Auto Bailouts, Mortgage Debt and the Economy

I have tried to stay out of the auto-bailout thing but I find that I need to add my two cents to the issue. I have done three successful turnarounds in my professional career and have consulted on quite a few more. It is from this perspective that I am making my comments. So here goes...

First, Ford (F) says that it can make it through the near-term without any assistance from the Federal Government. Good. Let it go for it!

Second, Cerberus Capital Management, LP, a private investment firm who boasts that, “strong corporate governance is the cornerstone of our business,” owns Chrysler. This is a private investment firm that recently took a risk, made a big investment, has access to billions of dollars of capital and is coming, hat-in-hand, to the Federal Government asking for money to carry Chrysler through this mess.

Come on…This sounds like we have a new model for private equity investment!

Third, there’s General Motors (GM): “What’s good for General Motors is good for the United States,” as a former CEO of General Motors put it. We bailout General Motors, and then we bailout the United States? Hmm…, I don’t think that is what was meant.

General Motors is a turnaround situation! In a turnaround situation, you get rid of the existing management and you bring in new management! Robert (Bob) Lutz says GM should stick with “Rick” Wagoner, Chairman and Chief Executive Officer, because he knows the business and knows what the current situation is and doesn’t have to be brought “up-to-speed” with the situation at GM.

I remember taking a thrift institution public during “the S & L crises” and going to numerous “dog-and-pony” shows of other companies taking their institutions public. I was especially taken aback by managements that would say…”Sure we were the management of this institution for the last 10 years in which the performance of this company got worse and worse…BUT, we have learned our lessons…we can make this bank work going forward!!!” Then they raised quite a few million dollars from people who were willing to bet on this story.

Guess what? Most of them didn’t make it!

We have also heard that the top engineers and other top management want Wagoner to stay. “He can do it!” they say.

Sure, these employees want Wagoner to stay! He is the safest thing for them and their positions. A turnaround specialist would take a long, hard look at these people and what they have done and are doing and that is exactly what the top engineers and other top management don’t want!

General Motors is a turnaround situation! If anyone (the Government) is going to invest money in this organization they need to demand the appropriate leadership…and the existing CEO and his top management IS NOT the leadership that is needed.

The bailout of the auto industry is not just about thousands or millions of workers being employed. I, personally, hope that these workers do not have to experience a great deal of suffering. The question is about whether or not any effort made by the government will have a fair probability of success. Thinking of these efforts as a bailout is not helpful when the situation calls for a turnaround. The issue, in my mind, is not being framed correctly.

Some Other Things

Information is starting to come out concerning the efforts to restructure mortgage debt, and the results are not encouraging.

Let me just say one thing about restructuring mortgages...or, for that matter, any debt in the present environment.

Generally, when the restructuring of debt takes place, the situation of the borrower and the situation in the economy are relatively stable. That is, any restructuring that takes place can count on income, employment, prices, sales, and so forth to remain relatively constant in the future. That way, the debt can be restructured in a way that presents the borrower with some likelihood that he or she will be able to pay off the debt.

In an environment that is not stable, the situation of the borrower and the situation within the economy are constantly ‘going south.’ And, there is no certainty about ‘how far south’ these things will go. Consequently, any debt restructured in this environment has a relatively low probability of being paid off. Those restructuring the debt are just postponing the day of reckoning and continuing to put these borrowers in a position of almost assured failure.

In essence, within the current environment, those that have been foreclosed upon have gone from borrowing using a sub-prime loan to borrowing using a sub-sub-prime loan.

As I have said in many other posts…once discipline is lost…there are no good solutions to the problems created by the loss of discipline.

Comments

[Asbytec:]

Great point on the stability when borrowing issue.

2008 Dec 11 08:44 AM

[Mike InMich:]

The following U.S. government policies, many of them having popular support, hurt the big three significantly relative to the foreign transplants:
1. Uneven union laws across states:
a. The 1935 U.S. government Wagner Act granted the right of workers in the private sector to organize labor unions and take place in strikes. What this effectively meant was the labor unions were allowed to seize the plant and prevent its use until they got what they wanted. This created the ridiculous result in the US that workers are paid in proportion to the pain they can inflict by shutting things down. Trains, docks, garbage collectors, police, … get high pay. People in low capital or less critical to safety related industries like restaurants and retail get paid low paid. The relationship of pay to skill, work ethic, hazards goes away. Soon after the Wagner act the UAW took over the auto industry; GM and Chrysler in 1937; Ford in 1941. With no foreign competition the UAW monopoly flourished for about 30 years.
b. The 1947 U.S. government Taft–Hartley Act tried to reign in the unions after a series of post-war strikes. While some provisions were national, the states were allowed to pass "right-to-work laws" that outlawed union shops. Such shops require workers to join the union and pay dues. Said state laws are serious impediments to union organization and viability because few people want to pay dues if not required.
c. The vast majority of foreign owned plants are in right-to-work states providing huge advantages in labor costs and productivity relative to the big three.
d. The big three would find it impossible to change the state laws where they are located due to union dominance of state governments. If they built in the South they have to accept the UAW because they would strike back in Michigan.
e. No other country has this crazy system to my knowledge.

2. Promoted defined benefit packages and kept them in the company name. Did you ever consider how totally stupid it is to pin an employee retirement package, meant to last about 50-60 years from first hire until death, to the viability of their company? The top 10 companies in 1950 were very different than in 2000, with the railroads taking a big dive since then. And in 2020 it will be totally different again. Defined benefit packages were a bad idea, promoted by the US government till this day, and the big three are paying the price. If a company is in decline, due to the other items mentioned here, their retiree pool grows relative to gross income and number of active workers. Costs rise and competitiveness goes down, sales decline in a vicious spiral. Note also that while someday the transplants will pay pensions here in the US, the bulk of their corporate salary people (engineers for instance) back home get pensions from the government. Again, a totally crazy concept promoted by the Feds with widespread public support. And again, affecting the big three orders of magnitude harder than the foreign auto companies.

In most western nations, if there is a defined benefit program, it is paid into a government fund and is divorced from the company. If the company fails, people don’t lose their pension. In the U.S., the Pension Benefit Guarantee Company, a quasi-government / private company (like Fanny-Mae) supposedly fills in when the company goes belly up. But it is really a welfare program, with maximum limits far lower than promised pensions for many salaried workers. The airline pilots at United Air Lines, the current poster child of how wonderful chapter 11 will be for the big three, got screwed out of a large percentage of their “guaranteed” pension. Apparently the courts have ruled bond holders have first dibs on people’s defined benefits supposedly “held in trust”. What a travesty; only in the worse run country in the western world. These plans were in lieu of 401k plans. They are not deferred compensation as some say. There is a pot of gold with the employees names on it.

See the PBS Frontline episode here for what happened at United.

www.pbs.org/wgbh/pages.../

All of you with defined benefit plans are in jeopardy. The Feds can fix these laws by simply making pension funding shortfalls first in line for bankruptcy allocations. Put the vulture chapter 11 lawyers and banks second in line after peoples pensions (which are essentially saving accounts).

3. No national healthcare. This is killing all US industry because we are competing with foreign companies with virtually no health care costs at home. Again, for transplants, the tens of thousands of such people at corporate headquarters are not in the U.S., but back home with free insurance. I’m basically a free market person but U.S. healthcare is so screwed up, and the employer based care creating such a competitive disadvantage, I give up – company paid healthcare must go and something needs to replace it. Watch for a future blog entry on that topic. Even though the transplants provide health care for their workers this is again an order of magnitude bigger problem for the big three because: 1) Corporate staff is back home with free health care, transplant workers are younger and therefore healthier, big three also pays health insurance for a million retirees.

4. Blunt instrument CAFÉ laws. The original purpose of CAFE was to reduce depletion of finite fossil fuel supplies and/or to reduce foreign imports. The Global Warming theory did not exist when CAFE was instituted but CAFÉ supports this as well. These same goals are achieved in almost all other Western counties via very high (on order of $3-$6 per gallon) federal gasoline taxes. That is the primary reason the cars are smaller in Europe and Japan. Our cowardly government did not want to be associated with taxes so instead wrote CAFE laws so the big three could do the taxing. I would argue that such laws fell, and continue to fall, disproportionately on the big three. The laws regulate an average fuel economy for a fleet produced by a given company. This forced the big three to abandon the cars they made money on, and build cars they don’t make money on, usually at a loss. The economics are simple: it takes as many overpaid UAW workers to put a door on a $14000 focus as a $30000 F150. So the bigger and more expensive the car the better the big three can compete. The above mentioned economic disadvantages of the big three are exaggerated on small, lower cost cars. And yes, people expect small cars to cost less. Screwed again by the feds! Ford, for instance, has trucks providing over 50% of sales. A rapidly increasing percentage of these trucks are used in the trades; try carrying a load of bricks or even a saddle in a Focus. Why does the Ford commercial truck have to go into a CAFÉ formula when a Mack Truck or Caterpillar dump truck does not? In the rest of the world, where gas taxes are used to reduce fossil fuel consumption, each company is allowed to compete in the part of the vehicle market where they do best. The customer takes the cost of gasoline with tax into consideration when he decides what size and features he needs, and then shops the brands that play in that market. With CAFÉ, the big three were forced at gunpoint to build and sell small cars at a loss just so they could meet the consumer demand for larger cars and trucks with their greater utility (carried more people for instance). The Japanese entered the market in the small car nitch where their low cost and experience from the sane countries with gas taxes gave them the greatest advantage. The Japanese became associated with small cars and better gas mileage, although for the same size car and performance there was no difference on average.
It it were one or two of these items the big three might have competed better, but between the four the cost disadvantage in thousands per car and the hill too hard to climb. People seem to think Americans are superman, blessed with privilege, and the big three should have been able to overcome these odds against our oriental upstarts. In my opinion the big three did an amazing job lasting this long, as they are only mere mortals; doing the best they can given the stacked deck against them.
In the end it is not the above items that are killing the big three right now. These items and the recent gas spike put the big three in a weak position, but they were recovering with the help of the UAW. Cars sell on credit, and there is no money available. Houses are also credit sensitive, but the housing industry doesn’t have the large capital equipment (factories, labs, buildings) and huge staffs (engineers…) to keep feeding when there is a drop in sales. And the housing industry is dominated by illegal alien workers which they just let go.
This credit crisis in not of the big three’s making by any stretch of the imagination. The most likely biggest wrongdoers in the congress and the federal bureaucracy, will keep their jobs and pensions. The second biggest wrongdoers in the financial sector, are getting a trillion or so dollars of bailouts.
The big three are asking for a 5% loan and all this hate comes out in the press and the web. The gap between perception and reality is staggering.

2008 Dec 11 09:09 AM

[Zee4Money:]

Excellent comments - Where was this information in the recent hearings? I cannot imagine how Wagner was able to sit in hearing room and listen to misinformed Senators scream at him about corporate jets while he does not dare point out the gov'ts role in killing American auto manufacturing. - I really hope one misinformed Senator from Alabama is not allowed to kill three American companies. If he does in Americans that want to buy a Chevy will do so with a made in China label.

On Dec 11 09:09 AM Mike_I_N_Mich wrote:

>
> The following U.S. government policies, many of them having popular
> support, hurt the big three significantly relative to the foreign
> transplants:
> 1. Uneven union laws across states:
> a. The 1935 U.S. government Wagner Act granted the right of workers
> in the private sector to organize labor unions and take place in
> strikes. What this effectively meant was the labor unions were allowed
> to seize the plant and prevent its use until they got what they wanted.
> This created the ridiculous result in the US that workers are paid
> in proportion to the pain they can inflict by shutting things down.
> Trains, docks, garbage collectors, police, … get high pay. People
> in low capital or less critical to safety related industries like
> restaurants and retail get paid low paid. The relationship of pay
> to skill, work ethic, hazards goes away. Soon after the Wagner act
> the UAW took over the auto industry; GM and Chrysler in 1937; Ford
> in 1941. With no foreign competition the UAW monopoly flourished
> for about 30 years.
> b. The 1947 U.S. government Taft–Hartley Act tried to reign in the
> unions after a series of post-war strikes. While some provisions
> were national, the states were allowed to pass "right-to-work laws"
> that outlawed union shops. Such shops require workers to join the
> union and pay dues. Said state laws are serious impediments to union
> organization and viability because few people want to pay dues if
> not required.
> c. The vast majority of foreign owned plants are in right-to-work
> states providing huge advantages in labor costs and productivity
> relative to the big three.
> d. The big three would find it impossible to change the state laws
> where they are located due to union dominance of state governments.
> If they built in the South they have to accept the UAW because they
> would strike back in Michigan.
> e. No other country has this crazy system to my knowledge.
>
> 2. Promoted defined benefit packages and kept them in the company
> name. Did you ever consider how totally stupid it is to pin an employee
> retirement package, meant to last about 50-60 years from first hire
> until death, to the viability of their company? The top 10 companies
> in 1950 were very different than in 2000, with the railroads taking
> a big dive since then. And in 2020 it will be totally different again.
> Defined benefit packages were a bad idea, promoted by the US government
> till this day, and the big three are paying the price. If a company
> is in decline, due to the other items mentioned here, their retiree
> pool grows relative to gross income and number of active workers.
> Costs rise and competitiveness goes down, sales decline in a vicious
> spiral. Note also that while someday the transplants will pay pensions
> here in the US, the bulk of their corporate salary people (engineers
> for instance) back home get pensions from the government. Again,
> a totally crazy concept promoted by the Feds with widespread public
> support. And again, affecting the big three orders of magnitude harder
> than the foreign auto companies.
>
> In most western nations, if there is a defined benefit program, it
> is paid into a government fund and is divorced from the company.
> If the company fails, people don’t lose their pension. In the U.S.,
> the Pension Benefit Guarantee Company, a quasi-government / private
> company (like Fanny-Mae) supposedly fills in when the company goes
> belly up. But it is really a welfare program, with maximum limits
> far lower than promised pensions for many salaried workers. The airline
> pilots at United Air Lines, the current poster child of how wonderful
> chapter 11 will be for the big three, got screwed out of a large
> percentage of their “guaranteed” pension. Apparently the courts have
> ruled bond holders have first dibs on people’s defined benefits supposedly
> “held in trust”. What a travesty; only in the worse run country in
> the western world. These plans were in lieu of 401k plans. They are
> not deferred compensation as some say. There is a pot of gold with
> the employees names on it.
>
> See the PBS Frontline episode here for what happened at United.
>
>
> www.pbs.org/wgbh/pages.../
>
> All of you with defined benefit plans are in jeopardy. The Feds can
> fix these laws by simply making pension funding shortfalls first
> in line for bankruptcy allocations. Put the vulture chapter 11 lawyers
> and banks second in line after peoples pensions (which are essentially
> saving accounts).
>
> 3. No national healthcare. This is killing all US industry because
> we are competing with foreign companies with virtually no health
> care costs at home. Again, for transplants, the tens of thousands
> of such people at corporate headquarters are not in the U.S., but
> back home with free insurance. I’m basically a free market person
> but U.S. healthcare is so screwed up, and the employer based care
> creating such a competitive disadvantage, I give up – company paid
> healthcare must go and something needs to replace it. Watch for a
> future blog entry on that topic. Even though the transplants provide
> health care for their workers this is again an order of magnitude
> bigger problem for the big three because: 1) Corporate staff is back
> home with free health care, transplant workers are younger and therefore
> healthier, big three also pays health insurance for a million retirees.
>
>
> 4. Blunt instrument CAFÉ laws. The original purpose of CAFE was to
> reduce depletion of finite fossil fuel supplies and/or to reduce
> foreign imports. The Global Warming theory did not exist when CAFE
> was instituted but CAFÉ supports this as well. These same goals are
> achieved in almost all other Western counties via very high (on order
> of $3-$6 per gallon) federal gasoline taxes. That is the primary
> reason the cars are smaller in Europe and Japan. Our cowardly government
> did not want to be associated with taxes so instead wrote CAFE laws
> so the big three could do the taxing. I would argue that such laws
> fell, and continue to fall, disproportionately on the big three.
> The laws regulate an average fuel economy for a fleet produced by
> a given company. This forced the big three to abandon the cars they
> made money on, and build cars they don’t make money on, usually at
> a loss. The economics are simple: it takes as many overpaid UAW workers
> to put a door on a $14000 focus as a $30000 F150. So the bigger and
> more expensive the car the better the big three can compete. The
> above mentioned economic disadvantages of the big three are exaggerated
> on small, lower cost cars. And yes, people expect small cars to cost
> less. Screwed again by the feds! Ford, for instance, has trucks providing
> over 50% of sales. A rapidly increasing percentage of these trucks
> are used in the trades; try carrying a load of bricks or even a saddle
> in a Focus. Why does the Ford commercial truck have to go into a
> CAFÉ formula when a Mack Truck or Caterpillar dump truck does not?
> In the rest of the world, where gas taxes are used to reduce fossil
> fuel consumption, each company is allowed to compete in the part
> of the vehicle market where they do best. The customer takes the
> cost of gasoline with tax into consideration when he decides what
> size and features he needs, and then shops the brands that play in
> that market. With CAFÉ, the big three were forced at gunpoint to
> build and sell small cars at a loss just so they could meet the consumer
> demand for larger cars and trucks with their greater utility (carried
> more people for instance). The Japanese entered the market in the
> small car nitch where their low cost and experience from the sane
> countries with gas taxes gave them the greatest advantage. The Japanese
> became associated with small cars and better gas mileage, although
> for the same size car and performance there was no difference on
> average.
> It it were one or two of these items the big three might have competed
> better, but between the four the cost disadvantage in thousands per
> car and the hill too hard to climb. People seem to think Americans
> are superman, blessed with privilege, and the big three should have
> been able to overcome these odds against our oriental upstarts. In
> my opinion the big three did an amazing job lasting this long, as
> they are only mere mortals; doing the best they can given the stacked
> deck against them.
> In the end it is not the above items that are killing the big three
> right now. These items and the recent gas spike put the big three
> in a weak position, but they were recovering with the help of the
> UAW. Cars sell on credit, and there is no money available. Houses
> are also credit sensitive, but the housing industry doesn’t have
> the large capital equipment (factories, labs, buildings) and huge
> staffs (engineers…) to keep feeding when there is a drop in sales.
> And the housing industry is dominated by illegal alien workers which
> they just let go.
> This credit crisis in not of the big three’s making by any stretch
> of the imagination. The most likely biggest wrongdoers in the congress
> and the federal bureaucracy, will keep their jobs and pensions. The
> second biggest wrongdoers in the financial sector, are getting a
> trillion or so dollars of bailouts.
> The big three are asking for a 5% loan and all this hate comes out
> in the press and the web. The gap between perception and reality
> is staggering.

2008 Dec 11 10:37 AM

[303820:]

BOB CORKER:* Require that the "all-in" labor costs and work rules of the Detroit Three be immediately brought on par with foreign car makers such as Nissan, Toyota and Honda.

* Require that any compensation -- outside of customary service pay -- that occurs for workers who have been fired, laid off, furloughed, or idled, be immediately terminated.
THANK-YOU RONALD REGAN! THIS IS THE REASON THE FOREIGN TRANSPLANTS WERE BROUGHT TO THIS COUNTRY TO BUST THE UNION.NISSAN, TOYOTA, AND HONDA HAVE NO PENSION BENEFITS THEY ALSO HAVE LIMITED HEALTH CARE...SO INSTEAD OF THEM COMPETING WITH US...IN OUR LAND...OUR STANDARD OF LIVING...WE HAVE TO LOWER OUR SELFS TO THEIR'S.AND WHEN IN 2010 OUR HEROES IN WASHINGTON ALLOW THE CHINESE TO SHIP THEIR CARS TO USA THEN OUR HEROES (BOB CORKER AND RICHARD SHELBY) WOULD WANT US TO COMPETE WITH THEM TOO!

WARS ARE FOUGHT ON EMPTY STOMACHS...WAKE UP AMERICA!

2008 Dec 11 04:10 PM

[Fl00rman:]

Present management at GM did not cause the problem. Thirty years ago the union contract was becoming something no company could survive unless the trend changed. Now all present management can do to change the root of the problem is declare bankruptcy to void the contract. It is not a simple matter of poor present management.

2008 Dec 12 12:00 AM

[Homer II:]

To Mike_I_N_Mich:

All you folks in MI who chronically vote Democratic tickets, need to examine why you have elected those officials who are just surrogates to the UAW. The problem you have there was brought upon you by your own voting preferences. The Big3 have been sucked dry by the UAW vampires, while your own Senators, Representatives, and Governor stand idly by. Next election, try voting for the other partys candidates.. maybe they will work to help you get the monkey off your backs (and wallets)

2008 Dec 12 12:46 AM

[Mike InMich:]

Homer.
I vote Republican, except when I was in his district I voted for mean John Dingle. You are right though, Michigan mostly votes Democratic. I think you will find that the Dems at the national level, like Dingle, tried to keep CAFE laws in check.

2008 Dec 16 11:48 PM