It is time for our government to trust the citizens.
Fully agree.
Government for the people, by the people. The role of government must be to provide policies gear towards ensuring the long term competitive advantage of the American citizenry. In cases where bailing out business supports this goal, then government intervention is appropriate.
While the loss of the big three would not over the long term result in significant job loss, as eventually new jobs would be created by the Japanese and German automakers, with LUCK in US, the short term turmoil of the loss is too large to risk allowing the companies to disappear.
The effect of the loss of 3,000,000consumers to the US economy would be significant, and further compound the financial difficulties the country is facing.
Very clear is the current shareholders and creditors need to bare the brunt of the financial impact. Unclear however, is whether the firms would re-emerge from bankruptcy. The government should take a role to ensure the firms continue to operate, and force real restructing of the business. Whether this is achieved by goverment intervention, or bankruptcy law with a twist, doesn't really matter. Expediency is key as this issue is yet another major drag on consumer sentiment.
Clearly the contracts of the UAW have been too rich. They need to be rightsized. The UAW negotiations have been akin to a herion addict holding a gun to its supplier. The supplier has been unable to do the right thing and provide benefit consistent with their ability to operate as a long term sound business. The UAW is now at the point that they are about to breathe their last breath. The government role should be ensure the patient keeps on living, but without the heroin.
Finally, and this is a longer term structural issue. The governement needs to figure out how to incentivize our smartest citizens to join manufacturing firms to build real value for the country, not join financial firms that do not build broad based value for the country.
I'm not sure we have enough talent in the US automobile industry at the moment to put a product on the road that people will want to buy.
For the brighest university graduates, serving the country could equate to joining a manufacturing company.
Art,
I just read Krugman's and Brook's article in the IHT this morning (Saturday). In general, they are expressing points I've been making all along . Agree with Brooks and you that Obama's "Car Csar" idea may not be achievable or workable, but wouldn't right away give up on it necessarily. All depends on how the restructuring of the industry takes place, i.e., scale of government involvement vs. market forces and the UAW. Note that Brooks mentions a $50 billion added bailout infusion is in the offering to the Big Three in addition to a $25 billion loan already put foreward.
As I have been saying this open-ended funding with scarce taxpayer funds is just the top of the iceberg. A precedent is being established with this GM bailout strategy that cannot not ignor Chrysler and Ford and possibility of others wanting similar treatment. We should be upfront about the approximate full auto maker bailout bill which I feel will shock us back to the reality we can´t afford the full taxpayer hit without seriously undermining investments needed in new enterprises and social infrastructure. You and I don´t have disagreements here on the scope and substance of the dilemma ... perhaps only in how to deal with the initial vs. ultimate costs of a rescue startegy.
These gross rescue underestimates (maybe done intentionally to calm the public) are occuring everywhere with AIG, Fannie Mae and Freddie Mac where experts believe the $100 billion will be far exceeded, etc. And we haven't heard the last yet about the lingering unknown write-off exposures to Credit Default Swaps affecting corporations as well as packaged home mortgages.
If all these bailouts and overruns added to 2009 budget Deficit of $500 billion cause the Deficit to reach $1.1 trillion (or 7.7% of GDP) BEFORE commiting Constructive Investments of $600 billion(Krugman´s proposal) for reinvigorating our economy, then we will be seeing a Deficit level in 2010 of at least $1.5 trillion ... or ±10.0% of GDP which matches the worse year level (10.6%) of Sweden's financial collapse in early 90s. In addition, the National Debt will climb to at least $12.0 trillion by 2010 or ±85% of GDP ... in line with Sweden´s worse year level in its recovery phase (81%) but (happily) much lower than Japan´s worst year level(174%) shown in Table 27 of a prior post.
Yes, a lot of innocents are going to be hurt whatever form the reconstruction and financing of auto industry takes. Obviously, the streamlining process and possible merger or failure of one of the Big Three will cause significant job losses ... but my overall $350 billion ultimate cost estimate (funded publically and privately) includes substantial funds to help those workers affected in the turnaround process. Delaying the process by piecemeal solutions increases the public and private costs dramatically as Japan´s experience has clearly revealed.
Instead of bailing out GM, the government might better put its money into smaller car firms like Tesla Motors which are already building plug-in electrics. All these firms lack is the capital base in order to become major firms in the US. Why prop up dying car companies who have screwed us for years? The auto workers could find jobs with the emerging auto makers.
The Big 3 have been in cahoots with the oil companies via interlocking boards of directors for years. GM had a perfectly good electric car, the EV1, in 1997 which it leased to individuals in California because California law at the time required a certain percentage of sales to be emission free. But instead of pursuing R&D and sales of the electric vehicle, they lobbied to get the law changed so that there was no mandate for emission free vehicles.
After a successful lobbying effort, GM called back all the EV1s. They had never sold them to the public - only leased them, and they would not let any of the lessees buy their vehicles outright so you know their intentions from the start were to get those cars off the road as soon as their lobbyists were successful in changing CA law.
They then crushed all the EV1s as if they wanted to blot them out of existence. Can you think of any other reason they would not at least sell them to the lessees or let them continue to exist? They were popular cars and many of the lessees begged GM to let them keep them. GM had no mercy. They were determined to force gas guzzlers on the American people because that's where their profits were.
So I say let GM die! They had no mercy for the electric car industry 10 years ago. Now they're the beggars, and they want the American people to rescue them when they had no sympathy for the American people just an eyeblink ago. Tesla Motors and other startups have done the R&D for the next generation of electric vehicles. Taxpayer money should go to supporting them. They're the wave of the future not GM, Ford and Chrysler. Jobs can be transitioned from the Big 3 to Tesla Motors and other successful startups so it's not a question of saving jobs. Can government get off its ass, do something constructive and provide a transitioning process including extended unemployment benefits with a pathway to a new job in the electric car industry? It's not rocket science.
Don't rescue smokestack industries but provide a path to the future for workers.
Also posted on Will Blog For Food
I agree; too big to fail, is simply too big. Guys like Henry Paulson, being big Wall St guys, are the wrong people to judge whether a Wall St firm is too big to fail. Because they have always seen Wall St as it is, they cannot envision how it could be different. So, their objective is to keep it the same as it has been. He means well, but his tunnel vision makes him the wrong man for the job.
What happened to be held RESPONSIBLE for your actions? When you bounce a check does the government swoop in and give you a "bail out check" to cover it? NOPE you screwed up YOU pay for it. It seems that, that rules doesn't apply to companies that have America by the BALLS. Anti-Trust Law suits should follow this in earnest. Nobody should have that much power of the people all the small care or nobody has a "SMALL BUSINESS" Small Business is a terrible word..it's all BIG BUSINESS to the people running the companies. The crap that goes on with these tax cuts is so stupid. I never see what these things do, they never positively affect MY bottom line. Stop blowing smoke up my ass and do something. Phil
Walter Johnson,
Of your to-the-point remarks, the one that stood out to me was, "the federal government also needs to analyse the WHOLE cost of its to bailout or not to bailout."
Amen!
Frank Thomas, The Netherlands
Frank:
Rants should be made of sterner stuff. ;)
One can little argue that the history of the US auto industry, over the past 40+ years, has been nothing more than a comedy of errors. The earliest signs were quality and safety. Not until it became common knowledge that foreign cars, especially the Japanese cars, which were geared to the masses, were made better, did US auto makers start focusing on safety and quality. In short order they closed the gap significantly.
I think most of us agree that despite ridiculous executive salaries and questionable numbers of brands and models it is wages and legacy costs that have severely hampered the competitiveness of the US auto industry. Even size alone has been a deterrent to advancements. A growing, expanding operation gains much in economies of scale but also loses much in efficiency and reaction speed. That is one reason I don't view a merger or industry consolidation as a good solution.
It is still a fact that generally the Big Three has been profitable up to the last three years. One has to wonder how much of the recent losses were by design heading into new contract negotiations with the unions. GM's automotive sales in 2005 declined from 2004 by $3 billion +/- but the cost of sales and other expenses increased by $12 billion +/-. I didn't read all the notes nor try and dig deeper to know why, but to your point, in a year in which the overall industry had reasonable sales, why the huge increase in cost of sales? Could negotiating games have been afoot?
The design argument is questionable. Since tastes vary between nations I'm not sure that European designs would be acceptable to the US consumer and vice-versa. To a large extent it's not easy, from a distance, to tell the difference between a Honda and a Chrysler Sebring. Car designs have tended to grow far more similar, across all spectrums, that was true 30 or 40 years ago.
I do marvel that if Ford has a car that gets 65 mpg in Europe, why they wouldn't have ratcheted up production and ship them to the US, during the gas price fiasco. I can only guess that emission standards or some other regulations would require them to make significant alterations for US sales. I also have to wonder if the Big Three execs didn't shift to much focus to gaining market share in foreign markets, perhaps assuming that they had a good hold on US markets. No doubt their strategic blunders keep mounting.
It's highly likely, as Japanese auto makers moved into SUVs and Pick Up trucks, that the Big Three market share, in those markets, would have begun declining. On cursory review it appears that the Big Three have segued to assembly operations only at many of their plants, notwithstanding part or wholly owned subsidiary relationships with parts manufacturers, but the Japanese benefit from lower labor costs in the manufature of parts which are shipped here for assembly. The transfer costs game also robs the US of tax revenues.
We do have a plethora of economic problems in all factions of our economy. We sorely need an infusion of funds in a variety of economic industries. I'm not sure that fiscal prudence is tantamount at this point. It might not be unreasonable to suggest that if Japan can withstand a National Debt equal to 174% of GDP we might withstand considerably more than that. We need to fix our current ailments and we need to fix the more obscure ailments, such as infrastructure, as well. Given that the government is not limited, budgetarily, to the constraints of a household or a business, we may need to make money flow like water in the interim.
Few in this discussion, like many here, give a damn about GM or Ford or Chrysler or AIG or any of their executives. If we were only bailing out the companies and their executives we would all vote for letting them fail. It is the workers and our economy which are at stake. We can enact legislation to extend or even raise unemployment benefits but we won't be able to come close to a European model. Politics will estop that kind of monumental change. Unemployment benefits are a stop gap, they are a temporary means to tide folks over, but if there are no new jobs to pick up hundreds of thousands of unemployed workers, all we have done is kick the can down the road. Granted, multiple car manufacturers, from all around the globe will flock here to take advantage, and while the wages and benefits paid will be reasonable they will be a far cry from current wages and benefits of the Big Three workers. These BT workers have lifestyles that are predicated on the continuation of their current earnings. It is not likely that other car makers will pick up a sizeable portion of laid off workers.
We can hammer the UAW, et al, for the heinous pay packages they secured for their members but they were doing what they are supposed to do. Hell they gave in quite a bit in the last contract by letting the Big Three replace normal entry level salaries to far lesser amounts. If we were to break the UAW, et al, through government fiat or bankruptcy proceedings, we would likely spell the deathknell to any union movement in the US.
Agree that in a buyout or merger heads would fall, especially at the top, but we would be dealing with a well funded group of businessmen, who would have reviewed the failings and would have a pre-prepared turnaround plan with ideas for competent new leadership. Guessing a little here since if we look at the Private Equity firm that bought Chrysler and then installed a failed former Home Depot CEO at the helm, one would be inclined to suggest I'm smoking an illegal substance.
If we fire the execs and the Board then who will select the new Board and the new execs? Our Congress? Really? Talk about political influence. New auto execs will be subject to Senate confirmation? Current circumstances dictate that now is not the time for an overhaul of old paradigms. The ship is listing badly and we need to right it, even under its incompetent Captain, and then set about to push for changes and repairs. To come back after the fact and influence changes will require restrictions and agreements that allow the government some control and reentry, in any form of bailout.
Getting there politically is a huge mountain to climb. We already have conservatives who are vehemently opposing any bailout funds for the auto industry. We had to load TARP with a boatload of pork to get it passed. Conservatives are holding fast to their "free market" ideology. They believe that if we pierce the corporate veil, we will never get Humpty back together again. They may be right but you can't begin the healing process until you stop the bleeding. The new Congress along with Obama may not fair any better. It is highly likely that our Congress will end up playing Nero, fiddling while "Rome" burns.
You want a plan and a forecast of what amounts, in total, will be needed. How do you do that when you have no idea what revenues will be going forward. You are well aware that any prognostications of future cash flows are entirely dependent on revenue estimates. At this point a "worst case scenario" would be the only viable presentation.
In our current disaster we have no choice but to throw caution to the wind. We have to focus less on "who did what and to whom" and more on how do we keep the ship afloat. As it is, almost any solution will set us back a number of years, economically. The best we can do is salvage critical industries and then spend on necessary programs that will provide a base for a new economy in the future.
I am not all that concerned about availability of US government credit; call that naive, maybe even stupid, but the whole world is vested in our solving our issues. There has to be some point where enough is enough but given Japan's numbers and somewhat recovery, faith would seem to be in plentiful supply.
For a variety of reasons the Swedish solution won't fly here. I heard Senator Richard Shelby, R-AL, just yesterday, arguing that we don't want to act like Europe. Foolish? Likely. But that is symptomatic of the ideological barriers we face.
Ironically, could we be facing, not only the demise of a laissez-faire economy but also our form of government? Whatever the remedies are to be, clearly we will have to master walking and chewing gum at the same time.
One cannot argue with your experienced, excellent, proposal for analysis, but I fear that it wastes valuable time, when time is our most significant enemy.
Frank:
An additional thought, spurred by Walter and your agreement with him.
I am amazed that stronger arguments have not been made for all the benefits of universal health care reform. I'm not wild about Obama's plan as presented during the election campaign and am hoping that it was just a way of pandering politically. I do believe it will work to change the method of health insurance in the future but there are distinct benefits that could be effected immediately.
Small business is often limited in hiring well qualified people because they can't afford to offer health insurance benefits. The constantly rising premium costs are taxing even the best run major corporations. A universal system, especially a single payer one, would lift a serious problem from the shoulders of US businesses of all shapes and sizes.
Someone needs to present the real benefit, from a cost perspective, of a change of this nature. We will have all the nutcases pointing to the supposed failings or shortcomings of Canada's system or the many European systems but since the major problem for US consumers is cost and affordability, I think inroads can be made to any resistance.
If only we had an informed populace!
Frank:
Hear ya and am not in total disagreement other than which comes first, the chicken or the egg?
The $25 billion, although a bailout of sorts, was supposed to be targeted for retooling to smaller more fuel efficient cars. Not sure how well the targeting was spelled out in the legislation though.
The $50 billion is clearly a bailout, although I'm not sure it's only for GM. Am also not sure if there will be any limitations placed on its use. The big unknown here, as I stated before, is when, if ever, the economy is going to turn around. I don't follow the auto industry that closely but I don't recall seeing any announcements that wholesale layoffs are coming. Though promising, if true, it could be more to keep the government happy while things are being debated or could be due to the model year changes and they're building inventories in anticipation of a turnaround. I would think, if they're smart, they would also realize that if car sales are anemic now, what will happen if they layoff tens of thousands of potential buyers of their vehicles, almost a locked customer base?
What should happen if more and more come to the feeding trough? If it were me I'd be inclined to make my decision based on the impact to the overall economy. Unfair, no doubt, but saving millions of jobs trumps saving tens of thousands.
As far as unemployment goes; some sort of extension is needed immediately but I believe benefits are determined by state law and not federal, so if a state has weekly benefits that do no more than fill up a gas tank, we've just added more tank fulls. Across the board, we were ill-prepared for this kind of eventuality.
Most businesses have contingency plans for catastrophies. Not for every conceivable catastrophy but for the more serious potentialities. As a government we didn't do that. Even the Fed, and I'm not one of these Fed bashers, thought that their normal monetary tools would rule the day and didn't consider, what if.
That has left us with two alternatives: Sit back and watch the "free market" at work and see what happens or start shotgunning solutions seeking anything and everything that will produce some kind of results. If you're not prepared to die, the funeral expenses will kill you.
I would guess that the AIG pig will need more and the reason is likely because they are on the wrong end of a lot of the credit default swaps. Not continuing to bail them out will bring about another crescendo and that one may be the finale.
We are in the cauldron and our only hope is to keep throwing money at the witches. There are many suggesting that Obama didn't win, he lost.
Art,
You don't understand the nuances many are suggesting here to this auto-maker problem, forgetting yours truly for a moment. I'm not in the least interested in being right but primarily in raising the correct questions before jumping off the deep end with specific "put-out-the-fire" policies and programs.
You make a number of general assumptions without stopping a moment to question their validity. To quote or paraphrase some:
"Current circumstances dictate that now is not the time for an overhaul of old paradigms."
No one is saying the overhaul must occur immediately only
that the framework and dimension of the problem should be identified NOW BEFORE commiting vast sums of money to the problem.
In the meanwhile, let's put out the fire with what is immediately necessary ... and no more.
This was my suggested "breathing space" approach of near-term funding to GM to buy time to assess the deeper auto industry problems, prospects and optimum financial course for a long-term structural recovery in the best interests of the nation.
"What you are saying, Frank, as appropriate as it may be, is a waste of time, and time is our worst enemy. We need to focus on how to keep the ship afloat. The best we can do is salvage the critical industries and then later do the right things."
I take recourse here, Art, in an old expression: "There's a time for DARING; There's a time for CAUTION."
I apply both wisdoms to the financial dilemma confronting our nation near and long-term: "Now is the time for Daring to stop the bleeding, followed by a time for Caution to know the unknowns, and then embark on a bold new course of Daring that fixes the problem with some permanence."
People who crawl into the inner safe sanctuary of their provincialism, like your Senator Richard Shelby, with the comment, "We don't like to act like Europe (e.g., Sweden)," haven't the slightest idea of what they are refusing which is...THINKING!
Of the Prime Ministers meeting now in America, who are directly bringing up the question of the need for much stiffer coordination and harmonization of financial institution regulations and oversight? The Europeans ... to which the Shelbys of this world may self-confidently respond, Bah! Humbug! We neither want or need that "Swedish solution."
Art, you know better also, it's never a waste of time to THINK before acting. Any good play is a buildup ... get the first act wrong and the whole play is compromised.
Art,
Sorry, I didn't read your last post before just sending my "Bah, Humbug" post to you. In spite of this, I think we can agree to agree on most aspects confronting the auto industry crisis and agree to disagree on others. It's been a good interchange on a very, very serious matter. Thank you.
Many people dislike reading from computer screens; they print first and read later. But I saw no printer-friendly button on RR's blog, and I don't want to print out all the comments.
Please add a printer-friendly button that only prints RRs words.
Dear Professor REICH,
Annyong haseyo! Greetings from Korea!
It is great for me to discover your blog (only yesterday).
Congratulations for being in the
blogosphere, giving me quick and easy access to your latest ideas.
I have been an avid follower and reader of your ideas, since you wrote the wealth of nations.
I always ask my students to read and review your ideas.
Now I am trying to get a copy of your latest work on super capitalism.
Meanwhile, I congratulate you and the people of the US in having a great new chance to re create the wonder that is the United States.
You have a lot of hard work ahead.
We in Asia will surely learn from your work and experience. We also must remind ourselves to continue working hard, being creative and innovative.
Your ideas continue to be part of my own work.
MARAGTAS S.V. AMANTE
from the Philippines
but now a professor of business
and economics, Hanyang University
in Ansan, Seoul, KOREA
Email: amante2008@hanyang.ac.kr
I am so glad someone is pointing this out. Why can't all these companies file for bankruptcy rather than getting a bailout?
And I agree with Tim, we need to break these big companies, auto dealers, banks, media conglomerations up. They are monopolies. Many smaller businesses competing with one another would hire more people locally and increase employment. With more people in steady jobs the economy would improve.
The bailout money should be used to encourage sustainable local jobs, rebuild manufacturing and growth in alternative energy.
Great piece Professor Reich. Just hope that you won't stop writing when you join the government.
The Not-so-Big 3 made and sold SUVs because that is what the consumers wanted to buy. When the market collapsed, they had no ready alternatives. So, the american consumer contributed to their dilemma, but they should have seen this coming and lead consumer education. The top management has to go as their strategy is flawed. THe UAW has to recognize they can no longer push up total compensation, and must know negotiate to save the jobs they can. The high labor costs are part of the issue.
Core industries are more important than Financial Marketers selling air and paper.
Your blog is one of few examples of solutions rather than ideology The auto industry crises are an example of decision making with little understanding, goals or analysis. On one hand advocates argue that the government needs to bail out the industry in order to save jobs, related companies, and more economic crises. Critics claim the companies have no plan; they will only need more money in a year or so and are not dealing with long term solutions. However, few participants are looking at the impact of various proposed solutions.
For example, American company’s costs and dealer networks are both expensive and non-competitive. The companies have failed to develop plans to make small cars competitive while relying on gas guzzlers like big vans for their profits. The companies over the last few years have invested over $ 2 billion in capital investment with little or no return. They have models and dealer structures that are unwieldy and out of touch with today’s realities. Finally we treat any bailout as universal rather than evaluate each company separately.
We probably need some kind of Federal bailout to keep the companies solvent and avoid bankruptcy which seems to have more negative consequences than the country wants to risk. However, why not consider some of the following suggestions to provide some long term solutions and ensure that the companies and its employees make a commitment to fix the problems:
• Ask all employees (union and management) to take a 10 % pay cut to make the companies more competitive and save lots of cash. Set up a pool to give that savings in options at 50% above the current stock price. It thus provides incentive systems for employees to earn back the lost pay.
• Eliminate unprofitable cars and marketing with little hope. In particular eliminate gas guzzlers to provide investment for more efficient cars.
• Reduce dealer incentives costs and force dealers to be competitive. This will result in an inevitable loss of 20-40% of the dealers.
• These changes should also reduce costs, enable car companies to lower prices and increase sales.
• Have the companies focus on energy efficient cars to provide long term social gains. This can be simply accomplished by expanding the taxes on cars with low gas mileage.
Discussing these or other programs forces the companies to develop long term solutions. It also forces them to take responsibility for their futures rather than just ask the Federal Government for handouts. Finally it changes the argument from political philosophy to developing integrated solutions.
Dr. Reich, cc: Art Layman
I apologize for getting into a trite off-subject, but it's simply astounding and bazaar to me and others to see CNN giving so much prime time lately to Sarah Palin right at a period of a massive and complex breakdown in our economy.
How utterly naive and unrealistic CNN's Wolf Blitzer seems romantizing her credibility to even come close to addressing intelligently our nation's problems.
She's the last person the general public should now be paying attention to concerning her future plans, superficial pronouncements, and obsession with her own self-promotion. One of her many obvious attempts at self-adulation was a remark just made today on CNN and last Friday that Obamam should follow her example of selecting the best for his Cabinet positions and set partisianship aside. Boy, talk about preaching to the Preacher. How childish and phoney does it get.
It's truly puzzling to watch CNN's Blitzer grovel and hang on her every word as if she's suddenly a symbolic reincarnation of Henry Kissenger and Ronald Reagan combined about to become the next President ... all quite degrading triva broadcasting by CNN, in this viewer's opinion given the extreme crisis we are in.
It seems I've seen more of this political neophyte on TV lately than any other competent political leader or expert, including Obama. How ridiculously unmeaningful can the US media get? No limit, I guess, even for CNN which constantly praises itself as being the best in quality broadcasting.
What a joke in broadcasting priorities! Right at a time we need to be focusing on the effectiveness of the $700 billion bailout and emergency aid to the auto indusrty and to those facing job loss and/or home foreclosures.
Frank:
"What we have here is a failure to communicate".
To wit:
What I said, One cannot argue with your experienced, excellent, proposal for analysis, but I fear that it wastes valuable time, when time is our most significant enemy.
What you quote me as saying, "What you are saying, Frank, as appropriate as it may be, is a waste of time, and time is our worst enemy... "
The differences may be nuance but essentially what I am saying and what you are hearing are not quite the same thing.
We may have the reverse situation in my interpretation of your overall positions. I did not pick up on any segmentation you are proposing. I didn't catch where you were saying bail a little now but don't commit to more or attempt more until we have a complete analysis of the US auto industry, its prospects and possible solutions.
I can subscribe to that prescription with questions. Who is to amass the data to support future bailout funds? Current management - likely the most efficient source but reliability/integrity could be an issue? Congress - can the blind really lead the blind? A special committee or a Car Czar - how do they get access to internal confidential info?
The Big Three face innumerable problems in getting back to sufficient profit levels. Most probably hourly wage and benefits are the biggest hurdle because of union contracts and involvement. Great strides have been made, over time, to paring down current wages and benefits but from the union perspective and a fairness perspective it is a slow process. Legacy costs are the real elephant in the room.
Throughout the last half of the 20th century the unions pushed for pension and health insurance benefits for a retiring work force. This was not necessarily a bad thing nor inconsistent with the cultural view of rewarding a lifetime of service with a guarantee of a comfortable retirement. The astronomical rise in health care costs coupled with the increase in average life spans has caused this concept to be too costly. But what to do? Get rid of them through an actual or quasi Chapter 11 process? What happens to the retirees? The burden of the health care costs could be greatly reduced by a universal, single payer, health care program. The government does have a pension bailout fund but it's currently in deficit in billions of dollars and the normal settlement is to cut pension benefits in half, at best. Necessary? Most likely, but a lot of people get punished for doing the right thing all their lives.
In a Chapter 11 process the major factor in allowing the bankrupt company to continue in business during the process is a new credit line from some lending source. This new credit line is normally protected by going to the head of the line in case of eventual liquidation. Looking at the balance sheets of GM I'm not sure it would be a long line of lenders in normal times but in today's difficulties, even solid companies can't get financing. Enter the government?
In looking back at history we see various inequities in the US auto industry. As Japanese, and other foreign auto makers, moved assembly operations over here they did it for a variety of reasons. The huge loss of automotive jobs during and after the 70s provided an experienced workforce that would require minimal training. With those huge job losses, especially considering significant wage losses, coupled with a move at that time for buying American, becoming a, sort of, American manufacturer, increased the opportunity for more sales and more profits. Now the Big Three were still locked in high hourly wages/benefits and the interlopers (not meant derogatorily) were able to offer decent wages/benefits well below those of the Big Three. Additionally, since they were just entering the US employment picture they had none of the legacy costs that were beginning to strangle the Big Three.
I don't see a painless way out of this and most of the pain will be directed at the least of those in the process. Even many of the shareholders are innocents in all this. Many of them merely invested in what was perceived as a solid, long term investment unaware of the mayhem that loomed.
I would go along with you in this manner. An immediate bailout to keep the Big Three solvent. The $50 billion number currently being considered sounds reasonable. Limits should be placed on executive pay, with no bonuses at all. Performance bonuses for workers should also be stopped. Annual merit increases should also be halted during this turnaround since the current wage rates are more than sufficient for a decent lifestyle. We are talking survival here.
Further financial aid would be predicated on a turnaround plan that exhibits a way out of the current dilemma with a provision for exhibiting ongoing competitive capability. Assessing the integrity and viability of such a plan should be made by a special commission, made up of experienced, maybe retired, bastions of the industry. Care would have to be taken to not let confidential strategies be leaked to competitors. This commission could report to the Congress, through a Congressional Committee, probably in closed session, and recommend any further financial actions. Certainly the special commission would need a dialogue mechanism with the companies to discuss and alter issues that the committee did not agree with. Should our current downturn continue, the plan would need to reflect minimal funding needed to stay afloat and then plans for remaining competitive after the economy regains momentum. That would also require a definition of a stopping point for further funding.
My accountant nature would opt for voting stock and seats on the Board but that may be overkill and create more harm than good. I tend to believe that some sort of ongoing auditing or expenditure approval process should be in place but in such a large organization that adds costs and could really be a cog in necessary urgent actions. My major concern is that once an unwise or illegal action is taken reversing it would be like moving mountains.
Guaranteed dividend preferred stock is probably the best investment method, I would not go for loans, with provisions that should payback occur sooner than expected, all or a portion of the dividends could be applied to the principle payback. Ending the arrangement sooner rather than later is more important than income to the government.
Some sort of agreement on legacy costs would be necessary since I don't see the Big Three becoming competitive while holding onto that albatross. I believe they can still be competitive under current wage scales, even though difficult, but the legacy costs have to be dealt with.
There are a lot of pieces here and the longer it takes us to turn around the economy the more fragile those pieces become. Those making up the special commission are not going to want to make this a career position. Maybe target statistics leading to a return to the private sector for financing would be in order as well.
Now there's your creative ideas. You figure out how they could work. ;)
Art and Frank:
I agreee that Obama should go big and bold right out of the box. This is not a time for fooling around or taking piecemeal, namby-pamby measures. Ronald Reagan signed legislation moments after taking the oath of office. Obama should do the same. Now he has a mandat, if you want to call a crisis a mandate, but in two years who knows what the situation will be. He should take a comprehensive, overall, yes, even ideological approach and not dole out $25 billion here and $25 billion there. He should not take a band-aid approach to a massive hemorrhage! Better to include the Big 3 automakers in a comprehensive plan than to bail them out now. BTW, isn't GM the biggest seller of autos world wide just not in the US? So they are not destitute. They have other very successful operations abroad.
And universal health care will do more to help the auto industry than any other measure because the cost of health care alone makes GMs, Fords and Chryslers uncompetitiive in the marketplace since it adds around $2000. to the cost of each vehicle which is not the case for foeign auto manufacturers which operate in countries with universal health care in place.
If Obama does not come strongly out of the box on January 20, he risks getting mired down in petty political struggles, and he underestimates how much conservatives, especially Rush Limbaugh, want himm to fail. In fact Rush and many others will do everything in their considerable powers to see to it that Obama will fail. That's why Obama needs to reinstitute the Fairness Doctrine if he hopes to change political culture in this country. Wolf Blitzer devoting considerable time to Sarah Palin is just indicative of the fact that 48% of the electorate voted for her, and, in most major American media markets, 100% of the people listen to Rush Limbaugh. Obama needs to be wary about his penchant for inclusiveness. The Republican leopards will not change their spots so easily. They will merely wait for the best opportunity to pounce. Not everyone is as solutions oriented as the readers of this blog.
Frank:
I feel your pain! I watched the interview as well. Keep in mind we in the US are all about celebrity. Intelligence is so boring. Fareed Zakaria's program, which follows Wolf over here, is a mere pandering to a wayward audience.
I am even more aghast at the whole conservative movement, including Ms. Palin. The big brouhaha for conservatives is, "we just lost an election in a huge manner and we have to figure out how to get back to winning". "We have to get our mojo back".
Now there are a few, seemingly lead by Pawlenty, talking about expanding the movement to address the needs and concerns of the common man, i.e. Joe the Plumber. He talks the talk consistent with the Brooks article a few weeks ago, about reinventing the conservative movement. The problem is Pawlenty, and others, talk more about communicating their principles to a broader audience rather than modifying their principles to fit the concerns of the broader audience. It shouldn't take a rocket scientist to figure out that the Reagan philosophy is a failed idea. Not all of it, but many of the major aspects.
As for Palin, she's getting an hour and a half of fame rather than fifteen minutes, but I do believe soon she will retire to the land of endless nights and never be heard from again. We are told by many on both sides of the political spectrum that she is bright. I have yet to see her exhibit any brilliance. To me she makes Dumbya look like the second coming of Einstein.
The real shame is that in our pornographic political theater, at some future point conservatives will make election strides again and they will be taken as vindication for their better ideas. For the same reasons we see so much Palin, the American public gets bored with the same ol, same ol, even if times are good. We are forever looking gift horses in the mouth.
John Lawrence:
Agree! I can hear Rush now explaining to his audience that Obama is taking a leak on taxpayer time. Katy bar the door if Chitlins ever appear on a White House dinner menu.
Employment in the US auto industry will remain the same if GM fails.
US demand for cars will not change, so if GM disappears the cars will be built mostly by the remaining five integrated US carmakers, who will increase their employment and production. (Toyota, Honda, Nissan, Chrysler and Ford all design and build cars in the US).
Why do they keep trying to scare us into thinking that bankruptcy means closure? The US probably has the most lenient bankruptcy laws in the world, designed to help companies get back on their feet.
There are plenty of parts suppliers. Detroit is telling us that there might be a "cascade effect" if GM closes, with parts suppliers closing and Ford and Chrysler not being able to buy parts. Remember those auto parts stores you see around? Do they stock only one brand of brake lining? Unless Detroit is telling us that they are not up to the task of changing the brand of spark plugs they use, and frankly it is only a little more complicated than that in reality, I wish they would stop insulting our collective intelligence.
Christopher Plummer:
Interesting how oversimplification makes the largest problems disappear.
Frank:
Frank Rich has an excellent article on the Palin, conservative futures.
Frank:
You'll love Dick Cavett's in the NYT even more (on Palin).
Dear Robert,
This is a rare occasion on which we disagree. To the extent that management is another name for engineering, the big three have failed. In order to turn them into a success, their management and forced adoption of the Deming principles (W. Edwards Deming) must be agreed to. That means that new management must listen to its employees and to consumers. Consumers have been demanding alternative, economic transit for years and years. And, they have voted with their feet. To win the consumers back, the big three need a completely new vantage point.
Felix Kramer at calcars.org has provided a way for the Power Industry in concert with the Federal government to refinance the Auto Industry:
http://www.calcars.org/calcars-news/1026.html
I think you should consider it.
Art A Layman
When listening to Detroit you have to take it with a pinch of salt.
Remember, these are the people who said that installing seatbelts would bankrupt them, that catalytic converters were impossible, that consumers would never pay for airbags and that they would be selling electric cars by nineteen seventy three!
Detroit has always been more economical with the truth than their cars have been with gas.
The one point in this post that rather sticks in my craw is the idea that the UAW should agree to wage and benefit cuts. We're bailing out AIG who holds on to their "bonus" fund opting to use tax dollars instead so they don't miss out on their bonuses, the top brass at GM is not being asked to take pay cuts or even examine their bonus structures, yet the line worker - expected to also spend money to re-vitalize the economy - is to take a pay cut. One of the highest benefit costs is health care. Are we then considering that the workers can have their health care benefits cut and can depend on some form of universal health care? I know I wouldn't want to take that risk.
This is all very complicated, and I don't pretend to understand it all. However, I do hope that a sense of fairness permeates any of these discussions, as well as an understanding that a union job at GM is not a luxurious life-style. My friends from Indiana who work for GM only do well when they can get enough seniority to pull in lots of over-time. Their "bonus" only comes from hard work.
F.O.R.D. = Found On Road Dead. Hmm...where did they go wrong?
Art Layman, John Lawrence:
Here it is 1:30 in the evening in Holland. I've just finished with correcting college student three hour exams while trying to keep up with you two demanding go getters.
I hope this initial response gives food for thought and touches on all our different exchanges about "What to do Next" concerning the auto-bailout crisis of the Big Three.
So allow me now just to proffer a capsule outline of my approach for discussion.
As I've already stated, based on my prior studies of this industry I see no way all three can survive long-term. My personal judgment is that Ford is the strongest and GM and Chrysler are equally weak in US with GM and Ford having rather strong overseas operations.
One will either disappear completely or be integrated into one of the other two survivors. So two firms eventually become an effective 1.5 firm ... with all related immense cost duplication and bureaucracy eliminated as quickly and as smoothly as possible.
There are two times Phases in learning who the final two survivors are:
PHASE I. This is the current, immediate
"Intensive Care Phase": our politicians and experts need to buytime to oversee preparation of Fast-Track completion and analysis of a Viable Plan from each firm.
Meanwhile, each firm would receive at their choice an immediate infusion of at least $25 billion for liquidity and retooling costs for new generation fuel-efficient cars.
II. Viable Plan Phase: Each firm would be given similar crisp, no more than 10 page format (covering, perhaps, Low Probable and Probable scenarios), for submitting and presenting its Viable 6-year Plan for turnaround and survival (won't go here into specifics of format, although I could. Highly energetic, knowledgable brains are abundant for this task).
Each firm must complete its Viable 6-year Plan by March 31, 2009. It will be studied by an independent ad hoc bipartisan Independent Committee including 4 or 5 outstanding persons from academia and industry (including the great consulting firm McKinsey), and headed by someone of the wisdom and business savvy of a Warren Buffet.
The Committee would make a recommendation to Congrass by June 30, 2009 which two firms have the best prospects for long-term survival and which one does not. I think it would obviously be in the interest of the three firms to involve the very best of their overseas people in the preparation of Viable Plans ... as their overseas operations are obviously much further ahead in cleverly producing the right cars compared to the relatively comatose innovation and bureaucratic inefficiencies of the Big Three´s US business operations.
The one firm that is rejected has three options: (1)find a suitable private financing partner because no more public funding would be provided to support continued operations; (2) explore possibility of merger with one of two surviving firms; (3) enter Chapter 11 bankruptcy.
Under options (2) and (3), the government would agree to provide funds necessary for one-year extended worker unemployment compensation, retraining and job recycling (in new industries) for all those workers made redundant.
The streamlining process of the surviving firms would be supported with up to $100 billion in added loans for each firm with strict conditions on reporting progress results; on executive pay and bonuses; on government official representation on Board of Directors; on payment of a 7% interest rate on borrowed capital with government option in 10 years of having entire loans paid off at 175% of their original face value or of converting their loans to a, say 15% share ownership interest in either of the surviving firms.
You will notice I don´t take John´s tough approach of letting all three firms go out of business or enter Chapter 11 bankruptcy and I also do not adopt Art´s apparent inclination that all three can survive as competitive ongoing firms. Call it preconceived notions on my part, but I think our government would go bankrupt 5times over if it got sucked into this bailout scenario ... given the superior entrenched competition of Toyota, Honda and Volkswagen, etc. The Independent Committee and yours truly must be prepared to be convinced otherwise about this judgment, though, with the Viable Plans.
No matter what happens, I think the ultimate Turnaround funds over
next 5-6 years will approach $350 billion under above approach ... coming partly from the government, partly from private sources. All three firms are under liquidity, solvency AND investment pressures simultaneously during a credit crisis of dramatic dimensions.
Thus, I assume the Viable Plans will take 5-6 years to execute and no major results in profitability or cashflow will be realized during that time.
I also assume that breaking up the firms into smaller units is not viable because the capital intensive nature of auto manufacturing facilities and R&D requires firms of scale ... but also dynamic firms responding directly and ruthlessly to societal needs for fuel-efficient, smaller vehicles with elimination of at least 50% of the huge proliferation of model versions existing today.
Of course, it´s possible the Independent Committee will recommend that only one firm is deserving of additional government funds for ongoing operations ... which is getting closer to John´s inclination to let the chips fall hard if the facts so indicate this is necessary ... in which case John's idea of a radical downsizing of the Big Three possibly around young highly entrepreneurial, innovative company upstarts in the industry may become a realistic option.
For the moment, I would give the Big Three the floor to clarify the Mess they are in and how they plan to get out of it without bleeding scarce taxpayer funds desperately needed for investments in social infrastructure and new enterprises (e.g. alternate fuels).
Your comments, additions, and revisions are welcome to this framework approach for our Congress to proceed post haste on.
The approach reflects a combination of Daring and Caution on this serious matter by incorporating Speed for immediate "Intensive Care" liquidity and tooling cost realities and "Breathing Room" for appropriate deliberation on critical Viable Plans for ongoing Big Three survival.
Frank Thomas, The Netherlands
http://spitfirelist.com/?p=2945
In the case of the auto-makers' bailout, it's a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people have stopped buying them. If GM and Ford don't want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.
Thanks for telling the truth about the labor side of the problem as well as the management side. We can't afford to let all these jobs go, but we can't afford to save them unless we can make these companies competitive.
Mr. Reich, You had me until you said that labor and the UAW should make concessions. Sorry, but they have been making concessions for the last decade. They aren't the problem. Why is it that when the government bails out AIG and the rest of Wall Street there is no mention of concessions being made by the CEO's and their board members who got us into this mess? Again, why is there no mention of consessions being made by the CEO's of the Auto industry who have giant egos and an unwillingness to keep up with new technologies and the needs of the 21st century. Seriously, if you want to bailout GM or the rest of the Auto industry, start by mandatory firings of all CEO's and board members first without pay. They created this mess they must now leave. Second replace them with temporary CEO's for $1 a year like Lee Iococca did in 1980 to manage the corporations and hire their own boards to plan new innovations and restructuring. Steve Jobs of Apple Computer and PayPal co-founder Elon Musk come to mind along with engineers Martin Eberhard and Marc Tarpenning founders of Tesla Motors come to mind.
However, to help with the Auto Industry's bottom line this country must implement Universal Health care in the form of a single payer system. This is the only way we are going to be competative in the world economy.
And as far as the shareholder is concerned, the American Tax payer comes first and should be the first to benefit from the bailout just like we did when the government drove a hard bargain with Chrystler and ultimately made the taxpayer hundreds of millions.
If the time we live in is dire or calls for drastic measures then we can't hold back. We need to take bold measures to get us all out of this mess. Those bold measures were not taken by the CEO's of the auto industry when they needed them a decade or two decades ago. They can't be trusted to do the right thing.
Nothing is going to change in Washington unless Washington is willing to stop catering to the top of the corporate food chain who are making the bad decisions in the first place. Washington needs to restructure it's thinking to serve of the working person and taxpayer to turn the country around.
So Robert, who is on your short list to head Treasury? Sheila Bair of FDIC? Someone, anyone, who is not a disciple of deregulation mania?
Art, John:
As stated in earlier posts, if we are going to give serious taxpayer money out to rescue any of the Big Three like GM, then a new Board of Directors and top Management team are a must.
I have said this should happen FAST, as soon as any taxpayer funds are provided ... so even in my immediate Intensive Care PHASE I. However, I admit, Art, this is a debatable move now but should be definitely a policy action upon Congressional decisions June 30 under my PHASE II approach.
I would drop this condition in my PHASE I step even if the government preference were to place one or more of the Big Three immediately in receivership before any interim "Breathing Room" taxpayer funds are provided until Viable Plans are committed. I'm now feel this tactic is neither desirable nor legally/logistically feasible given the urgency for immediate cash infusions. Cooperation of all participants is vitally needed now on Emergency Intensive Care help and assurances for workers.
Thomas Friedman's quote of a former Wall Street Detroit bureau chief's recommended management/board changes if significant taxpayer funds are committed is to-the-point assuming a Chapter 11 for GM (I assume possible upon final decisions in my Phase II final government decision-making process):
"In return for any direct investment (e.g., GM), the Board and the Management should go. Shareholders should lose their paltry remaining equity."
"And a hard-nosed government-appointed Receiver -- someone hardnosed and non-political, e.g., like, Warren Buffet or a top industry executive engineer(from abroad or Telsa Motors if no conflicts of interest) or business executive from another industry -- should have broad powers to oversee revamping of GM with a Viable Business Plan and return it to private operation as soon as possible. That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations, selling others and downsizing the company."
Christopher Plummer:
I'm shocked! Shocked! That promotional self-interest has been going on for years in Detroit.
It is part of the Kabuki Dance between government and industry that takes place across all industries in our economic system(?). The government dictates and industry whines. It is part of the democratic free market process.
There is a possibility that your simplistic analysis could be valid but you are suggesting playing Russian Roulette with a bullet in every chamber.
To all the doomsdayers, about GM, on here, are they not the number one or number two auto company in most foreign markets? They must be doing something right.
THE GREAT BAILOUT
Obama is--we know--a reader,
And also--it may be--a leader;
But it is very hard to lead
A nation so consumed with greed.
It turns the Christ upon his head:
Meekness and poverty stay dead
Within an economic system
Bailing out theft, but never wisdom.
The "least of these" my brother is,
But no one wants to hear of this,
"Spreading the wealth" the Christian way
Becomes a sin; the poor the prey.
It was the age--O don´t you doubt--
To be known as the Great Bail-Out,
As Wealth bailed from the common good
But left the poor to drink the flood.
.
Frank:
Whew! You are tough. Lots of good thoughts, lots of bad.
I disagree completely (surprise!) with your Board/executive purging. Once again, GM still has a leading market share in much of the world. They are teetering in the US primarily due to their strategic failure to foresee the likelihood of severely rising oil prices. The, almost, tripling of oil prices in a six month period blew a lot of business plans away, not just the auto industry. GM's management has been involved in a very complex restructuring for a number of years. Granted their union contracts, among other variables, are a huge impediment, that foreign car makers don't face in the US, and sets the pace for change. They have, however, made great strides in getting labor costs under control. It is still legacy costs that are maintaining a tight grip around their throat.
I don't know about Europe but in the US, entrenched corporate cultures are often the roadblock to fast, efficient change. Getting rid of a management which is part of and thoroughly familiar with their culture could bring chaos. Again, these are not inept, incompetent people, they may be lacking in foresight and, like most American business, may be inclined to take risk too lightly, but if you look at the labor cost disparity, which they have been struggling with for years, one could marvel at their success in spite of it.
To my mind another set of strategic errors GM made were with GMAC. First, getting into the mortgage market tied up funds that could be available for car leasing and loans. Second, selling off controlling interest in GMAC, looking at the current credit crisis, robbed them of an important tool for price competition through special financing terms. We cannot forget that this current economic dilemma came on us like a lightening strike; a year ago the US GDP was growing at a 4+% rate.
You'll have to pardon me but I need to vent a little "Bah, Humbug" of my own here.
Your proposal does smack of an academic/consultant type approach. Not all bad but my experience tells me not all good either. My "shooting the wounded" phrase is from a cliche, at least in Anerica, that defines what consutants do; they come in after the battle and shoot the wounded. Not aware of a similar cliche for academics but one might assert that they are inclined to shoot the wounded before there are any wounded (my apologies Dr. Reich).
A few myths or mitigating factors:
The various models issue is somewhat of a red herring. Across their various brands, GM, and Ford and Chrysler, use the same or similar drive trains and frames for comparable sized models. Primarily only the body shells are different.
The auto market is not just one big transportation market, it is an aggregation of a whole bunch of niche markets. If GM, for instance, were to eliminate some of their models, especially in the compact/midsize sedan and coupe lines they would be ceding those lines to foreign car makers, most likely the Japanese, giving up even more market share, which is a very serious parameter in the industry. There are surely duplicate costs in design and manufacturing but I don't know that the cost savings would offset the market share loss.
If we look back, when Japan, after WWII, began their return to the world economic stage they were renown for making miniature things. Toys segued to transistor radios and other small things. When they first entered the US car market they came in with small cars and thus cheaper prices to serve a niche market for those that could not afford or did not want the tanks that US car makers were building. The efforts of US auto makers were anemic when they began to try and compete. I have long marveled that the US could never produce a decent 4 cylinder engine when Europe had engineered them to a fine tuned, powerful machine. I still marvel at why we Americans are enamored with getting from 0 to 60 in five seconds. Even at that Europe had cars meeting that standard long before the US.
As I mentioned before Japan entered the US manufacturing business by being able to take advantage of significant automotive job losses in the 70s. This gave them a labor market happy to just get a decent paying job with good benefits. One could argue that to keep the playing field level they should have been required to pay industry union scale wages but that would have been undemocratic and surely not a free market approach.
Is taking advantage fair? In the world of commerce all's fair. But what of workers? If you extrapolate you get back to the economic postulate that when competing with cheaper labor, wages must come down. Not a scenario that bodes well for workers anywhere in the world. It continues the economic paradigm that suggests that labor is a mere pawn that can have no influence on pay scales.
I would agree that Japan, as well as many European brands, ushered in a reliance on quality. American products, for years, were predicated on short term obsolescence, presumably for creating future sales. We are now entering phase II of that aura in that we are importing products of poor quality, often because we cannot control quality sufficiently in foreign manufacturing operations.
On your 6 year plan: 10 pages? Damn, the financial numbers would take more pages than that. Much more important would be the narrative that explains how they plan on getting from here to there and that is far more than ten pages. Yea, if you want bullet points and condensed numbers you could get there but what would that really tell us. That kind of presentation is fine for a Wall Street forecast meeting or for impressing the shareholders but for an exercise that is predetermined to be about survival it falls more than a tad short.
Who would be providing the basic economic forecast to set the stage for this plan. Would each company just use their own future overall economic forecasts? Would that not skew the process to assessing the economic forecast viability more than the actual company expectation forecast? I will give you that if the auto companies were seeking a bank loan, from just one bank, they would follow your proposal but there would not likely be a ten page limit in that case.
I worked for a corporation that every year required a detailed next year business plan with a five year forecast plan, including economic assumptions and necessary investments and it usually ran at least 30 pages and that was for a small subsidiary. We're talking huge conglomerates here with entrails running everywhere. In your format we'd get less truth and more sales pitch.
I don't envision this bailout process as a long term contract. Granted there will always be the risk of losing huge numbers of jobs should we face another decline or if this one goes on for years but I see the objective as helping these companies through the fire and then after that they should be back on their own. Some may fail and there may be mergers but the market, in more normal times, can deal with that. The whole impetus right now is in not letting market forces drive us down too deep a hole. One that could take the whole economy down with it.
You mention private funding as a booster or catalyst or other option. We already have one player, Chyrsler, owned and run by a private equity group. Has that bode us well? The problem with private funding is it only comes from an interest in turning profits quickly. The group that bought Chrysler wasn't really interested in building fine autos, they were interested in massaging a company and turning it over for a profit. They too, may have lacked some foresight and certainly the recent turn of events screwed up their plans. Would bet that in current merger talks with GM, now suspended, they are praying every night to get out with minimal losses, even as they hope for greater profits.
No one can argue with your cost savings from mergers through elimination of duplicate functions and costs. Is fewer jobs to be the goal here? We've been going through that scenario for years now and it has been a prime factor in stagnant and declining wages for workers. Ain't likely Walmart will ever pay manufacturing scale wages.
You cling to (guns and religion?) the euphoria of worker retraining programs. Though these are good and necessary, for many workers they are deathknells. The Big Three have workers averaging in age in the mid-forties. Family situations, committed lifestyle responsibilities, re-entering a disciplined learning mode, and many of them haven't been in that mode since high school, all serve as significant obstacles to successful completion. Once they complete retraining what do they have to look at? Competing in the marketplace with similarly educated folks half their age?
The 21st century jobs are popping up in the sciences, health, biotech, etc., and these curriculums will not be easy for those who have been outside the learning environment for eons. Hell, I marvel at how difficult acounting seemed to be when I was learning it and how ridiculously simple it is in practice. Job retraining, to a great extent, is a feel good sales pitch proffered as Pepto-Bismol for a stomach ailment known as unemployment.
We have talked before, and there is strong validity that global competition will result in bigger and bigger monolithic corporations, made possible by mergers and acquisitions. Each consolidation will lead to less and less jobs, not even considering technological advances. We have an immediate crisis to be tamed but in the long term we need to get back to figuring out how to save jobs not eliminate them.
Alternative energy jobs offer some promise but after a brief period of unbridled growth we will begin to see consolidation and technology taking over there as well. Efficiencies and productivity and profits all combine to attack workers.
I also disagree strongly with your interest rates and payback terms on loans made to the selected winners. The goal of this process is not to make the federal government a player in the marketplace driven by seeking more profits. Their involvement should be to save jobs, and thus the economy, and to preserve order amid mayhem. 7% interest in today's market is nearing junk bond levels, maybe even usurious. I know, I know, but this is taxpayer money and taxpayers deserve a reasonable rate of return. Is not a flourishing economy a decent rate of return? A return to stability and opportunity is not sufficient? Your suggestion appears more of that "exacting a pound of flesh" syndrome.
Unless you propose to void all union contracts, extended unemployment benefits for union workers is likely not necessary since they have pretty hefty unemployment benefits now. Don't know the latest but previously they were guaranteed one year at full pay in case of extended layoff.
I would hold fast to my recommendation but I never intended for it to be a controlling commission but rather an intermediary to convert complex business strategies and jargon to a Congress not well experienced in all the nuances of big business. We have far too many, Senators at this point, pontificating on how best to run an automotive company.
Everyone, including you, seems to want to pile a history of slow reaction to the marketplace on top of current management and put them in the stocks for all to see. Right now I'm not sure Ford or Chrysler are begging for funds. That may be because they are better positioned or because they enjoy letting GM take all the heat. In the latter case, actually in either case, should funding be made available to GM, they will be the first in line claiming an unfair market advantage being provided for GM.
Again, GM was operating under a restructure plan which I believe commenced in the late 90s. There was no way it could be a fast restructure due to the size and complexity of their entire operation. Granted they were still relying on truck and SUV sales to keep profits flowing in the interim as they moved to a different model. The idea was working well in the US and Asia until two unexpected events blew everything up. Chances are GM and the others could have weathered the bursting of the housing bubble, with a lesser credit crunch, or the tremendous jump in gas prices, given that many experts didn't consider the high oil prices to hold for very long. The confluence of the two sent everybody scrambling and those depending on gas guzzler sales were speeding downhill ahead of many others. Speculation is that Toyota won't fair as well as Honda and others, in the current environment because of their entry into and somewhat reliance on SUV and large truck sales.
Ford and the Japanese still having financing arms available to promote sales even in this bad time but GMAC is hung up in the mortgage market troubles and can't help GM with fancy financing deals.
GM must have been considering some kind of problems, I doubt the current ones, because they built up a pretty hefty cash position which has carried them the past couple of years. Great progress has been made in their wage contracts getting them back to a competitive position in a couple more years. They have the guarantee of retooling funding once things stabilize. The current mess is demobilizing any further progress and that's why government intervention is needed. We need to turn the economy around and allowing any one of the Big Three to fail will prolong that, adding seriously to a potential further decline. That is the reason for a bailout. If not for the current overall dilemma chances are GM and the others could have muddled through.
GM has long been the whipping boy for all those desiring to beat up on the US auto makers. I get the sense that the current desire to punish them is just an exacerbation of a long term syndrome.
BTW, in the US we have no 1:30 in the evening. It's either 1:30 in the morning or 1:30 in the afternoon. If you were suggesting 1:30 in the morning, need I mention that the elderly require lots of rest?
has anyone seen the new GM commercial begging for help? unbelievable!
http://wormseyevieweconomics.blogspot.com/2008/11/gms-cry-for-help.html
Art, cc: John, Dr. Reich
Here's a partial reply to your post which I will followup with a final post. Yes, my last post was 1:30 in the morning.
First, I was one of the very first 2 or 3 Americans in 1969 who joined European firms mostly on one-two year Interim Management contracts. My job was up for discussion each year. You talk about performance incentives! But, I soon discovered how Europeans have a great balance between short and long-term management processes. You are really off the mark to generalize me with consultants and academics who "shoot the wounded."
I wouldn't have made it one year let alone 10 years in my work as an Interim Consultant Manager if I had behaved that way with my Dutch employers. Worker security and loyalty are sacred here in exchange for a solid work ethic and low-key innovation that in recent years has become far more intense and focused.
Your 1st paragraph talks about GM not forseeing likehood of severely rising oil prices ... well who did? They also didn't see that the Japanese were beating them soundly in their own backyard territory for over 20 years. Who's responsible for this? Could it be GM management?
You say GM US was involved in a very complex restructuring for a "number of years." Well, nothing much came out of it and why did it take years? They lost $10 billion in 2005 which was a good industry year.
You say correctly Union contracts have been a huge costly impediment and foreign contractors don´t face this. Well, who has been behaving smarter? GM entering such irresponsible contracts or the foreigners not doing so?
You say that GM has been making great strides in getting labor costs under control and then you follow this with the vague remark that "legacy costs are maintaining a tight grip around their throat."
Well, who,s to blame for this? I confess I´m not sure what is meant precisely by the term "legacy costs."
Summarizing your introductory paragraph, followed by paragraphs citing GM's many years of market and model cost negligence: no one but GM management is responsible for the long history of mistakes ... which included ruthlessly destroying their good electric car designs John Lawrence takes note of.
In paragraph two, you say that GM has made a strategic error selling off GMAC as it has robbed them of an important tool for price competition. Well, who's responsible for this? Could it be GM management?
You site surprise of the huge jump in oil prices and fact GDP was growing at a 4% rate as a sort of indirect justification for GM's failures. But GM has been stredily losing marketing penetration to Toyota for 20 years. Who's responsibility is this? The oil price surprise only revealed more nakedly the inherent structural vulnerabilites of GM business model that has been long in development. I don't see Toyota in the position now of almost begging their government for a survival bailout.
You say if GM were to eliminate their models in the compact, midsize and coupe lines, they would be ceding those lines to foreign makers, thereby giving up market share. Well, who's been losing gigantic US market share over the past 20 years, GM or Toyota? And who's saying they should eliminate such models? What is being said is that they should reduce the number of all vehicle models to competitive levels and downsize their stupid proliferation of "big" car models.
They do all this rather well in Europe (as does Ford) ... so why not in the US? Model for model -- no matter what the market niche -- the size, weight, and of course efficiency of US cars have long been markedly inferior to Asian cars assembled in US as well as to most Asian and European imports. This is Not true for GM and Ford in Europe ... that is why in my prior Phase I and II post I made obvious suggestion GM's European executives should play a major role in formulating and presenting a Viable GM Plan for survival according to suggested PHASE II deadline.
You rightly say US carmakers were and have been "anemic" (I used the word comatose innovative) when they began to try and compete with the Japanese with a decent 4 cyclinder engine ... when Europe (including GM UK) since long ago has engineered to a fine tune machine. This is true for most US car product lines, not just GM's. Again, who's responsible for this? Could it be GM management and/or is it the fault of the American public as some are saying?
You say Japan should have been required to pay GM's union scale wages. You imply this is an unfair taking advantage paradigm that exploits labor as a pawn in the US competitive production process. However, all research I've read about American workers employed in Toyato's plants is rather positive due to stable working conditions, reasonable benefits, and serious attention to worker involvement in productivity improvements ... all leading to superior quality vehicles on the average. It GM's management that entered unreasonable and unsustainable pension agreements and wage arrangements with workers ... not Toyota. Who's responsible for these misjudgments causing billions of losses today? Could it be GM management?
Lastly, and I'll stop here to catch my breath, you say my 10 pages wouldn't even cover the numbers. You missed completely what I was saying, Art. My 10 pages referred to the FORMAT alone for the Plans which personally I think is obscenely too much! The written and numbers document will be much longer ... but in Europe I was always required to reduce my 25page plus reports to no more than 3pages. My goal with the Format suggestion is simple. Each company submits a Viable 6-year Plan of survival according to a Similar Format so good comparisons can be made. Of course, the narrative is the most important part and the numbers are only as good as the narrative strategies, action programs, and implementation steps. This is nothing new you are cautioning this old entrepreneur about who's done his lifetime share of Business Plans to raise capital.
We've got to do everything reasonably possible NOW to stop the financial bleeding and deepening of this mini-depression ... including the home foreclosure problem, stabilizing the auto-maker crisis, and related unemployment escalation.
I want GM to go foreward as much as you do, but the reality how and whether this is possible for any of the Big Three remains to be seen in their Viable Plans to continue as successful ongoing firms. I feel more time is needed to prepare these plans ... therefore, my suggestion of a March 31 submission deadline for all three manaufacturers. I've framed it as a super serious contest for taxpayer trust and likely very significant taxpayer rescue funds for a structurally competitive recovery ... still to be proven possible on even a Low Probable scenario, recognizing there are no guarantees in this life.
BUT at the same time action must be taken immediately on the near-term liquidity and tooling cost pressures ... intensified by the current serious credit crunch. Therefore, my theme of facing the immediate crisis and structural crisis in two PHASES with both "DARING and CAUTION"
I shall followup on your other helpful critique and concerns soon. So please wait before you post further retorts. Thanks.
Art,
Minor correction: 6th paragraph from bottom, line 9:
...It was GM's management that entered...
Proposal:
A Better Big 3 Bail-out
How about a bail-out with benefits? One that works for the short and the long-run; one that is not a black box cash infusion but that tangibly and directly helps:
• Manufacturers and workers
• Dealer and consumers
• The bottom-line and the environment
The way to achieve this is to have a substantial part of the bail-out be in the form of a revolving loan fund for the purchase of low-emitting vehicles. Essentially, the government fund would directly finance the purchase of a large number of the most fuel efficient and low-polluting vehicles. It could work like this:
Government sets up a “Fuel Saver Vehicle Purchase Fund”
The fund buys from the big 3 their “most efficient” vehicles: high mpg conventional vehicles, prius-type hybrids, and heavy duty hybrids. In later stages it could be plug-in hybrids or full electric vehicles.
The fund would be a revolving loan fund program that works over the next five years.
The fund directly “buys” the fuel efficient vehicles in a three way arrangement between big 3, dealers, and the fund. Details could vary, but essentially:
o Manufacturers are paid on order of the designated vehicles
o Dealers sign loan papers with the fund
o When vehicle is sold, the loan is transferred to the buyer
o Like a construction loan, it could be no cost to dealer while vehicles are in inventory
The invoice price to the dealer is 10% less than true cost -- to expedite sales of the fuel efficient, low GHG (but likely higher cost) vehicles.
Dealers agree to a maximum mark-up on these vehicles that would allow a modest profit, but not windfalls.
The consumer loan would be up to six years at 2% interest.
Note, instead of the invoice mark-down, the recent rebates could be increased. A mark-down could be tricky to enforce.
The benefits and the rationale for the program are as follows:
Big 3 get cash infusion to stave off depression 2.0
Jobs in some factories increase, lay-offs are avoided
Dealers get big help financing this part of their inventory
Consumer gets help (the 10% price discount) buying the fuel efficient vehicles.
Environment and planet benefit from lower pollution and GHG emission rates from high efficiency vehicles.
Taxpayers get paid back. It’s a loan – except for cost of the price discount.
The difference between this and the recently enacted tax rebates is that this program:
• Quickly gets money directly to companies because vehicles are purchased by the fund
• Keeps workers employed now because production is assured by the up-front purchase.
• Helps dealer financing which is part of the problem.
• Helps consumers with low-cost loans in addition to more discount.
• Unlike tax rebate, program costs are mostly recovered (it’s a loan).
Here’s what it would look like assuming a $10 billion revolving loan fund operating over 5 years and making 6 year car loans to consumers at 2% interest. The fund would order and immediately pay for low-emitting vehicles so workers would be hired. The vehicles would be “pushed” out to dealers (at no dealer cost) to be sold on 2% financing plus a set amount for dealer mark-up. In the first year $10 billion worth of efficient vehicles would be purchased and financed. For the next four years, principle and interest payments from the first year would purchase and finance additional vehicles. During years 6 through 11, no new orders initiate and the government keeps the principle and interest payments to recoup it’s initial $10 billion investment. The financing could be contracted out to banks, it doesn’t have to be a new bureaucracy:
Initial capitalization of revolving loan program: $10 billion
Direct first year capital infusion to big 3 10 billion (same $ as above)
Total infusion to big 3 at end of 5 years 16.3 billion
Total return to tax payers after 11 years 15.6 billion
Net cost to taxpayers (due to discounts) .7 billion
This is not a wild concept. Revolving loan programs have been used in housing and many other governmental programs.
While the big 3 do not have the most efficient vehicles on the market they do have some hybrids and some high MPG vehicles. They will have more hybrids and plug-in hybrids coming on line. This program would finance the “most efficient” 4% of the 9 million vehicles sold by the Big Three in 2006.
Bob,
As an attorney who helps the guys and gals on Main Street you have certainly hit it on the head. There are so many people who have been taken advantage of by the banks, the automobile financing companies and the big oil companies that we need to look at a way to help the majority of people who make up this country.
Thanks for your comments.
Sam Mutch KSG/MPA '86
The discussion is great and it seems that everyone agrees the automakers and union and partners need to submit a plan to ensure their long term survival. Isn't this the responsibility of the companies rather than impose the ieas presented in these blogs. I would repeat that many of the ideas include some notion of sacrfice now and payback if they succeed. My simple recommendation was a 10% pay cut replaced by options for all employees if they succeed.
I've already sent Obama an email asking (begging, really) him to hire you. We really need your voice of reason to help our country out!
GM didn't make a product anyone wanted to buy. If I started a business selling Christmas sweater, and no one wanted to buy them, then I would go out of business despite all of the Chinese workers I wouldn't be employing. If you make a product that people don't want, you shouldn't be in business.
I'm really unclear about how it is that these bailout deals are being made without any opportunity for the public to weigh in? When do we get to vote on how our taxpayer dollars are being spent?
The online comments in response to the article yesterday in the Chronicle titled "Are You an Idiot to Keep Paying Your Mortgage?", pretty much sum up how I feel about the mortgage bailout plan, yet I don't remember Pelosi asking me for my opinion before marching forward.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/16/BUQR1442LQ.DTL&hw=mortgage&sn=005&sc=552
Art and Frank:
Here's another idea for a GM bailout: Let the government buy up all the GM stock which is selling for less than Bed, Bath and Beyond (a good name for household merchandise; a bad name for a nursing home.) The government turns over the stock to the workers. Voila! Workers replace CEO and Board of Directors. They keep their jobs. And with productivity rise, they raise their own wages instead of dividends going to management and srockholders. As stock regains value, workers profit also.
GM can produce flex-fuel vehicles in Brazil but not in US?! Boo-hoo GM. Long live GM abroad. Let it die in US, or maybe one day make a comeback with profits made in Brazil and elsewhere. I understand that Chevrolet is the most popular car world-wide. So why do they come crying to the American taxpayers?
The following is from April 2007.
SAO PAULO (Market Watch) -- The Brazilian unit of U.S.-based auto giant General Motors Corp.expects to reach the 1 million-mark for flex-fuel vehicle production by the end of July, the company said in a statement Tuesday.
As of April 14, the company had produced 921,799 of the flex-fuel vehicles, which run on any combination of gasoline and sugarcane ethanol, GM said.
Flex-fuel hybrids could run on any combination of electricity, gas or ethanol thereby potentially getting 500 miles per gallon (of gasoline. Both ethanol and electricity are renewable resources thus minimizing need for imported oil. Etahnol from switchgrass, of course, is preferable to ethanol from corn even if it has to be imported.
I wouldn't be surprised if the author of this article and many those who post comments are hypocrites...they say that bailouts are so bad, yet I'm sure many of them voted for bailouts...voted for McCain and his bailouts or voted for Obama and his bailouts.
I'm certainly not a hypocrite, as I voted against bailouts...I did the right thing and voted for an anti-bailout 3rd party candidate.
John Lawrence:
Fantastic! Hillarious! This statement was worth the price of admission:
...Bed, Bath and Beyond (a good name for household merchandise; a bad name for a nursing home.)
I have a favorite about nursing homes that's a little sicker:
"Folks are dying to get out of them."
Now I'll get back to reading the rest of your post.
Frank:
Would like to adhere to your desires but we are in different time zones and on different time schedules so I feel I must respond now. As we enter the latter stages of mortality one never knows at what hour the bell will toll. It's also important to write things down as thoughts emerge. As you are well aware, in the twilight years memories can be fleeting.
Would beseech you to not get too defensive. Consultant jokes are great fun with only a modicum of truth to them. It should be apparent that I love injecting a little humor in my posts as well as some digs once in awhile. The other thing old age teaches us is not to get too serious about anything; remember Shakespeare's admonition about life, fretting and strutting and then, after an hour, it's over.
Now your littany of: Who did this or that? Could it be GM management? Sounds a little like the climax to a Perry Mason TV show (more humor). If you run down the list it would appear you are blaming current GM management for 5 or 6 decades of mistakes by previous managements.
The significance of the oil price spike was that it came at a time when GM was already reeling from a shift away from SUV, big truck sales. As the global warming issue began to crescendo there was more and more pressure on those buying the gas guzzlers, blaming them for contributing to the problems. Likely there were other reasons as well but this alone began to impact gas guzzler sales. Enter the oil price rise and the market almost shut down.
In 2005 the bulk of GM's losses were in GMNA ($8.2 billion) and most of that was due to a 1.3% decrease in US market share. There were numerous asset writedowns, additional accruals, and other accounting adjustments (looks like mostly noncash items), ranging from millions to hundreds of millions. Significant restructuring charges, some associated with plant closings added to the losses. Cumulatively we're starting to talk big bucks.
In the $10.6 billion overall loss there was a $3.6 billion charge for smoothing contractual difficulties with Delphi which was spun off in 1999 and was in bankruptcy in 2005. The spin off included numerous guarantees required by the UAW.
Now there can be little doubt that over the years union contracts have probably caused great pain to management but those types of arrangements were established years ago, generally for good reasons, and the contracts run for 4 year periods (that may have varied over the years). The 4 year contractual period does preclude GM mgt from being able to react quickly, from a cost reduction standpoint. Further at contract renewal time it is not a zero based process. They don't start over from scratch each time. The unions start from where they are and look to build up and the company starts from where they are and attempts to either build down or minimize the build up.
GM can't do much about the union involvement because there are numerous laws protecting the union's interest. They can, and have, stonewall and move to strikes but that tends to be a lose-lose proposition and strikes can get nasty.
This alone gives foreign firms, operating in the US or not, huge advantages in reactions to markets as well as costs. It's easy to argue that the unions are the culprit here but they do represent the workers and have provided for them well and the wages and benefits secured have trickled down to many other nonunion workers in our economy.
The Job Banks program along with numerous other benefit considerations mean that even a massive layoff would result in the company continuing to bleed cash for a long period of time before the cost savings would kick in. BTW, the legacy costs are the guaranteed pension payments and health insurance premiums provided to retirees. Early retirement programs, used frequently, just add to this cost.
In net, the unions are partners, with no management responsibility, but they can impair management actions meant to improve the plight of the company. That is beginning to turnaround as the unions begin to realize that the golden goose is mortal as well.
As discussed before, GM, especially, but Ford and even Chrysler, are behemoths. They enjoy certain economies of scale from their size but the price, even without unions, is slower reaction times to market forces or restructuring needs.
The reason that smaller players can often be effective in certain industries is, generally, lower cost structures and the ease with which they can undertake major changes.
For years the Big Three have been the targets. GM has been the world leader in market share for years and so everyone took aim. The aim of the others is getting better and GM is seguing from target to arrow albeit slowly. It appears that they may now be number 2 in world market share. That's a bad performance? Given that foreign competition is not coming from idiots and upstarts, the industry has some pretty bright people running it all around the world, it seems logical that the big boys are going to suffer market share losses and thus financial losses. The natural tool for offsetting market interlopers is prices. Generally it is considered conventional wisdom that market leaders have the economic power to withstand lowering prices. This has been true for a number of years but margins have become so small that the big players, given the locked in costs they have to live with, can't really employ a lower price strategy.
The quality issue is an old one and is really just folklore today. In the last 15 or 20 years the Big Three have had their vehicles move into the upper echelons, including the top spot from time to time, of the quality and safety studies. Like in most things, education of the masses is a slow process. Yes, they did languish for years but they have made numerous improvements in quality and safety.
I fully understand your favorable view of European practices but markets and consumers vary. What sells in Europe does not necessarily sell in the US. The driving habits and logistics of Europe and much of Asia are far different from those of the US. The variety demanded by US consumers is far different from that in other countries. Though multiple brands and models appear cost ineffective, generally they are meeting a market demand. Changes are made from time to time but often slowly after much consideration. GM phased out their Oldsmobile brand in recent years and there were many diehard Olds fans that likely moved away from GM out of spite. There have been instances of models being dropped only to have to resurrect them because of consumer backlash. I don't disagree that some downsizing of models, even brands, may have to occur going forward, but American consumers will be upset no matter what the change or the reasons for it.
Agree that presently the Japanese automakers are not begging for government loans but be careful about what you suggest. Japan has just announced that they are in a recession and Japanese car makers are suffering all over the world just like US car makers. A deeper recession might change the request pattern. There is an ongoing discussion about the extent of the Japanese government's involvement in funding the research which lead to the gas/electric system used in the Prius. I seem to recall instances where European governments have subsidized various auto manufacturers within their countries in the past. We don't necessarily have a worldwide level playing field.
My GMAC assertion was somewhat of a guess on my part. It does seem to be hurting GM now but there may also have been good reasons for their selling off a 51% stake at the time. Again, nobody expected a credit crunch either. GMAC had bogged themselves down in the mortgage business as well and conceivably were a cash drain on GM even though they were and remain profitable.
Though failing in some engine innovations, GM makes one of the best V6 engines in the world. They also make one of the best V8 engines and have for years. You can argue whether this is wise but again many US consumers want big engines. Certainly they are necessary for driving the "tanks" but you can even find V8 engines in midsize US cars as optional. For my money they're a waste because the V6 does as good a job and with more fuel efficiency but my late father-in-law would not buy a car that didn't have a V8 engine. You don't tend to be sucessful telling the American consumer that he's crazy.
This is not an epistle suggesting that current GM or Big Three management should not be blamed and skewered to some extent but you are blaming them for a number of difficulties that they inherited and inherited from a time when there were no Japanese auto makers. My main point in all this is when any management is deeply embroiled in a long term turnaround and then gets hit with a general economic decline, aspects of which impact them more than other industries, jettisoning that management compounds rather than simplifies solutions.
I'm not clear what you mean by FORMAT. If you mean a FORMAT for the final presentation, if you skinnied it down to:
Assets
Liabilities
Capital
Sales
Expenses
Profits
You would need at least 7 pages if you included the base year data. But this is the stuff of dog and pony shows. It essentially says nothing. I would agree that the heftier submissions should have a required FORMAT to enable ease in comparison. If the bigger books are to be submitted to an expert commission then the commission can skinny it down for a Congressional Committee after acquiring a significant understanding to answer questions. Have done my share of putting together business plans as well. My experience with Venture Capitalists is they care less about the projected (guessed?) final numbers than about the understanding of management regarding their markets and their strategies.
You didn't address the issue of who sets up the economic environment standards. There has to be some base of economic understanding so as to avoid the hassle of A assumed an economic turnaround in 2012 and B thought it was 2014.
Business plans, 5 year, 6 year, whatever, are highly questionable anyway. So many assumptions about so many variables have to be covered that you likely end up with an economic model that holds those so many's constant or you assume some constant rate of increase/decrease. Usually the best thing they are good for is explaining actual variances to original plans. They are often a necessary evil but in practice yield little of value beyond a sales pitch.
Art,
Haven't much time, can only say I think relatively very poor results over a long time determine one's approach to the bailout Mess and not who inherited what from whom.
All GM managements have stood by for two decades and allowed themselves to be beaten by Toyota in their own back yard as well as be squeezed forceably by Nissan and Honda (latter is now matching Chevrolet sales -- GM's best performer for some time).
GM executives are "suddenly" realizing only NOW as one executive just remarked, "there has been a shift from large trucks and SUVs to more fuel-efficient cars." He continues brilliantly and naively, "people are moving to small less-expensive products as well as focusing on fuel economy."
Gosh, tell me something I didn't know years ago and more importantly that foreign vehicle producers haven't known for ages. You can rationalize GM's erratic management structure until the angels land, Art, but the fact remains the two decade brain-dead market performance has been terrible ... especially related to US operations. I recall a recent somewhat belated management announcement by GM that they will be shutting down some truck and SUV plants. Rip van Winkle didn't sleep this long!
As I've noted on the positive side, Ford and GM do rather well in Europe and other overseas markets which account for up to 60%of their annual unit sales abroad. It never occured to their bureacratic mauseleum to bring their obvious management finesse abroad to the states.
In this regard, Ford is showing some real alertness finally with some aggressive moves to gain market share not only in growing "crossover vehicle" market but in the so-called subcompact and compact car market. Right now sales of small, mid-size cars are comprising over 35% of US market and have been increasing dramatically the past 18 months. Accordingly, Ford announced in July that it will bring six of its more fuel-efficient European models to the US soon. Praise God! It's about time ... and I pray not too late!
Ford is also going to introduce the "ECOnetic" version of the Ford Fiesta which will have a specially tuned turbocharged, direct-injection diesel engine that gets 63.6 miles per gallon. But of course hybrid engines that also use electric can be on the market soon getting much, much higher mileage efficiencies well above 100miles a gallon with green fuels.
So, there's hope... despite the record two decade mismanagement performance (understatement?) of Big Three:
SALES DECLINE THROUGH MAY 2008:
GM..........-30%
FORD........-16%
CHRYSLER....-25%
HONDA.......+11%
NISSAN......+4%
TOYOTA......-8%
The US market share of the BIG Three is trending to below 45% now vs. 60% in 2000.
I agree, Art, bad management is married now to a vicious financial crisis spurred by irresponsible use of debt in all directions ... resulting in tight credit, falling housing prices, loss of consumer confidence and rising "misery index," and weakening labor markets all intensifying the auto industry's cash crisis to bizarre danger levels where bankruptcy seems inevitable for GM if not Ford or Chrysler. The combination of illiquidity, insolvency and need for major tooling investments underscores the urgency to answer the question, Who's too big to fail? What's the probable ultimate funding requirement to avoid piecemeal bailout breadline that only prolongs pain and duration of recovery? What should be the government's tough conditions for coming to the rescue ... immediately and to assist in more effective long-term restructuring of industry?
Here's a summary of the BIG SIX 2007 results showing US industry market shares and unit sales ... the later dropping now dropping preciptously from 16.1 million units in 2007 to an annualized figure of possibly 12 million units or lower in 2008!
US MARKET SHARE BIG SIX 2007:
...........MARKET.....VEHICLE
...........SHARE.......SALES
GM..........23.8%.....3,866,620
TOYOTA......16.3%.....2,620,825
FORD........15.5%.....2,572,599
CHRYSLER....12.9%.....2,076,650
HONDA........9.6%.....1,551,542
NISSAN.......6.6%.....1,068,238
As is evident, the BIG FOREIGN THREE have been steadily outclassing our BIG THREE ... Honda is only a step away from surpassing Chrysler which is structurally in as bad a financial Mess as GM ... I hope Chrysler's venture capital owner, Cerberus Capital Management, has very deep pockets.
I stay to my judgment, Art, that one of our Big Three will likely go out of business (with taxpayers picking up the tab at a lower cost than feeding a dead horse with good hay) or it will be in a Chapter 11 situation where a workout merger -- with one of the Big Six or with private equity or a smaller, dynamic auto-maker -- may be possible.
I plan to live long enough to be proven wrong on this ... and if I am wrong, I have in mind a very special gift for you, Art. A nice surprise, so you've got to stick around to call my promise.
Meanwhile, Congress should consider my PHASE 1 and PHASE 2 approach to the bailout financing crisis immediately sinking the Big Three. Viable Plans for long-term survival are a necessity, requiring a bit more time, e.g., to take a look at Robertssaunders original post above, and to examine in depth all realistic options.
Government (taxpayer) financing bailout terms are of course negotiable. I think taxpayers are deserving of a premium for the obvious risks. You don't agree. That's fine. The Dutch government is getting an 8.5%fixed interest rate from ING for a $13 billion loan plus the option to have loan paid off within 5 years at 150% of face value or to convert loan in 5 years into a preferred share interest.
Boy, do the Dutch government know how to protect the interests of taxpayers like the Norwegian government does in owning 50% of its offshore oil-gas properties by which they have built up a magnificent soverign fund for future generations. And, believe me, ING does not need $13 billion (perhaps $3 billion) ... but took the deal to build client and genral market confidence that they have more than an adequate and legally required reserve Cushion to absorb any future surprises in these chaotic times.
Apologize for not responding to all your assumptions, counter facts and arguments, but I think we both have offered our best advice to Dr. Reich ... "bottoms up" and free of charge. That alone feels good enough for me ... even if it's probably all words to the wind.
Thank you for your extremely insightful blog. I read it regularly with great interest. I agree in principle with your notion of allowing the bankruptcy process to function and placing the burden of 'bailout' on those individuals and institutions that took the known risks of investing in, or lending to, a given company. I'm curious to know your reaction to the article that appeared in today's NY Times highlighting the inadequacy of the normal bankruptcy brought on by the extreme tightening of the credit markets: http://www.nytimes.com/2008/11/19/business/economy/19bankruptcy.html?_r=1&hp
Obviously, the long term answer is to get the credit market flowing again, but how do we solve the short-term issue where otherwise solvent (albeit restructured) companies will cease to exist due to short-term, 'irrational pessimism' by lenders?
There is a lack of antestinal fortitude that is necessary to overcome the problems at the big three. We can call it a bailout, but let's make it conditional on them actually changing the way they do business. My simple proposal is at http://www.e-m8.org/2008/11/precondition-for-gm-bail-out/
I'm surprised Robert Reich said workers should accept pay and benefits cuts. In most industries, wages and salaries of workers have barely kept up with inflation while executive compensation and corporate profits have shot through the roof.
As we have seen with the Wall Street bailout, the Ivy League MBAs took our tax dollars, bought their competitors, gave themselves bonuses, and partied heary, which only benefited the cabana boys, maids, and hookers at whichever resort they have their next retreat.
I am convinced I have the answer to our economic troubles. This whole thing started with the real estate crises and must be fixed with real estate. This is not Harvard economics, it is 5th garde economics. It is simple supply and demand. We must create demand for real estate again and that will spark the rest of the economy including the automobile industry, banking, construction, insurance, manufacturing and everything else. The way to do this is by putting a zero percent capital gains tax on any piece of real estate purchased over the next 2 years (or some trial period) no matter when you sell it, 1 day, 1 week 1 year 10 years this property will be exempt from capital gains from this purchaser. This will get investors off the fence and properties will start moving again thus stablizing the price making others eager to purchase and banks willing to lend. The government has nothing to lose and everything to gain because no one is buying and selling now anyway so there is no lost capital gains anyway. If this does not produce dramatic results like I am sure it will we can sweeten the pot a little by giving a 10, 20 or 30% tax credit on newly purchased real estate. Definetly a doctor, lawyer or others with a high fed. tax liability will purchase a property to help offset it.
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It it as simple as it gets, its seen, but overlooked. The big 3 is not asking for a "bailout", they are asking for a bridge loan that the banks will not give. The big 3 aren't going anywhere, they have been, and always will be a good investment. The financial institutions that are unwilling to make the normal loans as they always have in the past had their bailout with our taxpayer dollars. Now they are hoarding the monies, and shutting this country down. If the banks would loan the funds, this bridge loan would not be required. Our leaders have let this country down by bowing to wall street. If the small percentage of the citizens of the United States of America who's income is not in some way connected to the manufacturing industry are so self centered, or blind that they do not realize what is about to happen without the "loan", this recession will be known as the greatest depression of all time. I suppose we can all work at McDonals, and eat out at Burger King for a change, and by the way, whoever is last to leave, don't bother closing the door or turning off the lights, Consumers will be next. Now come the black out.
"And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy."
It's not a tragedy, Robert, it's a strategy.
^^ nice blog!! ^@^
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