Rick Wagoner, Chairman and Chief Executive Officer of General Motors, will resign as a part of the agreement with the federal government in which the company will receive additional federal aid. General Motors is a turnaround situation; it is not a restructuring exercise. The odds are against a company pulling off a turnaround with the same people that led them into the situation they now face.
Some people argue that the problem is the bad economy, something that the executives are not responsible for and therefore should be allowed to continue in their positions. This, to me, is like saying that executives in financial institutions are not responsible for the collapse in the financial market that exposed to the world the increased risk they imposed upon their companies or the large increases in leverage that accompanied their use of more exotic financial instruments.
When you make bad decisions, a bad economy will exacerbate the results that come from these choices. But, one cannot just place all the blame on the bad economy.
This analysis puts us back into a discussion about our understanding of exactly what it is that we are now facing in the financial markets and the economy. One way to distinguish the two views that seem to be the predominant ones now in vogue concerning our current situation is between those that believe the main problem relating to financial assets is the liquidity of these assets.
In this argument, people insist that banks and other financial institutions are caught in a trap where the markets for many of their assets are so illiquid that these organizations are unable to price the assets and then, possibly sell them. This seems to be the assumption behind the recently presented investment program, the P-PIP, that was announced by the Treasury last week.
The alternative view is that many financial institutions are insolvent and that what is really needed is a recapitalization of those organizations that still have a future while those that are not capable of being salvaged should be closed. Those that take this approach contend that this problem will not go away and will have to be addressed sooner or later. They also argue that dealing with it sooner will speed on a recovery and will also cost the taxpayer less in the longer run. (See my post http://seekingalpha.com/article/127639-public-private-investment-program-liquidity-or-solvency.)
The other area of concern is the status of many of the firms that find themselves in trouble. One group of analysts believes that the problem is one of a bad economy and a bad financial market and that all the companies need to do is restructure their current operations. This can be done, they argue, with the existing management and with just “tweaking” the existing business model.
Yet, here we are with General Motors. Over 20,000 employees were given the option of taking a buyout of their employment contracts. A total of about 7,500 took the buyout, but this was a disappointing result. Several of the product lines are going to be discontinued and/or sold off to bailouts in other nations. Contracts with labor unions regarding working arrangements and conditions must be massively changed. And, a substantial number of the bondholders must convert their bond holdings into equity. This doesn’t even touch the fact that the auto companies are substantially behind the curve in terms of real innovations and preparations for future technologies and products.
Given these factors that need to be addressed and resolved, I believe that one can only call this a turnaround situation, a condition in which new eyes and ears must be applied. To me there is little hope that the executives that got the company into this position are the executives that will bring these companies into the 21st century let alone into the 1980s.
This judgment applies not only to the automobile industry: it also applies to banks and other financial institutions, as well as many manufacturing organizations and other companies that require major changes in their business models. (See my post http://seekingalpha.com/article/127625-let-go-the-experts-who-have-learned-to-fail.)
This country (and the world) is facing a series of serious structural dislocations. The problems are not ones of liquidity or keeping on, keeping on. Lobbying to maintain the status quo will not give us much hope for the future. Inflating our way out of the bad debt or band-aiding inadequate business models will only postpone what needs to be done.
The arrogance that Rick Wagoner exhibited in his first appearance in front of Congress probably doomed him to this result. The behavior of other executives from both the financial and non-financial sectors has not endeared them to either the people of the country or to their representatives in Congress. This will probably not help the executives in the long run. Sometimes a little humility is a good thing!
Bankruptcy is another option for many firms. One could argue that taking this path would probably be an efficient way to get companies into the turnaround mode although it would not include government money as a part of the process. It would keep government officials out of the turnaround process and avoid relationships that are uncomfortable for the new managements that will be leading the companies out of the bankruptcy.
This in not a normal, relatively mild recession that will be ended through the injection of liquidity into the monetary system. The economy is facing a management problem and a debt problem that must be worked through. It is not clear that this is fully understood by those attempting to turn the economy around.
Showing posts with label Rick Wagoner. Show all posts
Showing posts with label Rick Wagoner. Show all posts
Sunday, March 29, 2009
Monday, March 23, 2009
A Lesson from AIG for the Bank Bailout Plan
One of the reasons given for the awarding of bonuses at AIG was the need to keep people around that had “expertise.” That is, if we lose the “experts” we are really in trouble!
This, to me, is one of the greatest fallacies in the corporate world.
It is a fallacy for two very important reasons. The first fallacy is that people are irreplaceable. The second fallacy is that the people that performed badly in the past can get you out of the mess they got you into.
In my experience, no one is irreplaceable and the minute that you begin to believe that either you or the people in charge are irreplaceable you are setting yourself up for big problems. We do not need Rick Wagoner of General Motors nor do we need Vikram Pandit of Citigroup. They are not indispensable in any recovery or turnaround of the companies that they are a part of. Neither are the traders, or the quants, or other executives that got these companies where they are.
We are sold a “bill of goods” about how important these people are to the organization, yet it is remarkably surprising that when they are gone things don’t fall apart. In most cases the situation improves and the company performs at a higher level. It just seems as if in a complex and difficult situation that putting “someone new” in authority is the more dangerous path.
Time-after-time we see that replacing these people is not dangerous. In fact, it turns out to be the best thing that could happen.
Obviously, the incumbents want you to believe that they are indispensable. They will do everything that they need to do to convince you of their importance to future success. And, this includes groveling to the government to assure that they will be kept in place when and if the government bails out their organization or takes it over. Rick Wagoner is sure acting different these days when he is desperate to retain his position at General Motors that he did when he arrogantly arrived in Washington, D. C. on his first trip to the “big” city to appear at Congressional hearings.
Let me add here, however, that this is one of the worst things that the government does when it bails out a company. Because government doesn’t know any better, it often buys into the argument that the current leadership should stay on after the bailout because it has the experience and knows the company better than anyone else does. Government assistance tends to entrench existing management. After all, since the government has worked with this management team to create the bailout in which they are now companions rather than adversaries. That is, they are in bed together.
This is a good reason why government needs to let the shareholders or the bankruptcy courts handle most of these situations. If a management change is needed, there needs to be a practiced means of proceeding toward an orderly transition of power rather than have government insert its heavy hand into the process. Even if government appoints new executive leadership, the choice is usually a person who is an “expert” with “experience” in that firm, which, again, limits the possibilities that the firm will move ahead into the future rather than stay mired in the past.
My experience with the second fallacy also leads me to believe that the “experienced” people should be removed. During the savings and loan crisis, I don’t know how many times I heard the executives of failing thrift institutions seeking money in an IPO tell potential investors, “Yes, we were the ones that managed the organization that brought it to the edge of failure, but, we have learned from this experience! You should give us $100 million in our IPO.”
What have these executives learned?
They have learned how to fail, that’s what they have learned!
There was an interesting article in the business section of the Sunday New York Times which discussed investing in start up companies. I remember myself, because I have worked in that space, that one of the old “truths” of investing in young entrepreneurs is that you should look at people who have failed in earlier business attempts and it even was a “badge of honor” to have failed many times. Recent research does not support this conclusion. On average, those that have failed starting businesses tend to continue to fail. This attitude relating to failure was advice given to venture capitalists or angel investors that are looking desperately to place money. The situation arose during “booms” when there was too much money chasing too few deals. Nothing replaces the success of an entrepreneur as a guide to potential future success.
Still one has to be careful here. Two cases come to mind. First, Nassim Nicholas Taleb in his book “Fooled by Randomness” discusses traders that succeed fantastically because they are in the right spot at the right time. Through no skill of their own do they achieve success, and, because they now think that they are geniuses, go on and lose most if not all of what they gained in their one success. Obviously, these people are not geniuses and should not be treated as such. What you want is people that continue to succeed and succeed in ways that are not just lucky successes.
Second, in an “up” market, almost everyone can succeed, sometimes spectacularly. This can happen in overheated housing markets, in firms that are of the dot.com variety, and in growing and running financial institutions. Credit bubbles help. The sad thing about this is that the people that have just benefited from the “bubble” and not from their “skill” are not found out until the “bubble” bursts. Then the true reason for the success of these individuals becomes obvious.
Furthermore, if a chief executive or a management operated in an environment that was “hot” and where increased risk taking and adding additional leverage were the skills needed in order to succeed they are not the chief executive or management to operate within an environment that is “cool” and where reducing risk and de-leveraging are the tools required. Speed racers are not needed on streets where the speed limit is 25 miles per hour.
It should be clear that the people that get you into a mess are not the people you should count on to get you out of the mess. But, again, the government usually does not see this except in cases of fraud or other types of criminal behavior. Therefore, the government will often stick with those people that are experienced in failure.
These comments can be applied to any approach the government takes to resolving issues in the private sector, whether it be in terms of dealing with the toxic assets of financial institutions or bailing out failed managements in the auto industry. The government must be realistic in what it can do. A bank bailout plan that just brings in private investors to relieve institutions of bad debts while leaving bank managements in place is not going to give the financial sector and the economy what it needs.
Yes, something needs to be done about the bad assets banks have on their books. Losses have to be absorbed by the banks and their owners, themselves, or the government must absorb the losses. The insolvent banks, and auto companies, need to be closed or put into bankruptcy. The world needs to move on and the bad decisions of the past must be accounted for. Someone must pay—sometime. Unfortunately, when government gets involved, the solutions to things often only get postponed or delayed. That is not what the financial markets or the economy needs at this time.
And, this includes Cerberus and Chrysler Corp. Cerberus made a wrong deal at the wrong time. They need to move on.
This, to me, is one of the greatest fallacies in the corporate world.
It is a fallacy for two very important reasons. The first fallacy is that people are irreplaceable. The second fallacy is that the people that performed badly in the past can get you out of the mess they got you into.
In my experience, no one is irreplaceable and the minute that you begin to believe that either you or the people in charge are irreplaceable you are setting yourself up for big problems. We do not need Rick Wagoner of General Motors nor do we need Vikram Pandit of Citigroup. They are not indispensable in any recovery or turnaround of the companies that they are a part of. Neither are the traders, or the quants, or other executives that got these companies where they are.
We are sold a “bill of goods” about how important these people are to the organization, yet it is remarkably surprising that when they are gone things don’t fall apart. In most cases the situation improves and the company performs at a higher level. It just seems as if in a complex and difficult situation that putting “someone new” in authority is the more dangerous path.
Time-after-time we see that replacing these people is not dangerous. In fact, it turns out to be the best thing that could happen.
Obviously, the incumbents want you to believe that they are indispensable. They will do everything that they need to do to convince you of their importance to future success. And, this includes groveling to the government to assure that they will be kept in place when and if the government bails out their organization or takes it over. Rick Wagoner is sure acting different these days when he is desperate to retain his position at General Motors that he did when he arrogantly arrived in Washington, D. C. on his first trip to the “big” city to appear at Congressional hearings.
Let me add here, however, that this is one of the worst things that the government does when it bails out a company. Because government doesn’t know any better, it often buys into the argument that the current leadership should stay on after the bailout because it has the experience and knows the company better than anyone else does. Government assistance tends to entrench existing management. After all, since the government has worked with this management team to create the bailout in which they are now companions rather than adversaries. That is, they are in bed together.
This is a good reason why government needs to let the shareholders or the bankruptcy courts handle most of these situations. If a management change is needed, there needs to be a practiced means of proceeding toward an orderly transition of power rather than have government insert its heavy hand into the process. Even if government appoints new executive leadership, the choice is usually a person who is an “expert” with “experience” in that firm, which, again, limits the possibilities that the firm will move ahead into the future rather than stay mired in the past.
My experience with the second fallacy also leads me to believe that the “experienced” people should be removed. During the savings and loan crisis, I don’t know how many times I heard the executives of failing thrift institutions seeking money in an IPO tell potential investors, “Yes, we were the ones that managed the organization that brought it to the edge of failure, but, we have learned from this experience! You should give us $100 million in our IPO.”
What have these executives learned?
They have learned how to fail, that’s what they have learned!
There was an interesting article in the business section of the Sunday New York Times which discussed investing in start up companies. I remember myself, because I have worked in that space, that one of the old “truths” of investing in young entrepreneurs is that you should look at people who have failed in earlier business attempts and it even was a “badge of honor” to have failed many times. Recent research does not support this conclusion. On average, those that have failed starting businesses tend to continue to fail. This attitude relating to failure was advice given to venture capitalists or angel investors that are looking desperately to place money. The situation arose during “booms” when there was too much money chasing too few deals. Nothing replaces the success of an entrepreneur as a guide to potential future success.
Still one has to be careful here. Two cases come to mind. First, Nassim Nicholas Taleb in his book “Fooled by Randomness” discusses traders that succeed fantastically because they are in the right spot at the right time. Through no skill of their own do they achieve success, and, because they now think that they are geniuses, go on and lose most if not all of what they gained in their one success. Obviously, these people are not geniuses and should not be treated as such. What you want is people that continue to succeed and succeed in ways that are not just lucky successes.
Second, in an “up” market, almost everyone can succeed, sometimes spectacularly. This can happen in overheated housing markets, in firms that are of the dot.com variety, and in growing and running financial institutions. Credit bubbles help. The sad thing about this is that the people that have just benefited from the “bubble” and not from their “skill” are not found out until the “bubble” bursts. Then the true reason for the success of these individuals becomes obvious.
Furthermore, if a chief executive or a management operated in an environment that was “hot” and where increased risk taking and adding additional leverage were the skills needed in order to succeed they are not the chief executive or management to operate within an environment that is “cool” and where reducing risk and de-leveraging are the tools required. Speed racers are not needed on streets where the speed limit is 25 miles per hour.
It should be clear that the people that get you into a mess are not the people you should count on to get you out of the mess. But, again, the government usually does not see this except in cases of fraud or other types of criminal behavior. Therefore, the government will often stick with those people that are experienced in failure.
These comments can be applied to any approach the government takes to resolving issues in the private sector, whether it be in terms of dealing with the toxic assets of financial institutions or bailing out failed managements in the auto industry. The government must be realistic in what it can do. A bank bailout plan that just brings in private investors to relieve institutions of bad debts while leaving bank managements in place is not going to give the financial sector and the economy what it needs.
Yes, something needs to be done about the bad assets banks have on their books. Losses have to be absorbed by the banks and their owners, themselves, or the government must absorb the losses. The insolvent banks, and auto companies, need to be closed or put into bankruptcy. The world needs to move on and the bad decisions of the past must be accounted for. Someone must pay—sometime. Unfortunately, when government gets involved, the solutions to things often only get postponed or delayed. That is not what the financial markets or the economy needs at this time.
And, this includes Cerberus and Chrysler Corp. Cerberus made a wrong deal at the wrong time. They need to move on.
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