Building Boring Nationalized Companies

I’m back, relaxed, after the longest amount of time I’ve spent off-blog in three years. Trying to get back up to speed this morning, I noticed an interesting twist in the annals of bailed-out too-big-to-fail companies: RBS is being forced to sell some core assets, like its auto-insurance operations, which give stability to its earnings. At the same time, GM has managed to unsell Opel, an equally-core asset which had been going to Canada’s Magma.

I like both of these developments. There’s a big difference between a too-big-to-fail bank and a too-big-to-fail automaker: leverage. GM’s failure would have devastating repercussions in terms of midwestern unemployment, which is why the US government bailed it out. But it wouldn’t threaten the international financial architecture in the way that the failure of RBS (RBS) would. So the world’s taxpayers have more interest in shrinking RBS than they do in shrinking GM.

Opel is GM’s best hope for the future, in that it’s very good at making small, fuel-efficient cars. Selling it makes much less sense than trying to import that technology into the US. If GM’s management can work out a way in which keeping Opel costs less than selling it, that’s a great result for the company.

At RBS, by contrast, it’s long past time that the financial-supermarket model is broken up. If RBS can really manage its retail banking network as well as it says it can, that should be just as much of a source of stable and predictable earnings as the auto-insurance business is. And no one’s telling RBS to sell off the disastrously-acquired ABN Amro branches, which means that the bank can evolve into becoming another strong Anglo-Dutch giant like Unilever or Shell.

If all goes according to plan, both GM and RBS will end up as large, successful, boring companies — the kind of companies that Warren Buffett has made his fortune by buying-and-holding. Both have a macroeconomic tailwind behind them right now: GM in the form of a natural rebound in car sales from their depressed 2008-9 levels, and RBS in the form of an extremely low cost of funds. If these were private companies, they might use that tailwind to make big and risky bets. But because they’re state-owned, instead they’re using it to simply get into a position where they can become established and profitable enough to let their respective governments sell down their stakes sooner rather than later. Although even after that happens, regulators will continue to keep a close eye on RBS, and the amount of risk it’s taking on.

Comments

[Alex Filonov:]

Problem with Opel: it's by far is the worst European auto company (if you don't count the Russians). On the other hand, I agree, GM doesn't have anything else in Europe and small and midsize car design was done by Opel last 20 years.

Nov 04 10:32 AM

[Leftfield:]

There is a discarded Constitutional principle of equal protection under the law that might have allowed a safety net to protect victims of GM, or any bankruptcy, without bailing out the whole company. Which would allow for time-tested distribution of assets and ultimately their allocation to their best use. One former GM plant is starting to make EV's for a Danish company, for example.
To bail out the highest-paid in corporations, and, most disgustingly, Wall St., to have idiot lawyer/campaign workers serve as Washington industrial "czars," is to lock in place the most profligate people and organizations anywhere.
Let people who rode those organizations down, take a deserved pay cut and reflect on a new way forward that is sustainable by offering a product or service at a price people will pay at a profit. My kids don't owe them a bonus or guaranteed-for-life union extravagance.

Nov 04 10:38 AM

[nym:]

You're back just in time to write the 200th or so article on SA commenting on Buffett's recent purchase.

Nov 05 11:35 AM