Thursday, November 20, 2008

Bailing Out Mr. Potatoe Head

Yeah. That is a funny spelling of potato. It is former Vice President Dan Quayle's trademark. Well Mr. Quayle is at it again. He is global investing chief of Cerberus Capital Management which owns Chrysler. And of course Chrysler wants in on the proposed auto bail out.

Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.
And what is one of GM's very big problems? Their Union.
The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.
Well the unions have a lot of clout with the incoming administration. Which may not be a good thing.

And too big to fail? Hmmm. Too politically connected to fail. And since we are speaking of politics Chrysler is in the thick of it.
As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.

Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."
So the owners of Chrysler are loaded up with paid for political connections. You know this whole deal from top to bottom looks like Chicago politics and real estate deals with Tony Rezko. I think I detect a pattern here. And it is not one that gives any comfort. The money goes to the auto companies just like it went to Tony Rezko's housing rehab company and after a while the properties rehabbed fail any way. With the owners walking off with some very handsome fees. Well like they say in Chicago ubi est?

H/T Design News

Cross Posted at Classical Values


John_David_Galt said...

Was the ironic misspelling of Dan Quayle's name intentional?

M. Simon said...


Fixed at Classical Values yesterday. Forgot to do it here.

Thanks for the heads up.