I spent two years in Ann Arbor, Michigan at the height of the American automobile industry (1966-1968). Many of my colleagues took positions with automobile related companies. If Detroit would have enjoyed the weather of Los Angeles, there but for the Grace of God go I. Fortunately, my internal thermometer told me to look for a job in a more hospitable environment.
While I recognize that forcing the automobile companies into a Chapter XI restructuring might be the best solution, I also think that today’s announcement of 533,000 job losses should make us all understand the lurking danger of the “law of unintended results.” To absolutely guarantee that the Big Three emerge, the government must guarantee debtor-in-possession financing. Otherwise, from suppliers to prospective automobile buyers, third parties will not constructively work with the Big Three to assure their emergence.
Bankruptcy is complex. For example, the failure of the Big Three will bankrupt additional suppliers, because these vendors will lose significant dollars on their accounts receivable from the Big Three. Moreover, the cost of fees generated by bankruptcy professionals to sort out the myriad of claims will be staggering.
We need to mindful. The stakes are large. That is, the automobile industry is our second largest employer. About 10% of all sales involve automobile products. Millions of people derive their living either directly or indirectly from the automobile industry.
Let me make these points:
First of all, I despise the second grade movie show trials that Congress seems to relish. In my judgment, the most cogent comments were provided by the chief economist from Moody’s, Mark Zandi. Zandi estimated that the total cost of the automobile bailout would be between $125 billion and $175 billion. However, he estimates that the failure of the automobile companies could be significantly higher. In essence, Americans must choose between several no win scenarios.
Most of the comments made have been self-servicing meaningless abstractions. The most frightening comments are “we need to have an automobile czar.” My God, if communism taught us anything it was that “command decisions” from the top are in the aggregate faulty. The long run success of the automobile industry will come from millions of little decisions made by “little and big” people who are trying one day at a time to make some improvements.
Secondly, to date America has spent or guaranteed close to $7 trillion dollars, primarily to shore up the financial community. If these guarantees do not trickle out to the rest of the economy, this largesse is for naught. Stated differently, if Goldman Sachs can issue FDIC guaranteed paper, why cannot Chrysler or General Motors?
Thirdly, while supervision of funding for any group should be thoroughly vetted, where were the investigations before giving money to the commercial and investment banks? To my knowledge, the money provided to Citigroup and A.I.G. must have taken place at 3:00 AM. The rationale for the bailouts and the amounts represent at best “fuzzy” thinking. The thought that in return for giving at least $335 billion of money either outright or in guarantees to Citigroup in return for 8% interest can in no way reflect “the best interests” of the American tax payer. In fact, I have invested considerable money in Citigroup since this bailout because I realize that the American tax payers have been taken to the cleaners.
Fourth, the automobile industry has been a key stone industry of the United States for over one hundred years. While it is true that major mistakes were made, some of them were well intentioned. That is, giving workers too generous health and pension benefits is not quite the same sin as jackass derivative bets or investing in sub-prime fraudulent asset-backed securities.
Stated differently, the next time Pearl Harbor occurs, instead of America rebounding as the arsenal of democracy we will have to provide our attackers a “ticket tape” parade. Since Wall Street has gotten so much money, I think we can afford to hire Dream Works to provide wonderful theatrics.
In all seriousness, it does seem counter intuitive that America spends $trillions on defense and allows basic industries who should be our first line suppliers to disappear. Can we really expect that China would serve as an effective arsenal for democracy?
Fifth, the “holier than thou” comments about Detroit making the wrong automobiles are unfair. That is, manufacturers produce based on market demand. At $140 dollars a barrel of oil, we want the most gasoline efficient vehicles. At $40 a barrel, we want gas guzzlers. The $100 movement of oil prices in four months is indeed a Black Swan event. The Congressmen who are screaming at auto executives for “making gas guzzlers” must not be looking at today’s oil prices.
Sixth: Of course we need to establish a cogent energy policy that will reinforce our long run need for non hydrocarbon solutions. However, to lecture Detroit about its responsibilities, when energy guidelines and policies should evolve from the federal government is a “spectacle.”
Seventh: The idea that we need to get new leadership in the automobile industry is “wishful thinking.” The chief executives from the Big Three represent totally different backgrounds. Rick Waggoner has spent his entire life in the automobile industry. Alan Mullaly of Ford was formerly a senior executive of Boeing. Robert Nardelli spent most of his career at General Electric before running Home Depot. In a nutshell, these men are experienced business executives. To make them the “fall guys” frankly is affront. That is, 2008 has demonstrated failings in government enterprises, financial enterprises, and the automobile industry. Mea Culpa has ubiquitous applications.
The most successful automobile titans were Henry Ford and Alfred Sloan. Frankly, while both of these men deserve to be in the Business Hall of Fame, their management style is not 21st century politically correct. On the other hand, if Washington DC thinks trotting out Robert Rubin, Hank Paulsen, or some thirty-five year wiz kid is the answer, I would argue that in a few years they might beg for the current executives of the automobile industry to return.
In my opinion, experience does matter. Therefore, by definition, one should encourage new leadership that has considerable experience in the automobile industry. It might be preferable to bring in executives from the ranks of the Japanese or German manufacturers; however, these gentlemen might not have cultural background to operate effectively in Detroit.
In conclusion, just like the failure of Lehman Brothers, the “law of unintended results” could become far greater than the consensus predictions of the experts. That is, we better think long and hard before we throw the automobile companies into Chapter XI.
The failure of the automobile companies is that they might not have hired the right lobbyists nor had “politically connected” board of directors. That is, in the end, the American tax payer has suffered an increase in potential liabilities of close to $7 trillion dollars. Decisions have been made on an ad hoc basis and the rationale has altered. Moreover, nobody can understand why if $25 billion is available to the automobile companies under current legislation; that is to manufacture “efficient automobiles” why does not Congress compromise. In essence, the American public is not getting the whole truth. The debate should not be whether to use TARP money, but rather could one loosen the guidelines for the $25 billion already allocated. The failure to explain this magical thinking on the part of Congress is frustrating.
Everybody reading this essay has for the right reasons a different solution. However, the one thing that is clear. Wall Street has gotten deluxe treatment and Main Street has gotten a “run around.”
Originally published in the Sarasota Herald-Tribune
