Archive for December, 2008
December 17th, 2008
Published Dec. 15:
These days, there are only two words to remember about the economic crisis — until February, at any rate:
Lame duck.
That applies as much to Wall Street as it does to Capitol Hill — especially since Wall Street is now officially owned by Capitol Hill — where the 110th Congress is spending its twilight hours bickering over the various details of one bailout or another.
In a lame-duck world, we see a lot of activity but very little action. And we probably shouldn’t expect to see any real substance until after Jan. 20, when Barack Obama assumes the mantle of president and the power brokers in Washington and Lower Manhattan resume their regularly scheduled hysteria.
Until then, a general lassitude has gripped both regions — except, of course, congressional Democrats, who spent most of the fourth quarter looking less like lame ducks and more like Goosey Loosey, running in crazed, squawking circles and scattering feathers hither and yon in so-far vain attempts for some kind of loan money to throw at Detroit’s automakers.
It was no different last week, when they pushed a trimmed-down, $14 billion, no-frills version. They even managed to get President Bush’s buy-in before they were brought up short by skeptical Republicans.
But even if Republicans are successful in temporarily halting any sort of real action on the plan — I get the feeling that the GOP has already pounced on one of its talking points for the 2012 presidential election — both sides seem to like the idea of hiring a baby sitter to keep an eye on the automakers, gleefully dubbed the “car czar.”
I already feel sorry for the poor slob who gets tapped for that job.
As Congress sees it, this is the guy who will dole out the loans, with the power to force General Motors and Chrysler into bankruptcy by next spring if the two don’t cut quick deals with labor unions and creditors to restructure their businesses and become viable.
So the guy has to get tough with the automakers, with the United Auto Workers, with suppliers and other creditors. In other words, he has to start smacking around the very corporations Congress won’t because those same corporations tend to be sizable contributors to political campaigns.
Into this thankless job walks our hapless middleman, who must report to Congress every couple of weeks.
He has to rewrite the rules for the auto companies and get them to play a new kind of game, one that will almost certainly never be over because nobody has specified what “viable” means. Profitable? Green? Leaders in market share? Downsized? Research and development scions?
In this day and age, and with the companies in question, those results don’t necessarily go hand in hand.
December 17th, 2008
Published Dec. 14:
We’ve been reading quite a bit about the Big Three lately. Some of it, you’ve read here — despite my vow, made about 10 columns ago, that I’d write nothing more about the embattled automakers until some sort of inevitable and ill-advised bailout plan is finalized.
Sadly, I vastly underestimated the volume of hot air to be generated by Detroit and Washington. Not to mention me.
The debate, of course, continued last week, when a last-ditch effort by House Democrats and the Bush administration couldn’t get past Senate Republicans.
Afterward, most headlines read something like this: “No deal for Big Three bailout.”
But something has gotten lost in the veritable forest of headlines that has sprouted around the U.S. auto industry in recent months:
There is no Big Three. Not, at least, how we in the U.S. traditionally recognize it.
For most of the 20th century, General Motors Corp., Ford Motor Co. and Chrysler Corp., in that order, earned the moniker. They dominated the global market even through the 1990s, when the trio controlled two-thirds of global market share.
But by 2007, only one remained in that vaunted group. After commanding the top spot for nearly a century, General Motors fell to Toyota Motor Corp.
Volkswagen AG muscled Ford into the fourth spot, while Hyundai-Kia, Honda, Nissan and PSA/Peugeot pulled ahead of the then-recently-renamed Chrysler LLC, which ranked ninth.
And that doesn’t count the crippling sales drop of 2008. After this year, I suspect the scorched earth of the global auto industry will look substantially different.
Which brings us to this month, and the dramatic pleas from two of the former Big Three for $14 billion in emergency cash from Congress to stave off bankruptcy. Until March, that is. When, I expect, they’ll be back for more money to stay in business for another three months or so.
In the meantime, because Congress couldn’t agree on the time of day, let alone a Detroit bailout, the Bush administration has as much as promised to pony up the money from the Troubled Asset Relief Program, the $700 billion plan Congress passed this fall to prop up Wall Street’s rickety banks.
Here’s what I still don’t understand: Why would a bankrupt Chrysler or GM be so catastrophic? In too many cases I’ve seen “bankrupt” being used almost interchangeably with “collapse” or “closed.” And lots of reports are featuring a “3 million jobs lost” figure when they speculate darkly about the automakers’ future without a bailout.
That unemployment number comes from a study by the Center for Automotive Research in Ann Arbor, Mich. — whose chief, David Cole, firmly supports the bailout idea — which suggested that 3 million people would be out of work if all three of Detroit’s automakers closed for good.
Which isn’t going to happen, with or without a fistful of government money. And Congress knows it.
That’s why, as a provision in its bailout package, it authorized — indeed, demanded — that a newly named “car czar” force GM and Chrysler into bankruptcy by the end of next year if the companies didn’t demonstrate some kind of commitment to solvency.
Examine, if you will, Exhibit A: Northwest Airlines. United Airlines. Delta Air Lines.
Or Exhibit B: the U.S. steel industry.
All of them were forced to file for Chapter 11 protection, without so much as a peep from Congress. And there is still a U.S. steel industry. There are still U.S. airlines. They’re smaller, to be sure. But they’re here. And hopefully smarter and leaner than they were before bankruptcy.
Or how about Exhibit C: Delphi Corp., GM’s former parts-making arm, which filed for Chapter 11 protection in 2005. Not a peep from Congress then, either.
Three years later, Delphi is still in bankruptcy and still producing parts for the auto industry.
It’s not ideal. It’s not pretty. But a nationalized auto industry is uglier. And all the gnashing of teeth about the jobs lost under a bankrupt automaker just doesn’t wash.
Thousands of jobs have already been lost. Thousands more are in the works. And what about the number of jobs the federal government will demand once it’s in charge of the industry?
The automakers got themselves into this mess. This is the consequence of their actions. They should have to face up to it.
Not surprisingly, the automakers think it’s a terrible idea.
Nobody will buy a car from a bankrupt automaker, they argue, because consumers will have no confidence in the company.
No offense, but I think that’s what got their as-yet-not-bankrupt companies into this mess in the first place.
December 17th, 2008
Published Dec. 8:
Musical chairs was so much easier when I was a kid: When the music stops, sit down. If all the chairs are taken, you’re out.
But there’s an updated version playing out on Capitol Hill as the Treasury Department decides which companies get to tap into the $700 billion bailout package. And it’s getting out of hand.
In the early days of this new game, the losers would slink off to file for bankruptcy and the winners got a fat payout from the federal government.
But the players have since become far more sophisticated, and the rules have changed somewhat. Companies without chairs have a chance to convince Treasury that they should have one. And if that doesn’t work, the company will build its own.
Such is the case with GMAC, the financing unit of General Motors Corp., which is becoming a bank holding company so it can get its hands on some of that $700 billion. Otherwise, it doesn’t qualify.
GMAC, which is 51 percent owned by Chrysler parent Cerberus Capital Management, says the change will increase its stability so it can keep providing automotive and mortgage financing. In fact, it has several reasons, most of which seem to revolve around the fact that it needs money.
It’s a little less clear why taxpayers should start footing its bills. Not to mention why a car and mortgage lender gets to suddenly declare itself a completely different kind of company.
In the simplest terms, a bank holding company is one that owns two or more banks. Well, it had been until the government started giving away so much money.
But once American Express and Goldman Sachs — a credit card company and investment bank, respectively — got the nod to become holding companies, the floodgates were opened.
These days, I could probably qualify as a bank holding company if I did my homework.
And that makes me nervous.
Billions of dollars are being spread around to companies and industries of every stripe. Who’s keeping track of all the rules? Who’s making sure the money is being used correctly? Who makes sure these companies repay the public?
Since March, when the Federal Reserve announced a rescue package to provide up to $200 billion in loans to banks and investment houses and loaned $29 billion to JPMorgan Chase & Co. to buy collapsed investment bank Bear Stearns, the rescue money has continued to pile up.
When IndyMac failed in July, it cost the Federal Deposit Insurance Corp. billions to compensate deposit holders. That’s the same month President Bush signed a housing bill that included $300 billion in new loan authority to back cheaper mortgages for troubled homeowners.
In September, the feds:
Took over Fannie Mae and Freddie Mac, pledging up to $200 billion to back the mortgage giants’ assets.
Injected $85 billion to shore up failing insurance giant American International Group. That number has since been modified a few times — increased each time, of course. At last count, taxpayers were into AIG for $150 billion.
Guaranteed money-market fund losses up to $50 billion; boosted to $620 billion the amount available to the Federal Reserve through currency swaps.
Tripled the amount available for short-term loans to financial institutions.
And that’s before the $700 billion bailout package took effect in October.
Now for the really troubling news: The Government Accountability Office said last week that the Treasury Department has no mechanisms to ensure that banks comply with the rules around the $700 bailout package.
The GAO is one of three watchdogs assigned by Congress to monitor the Troubled Asset Relief program. A congressional oversight panel is scheduled to issue its report Dec. 10, and an inspector general’s position created to oversee the program hasn’t yet been filled.
Then of course there’s Neel Kashkari, head of the Treasury Department’s Office of Financial Stability, who said the agency is developing its own compliance program.
I wonder how many chairs those guys get.
December 17th, 2008
Published Dec. 7:
Rick Wagoner said he felt “optimistic” after the first day of testimony — a mind-numbing six hours worth — Thursday on Capitol Hill.
I’m glad somebody was.
The General Motors CEO, suitably chastened from the embarrassing debacle in Congress three weeks ago, submitted to two full days of grilling two weeks later, joined by his counterparts at Chrysler and Ford, as well as the president of the United Auto Workers.
The automakers can almost taste the $34 billion in emergency loans they’re asking from the government. And because no politician wants to return to his or her district bearing thousands of lost jobs, from autoworkers to car salesmen, the three companies will likely get their money — as long as those politicians, whose questions to automakers have ranged from the ruthlessly critical to mawkishly sentimental, can convince their constituents that they did not hand the U.S. auto industry a blank check.
They seem to think they can. Hence Wagoner’s buoyant attitude.
I guess I’d feel a little perkier about the whole thing if I were at all reassured that somebody at the car companies had a solid grasp — any kind of grasp, actually — on how business is going. Because I’m fairly certain Wagoner and his compatriots don’t.
In the fall, GM approached Congress about a mere $15 billion loan so it could buy Chrysler. It was having fair to moderate liquidity troubles at the time and had its eye on the $11 billion-plus in cash Chrysler had on its balance sheet.
Those talks ended abruptly the first week of November, when the three automakers reported wretched October sales and GM just as abruptly announced it would not have enough cash to continue operating through the end of the year.
At the time, I thought the timing was a master stroke — infuriating, but a master stroke — coming as it did the day before Barack Obama won the White House.
But let’s give them the benefit of the doubt. It could be just a coincidence that their bank accounts just happened to disintegrate as Democrats prepared to take over Capitol Hill.
Still, somebody please tell me Wagoner and Chrysler CEO Bob Nardelli — whose company has apparently burned through its $11 billion and will close before January — weren’t flabbergasted to learn this. That some flunkie didn’t tiptoe into their respective offices the day before and inform them that they had successfully run their once-respected companies into the ground.
If they were, they need to find a different line of work. But I’ve always thought the guy in charge should have at least a working knowledge of the company’s financial picture. How naive of me.
If they weren’t, they need to find a different line of work. Even humble business editors know you don’t operate a company by hoping the economy will suddenly right itself over the weekend.
Then came November’s sales numbers (also wretched) and the CEOs’ first appearance in Congress. If you’ll recall, they were looking for a $25 billion loan at the time.
Two weeks later, they realized they needed $34 billion in loans or, they told lawmakers sadly, the effects would be “catastrophic” by March.
Do you suppose it really took them two weeks to realize that they had done the math wrong the first time? That they had no idea they would need an additional $10 billion to stay in business for four more months?
In other words, this loan will be the first installment.
One way or another, we’re going to end up paying through the nose for our American-made cars. Even if we don’t drive them.
December 2nd, 2008
Published Nov. 23:
With their recent sojourns to Washington to plead for money from the government, the Detroit automakers have managed to lose their respective identities.
They have officially become the hottest political potatoes on Capitol Hill.
After days of hysteria, during which the CEOs of the companies offered disastrous testimony to Congress, Democrats not only balked at writing the companies a blank check — a notion they have been desperately promoting for weeks — but abruptly joined their Republican counterparts by demanding some kind of justification from the automakers.
It seems that the CEOs managed to talk for two days and read a combined 30 pages of prepared testimony without ever telling congressional leaders why taxpayers should be responsible for saving the companies they can’t.
Actually, I think they gave the lawmakers too many reasons but not enough real answers.
They tried, of course, nodding like a row of bobblehead dolls when asked whether the investment would be a sound one.
It’s not bad management, the bobbleheads assured lawmakers solemnly. They just can’t get a loan these days.
Of course. That’s why every other American company is going to fail — within minutes! — if they don’t get their hands on some government money, or so their testimony suggested.
They should have stopped talking right then.
Unfortunately, they didn’t.
Ford CEO Alan Mulally acknowledged that the U.S. auto industry has made mistakes “in the past” and went on to argue that “the mix of the housing crisis, credit crunch, wildly fluctuating gas prices and major spikes in commodity prices has led to an unprecedented reversal in the business environment.”
Seems valid, although he failed to note that the “wildly fluctuating gas prices” have dropped to their lowest levels since 2004 without causing a dramatic uptick in sales, which I would expect, based on his argument.
But it was Chrysler CEO Bob Nardelli who came up with the most creative reasons the automakers should get handouts.
“The crippling of the industry would have severe and debilitating ramifications for the industrial base of the United States, would undermine our nation’s ability to respond to military challenges and would threaten our national security,” he told Congress.
To which “industry” is he referring? Halliburton?
He certainly can’t be talking about the domestic auto industry, which hasn’t worked for the Department of Defense for decades, or its suppliers, who have competitors around the globe.
And wrapping the No. 3 U.S. automaker in the U.S. flag under the guise of “national security” is hysterical, irresponsible hyperbole.
General Motors jumped on the same bandwagon last week at gmfactsandfiction.com.
What’s the justification for invoking such a claim? “Buy a Pontiac or the terrorists win”?
