Auto Bailout, Take Four: A Dangerous Precedent

President Obama has spoken, and while he hasn't said much with his words, the ramifications and repercussions from his actions could be felt all across the nation. Over the weekend, the government ousted the CEO of a publicly traded company.

This action sets a dangerous precedent, and while I try to avoid clichés, this situation is screaming for the use of a couple; President Obama just opened Pandora's Box on a very slippery slope. Right now the government meddling with an automaker, but what happens when healthcare companies don't want to swallow the health care reform plan? Does that mean that the CEO of United Health (UNH) Stephen Hemsley or Pfizer (PFE) CEO Jeff Kindler will be the next to be shown the door?

I am not sure that the firing of Mr. Wagoner was the right move. In a time when the industry needs knowledgeable leadership, giving the ax to the CEO of one of the largest companies in the world doesn't seem smart. While he did see the Company's stock plummet from $50 to less than $3, he has been trying to change a culture that has suffered from decades of mismanagement. Remember, about 18 months ago, both GM and Ford (F) looked poised to report a profit during 2009 and 2010. However, GM has lost $82 billion since then as auto sales around the globe have tumbled.

Back to the plan: The government has given GM's management 60 days in which to really turn the company around, or make the plans to completely turn itself around. If that happens and the government is satisfied with the plan, the dollar value limit that could be on the check is limitless. However, who actually believes that that much will change in 60 days? I, for one, do not. Better yet, I feel that President Obama is just biding his time so he can set up an orderly bankruptcy filing that will not cost millions of Americans their jobs and billions more of their dollars. I have been in favor of helping the automakers, as a failure would send shockwaves through the industry. But I do feel that a quick bankruptcy would be in the best interest of everyone involved (GM, government, and the US taxpayers).

President Obama's plan doesn't offer a way to fix the industry, but it does say that every aspect of the industry needs to make concessions to survive. The biggest hope is that with the government's help, debt holders will be more willing to accept a transfer to equity, but with bankruptcy around the corner, there is little incentive for the debt holders to make such a move.

With respect to Chrysler, President Obama has drawn the line in the sand, but we will see if the administration will really stick to it. Can you imagine the outrage that would occur if Fiat, an Italian auto manufacturer, received $6 billion of AMERICAN taxpayer money to purchase Chrysler? Combining Fiat and Chrysler doesn't make much business sense besides opening the U.S. automotive market to Fiat; but beyond that, we are stretched to find any benefits for Chrysler. CEO of Chrysler Robert Nardelli has stayed in his current position, which we see as a two pronged approach. We do not think he should have stayed on, but we do see the potential benefits. Nardelli has been at the forefront of negotiations with Nissan first and now Fiat with respect to forming a joint venture or an all out sale. The other prong is that maybe the government will remain firm on its deadline and force the Company into bankruptcy. There is no executive or appointee that would accept only a 30 day window in which to turn a company around.

This is a "tough love" plan for the automakers, but we do foresee General Motors emerging and eventually becoming a profitable company again. We hope there isn't too much onerous costs put on the company surrounding fuel efficiency and newer forms of technology, while at the same time, the tax credit for the purchase of a new car could run into a lot of speed bumps. For instance, is it only General Motors and Chrysler, or will Ford be involved? And if it is only the Big Three, why aren't Toyota (TM) or Honda (HMC) or BMW or Volkswagen included because many models are now produced in America. If this is all about saving American jobs, then it will include all automakers that have production here.

The tough love comes in reference to what GM and Chrysler will have to force onto the unions, debt holders, dealerships, and auto parts suppliers. This road, we feel, will lead to bankruptcy. One of the biggest arguments against bankruptcy was the fact that no one would buy a car from a bankrupt auto maker because of the warranty issue (that has been rectified now).

However, we feel that auto sales cannot get much worse, so why not enter bankruptcy now? Additionally, if a consumer is that scared about purchasing a Chevrolet or Cadillac, maybe he/she will still purchase a car from a foreign manufacturer that manufacturers its cars in America (just a little note, that is MOST). All in all, the plan portends to drastic changes for the industry, while it has the potential of setting a very dangerous precedent for the overall economy as far as the replacement of a private company's executive is concerned.

Disclosure: no positions

Comments

[Miken:]

"If this is all about saving American jobs, then it will include all automakers that have production here."

People continue to declare Toyota as much an American company as GM. From GM's most recent 10-K and Toyota's most recent 20-K, consider the following:

Toyota sells 33.2% of their products in NA while only employing 12.0% of their people here.

GM sells 42.7% of their products in NA while employing 47.7% of the people here.

Just reporting the facts people. If you think this is being unfair, consider that Japan puts up numerous obstacles in the way of foreign makers invading their home market such that no foreign importer has a significant position there other than some high end niche companies that can afford to pass on some of the "inspection" fees on to the consumer.

Another issue is that Japan has a friendly government concerning the manufacturing sector who cooperates, protects, and nurtures their industries through various means so that their industries are not as vulnerable.

Our government seems to be more interested in a corrupt Wall Street and banking system than manufacturing.

Mar 31 07:45 AM

[Miken:]

I think Ed K is right on. I know that the President says he doesn't want to run GM, I think that's smart on his part.

His role will be limited to deciding who runs the company, how much money they make, and what products they produce. Other than that, he's out of it.

I hope the working people of the world like construction workers, appliance service people, and farmers are prepared to do their work in Prius'.


On Mar 31 08:23 AM ED K wrote:

> Your post makes some good points.I personally do not like the idea
> of the government being able to fire execs and possibly dictate what
> kind of products to produce.The precedent you speak of could lead
> to the end of the free market system and government control of any
> business they wanted.
>
> Let's hope that whatever happens will be well planned and thought
> out so that we can resolve the issues as quickly, painlessly as possible
> and move on to a better day.

Mar 31 09:21 AM

[Leftfield:]

When taxpayer billions are involved and workers have to be shed, why not the CEO? GM comes to the government for a bailout, workers have to go so why put management of public (now more public than ever because of losses) companies on a pedestal? Wagner has no doubt done some things right, but he killed the EV and kept Hummer to long etc. He gets $20 million severence pay for consolation.

Leadership in this country is a disgrace. Plus, as their "work" has thrown the world into turmoil, the ugly sight of our leaders mostly rewarding themselves more than ever is actually dangerous.

Mar 31 09:39 AM

[Drew M:]

Don't forget that the Japanese government has been keeping the Yen weak for decades (until just recently), making their exports cheap. Also, Toyota employees healthcare is paid for by the government (read taxpayer). The point is, IT IS NOT A LEVEL PLAYING FIELD. All those who say let the big three go under -- don't give them a dime of my money -- need to realize that those who will take their place DO get home country taxpayer dollars in one form or another. And doesn't the "survival of the fittest" arguement rest on the assumption of a level playing field?

Mar 31 10:03 AM

[FreeMkts:]

Government firing any private sector employee scares the hell out of me. Look how well Govies have run Fannie and Freddie? The time for prepackaged bankruptcy is gone. We are committed to propping up these crippled companies for at least four years. So where is the opportunity? BONDS. At this point, aren't GM bonds good as long as Govt backs the company? The stock is toxic waste but the bonds maturing within four years look very attractive to me.

At the same time, what is the implication for Ford? They should be at a competetive advantage without government in their business. GM will fail in the long run, especially with government dictating their product lineup. Plus, they have a government backstop if all else fails. However, you know every government vehicle will be GM in the foreseable future. Again, hard to see how Ford bonds maturing in three years or less don't get paid back.

Mar 31 10:29 AM

[slowdown:]

Which is why I say that GM/Ford and Chrysler should elimentat all employee and retiree health care plans. We know that the Big 3 combined are the largest health care consumers beating even the US Government. Therefore - we (the automotive sector) pay the costs associated with the uninsured. Our government will not do anything about health care costs until they are forced to. We pull out - the Health Insurance industry collapses and our Government will be forced to address the issue.


On Mar 31 10:03 AM Drew M wrote:

> Don't forget that the Japanese government has been keeping the Yen
> weak for decades (until just recently), making their exports cheap.
> Also, Toyota employees healthcare is paid for by the government (read
> taxpayer). The point is, IT IS NOT A LEVEL PLAYING FIELD. All those
> who say let the big three go under -- don't give them a dime of my
> money -- need to realize that those who will take their place DO
> get home country taxpayer dollars in one form or another. And doesn't
> the "survival of the fittest" arguement rest on the assumption of
> a level playing field?

Mar 31 10:52 AM

[slowdown:]

Wagner did not kill the EV - the market did.


On Mar 31 09:39 AM Leftfield wrote:

> When taxpayer billions are involved and workers have to be shed,
> why not the CEO? GM comes to the government for a bailout, workers
> have to go so why put management of public (now more public than
> ever because of losses) companies on a pedestal? Wagner has no doubt
> done some things right, but he killed the EV and kept Hummer to long
> etc. He gets $20 million severence pay for consolation.
>
> Leadership in this country is a disgrace. Plus, as their "work" has
> thrown the world into turmoil, the ugly sight of our leaders mostly
> rewarding themselves more than ever is actually dangerous.

Mar 31 10:54 AM

[jimcs:]

GM killed the EV-the market did not. The EV was marketed in California, a cosumer could not BUY the car, they had to lease it only. After the lease was up, consumer could not renew lease or buy the car from GM. GM took the cars back and took them out into the dessert and destroyed them.


On Mar 31 10:54 AM slowdown wrote:

> Wagner did not kill the EV - the market did.

Mar 31 12:01 PM

[Allan Frain:]

Just the latest in a long list of dangerous precedents. Government largesse will end only when the demise of the dollar limits its power.

Mar 31 02:25 PM