The Fate of General Motors' Rick Wagoner

Rick Wagoner, Chairman and Chief Executive Officer of General Motors (GM), will resign as a part of the agreement with the federal government in which the company will receive additional federal aid. General Motors is a turnaround situation; it is not a restructuring exercise. The odds are against a company pulling off a turnaround with the same people that led them into the situation they now face.

Some people argue that the problem is the bad economy, something that the executives are not responsible for and therefore should be allowed to continue in their positions. This, to me, is like saying that executives in financial institutions are not responsible for the collapse in the financial market that exposed to the world the increased risk they imposed upon their companies or the large increases in leverage that accompanied their use of more exotic financial instruments.

When you make bad decisions, a bad economy will exacerbate the results that come from these choices. But, one cannot just place all the blame on the bad economy.

This analysis puts us back into a discussion about our understanding of exactly what it is that we are now facing in the financial markets and the economy. One way to distinguish the two views that seem to be the predominant ones now in vogue concerning our current situation is between those that believe the main problem relating to financial assets is the liquidity of these assets.

In this argument, people insist that banks and other financial institutions are caught in a trap where the markets for many of their assets are so illiquid that these organizations are unable to price the assets and then, possibly sell them. This seems to be the assumption behind the recently presented investment program, the P-PIP, that was announced by the Treasury last week.

The alternative view is that many financial institutions are insolvent and that what is really needed is a recapitalization of those organizations that still have a future while those that are not capable of being salvaged should be closed. Those that take this approach contend that this problem will not go away and will have to be addressed sooner or later. They also argue that dealing with it sooner will speed on a recovery and will also cost the taxpayer less in the longer run. (See my post)

The other area of concern is the status of many of the firms that find themselves in trouble. One group of analysts believes that the problem is one of a bad economy and a bad financial market and that all the companies need to do is restructure their current operations. This can be done, they argue, with the existing management and with just “tweaking” the existing business model.

Yet, here we are with General Motors. Over 20,000 employees were given the option of taking a buyout of their employment contracts. A total of about 7,500 took the buyout, but this was a disappointing result. Several of the product lines are going to be discontinued and / or sold off to bailouts in other nations. Contracts with labor unions regarding working arrangements and conditions must be massively changed. And, a substantial number of the bondholders must convert their bond holdings into equity. This doesn’t even touch the fact that the auto companies are substantially behind the curve in terms of real innovations and preparations for future technologies and products.

Given these factors that need to be addressed and resolved, I believe that one can only call this a turnaround situation, a condition in which new eyes and ears must be applied. To me there is little hope that the executives that got the company into this position are the executives that will bring these companies into the 21st century let alone into the 1980s.

This judgment applies not only to the automobile industry: it also applies to banks and other financial institutions, as well as many manufacturing organizations and other companies that require major changes in their business models. (See my post)

This country (and the world) is facing a series of serious structural dislocations. The problems are not ones of liquidity or keeping on, keeping on. Lobbying to maintain the status quo will not give us much hope for the future. Inflating our way out of the bad debt or band-aiding inadequate business models will only postpone what needs to be done.

The arrogance that Rick Wagoner exhibited in his first appearance in front of Congress probably doomed him to this result. The behavior of other executives from both the financial and non-financial sectors has not endeared them to either the people of the country or to their representatives in Congress. This will probably not help the executives in the long run. Sometimes a little humility is a good thing!

Bankruptcy is another option for many firms. One could argue that taking this path would probably be an efficient way to get companies into the turnaround mode although it would not include government money as a part of the process. It would keep government officials out of the turnaround process and avoid relationships that are uncomfortable for the new managements that will be leading the companies out of the bankruptcy.

This is not a normal, relatively mild recession that will be ended through the injection of liquidity into the monetary system. The economy is facing a management problem and a debt problem that must be worked through. It is not clear that this is fully understood by those attempting to turn the economy around.

Disclosure: No position

Comments

[ANTS:]

While there may be some empathy for Wagoners plight, the fact is he has been at GM for 30 years, 9 years as CEO and the company has been in continuous decline for all of those 9 years if not before. He got to the top doing what?

GM was actually built up during the depression wasn't it? Probably by a CEO who were very good.

The US corporate system/shareholders should be appreciative of this event, and hope that history repeats.

Mar 30 07:52 AM

[aarc:]

Just about time Obama shows some backbones!

We know corporate America has these Little Empires controlled by their CEOs. CEOs that use company board of directors as rubber stamps for them to get their fat salaries, exorbitant bonuses, and triple-A rated golden parachutes - while they underperformed such as manufacturing, or performed quite well using extra-ordinarily risky measures such as the banks in the mid-2000's, or even drive their companies down the drain such as Circuit City.

Many would not want the inexperienced hands of the government doing the dirty job of cleaning this mess corporate America is in.

However, who is going to the the job when the Board of Directors have become the puppets serving the CEOs while the lenders and shareholders are left holding the bag with nary a whimper.

Corporations are also given the easy way out options - get gov't bailout and hope for a turnaround OR declare bankcrupcy and be get done with it.

Responsibility and Accountability are two dirty words that must not even be mentioned in corporate America?

Mar 30 08:58 AM

[Juan Carlos...:]

GM´s turmoil will not be solved with Wagoner`s resignation. This requires a much more comprehensive approach in which the government seems to have a key role to play. But how far can the government go in terms of who runs a private company? Is this the beginning of the car industry nationalization? These are all relevant questions that pertain to the faith of the technological leap that GM was pushing so hard to accomplish. For a conjectural view as to why GM`s bankruptcy would delay the transition to electric propulsion in the world, see my yesterday´s blog on EV World.Com

Mar 30 09:12 AM

[Hot Richard:]

John,
Unless I missed it, you didn't provide any proof to back up your premise that Wagoner is arrogant. One of the commentors does, though.

I don't know if I'd call it arrogance. Companies get large and then the state comes sniffing around for a piece of the action. Soon there are lobbyists and contributions and regulations. Basically taking from taxpayers and giving to the connected. THAT is the scam and everyone eventually has to play. Auto has been playing for decades. Look also at Tech (Microsoft, Google) which goes from zero lobbyists to multi-million dollar lobbyist budgets overnight.

Wagoner may or may not be part of the problem. Your article didn't provide enough facts on him. But I know the state has a ton of blame here as pork has been flowing into Michigan and the auto industry to whore union votes for decades...along with coddling trade restrictions. Chickens...meet roost.

Let companies, regardless of how big, fall into bankruptcy and recievership. If that means you and your family are out of a job, that's what it means. There. Someone had to deliver the bad news and Hot Richard doesn't isn't shy.

Mar 30 09:29 AM

[Hot Richard:]

aarc,
You make me laugh hard and roll on the floor! There should be an easier way to write that.

"Responsibility and Accountability are two dirty words that must not even be mentioned in corporate America?"

So you cheer that government is going to get involved?!!!!?!!?!?!?!

You will bear witness to more waste, corruption, and idiocy with government calling the shots at GM than just about anything else in this world. Remember how much waste we saw at Katrina? GM Congress will make that look like an efficient robot welder.

When the hell are you folks going to look critically at government? They just spent $3 trillion of your money and can anyone point to anyone in government that is responsible and accountable for delivering anything?

Man, I gotta get me a job in government.

Mar 30 09:36 AM

[kelm:]

What I have observed with GM is that their executive management team has been continually behind the curve. For example, just days after the election they reveal that they need a massive infusion of cash or they will go bust by the end of '08 or in January of '09. A savvy management team would have had that data earlier and capitalized on the election to get leverage - they missed the boat.

After that each statement they made of how much they needed was swiftly overtaken by a new and much larger estimate. This happened time and time again.

GM is not dealing in complicated credit derivatives they are selling cars and trucks yet they have no more visibility into their operations than do the major investment banks. That is not sound management and Wagoner and his team are accountable for that.

I think it is a wise and long overdue move to make the change.

Mar 30 09:49 AM

[pacman1947:]

It's not all the time that a beggar comes to your door for a handout in a corporate jet. Perhaps that made a lasting impression on legislators and their constituents. I've heard mixed stories about the auto CEOs, but personal observation verifies the arrogance, short-sighted planning, and their almost wimpy character in dealing with unions, suppliers, and dealers.

The message Obama seems to send to the corporate aristocracy is this:

Your days of membership in the Monarchy of the Wizards of the Universe are over.

Many of the other executive forces are shaking in their boots as a result. But that could be an act.

The exercise of power is a two-edged sword.

The Treasury is quickly being drained and squeezed dry by the financial corporations. Their CEOs have already taken home the bacon. Obama have nothing left in the larder to deal with the next crisis. The CEOs may bring him down using their power when the time is right.

The drama of this corporate struggle should be educational to observe as it unfolds.

Mar 30 09:49 AM

[sickofthehype:]

Yep. Behind the curve for the last couple of decades, and that combined with poor management doomed this company. Notice a trend happening with these hundred year old organizations? Sad but true.

How can anyone possibly be surprised by this news??? At the time of the first bailout all you heard was that it was a matter of time - well, here we are.

Mar 30 10:53 AM

[Mad Hedge F...:]

Good Riddance! I’ll tell you what GM’s problem is. My dad was a lifetime GM customer, religiously buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a tragically deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, “I didn’t fight the Japanese for four years so I could buy their cars.” (He was a Marine). GM’s problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks that brought them home from harm’s way. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles. It is no coincidence that GM’s problems really accelerated with the passing of the “greatest generation.” During the last 35 years, when Japan’s share of the US car market climbed from 1% to 40%, I begged GM to mend their ways and build a quality, price competitive product that Americans wanted to buy. They answer was always the same: “Nobody can tell GM how to build cars.” Maybe someone should tell them.

Mar 30 12:08 PM

[rrbatch:]

No one here has mentioned the comparison of GM and Chrysler to FORD! Maybe Ford will have its comeuppance yet, but so far it has managed to avoid the financial meltdown and beggary of its U.S. competitors.

I don't find much to admire in the Great O's approach to governing, but his Auto Task Force came through this morning with an admirable analysis and rejection of the "restructuring" plans submitted by GM and Chrysler. They called spades spades, set firm timelines for corrective action, and offered constructive responses to the political issues of destitute Michigan communities and credibility of warranties. Kudos to the Task Force!

Let's not forget either that GM and its competitors turned out cars for years that its customers wanted to buy. Even Toyota, Nissan, and Honda introduced big SUVs - just before the oil prices of last summer caused the market to change its perception of what cars should be. The industry won't be transformed by any technological breakthroughs - just good design to provide the roomy vehicles that the U.S. market wants with incremental improvements in mileage at affordable cost.

It's well known what technical changes will make vehicles more efficient: lighter-weight materials (more composites), hybrid drives, and turbo chargers. (Forget about an all-electric car - this is a silly stunt for GM and companies like Tesla.) All of these changes come at a cost, and it will be interesting to see who can engineer them into affordable and attractive vehicles to come. But be patient - the lead times for these changes will still be five years or more.

Mar 30 12:18 PM

[Alpha Dinar:]

The Chinese have an old saying, "Kill the chicken to scare the monkey." “Kill the chicken to scare the monkey.” The chicken is GM’s CEO, Mr. Wagoner. The monkey? CEOs of financial companies in the US. By ousting Mr. Wagoner, President Obama sent a strong message to the monkeys of US financials to participate in his TALF and PPIP government initiatives. If they don’t? They simply lose their jobs. The fact is that the government is the one with money and, consequently, the ones with the last say. The government already owns large stakes in various financials. As for financials it doesn’t have stakes in, they can merely convince the board that the CEO isn’t cooperating and that they will not receive any support as long as he’s there. The board will surely send the CEO jumping out of the window.

Why are banks reluctant to participate in these programs? Participating means a huge hit to the already minuscule capital at banks because they will be marking down a lot of their artificially high book values. This will mean capital injection by the government and shareholder dilution. On the other hand, the governments likes it and will be willing to provide capital because it potentially means the poison is out of the system and financials are healthy again (supposedly).

As I write this article, the S&P 500 is down 3.37%. The market is definitely showing its disapproval of this fierce government intervention. However, can we really oppose such action if we have been relentlessly waiting for the invisible hand to save us from this free-fall? Keynes was smart because he realized that there is a good reason why this hand was called the “invisible hand.” We can’t see it!

Mar 30 02:48 PM

[henarl:]

The GM management or the Government management: A choice between dumb and dumber. Hire somebody from Toyota!

Mar 30 02:50 PM

[Gravity404:]

What about the $26 billion we already gave them? and now we are letting them go bankrupt?? they should have filed before we gave them anything.

Screw nationalizing the banks, nationalize the auto industry.

Mar 30 04:19 PM

[The Real Deal:]

So Rich Wagoner, CEO of a huge international corporation, shining example of capitalism, begged a supposed 'socialist' president for money. And it is the 'socialist' who demanded and got capitalist accounting for results from the famed capitalist.

I got to climb up to my attic and find that old dusty textbook book I locked away since I took economics 201 a very long time ago. Something about a certain Mr Marx who predicted that one day it will be socialism who save capitalism from its inevitable corruption.

Ah but we are not done. The CEOs of the Big 5 of Wall Street fame are still counting their fat bailout money, smiling all the way to the 'bank'. Isn't socialism such fun, especially when you can get away with it.

Mar 30 04:54 PM

[User 376845:]

Simply put: Wagner wasn't a car guy. This is an excellent article. Now if we could only get rid of the next 5 lower tiers of mutts.

Should have let GM fold when we had the chance....would have saved buckets of money.

Mar 30 05:22 PM

[Kinabalu:]

<<The odds are against a company pulling off a turnaround with the same people that led them into the situation they now face.>>

Wagoner has spent the last several months denying the benefits that a bankruptcy filing would have for GM. That has made his negotiations that much harder. It's time for someone more open to that possibility to take charge.

Mar 30 06:31 PM

[Deweyp:]

I have been reading replies to this and other articles about the auto industry and so far I don't see anything that really catches what happened today and has been happening for the past two months. This whole thing is about putting enough pressure and stark fear into the bond holders and the UAW that they finally come to the party. They have both been playing chicken hoping that Washington would cave in with more cash and bail them out. I suppose you can't blame them for trying, but it wasn't going to work as long as Obama and team are on it. With Wagoner gone, and Henderson in charge, a new face has been put on the issue. Henderson is known at GM as "The Hatchet Man" and everyone knows it. Wagoner did his best to deal fairly with the union, debt holders, retirees, suppliers, dealers and employees. Henderson won't be so gentle or kind, but he will get the job done. Count on it.


On Mar 30 12:18 PM rrbatch wrote:

> No one here has mentioned the comparison of GM and Chrysler to FORD!
> Maybe Ford will have its comeuppance yet, but so far it has managed
> to avoid the financial meltdown and beggary of its U.S. competitors.
>
>
> I don't find much to admire in the Great O's approach to governing,
> but his Auto Task Force came through this morning with an admirable
> analysis and rejection of the "restructuring" plans submitted by
> GM and Chrysler. They called spades spades, set firm timelines for
> corrective action, and offered constructive responses to the political
> issues of destitute Michigan communities and credibility of warranties.
> Kudos to the Task Force!
>
> Let's not forget either that GM and its competitors turned out cars
> for years that its customers wanted to buy. Even Toyota, Nissan,
> and Honda introduced big SUVs - just before the oil prices of last
> summer caused the market to change its perception of what cars should
> be. The industry won't be transformed by any technological breakthroughs
> - just good design to provide the roomy vehicles that the U.S. market
> wants with incremental improvements in mileage at affordable cost.
>
>
> It's well known what technical changes will make vehicles more efficient:
> lighter-weight materials (more composites), hybrid drives, and turbo
> chargers. (Forget about an all-electric car - this is a silly stunt
> for GM and companies like Tesla.) All of these changes come at a
> cost, and it will be interesting to see who can engineer them into
> affordable and attractive vehicles to come. But be patient - the
> lead times for these changes will still be five years or more.

Mar 30 06:56 PM

[a. palmer jr.:]

I doubt Washington can run a car company any better than they can run themselves except for the fact that Washington can print money. If GM had bought a printing press....
You know, I catch myself complaining about GM building big cars and trucks when the trend is toward gas mileage, but I got to remembering the days when GM did build some small cars. We had the Vega, the Corvair, the Chevette, you get the message? The only small car they had that I know of that was worth anything was the GEO Metro. They could get up to 60 miles per gallon when well tuned and didn't have all the troubles of the former GM tries. They were smart enough to put a Suzuki engine in most of them. Of course they scrapped them just before gas prices went up. Talk about timing!

Mar 30 09:57 PM

[a. palmer jr.:]

I doubt Washington can run a car company any better than they can run themselves except for the fact that Washington can print money. If GM had bought a printing press....
You know, I catch myself complaining about GM building big cars and trucks when the trend is toward gas mileage, but I got to remembering the days when GM did build some small cars. We had the Vega, the Corvair, the Chevette, you get the message? The only small car they had that I know of that was worth anything was the GEO Metro. They could get up to 60 miles per gallon when well tuned and didn't have all the troubles of the former GM tries. They were smart enough to put a Suzuki engine in most of them. Of course they scrapped them just before gas prices went up. Talk about timing!

Mar 30 09:57 PM

[chippo:]

This latest crisis is putting into focus just how staggeringly incompetent american management and corporate governance is in all areas except maximizing their own pay.

Mar 31 02:29 AM