Last week, my colleague John Richardson wrote an article titled “5 Reasons to Save the Big Three.” While I do not necessarily believe that a bailout in some form should be ruled out altogether by lawmakers, I do think there are a number of solid reasons to oppose government intervention at this time. So I thought I would offer a contrasting perspective.
Most Republicans are against any bailout based on their doctrinal “free-market” ideology (yes, the same philosophy that got us into this mess with the deregulation of Wall Street investment banks under Phil Gramm during the Clinton Administration). So we know we shouldn’t be looking to that side of the aisle for the moral high ground in this debate. The Democrats, under the leadership of Pelosi in the House and Reid in the Senate, are in a very precarious spot. On the one hand, the Democrats have been given a clear economic mandate by voters to clean up the mess caused by “eight failed years of Bush economic policies.” On the other, the Democrats have some very powerful interests to consider, namely the UAW and its thousands of blue collar voting members in Michigan and the Midwest. This balancing act has caused most Democrats, including Obama, to lean cautiously in favor of some type of federal intervention.
Following the first round of hearings, House Speaker Pelosi said: “Until they show us the plan, we cannot show them the money.” President-elect Obama also agreed that taxpayers can’t be expected to “pony up more money for an auto industry that has been resistant to change.” This week, the Big 3 are getting their second – and likely final – chance to convince lawmakers.
Bankruptcy or bailout? Here are 5 reasons why Congress should think twice before dolling out the money to the auto industry.
1. Alcoholics Don’t Deserve Liver Transplants
The U.S. auto industry isn’t failing now because of the current financial mess. To be sure, the credit crisis has exacerbated the cash crunch facing these companies. But the U.S. auto industry has been in a slow-death for several decades, something akin to a chronic alcoholic who has ignored attempts at intervention from family and friends over the years and now wonders why he is in need of a liver transplant. The current financial meltdown didn’t cause this crisis in the auto industry and a federal bailout likely won’t cure it. It will just postpone the inevitable.
2. How to Blow a 10-Run Lead in the 9th inning…
Since the 1960s, Detroit has been on the wrong side of almost every environmental, social and safety issue. Instead of responding to the new economic realities, GM and Ford have shoveled piles of money to lobbyists to uphold the status quo while their Japanese and Korean competitors raced ahead into the 21st century. Detroit started the second half of the 20th century with a huge leg up on their foreign competition and the wasteful inefficiency of U.S. automakers over the past forty years almost defies comprehension. It’s a little bit like the Yankees monumental collapse in 2004 against the Red Sox, only after this game is over no one in the stadium has a job left.
3. Is this What Capitalism Looks Like?
The U.S auto industry is a case-in-study of how not to run a business. GM, in particular, deserves special kudos for setting a new bar of corporate mismanagement. In 1960’s, GM’s stock peaked and has been on a downward spiral ever since. During this time, GM has lost market share in North America every year to foreign competitors. The company is now burning through $1 billion a month, shredding shareholder value in the process. Yet, despite this, management can’t seem to take a hint. The company has recently said publicly that it still intends to build hummers (no, that isn’t a joke). And Wagoner himself, the CEO of GM since 2000, is reported to have personally made the decision to kill their R&D on electric cars a few years ago, a decision he apparently now admits as a huge mistake (I guess there is something to be said of a little introspection).
David Yermack, professor of finance at New York University’s Stern School of Business, has tried to quantify this marvelous inefficiency:
General Motors and Ford have destroyed $110 billion in capital between 1980 and 1990. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM’s physical plant during this period was $128 billion, meaning that a net $182 billion of society’s capital has been pumped into GM over the past decade — a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998. As a society, we have very little to show for this $465 billion. (Source: WSJ, November 15, 2008, “”Just Say No to Detroit”).
In light of this analysis, are we really considering giving these two companies more money? According to Mr. Yermack: “If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.”
4. A Credibility Gap the Size of the Grand Canyon
Congressmen from both sides of the aisle chastised Wagoner, Mulally and Nardelli for flying corporate jets to Washington to ask for billions of dollars from taxpayers and pressed these executive to say whether they would cut their salaries to $1. To his credit, Chrysler’s Mr. Nardelli immediately said he would (Messrs. Wagoner and Mulally have subsequently caved in).
But let’s not forget the past. Although GM and Ford have been steadily losing money since 2005, Wagoner and Mulally have padded their bank accounts quite nicely during this period. Over the past two years, Wagoner and Mulally took home approximately $24 million and $49 million, respectively, in total compensation. Because Chrysler is owned by private equity firm Cerberus Capital Management, less is known about Nardelli’s pay package. But while serving as CEO of Home Depot, Mr. Nardelli and the board of directors came under fire from shareholders for problematic pay packages, eventually leading to his resignation. So if history is any judge, we can safely assume that Nardelli has his hand as far in the till as the other two.
I would submit that the first condition of the bailout should be that all legacy senior executives with a hand in getting paid exorbitantly to run their companies into the ground should be forced to resign. And I’m not talking about just Wagoner, Mulally and Nardelli but also individuals all the way down the executive vice president level who had responsibility for approving expenditures (shareholder money) to fight against tighter fuel efficiency standards and national health care reform. The cuts should run deep and include a house cleaning of the board of directors of both Ford and GM (unfortunately Chrysler is off limits as a privately held company).
5. Throwing Good Money After Bad
This bailout is being positioned as a “low-cost bridge loan” to help the companies weather the economic downturn. Looks to me like another bridge to nowhere. Over the years, the industry has wasted almost a half-trillion dollars. What good will another $25 billion do besides postponing the inevitable?
The main argument for subsidizing money-losing companies shouldn’t be to preserve employment because if this is the primary motivation then we know from the get-go it’s a loser. By all means, the 250,000 people who stand to lose their job if (or when) the industry collapses should be helped. Rather than flushing money into a bottom-less pit of corporate inefficiency and inept management, the government can instead put that money into a stand alone fund directed to help the industry’s struggling workforce. The program would focus on providing transitional support to pay for unemployment insurance and benefits and also provide job and technical training for workers. A program of this scale won’t be cheap but what it will do will be to allow taxpayers to cut the losses now instead of footing a bigger bill down the road. Workers didn’t create this mess but we all know who ends up paying when things go bad in corporate America.
Instead of rewarding proven losers, let’s invest in corporate innovators. California-based Tesla Motors would be a good candidate. The company manufactures an all-electric, zero-emission vehicle called “The Roadster” which is the only highway-capable production electric car in the U.S. and Europe. So far the company has delivered more than 50 Roadsters to market and is now ramping up output from ten cars to thirty cars per week by early next year. Nearly 2,000 people have placed deposits for the 2009 Roadster. Time magazine awarded the company’s Roadster 2nd place in “Best Inventions of 2008″ and the DuPont Registry named the Tesla Roadster “Best Green Exotic for 2009.”
Summary
There are several losers in this story; stockholders, employees, customers and taxpayers. But in our corporate welfare system built on the premise of “socialized loss, privatized gain” the executives of these three companies have been paid handsomely for ruining these companies. Taxpayers have already witnessed enough of this twisted version of capitalism with the Treasury bailout of Wall Street. We don’t need any more.
Democrats in Congress are delusional if they think they can micromanage a turnaround through government oversight. This type of oversight would surely be an improvement as it would make sure that executives do not pig out on indefensibly high pay packages during times of near insolvency. But this is not the long-term solution because an oversight board cannot make these companies do what most needs to be done; that is innovate. Only visionary, entrepreneurial managers can do that and these guys aren’t it. The leadership of these companies need to be gutted and injected with people full of fresh ideas not bound by conventional thinking.
Back in 1920, GM looked into the abyss of bankruptcy and was able to pull back from the edge. But today’s hyper-competitive globalized marketplace is a very different place from the American car industry of yesteryear. Detroit’s obituary is close to being written. Let’s let the last chapter of this tragic American tale come to an end so we can move on to a new story that has innovation and sustainability as its main plot.
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