By on December 7, 2008

Detroit needs a thorough cleansing, from top to bottom. Think along this line and the answer to the question of how to handle the bail out becomes self-evident. But given an unemployment rate at 6.7 percent and growing, Congress hit the panic button and succumbed to the pleas for help from Detroit. Nancy Pelosi decided not to play scrooge with your money. And that’s not good. We’re not against saving jobs, and preserving holiday cheer. But it’s just plain dumb to give money to those who can’t manage their own businesses. It’s like giving crack as a Xmas present to a crack addict. Recovery just gets delayed.

Detroit doesn’t need three companies. It needs two: GM and Ford. Other than job subsidy, Chrysler has no reason to continue. Some 80 percent of its revenues come from the crowded and competitive North American market; not one of its products could be considered “leading” by any metric. Its vehicle quality– mostly lack thereof–is legendary. Worse, the company has no future products that will change its current trajectory into liquidation.

Why is the U.S. taxpayer on the hook for Chrysler? Unlike GM or Ford, Chrysler’s rich owner, a private equity fund with multi-billions in private capital available, has $7b to invest in its portfolio company. And the rest. Here’s the petard by which Cerberus should be hoisted. John Snow, Cerberus’ chairman, made these comments (excerpted with highlights) in Detroit in July 2007, shortly after the acquisition of Chrysler:

“Cerberus is one of the world’s leading private investment firms with approximately $26 billion under management. Our investors are primarily made up of pension plans, charitable endowments, insurance companies and other long-term savings and retirement programs, including many state pension funds.

Cerberus fixes up underperforming companies and rebuilds them. Our entire focus is on improving the performance of the companies we buy. We bring real operational expertise to bear on our investments, with a cadre of over 150 seasoned, senior-level proven executives who are able to provide a wealth of advice, as well as supplement management teams to produce superior results. We do this patiently, taking a long-term view on our investments. Unlike many purely private equity firms, Cerberus does not invest with an exit strategy in mind. We invest with a “find, fix and hold” strategy.

The prescription we offer is patient capital. Because our investors – a broad base that includes pension funds, state workers’ programs, and private individuals – have a long investment horizon, we can afford to have the long view…to do things right.

For a starved enterprise with a sound strategy, we can offer much needed investment in products and people, freeing captured value. We are able to inject equity directly, and also efficiently raise capital in the debt markets.

Over twenty-five years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance. Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much needed support. Now, Cerberus has the opportunity to use the tremendous financial innovation of private investment to turn Chrysler around, to restore it to financial success, and to help it be a continuing source of good jobs for many Americans, as well as great products for American consumers.

Cerberus should be responsible for saving its investment in Chrysler. Period. Congress doesn’t see want to see union workers out in the cold and doesn’t want to pick winners and losers among the auto makers. So Chrysler gets dollars now too. Too bad for the taxpayers, but it’s the wrong decision Ms. Pelosi. Chrysler will only come back for more. There’s no way that $7b plus Section 136 billions (that’s the Energy Department program for fuel efficiency technology) gets this company to a profitable future. That takes years, not months, and a miracle that the public will find sudden virtue in the Chrysler badges. Are you outraged yet?

GM gets cash now, maybe $10b, to keep the lights on until March. And we hope that’s first priority funds, backed-up by every single un-hocked asset that GM has left. If Congress has real guts, they’ll tell GM to come back with a program, and not a plan, before March 31st. This program should look like a pre-packaged bankruptcy, with all the agreements in place from the creditors and the unions. But once the government opens its coffers, none of the creditors or the unions will be willing to take meaningful haircuts. They don’t need to– the government blinked first and will do so again. Why give now?

As for Ford, let’s face facts, Alan Mulally was only there to show support. He doesn’t want GM going into bankruptcy since Ford would go over the edge as suppliers fail. But with an assurance that funds will be available for The General, he can now rest at night as his suppliers can remain in business. But I’m sure he wished Congress would let Chrysler go down, he’d pick up a big chunk of their truck business sales– enough to alleviate his needs for future borrowings.

Pressed by time and rising unemployment. Congress took the easy way out. Ok, we get to watch the drama unfold this winter. Our job will be to continue leading the charge for meaningful restructuring at GM. We’ll root for Alan Mulally to accelerate Ford’s restructuring. And we’ll pray that Congress doesn’t advance another dime to Chrysler.

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12 Comments on “Editorial: Bailout Watch 259: Hype, Haircuts and Hysteria...”


  • avatar
    dwford

    Agreed. Now that the government has caved, why would the creditors give any more than token concessions? There is no way Congress will allow GM and Chrysler to go bankrupt. I see the GM-Chrysler merger happening sometime in March, contingent on new funds.

    The gov’t will probably pay off the VEBA bill.

  • avatar
    esg

    Chrysler-GO AWAY
    Ford-Give Mulally a chance
    GM-Ugh…

    GM-reduce wages top to bottom, end paying non working employees, further beat down the union and absolutely shed brands and “repeat” vehicles, oh…jettison Red Ink Rick now.

    Ford- same as above, except give Mulally a chance.

  • avatar
    dgduris

    But you see, once the coffers are opened up, it is the big guys – with lobbying power – who get the aid, regardless of need. Cerberus needs money from the taxpayers to support Chrysler like I need to by a new 300!

    Little businesses, like mine, will never get anything but increased taxation from the Feds. So we are right into the cronyism that the election was suppossed to rid us of. F them!

    Good thing I minored in Russian. I may need it. Comrade!

  • avatar

    Beyond the emotional issue of how they got to this point, there are some deeper issues which should be examined over the long term, and some breathing room can give us the time to do so:

    1. Strategically, it remains in the interest of the public at large that we maintain a U.S.-owned manufacturing base.

    2. Given the health care and pension liabilities, the cost to have one or more corporations shouldering at least a large part of this load is likely lower than if they all vanish and the taxpayer must take up the slack.

    3. How did we get here? If we don’t understand the answer to this question, we’ll only repeat the behavior. As much as one can cast blame on corporate leadership, investors are quite happy when provided with the illusion that something’s happening in a specific industry.

    Of the three points, I think the third issue is the most vital one. As investors, we asked for “leaders” like Red-ink Rick, who told us everything was ok as long as the share price was ok. This idea lead directly to the creation of financial instruments which had only to do with the illusion of making money, but were not founded on substance. Hence our economic dilemma.

    If we as a nation wish to build on the general economic disaster, it is worth asking ourselves why Toyota patiently built a company whose products are the standard in their industry, while GM did not. For all of the mistakes made by GM, Ford and Chrysler, there are underlying issues about our patience as investors which are worth understanding.

    As an example, Toto, a Japanese toilet manufacturer, has so dedicated itself to building high quality toilets (and related bathroom fixtures) that they are now the largest such manufacturer in the world. They began manufacturing in the U.S. in 1996 and have been very successful in this enterprise, in much the way that the transplant automakers have been.

    As Americans, we might ask ourselves why this has come to pass. It’s all too easy to blame “management” or “unions”, but perhaps its also the investor who shoulders the larger blame for failing to look for strategic value and thus encouraging short term decisions by our native corporations.

  • avatar
    IOtheworldaliving

    @edgett: Right on–patience is definitely a virtue. Companies have to be willing to spend money to properly implement measures that will cut costs and eliminate waste in the years to come. But that’s tough to do in American companies because it hurts the short-term financial metrics and upsets the investors who choose to focus more on those than on long-term profitability.

    Speaking of Scrooge, I like him very much. He earned all of his wealth by lending money to people who he knew would build successful enterprises and prosper themselves, which of course is good for everyone whether they know it or not. Nobody told him to stop doing that, not even the ghosts–his problem was that he was a bit blinded and he needed to take a broader view of the idea of “investment.”

    If Scrooge were around today, I can’t imagine even Marley or the other 3 spooks to tell him to give money to GM and Chrysler. Ford, maybe.

  • avatar
    carlos.negros

    I think it is useful to know who runs Cerberus. The CEO is Bush’s former Secretary of the Treasury, John Snow. Other associates include Dan Quale, David Hobbs (former legislative assistent to Bush), Christopher Smith, former chief of staff in the Treasury, and Arnold Havens, a former general counsel of the Treasury Department. It’s almost like these guys are hitting up the same administration where they worked in order to transfer money from the public treasury to themselves.

    Chrysler should be allowed to die. This is a private company run by inside players.

  • avatar
    dgduris

    An illuminating article on Cerberus at the link below to the Grey Lady…

    http://www.nytimes.com/2008/12/06/business/06chrysler.html?sq=detroit%20cerberus&st=cse&adxnnl=1&scp=1&adxnnlx=1228691286-M3GhLcjBAbVbM5bgZxkmVQ

  • avatar
    tparkit

    Let’s try this again, Edgett:

    Beyond the emotional issue of how they got to this point

    So focusing on the mess Detroit made for itself is “emotional”, it it? Gee, all this time I thought examining Detroit’s performance is all about track record, practical issues and problems.

    …there are some deeper issues which should be examined over the long term, and some breathing room can give us the time to do so

    The Big Three can get all the breathing room they need in bankruptcy court.

    Strategically, it remains in the interest of the public at large that we maintain a U.S.-owned manufacturing base.

    Do empty, motherhood statements come easily to you? And let’s be clear: “U.S.-owned” means government-owned.

    the cost … is likely lower than if they all vanish and the taxpayer must take up the (pension/benefit) slack.

    No. Taxpayers will spend years shoveling countless billions to the Big Three (yesterday a new estimate was as high as $125 billion) — and then get stuck with the pension obligations anyway. The bailout ensures we get hit twice.

    How did we get here? If we don’t understand the answer to this question, we’ll only repeat the behavior.

    What you mean “we”? Detroit will repeat it, all right — and the taxpayers will foot the bill.

    If we as a nation wish to build on the general economic disaster…

    The problem with your socialist/mega-government approach is that it will indeed be “we as a nation” who do the heavy lifting. Successful corporations are not built by governments — successful corporations are destroyed by governments.

    For all of the mistakes made by GM, Ford and Chrysler, there are underlying issues about our patience as investors which are worth understanding.

    Only if you’re trying to drag red herrings across the trail. Why do I get the feeling you want us to talk about anything – national strategic interests, investors, Japanese toilets — anything, that is, except the disaster Detroit has created and is responsible for.

    As Americans, we might ask ourselves why this has come to pass.

    There you go, fuzzifying the focus with “we”, and getting all big-picture again. Let’s not “ask ourselves”, or pretty soon we’ll be thinking it’s our job to fix it. Let’s ask Detroit how this has come to pass. They can work up an answer as to how they’re going to get out of it in Bankruptcy court.

    “…our native corporations.”

    Wow – I almost want to stand up and salute the Big Three. They’re truly our corporations!

  • avatar

    @tparkit

    American corporations react to investors and whether or not U.S. citizens constitute the majority of these, the tone has been set by the investor. We want short term results.

    I suggest “we” as it is altogether too simplistic to simply apportion blame to these three companies. We are, last time I looked, still a nation which has both strategic and monetary interests in retaining a vital manufacturing base. Imagine, if you will, that tomorrow morning we woke up and all of our weapons manufacturers were owned by a foreign concern like Beretta, and EADS or similar Chinese consortium had taken a controlling interest in Boeing and Lockheed Marietta. Surely we have a national interest in the retention of U.S. owned industry (and this does not mean government-owned, but operated by U.S. Citizens with public money) Or possibly you feel that once China owns and manages our manufacturing capacity, this will create a more financially independent and secure U.S.

    It is obvious that Detroit created their own fate. It was a long-term cooperative effort by management and labor who did not believe that foreign competitors could actually push into their marketplace. We the public were also involved; thousands of us saw this happening years ago, perhaps at a time when it was reversible. Detroit’s reliance on trucks/SUV’s as their sole source of profit was the subject of editorials in virtually every trade magazine. “We” the taxpayers and voters apparently offered little objection to IRS rules that allowed a 100% write-off of >6000 lb GVW vehicles, yet many of us could see exactly where it was leading.

    But if we simply say, too bad, guys, you made the mess and now you get to live with it, I suspect we are making a decision which is counter to our interests as a nation.

    What are the products we build? Can we really have an economy based solely on the manipulation of Other People’s Money? The Brits tried this, and the Dutch before them; neither are a world power today.

    Then again, we who were not directly involved can smugly sit in judgment and let them fail.

    Following the crash of 1929, we attempted to fill the gaps in the law that created the Depression. I don’t think this was done out of sympathy to greedy investors who had so marginalized their investments that they could not suffer a modest downturn in value.

    Any bailout of Detroit should be done with the clear objective of ensuring we retain a solid base of manufacturing. The capital required to recreate General Motors, or Ford, and the relatively small ROI on manufacturing suggests that if they go, we will not see manufacturing concerns of this magnitude again.

    Finally, if we simply cut them off, what are the costs involved in the loss of those jobs? Surely this loss involves us all.

    I’m not sure where you came to think I was making a socialist/megagovernment argument. Chapter 11 will involve the same kind of planning and approval by the government as does prevention.

    That auto manufacturing concerns can be operated profitably in the U.S. is not an issue; Honda, Toyota, BMW and Mercedes all seem able to do so. Are you suggesting that we lack the management talent to do this, or simply that it is not currently resident in Detroit?

  • avatar
    tparkit

    Hey, edgett,

    We are, last time I looked, still a nation which has both strategic and monetary interests in retaining a vital manufacturing base.

    So, we achieve a “vital manufacturing base” by propping up failed companies, and sending the message to others that failure has no consequences? Or by burdening the economy (read: the taxpayers, and our children) with the costs of an ill-advised rescue that effectively preempts market adjustments (i.e. a shift to other car manufacturers who have proven they know how to succeed)?

    It is obvious that Detroit created their own fate.

    What happened to “We”? And if their managers, unionized workers and investors did make their own mess, then allowing them to suffer the consequences is what happens to every obsolete industry — unless government intervenes to distort reality. India delayed its modernization for decades by doing just that.

    Then again, we who were not directly involved can smugly sit in judgment and let them fail.

    The rest of us didn’t decide Detroit’s failure by sitting in judgement. Further, we won’t somehow trigger it by letting them fail. Detroit selected failure all by themselves, and it is happening without any initiation or provocation by the taxpayers. Their failure is not our fault, and it is not happening because we “let them fail.”

    What are the products we build? Can we really have an economy based solely on the manipulation of Other People’s Money?

    Just a few sentences below that, you write: “That auto manufacturing concerns can be operated profitably in the U.S. is not an issue; Honda, Toyota, BMW and Mercedes all seem able to do so.” Talking out of both sides of your mouth will make your face sore.

    The capital required to recreate General Motors, or Ford, and the relatively small ROI on manufacturing suggests that if they go, we will not see manufacturing concerns of this magnitude again.

    The captial has ALREADY been destroyed. That’s why it’s called “failure”. The positive side of failure is that resources are re-deployed to successful industry. Unless, of course, government refuses to allow that healing process to happen by sending in yet more capital to be destroyed.

    I’m not sure where you came to think I was making a socialist/megagovernment argument.

    You really think we’re stupid, don’t you.

  • avatar

    tparkit –

    I really was not suggesting you’re stupid.

    I think it would be great if we had an economy in which there was no government interference whatsoever, and every company did the right thing for their investors, their employees and the public with no need of interference or assistance from the government. And then those who failed simply faded away.

    Yet as much as I like the free market ideal, it is akin to suggesting that we actually don’t need police, since it is in every individual’s interest to behave in a manner which best suits society.

    As to government help for ailing companies, Harley Davidson is a reasonable example. When the tariff was passed (government protectionism), they were very close to bankruptcy. In the intervening 20+ years, they have built a robust business. At the time, I felt as you do – they built crappy motorcycles, did not update their product and saw no reason why they deserved help from the government. I think the intervening 20 years have shown that I was wrong at the time. Chrysler’s loan guarantees also suggest that help can be beneficial.

    I don’t disagree with you about the underlying reasons for Detroit’s failure. However, neither they nor the public really expected the downturn we are now facing. For all of the bad things I could say about GM, as an example, they are building some decent automobiles for the first time in 20 years. Ford’s lineup is not stellar, but includes some decent products.

    If you look at our aerospace industry, including many of the companies who make weapons systems, they would not be in business today without assistance from the government. Do you really believe that Boeing, Lockheed-Martin and their ilk would be around without huge support from the government? Why should our automakers not at least get loan guarantees?

    I don’t think this is an all-or-none issue. I appreciate your point of view and read TTAC specifically because of the thoughtful commentary which accompanies a wide variety of subjects related to automobiles.

  • avatar
    tparkit

    Well, edgett,

    As to government help for ailing companies, Harley Davidson is a reasonable example. When the tariff was passed (government protectionism), they were very close to bankruptcy. In the intervening 20+ years, they have built a robust business. At the time, I felt as you do – they built crappy motorcycles, did not update their product and saw no reason why they deserved help from the government.

    You were right back then – Harley shouldn’t have gotten a dime.

    However, neither (Detroit) nor the public really expected the downturn we are now facing.

    The downturn is not the problem. Detroit has been failing visibly for years, and more subtly for decades. The downturn has merely brought this failure to maturity at an earlier point in time than it would have otherwise shown up. Said another way, the downturn has removed deniability.

    (GM is) building some decent automobiles for the first time in 20 years. Ford’s lineup is not stellar, but includes some decent products.

    Those are the products that will survive bankruptcy – provided the public wants to buy them (competitors’ comparable products might still prove superior at the respective price points). Even then, Detroit may not be able to sell enough of its better products to make a go of it unless the Big Three become the Big One – shedding 2/3 of the brass and half the office and production staff in the process. The bailout is intended, in part, to prevent this rationalization. Only bankruptcy (or the threat thereof) can chop away the deadwood and leave standing whatever green sprigs may remain in Detroit.

    Why should our automakers not at least get loan guarantees?

    In the case of Detroit, where failure is in the cards, a loan guarantee is the same as cash – and just as surely represents a dead loss to the taxpayers.

    I don’t think this is an all-or-none issue.

    Then somebody should buy you a lint brush for Christmas so you can de-fuzzify your perspective.

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