Wednesday, December 10, 2008

Auto Bailouts and Other Things

I have tried to stay out of the auto-bailout thing but I find that I need to add my two cents to the issue. I have done three successful turnarounds in my professional career and have consulted on quite a few more. It is from this perspective that I am making my comments. So hear goes.

First, Ford says that it can make it through the near-term without any assistance from the Federal Government. Good. Let them go for it!

Second, Chrysler…is owned by Cerberus Capital Management, LP…a private investment firm who boasts, “strong corporate governance is the cornerstone of our business.” This is a private investment firm that recently took a risk, made a big investment, has access to billions of dollars of capital…and is coming, hat-in-hand, to the Federal Government asking for money to carry Chrysler through this mess.

Come on…

Sounds like we have a new model for private equity investment!

Third, General Motors…”What’s good for General Motors is good for the United States,” as a former CEO of General Motors put it.

We bailout General Motors and then we bailout the United States? Hmmmmmmmmmmm…I don’t think that is what was meant.

General Motors is a turnaround situation!!!

In a turnaround situation you get rid of the existing management and you bring in new management!!!

Robert (Bob) Lutz says GM should stick with “Rick” Wagoner, Chairman and Chief Executive Officer, because he knows the business and knows what the current situation is and doesn’t have to be brought “up-to-speed” with the situation at GM.

I remember taking a thrift institution public during “the S & L crises” and going to numerous “dog-and-pony” shows of other companies taking their institutions public. I was especially taken aback by managements that would say…”Sure we were the management of this institution for the last 10 years in which the performance of this company got worse and worse…BUT, we have learned our lessons…we can make this bank work going forward!!!” And then they raised quite a few million dollars from people who were willing to bet on this story.

Guess what? Most of them didn’t make it!

We have also heard that the top engineers and other top management want Wagoner to stay. “He can do it!” they say.

Sure these employees want Wagoner to stay! He is the safest thing for them and their positions. A turnaround specialist would take a long, hard look at these people and what they have done and are doing and that is exactly what the top engineers and other top management don’t want!

General Motors is a turnaround situation! If anyone (the Government) is going to invest money in this organization they need to demand the appropriate leadership…and the existing CEO and his top management IS NOT the leadership that is needed.

The bailout of the auto industry is not just about thousands or millions of workers being employed. I, personally, hope that these workers do not have to experience a great deal of suffering.

The question is about whether or not any effort made by the government will have a fair probability of success. Thinking of these efforts as a bailout is not helpful when the situation calls for a turnaround. The issue, in my mind, is not being framed correctly.


Information is starting to come out concerning the efforts to restructure mortgage debt…and the results are not encouraging.

Let me just say one thing about restructuring mortgages…or, for that matter, any debt in the present environment.

Generally, when the restructuring of debt takes place, the situation of the borrower and the situation in the economy are relatively stable. That is, any restructuring that takes place can count on income, employment, prices, sales, and so forth to remain relatively constant in the future. That way, the debt can be restructured in a way that presents the borrower with some likelihood that he or she will be able to pay off the debt.

In an environment that is not stable the situation of the borrower and the situation within the economy is constantly ‘going South.’ And, there is no certainty about ‘how far South’ these things will go. Consequently, any debt restructured in this environment has a relatively low probability of being paid off. Those restructuring the debt are just postponing the day of reckoning and continuing to put these borrowers in a position of almost assured failure.

In essence, within the current environment, those that have been foreclosed upon have gone from borrowing using a sub-prime loan to borrowing using a sub-sub-prime loan.

As I have said in many other posts…once discipline is lost…there are no good solutions to the problems created by the loss of discipline.

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