Tuesday, November 18, 2008

"You Give Me... Money?"

Many years ago when I was in Paris, a young man approached me. He launched into an extensive narrative, in rapid-fire French. When he finished, I indicated to him in my very limited French that I didn't understand him. He paused for a moment then, you guessed it, asked, "You Give Me... Money?"

Some things just don't sound as good in translation.

Executives from the Big Three and the President of the UAW testified before the Senate today. The short version seems to be, "You give us money, and everything will work out." There seems to be a general unwillingness to even admit to some of the structural problems that will continue to cause problems with profitability and complicate the streamlining of their businesses. They were able to identify a lot of problems that could or would result from Chapter 11 bankruptcy, but skipped over the benefits of that process (or a "bankruptcy lite" conducted under the auspices of federal bailout legislation). And while I don't want to understate the amount of progress the Big Three have made in recent years, to overcome years of poor management decisions and business planning, I am left with the question of, "What happens if the economy doesn't pick up (big time) before the money runs out?" And the answer seems to be, a call for bailout, round two.

"Vous me donnez... l'argent?"

I don't want to dwell on the negative, and maybe (as Annie says) the sun will come out tomorrow, but I would have liked to have heard some more candid statements about the state of the industry and those factors that are unlikely to improve without some form of bankruptcy or "bankruptcy lite". Admittedly, it would be very difficult for these executives to discuss those issues in public. How could you discuss the need to eliminate brands or close hundreds of dealerships without creating anger and fear among your dealers, or making customers wary of any brand you mention is on the chopping block (or all of your brands if you are circumspect)?

Yet dealerships aren't going to close without a very expensive buyout and inevitable litigation (as happened with Oldsmobile), unless the closure is part of a bankruptcy process or a federal bill that preempts state laws on manufacturer-dealer relations. How do you admit that a huge factor in your not wanting your company to go through bankruptcy is that the people you work for - be they the shareholders or a private equity fund - and both you and the people you work with (who hold a lot of stock options, and probably also a whole lot of stock), really fear being wiped out? Chrysler CEO Robert Nardelli is apparently willing to work for $1/year, but tell me that will hold true if his equity stake is wiped out.

And tell me it's not about the share values and equity stakes when you have Cerberus "generously" offering to give up its profit in a future sale of Chrysler if it gets bailed out. Here's an idea - go to a Chrysler dealer, buy a car, drive it around the block, then ask them to loan you almost the entire value of the car on the promise that if you later sell it you'll waive your profit. Seriously - they paid $7.4 billion for Chrysler, and now they propose borrowing $7 billion.

My answer to Cerberus, really, is "I would be happier if you paid off your loan and still made a profit". Why? Because that would mean they turned the business around. I understand not wanting to tell your investors, "We lost your entire investment inside of two years," but the bailout should be about helping these companies succeed in the long-term, not just to let them scrabble through a year until they can find a way to dump their stake somewhere near break-even.

This is really tough - I'm not trying to kill off the UAW, and I care about the U.S. economy and industrial base, so I'm not among those who are happy to dig the Big Three a grave. But if we're putting this much (and probably more) taxpayer money on the line, I think we deserve something better than the status quo and the promise, "Even though we haven't changed our business models as a consequence of this unexpected crisis, what we're already doing is working. Trust us." And I suspect that the Big Three need a dose of tough love, something that both enables and compels their making serious structural reforms if they want billions of federal dollars, even if it causes their owners and shareholders to lose some equity, or the unfortunate closure of some plants and dealerships.


  1. I don't, for a wonder, really dispute any of your arguments. I do, however, have a question. What in the history of this administration (or any other recent one for that matter - including the next) leads you to believe that they are capable of the pragmatic decisions making and implementation you have described?


  2. Scrolling through this list, it's admittedly hard to find a Congress that would have been up to the job.

    You may recall one of the "brilliant" moves, from a few years back, was the decision by Congress to defer base closing decisions to a committee, with the requirement that they issue a thumbs up or thumbs down to the entire recommendation - it's a glorious abdication of individual responsibility. This may take something similar.

  3. The problem with that idea is that the reasons BRAC worked as well as it did (the economy is going to screw it up too) was in large measure that involved a "finite" process (base closure and realignment) and that it was an issue that mattered greatly to a few people (the homes of the bases) and you could make the pill go down easier by "lumping" the decision together.

    These types of decisions will involve soemthing a lot more compicatd than "do I close or do I not close" the base. BRAC also had a structure whereby the services came up with the list and Congress went thumbs up or down.

    Who will put together the plan for this?

    This will require puting together

  4. . . . a list of benefits to be paid out, potentially on an ongoing basis . . . and that will involve a lot more fighting at the trough . . .



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