G is for Gigantic M is for Meltdown

It’s got to the point where all you have to do is ask, and the billions come flying your way just because “you’re too big to fail”. It’s not a lesson any of us mere mortals can use, but if you’re a great big dinosaur of a car company, go right ahead.

General Motors we’re told by their auditors is at substantial risk of bankruptcy. That is not news. But it’s a useful little nugget to use if you happen to be GM looking for more cash to delay your collapse. Everyone knows the Obama administration is going to pay up, because the alternative is just too bleak to consider. GM goes under, and takes down the entire supplier structure which would be a body-blow to the rest of the world car industry, not to mention the hundreds of thousands added to the unemployment rolls in states that are already on their knees.

It’s a forlorn hope, but at least we should be a little imaginative in how we hand the money out this time. After all, we’ve kind of got these guys by the short and curlies. All we have to do (on behalf of the taxpayer of course, is twist). Here’s how…

First idea. How about insisting on the replacement of the entire senior management team? Does Rich Waggonner deserve to keep his job? Of course not. Should he retire with his many millions? Absolutely. Could anyone do a better job. My six year old daughter has expressed an interest in the gig. She and various other very smart people should be considered for the GM team.

Second idea. Perhaps we could structure the next ‘loan’ this way. We get ordinary stock and nationalize GM’s legacy costs. Turn GM healthcare and costs into pilot scheme for a new healthcare system. Have the US underwrite GM’s pensions. With those two costs off the books, the company’s share price will bounce back, and we the people sell our stock.

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normal is just a word

It’s more than a tad ironic that one of the last and most important acts of the outgoing Bush administration will be to attempt an end-run around Republicans in Congress and allow a bridge loan to the US automakers from the the $700 billion set aside all those months ago for the purchase of “toxic securities”.

The White House supported this turnaround with a fabulous piece of Bush logic. To wit; In normal times, the Bushies would have much preferred that the market decide the fate of the automakers, but these, it suggests, are not normal times, and therefore extraordinary measures are needed.

Not a bad version of the West Wing Shuffle, one might think. Except the logic has one drawback. It is as a result of years of allowing the market to take its ‘normal’ course that we are in the mess we are in now. One doesn’t test the beliefs of true free market ideologues during normal times. The only time they can be truly tested is in extremis.

You’d think that free market ideologues would be true to this logic, they are supposed to be, after all, Darwinian in their rigor. In their estimation, a company struggling in the marketplace must be allowed to die, just like a lame wildebeest must be allowed to be consumed by the cheetah on its tail. Upsetting the relationship between victor and vanquished is to deny the core of savage, brutal, evolutionary – or in other words free market principles. But the ideological unity of the free marketeers has been shattered forever. Some are still holding the line – and look silly and self serving doing it. Most have abandoned the fort, and now believe that the law of the market jungle must be tempered for the common good.

So much for the intellectual purity of the Conservative movement. It was always just a shaky front, and at the first sign of a tornado, it’s buckled like the set on a Keystone Cops movie lot. It was David Brooks who recently said the Reagan Revolution was over. Now he tells us. For years, we were subjected to a steady flow of rhetoric about the virtues of the marketplace. It was all we ever heard. It was such a simple pitch, so full of the natural justice of things we were told. Our entire legislative strategy became based on it. But the new normality those policies created was never tested until now. And even according to one of the chief footsoldiers of the Revolution, they were found to be profoundly wanting. What a total waste of time it turned out to be for one and all.

Unfortunately, it is not Thatcher, Reagan, Bush and their acolytes and puppeteers that will face the consequences.

It is our children.

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i speak with forked tongue

Before Mitch McConnell uttered the phrase above, he made sure to try to separate the bailout of the auto industry from the bailout of the financial industry. The financial bailout he said, was to shore up the entire economy. The auto bailout would support a single industry.

But McConnell’s cries of selectivism should fall on deaf ears. The US Auto Industry is no ordinary industry. It represents a big chunk of our albeit shrinking manufacturing output. It’s not as if the aluminum siding, or the garden furniture industries were looking for federal handouts. We’re talking about cars here. You can’t walk five yards in this country without seeing fifty. If the US car industry were to fail it would impact millions of Americans, would crush a thousand companies that rely on the Big Three, would severely impact the world auto industry, and would dig us deeper into recession.The truth is that sometimes principles have to suffer. But it’s not as if McConnell and his fellow Republicans can make any claim on ideological purity when it comes to subsidies.

America has been hedging againt failure with subsidies for years with handouts to the weak and the strong. In McConnell’s home state of Kentucky, the state coffers shelled out six figures per job to become home to Toyota, and for many years received the largesse of the Feds for the Tobacco industry. Without agricultural subsidies, US agro-business would have to compete on the world markets without handouts. We’ve been shelling out cash to the Oil companies too. And more recently, Hank Paulson and his Goldman lackeys hijacked the public coffers to save Fannie and Freddie, AIG, and biggest and best of all Citigroup. Without the public dollar, Citi would have been recession roadkill weeks ago. So it’s hard to see where the GOP Senate Caucus get off suggesting that the US taxpayer shouldn’t be asked to subsidize failure.

The GOP’s grasp on logic has always been tenuous at best, but their weasel-words in this case are simply craven. They make no attempt to look at the big picture. They just see this as an opportunity to break the UAW, which while it shares the blame is not the problem right now. This is a management issue. They make no attempt to see that the pitiful amount the Auto Industry is seeking is nothing next to the vast sea of cash that’s been made available for Vikram Pandit and the other Wall Street losers. And they don’t see that the structure of the deal is hardly a bailout – it’s  rather onerous loan at best. Worst of all is the White House announcement that they’ll consider using some of the TARP funds to help the Auto Industry, end running McConnell and his good-ol-boys (If the Auto Industry isn’t the definition of a “troubled asset”, I don’t know what is).  Perhaps McConnell’s “strategy”, if indeed it can be graced with the term, is to try and scupper the ‘bailout’ now, before January 20 rolls around and Olympia Snowe and Susan Collins are pushing an Obama supported bridge loan for the Auto Industry over the Senate filibuster line. Either way, McConnell and his knuckle-draggers are the personification of why the GOP are utterly bankrupt.

Hopefully GM won’t suffer a similar fate.

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Take the term “Bailout”.

In economic terms it means ‘assistance to a financial or other institution in distress’. But assistance can mean anything from a loan that nobody else will give with very stringent terms to a total and utter gift.

There have been a ton of bailouts in the last few months. We don’t have to list them all, we’re just going to focus on two ‘institutions’, Citigroup and the Big Three Auto manufacturers.

Let’s look at what these two have in common. Both of them are vast with global reach and influence.  Both of them made awful business decisions in the short, medium and long term that led them to the brink of collapse.

Now let’s look at what people perceive they have in common, namely that both are “too big to fail”, another term of limited meaning. Citigroup is too big to fail because of the depth of its interconnected interests throughout the financial world. The Auto Industry is too big to fail because whole regions of the country depend on it for their economic welfare.

Finally let’s examine where they are different. Citigroup is a financial institution that buys and sells assets with client and depositor funds. It employs in the region 300,000 people worldwide. The Auto industry makes cars and trucks, is the backbone of US manufacturing and directly and indirectly employs around three million Americans.

It’s a tribute to how well the Finance, Insurance, Real Estate or FIRE sector has sold itself over the last twenty years of the Reagan Revolution that a bloated, shapeless and rudderless behemoth of a bank should be regarded so highly, while the jewel of America’s industrial crown should be treated as if it’s already on the scrapheap.

That contrast is perfectly reflected in the way that the United States Congress and the Administration has handled the ‘bailouts’ to Citigroup and the Auto Industry.

Citigroup received the largest bailout in history without getting grilled by Congress, or having to show any contrition whatsoever because the $700 billion TARP program had already been signed into law. It has received a total of $45 billion in TARP funds, and the Government will cover 90% of the losses from its gigantic, unknowable mound of toxic mortgage debt in its $335 billion dollar loan portfolio, after the company absorbs the first $29 billion. This is the key to the bailout. Without the Government guarantee, confidence in Citi would have disintegrated in a matter of days after the rot set in about a month ago. In short it would have been finished, and we’d have been in a second credit freeze that would have made us wish that more than anything we could have the first one back. And in return for totally saving Citigroup from total collapse, the Government get a $27 billion sliver in preferred stock or warrants, the bosses lose their bonuses or parachutes, and the Feds get an office in Citigroup’s HQ to watch over operations. Not a bad deal.

Total potential bailout: Around $300 billion.

The Auto Industry got an incredibly rough ride in Congress, where they essentially grovelled for some change, not once but twice. They were castigated and humiliated in a series of hearings that took their cue squarely from the Spanish Inquisition. In return for Government funds, the Industry has to completely change its business model, completely overhaul its working practices and product ranges, and take orders from a “Car Czar” who would have tremendous power over Auto Industry decision making, including sign-off rights on any expenditure over $25 million, or in other words, anything remotely important. Auto Industry executives also take a huge hit (including a no-fly zone for their private planes), and the Government also get massive equity stakes in GM and Chrysler, because their market cap is so pitiful. (Ford decided to go it alone and not take Government money).

Total potential Bailout: $15 billion.

Now, I’ve never been much of a whiz at math, but by my reckoning the entire Auto Industry potentially gets 5% of what Citigroup is potentially getting. If Citigroup had received $15 billion instead of $300 billion it would now be owned by some unknown businessman from Dubai, who’d have bought it at the financial equivalent of a garage sale as a present for one of his wives. But the Auto Industry has to make do, its unions have to basically stick a fingers in every member’s eye, and the people of Michigan, Ohio, Kentucky and Wisconsin have to be extremely grateful for not very much.

Now it’s important to mention that if Citi and the Auto Industry had to live without bailouts the world would not cave in on itself. Bailouts aren’t about protecting ‘the little people’ who actually work for these companies, they’re about protecting management and shareholders. Bankruptcy wipes out both.

But putting aside whether or not a ‘bailout’ in either case was justifiable or advisable, the difference in the way Citi and the Auto Industry have been treated is staggering both in magnitude and detail . Their experiences are so utterly different, and yet are both referred to as having been “bailed out”. The press hardly blinked when Citigroup got its massive infusion of cash and confidence. The biggest and most egregious of Paulson’s handouts to his golfing buddies was all over so fast. At the same time, every detail of the Auto Industry bailout has been dissected to the point of absurdity, down to the make of hybrids that the bedraggled CEO’s sat in for the drive from Detroit to DC for their Congressional do-overs the other day.

This seems like a massive and illogical case of double standards at play, and ‘bailout fatigue’ doesn’t really describe it. TARP was set up at a time when everyone was truly panicking, and panic is not exactly a reliable driver of good policy. It was also limited to the financial sector because the panic was in the financial sector. In one fell swoop, America dumped nearly a trillion dollars into bailing stuff out. So now they’re getting snippy about a mere $15 billion for the car companies. The ROI on the financial bailout is hard to measure but if the Auto Industry were to disappear, the states of the upper Mid West would go from being the ‘rust-belt’ states to the ‘no-belt’ states. They’d be lucky to find a piece of string to hold up their pants. Millions of people would lose their jobs, livelihoods, and futures. If Citi were to go down, the Financial succubus would survive as it always does by hungrily digging into the entrails of one of its erstwhile gods; shareholders, executives, bank tellers, and office cleaners be damned.

Both Citi and the Auto Industry are going to have been “bailed out”. One of the bailouts is a huge gift, the other is a loan-shark’s dream.  When the same word is used to describe polar opposites, it’s a word without meaning.

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The one on the left is a Ford Ka, the one on the right is GM Vauxhall Corsa.

Small, good-looking, low cost, not at all thirsty, and sold in Europe for years.

Ford and GM during their latest congressional grovel sessions, said they’d tool up to produce small cars in the US. Great idea, except they’ve been making small cars for decades. Good ones too.

Here’s the rest of the Ford Europe Range, and here’s the GM Europe Range (brand name Vauxhall). Take a look. Would they be able to take on Toyota and Honda in the US? Definitely.

They both have great well designed ranges that could be really competitive in the US, with low emissions, great gas mileage (almost as good as a hybrid for way less money) and far better European styling than we’re used to here in the US even from the Japanese.

So why weren’t they for sale here?

Why weren’t their European versions (with left hand drive) shipped to the US? Why wasn’t the tooling imported to US factories years ago, to diversify their domestic ranges? Ford and GM could have saved themselves, and their dealers, and their workers, and all the people who depend on the car industry.

The answer is short-term profit hunger. Selling these cars makes less money than selling an SUV. Ford and GM tried to squeeze out the last drop of profit from the SUV and didn’t plan ahead, like any good business should. As usual, blinkered incompetence at the top is the primary reason. But there is another. Legacy costs. Ford and GM labor under onerous union agreements and health/pension benefit arrangements that eat up massive amounts of profit potential per car. If these costs were lower, profits from smaller cars would have been higher, and management would have been more willing to maintain them in their US ranges. But instead of dealing with the issue then – management waited until it was essentially too late. GM + Ford have taken massive hits to their brands that will take decades to eradicate.

Then there’s the issue of globalization.

We’ve been talking about it for years. But Ford and GM have been making cars in Europe for more than seventy-five years, way before globalization was even a word. They were among the first businesses in the world to go global. And yet, their US markets were profoundly devoid of the globalization they pioneered. The US market was provincial and protected. It was only a matter of time before Ford and GM paid the price.

That moment arrived in the last year. In spades.

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america the proud

The Auto Industry defines America. There is hardly a major part of recent American history that isn’t profoundly influenced by cars, socially, economically, and politically. As the nation debates the future of its manufacturing heart and soul, it’s worth looking back a few decades in the shape of a list of manufacturers and their slogans or ‘taglines’. It wasn’t always the “Big Three”.

The list speaks for itself about the how much the nation’s vibrant multi-faceted, innovative car industry has been laid low in the past few decades.

The name of each manufacturer (and there are many) is followed by their slogan. Full of pathos, a vigorous, often naive optimism,  and an odd polite dignity, they tell of a time when American manufacturing ruled the world. Some of the lines are truly priceless. Enjoy.

1. Allen: Wonderful Power. The King of the Hill Climbers.
2. American: Miles of Smiles
3. Anderson: The Season’s Most Enchanting Car.
4. Auburn: Once an Owner, Always a Friend
5. Austin: A Car to Run Around In.
6. Beggs: Made a Little Better Than Seems Necessary.
7. Buick: When Better Automobiles Are Built, Buick Will Build Them.
8. Cadillac: Standard of the World
9. Cartercar: No Clutch to Slip. No Gears to Strip.
10. Cole: The World’s Safest Car.
11. Columbia: Gem of the Highway.
12. Commonwealth: The Car With the Foundation.
13. Continental Beacon: The Lowest Priced Full-Sized Car in the World.
14. Daniels: The Distinguished Car, With Just a Little More Power Than You’ll Ever Need.
15. De Vaux: A Jewel For Beauty.
16. Diana: The Easiest Steering Car in America.
17. Dodge: Dependable.
18. Dorris: Built Up to a Standard Not Down to a Price.
19. Driggs: Built With the Precision of Ordinance.
20. Duesenberg: The World’s Champion Automobile.
21. Dupont: The Car That Makes an Instant Appeal.
22. Durant: Just a Real Good Car.
23. Duryea: A Carriage, Not a Machine.
24. Elmore: The Car That Has No Valves.
25. Empire: The Little Aristocrats.
26. Falcon-Knight: America’s Finest Type of Motor.
27. Flint: The Sensation Of The Year.
28. Ford: The Universal Car.
29. Gas Au Lec: The Simple Car.
30. Gearless: A Common Sense Car with No Tender or Delicate Parts.
31. Glide: Ride in a Glide, Then Decide.
32. Handley-Knight: For the Fine Car Owner Who Drives From Choice.
33. Hanover: Saves Money Every Mile.
34. Haynes Apperson: America’s First Car.
35. Hudson: Look For The White Triangle.
36. Jackson: No Hill Too Steep, No Sand Too Deep.
37. Jewett: In All the World, No Car Like This.
38. King: The Car Of No Regrets.
39. Kline: The Ace of the Highway.
40. Leach: The Master Creation of the Year.
41. Liberty: All The World Loves a Winner.
42. Lincoln: Get Behind The Wheel.
43. Malcolm: Easiest Riding Car In The World.
44. Martin: Little Brother of the Aeroplane.
45. Maxwell: Perfectly Simple. Simply Perfect.
46. Maytag: The Hill Climber.
47. Moore: The World’s Biggest Little Automobile.
48. Nash: Leads The World in Motor Car Value.
49. National: The All-Ball Bearing Car.
50. Oldsmobile: Nothing To Watch But The Road.
51. Packard: Ask The Man Who Owns One.
52. Paige: The Most Beautiful Car In America.
53. Pierce-Arrow: Pride of Its Makers Makes You Proud in Possession.
54. Pilot: The Car Ahead.
55. Pope-Toledo: The Quiet, Mile-a-Minute Car.
56. Reo: The Gold Standard of Value.
57. Rickenbacker: A Car Worthy Of Its Name.
58. Roamer: America’s Smartest Car.
59. Sears: The Businessman’s Car.
60. Sheridan: The Complete Car.
61. Star: Worth The Money.
62. Studebaker: The Automobile With a Reputation Behind It.
63. Templar: The Superfine Small Car.
64. Vaughan: Made in the Carolinas.
65. Westcott: The Car with a Longer Life.

A vibrant, entrepreneurial car Industry was alive and well in this country before the business consolidated after the war. And now it seems the remaining few car conglomeraes have not lived up to the entrepreneurial promise of the past. The question is simple. Can the Industry revive its competitive and innovative spirit of its bygone days, or will it be lost forever?

If the American spirit lives on, the ghosts of these troubled or long gone companies can tell us that the greatness of what once was could be once more. America can be proud again. It just has to be itself.

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Is this the future of the Big Three?

David Brooks in today’s NYT suggests that bailing out the Big Three US car companies is a bad idea. While I have some doubts about his ideologically driven “creative destruction” thesis, the notion that some US Government Car Czar is going to be able to prevent these monoliths from going over the precipice is absurd. They are beyond recall in their current form. I come from the UK and back in the seventies we experimented with nationalizing the once glorious British car industry. British Leyland was the result and it was a national joke.

There are many well documented reasons that the Big Three can’t be saved; ranging from massive legacy costs, onerous union agreements, byzantine, slow moving management, being enslaved by short term stock prices, outmoded technology, and of course bad, boring cars. These companies as they are now are from another era. They are inherently dysfunctional, and need to go.

It’s sobering to realize that despite having market capitalizations of around two to three billion dollars, neither GM and Ford have been snapped up by domestic or international buyers. Even asset strippers aren’t interested. The reason is simple. The sheer weight of their outstanding costs.

If the government should do anything it should take on these costs as an agreed stage in a sale of the companies. It’s absurdly territorial for Hank Paulson to suggest that saving the Auto Industry is not what the bailout money is for. The end of that program is to revive the US economy, not just fluff up the pillows for the financial system. His blinkered approach is a smokescreen for the failed free market ideology of his failed boss. Salvaging the mess that is the Big Three would be politically popular and economically sensible.

Health care and pension promises made by the companies must be honored. The pensions should be paid for current and past workers out of the Government’s pension fund, and current and past workers should be placed on the government health care system until the new system kicks in nationwide. Freed up from these costs, the companies could be sold to the highest bidder, and there would be many. The Big Three could be consolidated into one company or sold off in parcels, with specific specializations to encourage competition.

In return for reworking their debt, the government would receive preferential stock (like they recently purchased in the banks) with strict recoupment and interest requirements, and would insist on legislatively backed assurances from the new management that the vehicle range have gas mileage minimums of say 35 mpg, and that a given proportion of the range be hybrid, electric, and alternative fuel driven. There would also need to be assurances that new plant conform to alternative energy requirements. Finally, new owners would have to assure the government that they would not strip the assets of the companies, and continue the majority of their operations in the United States.

Under new management, and with a powerful infusion of foreign and domestic capital, plants could be retooled, workers retrained, and union agreements replaced. The UAW would have no role in the new system. Over time the US car market would be rebuilt and would be able to compete with its competitors. US workers would have jobs with a transformed system and sectors relying on the car industry would be able to thrive – after a leaner period.

This approach would enable professional auto people to remain at the helm of management, while freeing them up from constant financial concerns. In a decade or so, we’d be proud of GM and Ford once more – whatever banner they’re flying over their headquarters in Detroit.

Bailing out the Big Three without fundamental change and doing nothing would both end up the same way. Massive human wreckage, and a profound dent in what’s left of America’s manufacturing economy. Something has to be done.

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