Saturday, November 22, 2008

The Lemming School of Crisis Response

People are beginning to get restless, waiting for clear leadership from the Congress and the incoming political leadership in Washington. Frustration is rising as it becomes increasingly obvious that our political leaders have no interest in making any sort of bold decisions. This is a sad example of groupthink, but is worse than usual due to the way political power is doled out.

In normal business situations, there is always a problem with large groups, in that individual leadership is often opposed except by the nominal head of the group. There is only a small advantage in being the individual to step forward with a plan, and a large degree of risk if your suggestion or answer proves to be a wrong one. In political committees or appointments, it’s even worse, because the benefit, being appointed to the post, has already occurred and so only negative effects appear possible in taking a risk. At best, you stay where you are, at worse you are a well-known failure and ruined for a long time. As a result, when a crisis occurs, a group of appointees or advisors is inclined to wait for instructions from their superior, or to let someone else take the lead. It’s not that such people are unintelligent or even that they do not mean well, it’s that they are conditioned and expected to wait for someone else. This is not a party-specific condition, either. The same condition exists in republican committees that could not agree to face up to the coming Social Security crisis, and democratic committees which have to decide how to protect the American financial infrastructure.

President-elect Obama promised to provide fresh, clear leadership on the issues Americans care about most. He’s already running behind the curve on setting a course, because most people in Washington will not be willing to take the first step.

Friday, November 21, 2008

Americans are Not Helpless

One of the more revealing responses to my article on bankruptcy was the following comment from Paul Hooson:

Congress seldom has any problem spending billions for war or bombs, but when the lives of 3 million American jobs are in the balance, then the foot dragging really starts for a mere $25 billion which isn't a great deal of money.”

This is almost the quintessential liberal response to a difficult question. It ignores the topic and pursues a non-seqitur, it presents a false premise, and it assumes that people are helpless to take care of themselves. It also presents the absurd concept of ”lives of 3 million American jobs”. Jobs do not have lives, people have lives and people have jobs, and while a person cannot lose their life and just go on, just about everyone will lose a job or two or five in their lifetime, and they will move and survive, most of them will do just fine even if they lose a great job. If we start trying to protect folks from common life events simply because they are unpleasant, this will merely waste resources in yet another unrealistic adventure in government blundering.

The possibility that the three largest auto manufacturers in the United States may go out of business is troubling, but no more troubling than the failure of American steel, textile, electronics, and other manufacturing centers. The notion that the ‘Big 3’ deserve special treatment is laughable on its face, not least because the owners and management at these companies have clearly refused to take the necessary steps to make their businesses more viable. And what about the claim that the end of Ford, GM, and/or Chrysler would mean “dire” consequences for the nation? It would be difficult for many, but just as happened in so many places before, most of those workers would find new employment, and few would end up worse off in the long run. Especially since the demand for cars remains strong, and with ready-to-go factories in place and a supply infrastructure as well, it’s only a matter of fortitude and working out the math for a new super-company to emerge. Don’t think so? Hey, when I was growing up, the only choice you had for a phone was a wall-mounted landline by Bell. When I first went to college, computers were terminals physically connected to a mainframe IBM. So thinking that the top American car has to come from a company created in the early 20th Century can prove to be just as obsolete.

Thursday, November 20, 2008

Bankruptcy for Detroit

I am getting the sense that Congress was never really serious about handing over 25 billion more dollars to the Three Stooges Motorcar Companies, in addition to 25 billion already requested. Not surprising, since despite several visits by auto executives to Congress in the past year, not one has made a convincing case that their companies are competitive or responsible, and therefore there is no evidence to support a belief that they would be properly accountable or trustworthy with the money. Not one executive had a plan to explain how they would become truly competitive again; it was clear to everyone that this money was not going to address the true causes of the automakers’ current crisis. There was (and is) the very real possibility that giving taxpayer money to these companies might be the worst possible course of action.

So, having slowly begun to comprehend that even D.C. is not keen on continuing to enable a very bad habit in Detroit, the automakers have begun the predictable whine and rant. In general, they are trying to make folks believe that if they do not get the money they want, they will file bankruptcy, and this would result in “dire” consequences for the nation (a word used often in the past week by the suits). Personally, I tend to bristle at extortion attempts and that is exactly what this amounts to; ”buy our lousy cars and subsidize our worthless industry, or you’ll get hurt”. Hey, I’m sure that kind of thing works great at UAW meetings, but it does not work with honest people who earn their money through ingenuity and effort. For one thing, History has killed off companies and industries with no mercy over and over again in the past (remember when we were a world power in Textiles? Remember when the dominant personal transportation was horse-drawn carriage? Anyone still pay for home ice delivery to stay cool in the summer?) Adapt or die boyo, and GM/Ford/Chrysler have not adapted to reality in our lifetimes. They have ramped up the advertising, but along the way they have managed to forget the triangle of business strategy – you cannot compete unless you offer the best price, the most desirable features, or the highest quality. LoserCars of Detroit have managed to blow opportunities and one-time advantages in all three categories. Detroit had about a two-decade window where they could have done the things they needed to do to revive their mojo, but instead they chose to stay on the same reckless course and hope they could fake out the world. Right about now, no choices are left save the desperate.

So, on to bankruptcy. For a lot of people, bankruptcy means the end of the road, and that could be the case for one or even all three of these companies. But let’s first look at the other options.

Frankly, there are a lot of reasons why it would be a very good thing for these companies to file bankruptcy. Look, the prime directive for any company, is to make a profit. That’s because no matter what good things you want to do, you cannot do them unless the company first insures its survival. And if you look at these automakers, the first thing that jumps out at any accountant is the huge debt and liability they carry. I looked through GM’s 2007 Annual Report, for instance, and despite 181 billion dollars in sales and revenue, GM lost 38.7 billion (before accounting principle changes – GM changed its accounting principles three straight years). Net revenue was down 12% from 2006. And this was 2007, before the credit crunch of 2008 hit. What happened, basically, was that GM was so loaded up with debt and long-term commitments for things like pensions and multiple brand lines and dealership locations, that even in a good year it could just tread water; when things went bad they went really bad. Straight-forward accounting for GM shows operational losses for at least four years, and again that’s before we count 2008. The basic reason GM is in a panic, is because they have no idea how to sell more cars, and they have no way to to substantially cut costs. From what has been reported, Ford and Chrysler are in the same shape. All three companies are locked into contracts with stakeholders who refuse to give an inch, even if the alternative is the company’s dissolution. The most likely reason for this, is that the creditors do not believe that these large companies would actually fail. Therefore, two sound business reasons exist for moving towards bankruptcy: If the creditors come to understand that the company is going to file for bankruptcy, it is in their best interest to work out a way to avoid bankruptcy for their customer, and if bankruptcy cannot be avoided, a reasonably objective judge and standardized process exist to provide guidance and a background.

The most desirable chapter for filing would be Chapter 11, or reorganization. Frankly, that is the minimum action needed to make these companies face up to the fact that they simply have no effective business plan. For example, what is GM’s “base” product? These guys so over-specialized that pretty much all of their vehicles are for a niche market. Sure, they have basic sedans and such, but does any of them strike you as their core product, the way the Honda Accord or Toyota Camry does? Not even close. GM does not even have a core brand line ... fuhgeddaboudit. The only fix worth talking about, involves rebuilding everything, nothing held off the table. And it looks like only a bankruptcy could make that happen.

The car execs are whining that they would not be allowed a DIP (debtor-in-possession) in a bankruptcy. To which I answer, too freaking bad. I mean, companies do not deserve favors when they file bankruptcy, what they need to do is find their humble place and go along with the court. There’s not a single top executive at any of the “Big Three” who should be pulling down a paycheck these days, and if they are just now beginning to understand the scale of consequences for their screw-ups, well change their diapers and tell ‘em to shut up and stay out of the way. If they have to file bankruptcy, they’ll get a chance to plead for DIP, and if they cannot make that case then that proves the bankruptcy was overdue anyway. Chapter 11 with a competent trustee in charge could be the best thing to happen to the industry in half a century.

But what if Chapter 11 does not work out? Well, then we look at Chapters 13 or even 7. Yes, that means the companies go away as we know them, but it also means that the parts are sorted out and someone else acquire the means to make their own major automaker. There are plenty of groups with the means to create a successful corporation for making cars and trucks, and the infrastructure would be right there. The new company (or companies) could pick from optimal factory sites and equipment, a deep talent pool for design and manufacturing, and within two or three years a truly competitive and effective auto manufacturing industry would be reborn in America. It’s happened in other countries, so it can just as easily happen here. Quality cars at good prices with solid opportunity, the only losers being those unable or unwilling to work under the new company’s terms.

That’s really what this comes down to, you see. The new company would not be much different from what we see now, except that the new company’s directors could avoid the mistakes of the past. They could avoid making open-ended commitments that would kill future generations, they could find a functional agreement with unions that made best use of the skills and pride of union workers, while avoiding either side becoming the pawn of the other. The new company could focus on a few models, well-made and suited to the customer base, instead of drowning in more than a dozen nameplates. The new company could franchise dealerships in a way that keeps its cash flow free for business, and develop new products in line with sound business principles. But it starts with tearing down the wreckage that is the current corpse of American auto making.

Why will bankruptcy work? The short version is, because we need it to work. I work with companies which have filed bankruptcy, and what happens is one of two things; the company falls completely to pieces, or it gets its act together. In the first case someone else picks up the pieces and makes them work in a new way, and in the second the company bears up under what amounts to business boot camp and it clears out the trash from its past performance. This works because of three basic forces which work together – the company remains extant in terms of its people and product, the creditors find it is in their best interest to help the company survive and succeed, and the public finds the product is worth its money. Once the shock of a bankruptcy filing eases, the people generally realize they can still make things work, but they need to be more flexible.

And what if it does not work? In the last century, there have been many automakers. Prominent names included Studebaker, Packard, Deusenberg, and Hudson. Those names died out because they could not compete, and maybe it’s time for Ford, GM, and Chrysler to join them. If they do go, rest assured that someone will fill the demand for quality American-made cars.

Wednesday, November 19, 2008

Verdance and Venom

Shortly after the beginning of the second millennium AD, a great desire rose among the people of Europe for worthiness and meaning in their lives, and from this rose also the demand for the celebration of Corpus Christi, and renewed reverence for the Eucharist. This time was notable not only for the fact that the people, not the Pope in Rome nor the Church establishment, moved for the establishment of the celebration, but also because this renewed hunger for worthy service led to the creation of hospitals and shelters for the poor and sick. The Knights Hospitaller and the Knights Templar were created in those days, meant to serve and protect the weak and helpless. Devotion to the ideals and precepts of Christ were renewed as never before, and sadly never since.

Yet shortly after this time a different type of devotion rose, one which effect also remains to this day. The social changes in Europe in the early 11th Century included greater attention to women, and women became notable authors and patrons of literature. And at this time also appeared a new genre of literature, the immensely popular stories of ‘courtly love’. These stories of forbidden love, usually high in sexual content and lax in moral standards, became something of the precursor to modern soap operas and movies. A common example was one Marie de France, who seems to have created the formula with the requisite conditions of true love showing up some years after marriage, the immediate abandonment of marriage vows for ‘true love’, always represented in carnal action, and of course the rejection and often death of the husband who was betrayed, usually at the hand of the new rival. The common themes of these stories were that true love was more ‘sacred’ than marriage vows, that adultery was not only allowable but the inevitable “right” course when the lady was so inclined, and that sexual bliss was the same if not better than religious devotion. Whether we are discussing the text from ‘Lanval’ or the plot from the latest ‘Desperate Housewives’, this disparagement of faithful devotion and the replacement of God with Sex has been around quite a while, yet it should be easy for the reader to recognize the dangers in such moral equivalency.

The individual must make his or her own moral choices, but it is imperative for us to be aware that the differences are often very great in consequence and meaning, and what may appear to be a fulfilling and thoroughly enjoyable part of life, may in actual fact be poison venom, a danger to be avoided all the more because it appears to be the opposite of its true nature. This is not a lesson for pointing out to others, but for self-contemplation and alignment of values.

Tuesday, November 18, 2008

How Credit Works

The present financial crisis boils down to one fundamental issue – the credit crunch, now gone worldwide. The short explanation of how we got here, is that credit is an easy system to understand and use, yet one where plans are far too often short-sighted. One entity provides a good or service to another, and in lieu of immediate payment terms are set up for delayed payment, usually in a set of payments and with a charge for the credit being extended. The amount of credit charges is usually determined through negotiation and careful attention to necessary goals. For example, the reason almost no one really gives 0% interest rates on credit, is because over time that would unfairly benefit the buyer. Let’s say someone buys a car and gets a deal to pay $25,000 over five years with no interest. If the buyer pays an average of $5,000 a year with no interest, then most of the money for the purchase stays in the buyer’s hands for years, and he gets the use and profit from it. If the seller had received the entire $25,000 at the time of the sale, there is a clear profit compared to receiving the same money but later, so financing or credit terms are designed to make up the money that the seller loses by not demanding full payment up front (not to mention the money lost when someone buys on credit then defaults). It’s all about risk management, accepting the possibility of bad things happening in order to increase the profits from a venture. The credit system works because of two fundamental forces – the buyer is willing to pay more over time for something, in order to be able to make payments instead of paying for it all at once, and the seller is willing to take payments over time and risk a certain amount of default in order to increase overall profitability. That simple rule applies to all credit conditions.

So what went wrong? Greed on both ends, actually. Buyers bought homes they could not afford, while sellers built high-risk ventures into mainstream investment packages, on the theory that diversifying the investments would keep the high-yield aspects while some how mitigating the risk exposure. To make matters worse, high-risk mortgage investments became politically favored in order to offer not just home ownership to low-income families, but also offer high-end properties to people who could not possibly afford them, on the expectation of best-case scenarios, or in a phrase, the absurd belief that nothing but good things will happen in the foreseeable future. ARM loans, balloon-payment mortgages, and interest-only loans came into being in recent years, all of them extremely high in risk by their nature. The culture of saving up for what you want most had long ago been abandoned for the ‘buy now, pay later’ mantra, which itself had been set aside in favor of the even more basic ’Gimme’ culture. I mention this for several reasons. First, you have to understand that in a culture catering to increasing levels of personal greed, expectations of responsible behavior become less and less practical. A generation used to getting whatever it wants in toys and social norms, has now taken control of an economy and government wherein it believes that someone else can be made to pay for whatever these people want. Second, political duty has devolved from stewardship of the nation’s welfare and a duty to those who abide by the rules of order and commonwealth, to a state where any promise necessary to retain office will be made (like ‘lowering’ taxes for 95% of Americans, including those who pay no taxes at all). And third, for the past generation those who work hard and save have been the target of many unscrupulous criminals and congressmen, who see the needs of the lazy as far greater than those of the industrious, since the ratio of honest workers to lazy bums appears to have reached the order of about 1 to 6.

So here we are, the dominoes falling and everyone suddenly realizing they are standing underneath them. What to do? The simple answer is obvious; let the consequences work their way through. But doing that would mean letting a lot of mortgages crash, and with them a lot of banks would fail. Yes, the surviving banks would be much stronger and in the end the total costs would be minimized, but who in Washington has the courage to tell about 2 million families that they would have to lose their homes, and tell three or four dozen small and a couple major banks that they are out of business for their greed and stupidity, especially when this would disproportionately affect minorities? There is simply no such political will, nor am I sure that there ever has been, for what this would require. Instead, the Congress has decided that everyone should suffer a bit in order to prevent a minority from suffering a lot.

There is also some rational basis for the bailout decision. The failure of the stock market in 1929 was a bad thing, but not especially crippling for the country. What brought the recession into a full depression was the collapse of thousands of banks and savings & loans across the country, and these fell in large part due to a collapse of confidence. We see that to some extent in every economic downturn. Bad times hit, a company worries about its condition, they buy fewer supplies, hire no new people and maybe lay off folks, who spend less because they worry about their jobs, and fewer people spending makes things worse for the companies, who lay off more people and the cycle continues until it bottoms out and someone has the nerve to start hiring folks and buying things. When banks get hit, they make fewer loans and offer less interest on deposits and that slows down the economy too. If you can’t get a car or house loan, you won’t buy even if you want to buy. So, Congress does not have reason to worry so much about the investment firms or even the car makers – sorry GM – but they do worry about the banks in general. Loans have to be made to keep the economy from getting worse, and that means liquidity issues have to be addressed.

But you cannot just give money away, or at least you should understand that doing so is extremely stupid. So, there is an argument for spending $700,000,000,000.00 if it is done wisely, but then again we are talking about Congress here. Wisely would mean an investment that offered a reasonable return, not money spent as a giveaway to reward bad behavior and foolish decisions. That’s why the “bailout” money must not be spent directly to pay for bad mortgages, and why – sorry GM – the money may not be spent on the automakers. The money may be spent in any way that is likely to result in an improvement in the economy greater than the amount contributed. That is, just as is done with small matters of credit, the actions taken should be a balance of concessions in the short term granted in order to produce superior long-term results. That is the template which ought to be used in the application of these funds.

Monday, November 17, 2008

What Now For Hillary?

I do not ordinarily ponder the fates of major democratic party figureheads, but the saga of Hillary “The Great Khan” Clinton is riveting. Not too many people now seem to recognize just how big an upset it was, when Barack Obama’s machine beat the Clinton machine. And from that upset, what can we expect now from arguably the most powerful politician on the planet without a base of operation?

Hillary Rodham first made significant news when she delivered the first commencement address to Wellesley College ever made by a student (1969). That was no accident; Rodham had accomplished many successes as a student, including organizing a two-day strike by black students after the assassination of the Reverend Martin Luther King, Jr. Rodham was featured in Life magazine that same year, in part due to criticism in her speech of Senator Edward Brooke, who had addressed the students and faculty at Wellesley immediately before Rodham. After Wellesley, Rodham went to the Yale Law School, where she was active in research, free legal service for the poor, the Yale Review of Law and Social Action, and dating a fellow student, William Jefferson Clinton. The couple became increasingly active in politics, and worked hard for the McGovern campaign in 1972. Rodham graduated from Yale with her Juris Doctor in 1973, and a year later was an advisor to the House Judiciary Committee addressing the Watergate scandal – Ms. Rodham was noted for arguing that in the event of impeachment, President Nixon should not be allowed legal counsel.

Hillary Rodham and William Clinton were married in 1975, and a year later Bill Clinton was elected Attorney General for the state of Arkansas. In 1977 Hillary Rodham Clinton joined the Rose Law Firm, specializing in patent infringement and intellectual property law. Also in 1977, President Carter appointed Hillary Clinton to the board of directors for the Legal Services Corporation (created under Nixon to provide free services to those who could not privately afford it). In 1978 Hillary Clinton became the LSC’s first female Chairperson, the same year her husband won election as Governor of Arkansas. In 1979 Clinton became a full partner at the Rose Law Firm.

During the Reagan years Hillary and Bill Clinton continued to gain influence and power. In Hillary’s case, those years spent promoting her firm and favored organizations to which Hillary belonged, such as the New World Foundation. Hillary Clinton was named to the board of directors for TCBY, Wal-Mart, and Lafarge (Clinton was the first female board member at Wal-Mart).

Hillary Clinton was a distinctive First Lady on several counts. She was the first First Lady to hold a post-graduate degree, the first to have an office in the West Wing, and of course Ms. Clinton was also the only First Lady so far to ever claim equal authority to the President. Hillary Clinton became the first First Lady to see approval numbers drop to 35 percent within the first 21 months of her husband’s term.

Following her husband’s eight years as President of the United States, Hillary Rodham Clinton was elected as a United States Senator for the state of New York. Despite statements that she was not running for President in 2004, Clinton was widely viewed as a kingmaker, and a key factor not only in John Kerry’s nomination as the Democratic Party’s candidate, but also in Al Gore’s decision not to try for the nomination himself. In January of 2007, Hillary Clinton made clear her intention to win the White House, and as late as October of 2007, Hillary Clinton was well ahead of all her rivals in the Democrats’ chase. But somehow the prize eluded her, as first Iowa then South Carolina demonstrated surprising (at the time) strength by the Obama campaign. The race became a two-person contest, then one led by Obama, then a clear victory for the no-experience orator from Illinois. Senator Obama made noises to placate Clinton’s millions of supporters, but she faded in the public attention almost to obscurity. There was talk of a subversive movement to throw the election to McCain (on the theory that Clinton would have an open field in 2012 if Obama lost in 2008), but the PUMAs turned out not to be a significant factor in the election.

With the election over and the Administration of Barack Obama about to begin, it remains to be see how Hillary Rodham Clinton will direct her considerable ability and influence. There had been some considered discussion that Clinton would make a good Vice-President for Obama, but bad blood between the two camps made this suggestion impracticable from the start. Other strategists thought Clinton could ask for the post of Senate Majority Leader, but this would allow Clinton an effective veto of her own against Obama’s policies, and so this too failed to go beyond early discussions. There is talk now about Obama making Clinton his Secretary of State, a prestigious and powerful position, but not one which any would-be executive covets. It is difficult to imagine Senator Clinton accepting a position where she takes orders from a political rival and who would have the power to fire her any time he chose. But it also raises great speculation, to consider her other options and from them deduce the path where her most likely return to glory and power would wait.

Sunday, November 16, 2008

Put Away the Knives

Losing is not a good feeling. So I understand that a lot of folks are unhappy, even angry. Note to President-elect Obama; you won an impressive victory and congratulations, but there are many millions of Americans whose vote you did not win, and many more millions of people who won’t be quiet if you turn out to be just another partisan hypocrite who thinks he can fool his way into control of the government, but then ignore what America needs because he is obsessed with his own plans. With that said, however, all Americans needs to give President Obama a chance to do his job. You can say what you want when he says or does something out of line, but he has to have the chance to do the job.

I also think it’s appropriate for republicans to make peace with John McCain and Sarah Palin. Oddly, despite the fact that these two were running mates, a lot of folks love the one and hate the other – the thought seems to be that one had a chance but the other one screwed up the opportunity. I disagree. As much as I would like to have seen a republican win the White House this year, the combination of the economic crisis, the media manipulation, and the infighting among republicans made it too steep a hill to climb. So what must be done now, is for republicans to than Senator McCain and Governor Palin for their efforts, and mend our fences. Look, I was dead-set against McCain winning the GOP nomination, but I got over it and worked hard to get him elected. There are many concerns I have with how the republicans acted towards each other this year, not least their disgusting abandonment of the president after everything he has done for the party and at great personal cost, but now is the time for us to make peace with each other, for the needs of the nation are great and we cannot do well by being petty.