Time for Tough Love for Detroit?
GM and Chrysler filed their turnaround plans this week asking for an additional $30 billion in bailouts. Almost no one believes these plans will work or that this additional $30 billion on top of the $17 billion received to date will be sufficient. Ford, wisely, so far, stayed out of this charade, but faces the same endgame as these two procrastinators.
The American auto industry—like major league baseball—has been a symbol of American pride and a pastime lingering on beyond our boyhood dreams. I once had a 1970 Chevy Malibu convertible which my 75 yr old grandfather aptly described at the time as a “babe magnet”. We had an emotional attachment to our wheels. Then things began to change. We still rooted for our favorite brand, even as we abandoned them for better quality, more stylish, fuel efficient, more dependable foreign cars. Detroit responded by giving us more of the same. The imports just got better and then expanded production in America—not in Detroit—but in Alabama or Mississippi or elsewhere. Today, we have a robust American automotive industry, but the Big Three are now Toyota, Honda and BMW.
Is it time for tough love for Detroit?
We all know the answer is yes. Perhaps, a year ago the argument that GM was too big to fail was “scary” or that a bankrupt Big Three player could not sell cars because customers would fear to take a risk rang true. That game is over. The Bush Administration handed out the bailout money because it did not want GM or Chrysler to go down on their watch NOT because they believe they could save themselves even with financial help.
Now, bondholders and the UAW, Cerberus and other stakeholders are playing chicken with each other—hoping and praying—that Obama will expand Bush’s sentimental gift of a financial lifeline to these icons to stave off bankruptcy. My advice: Just say no.
What will happen then? Chrysler will almost certainly fail and be sold off for “parts” with the Jeep brand fetching a fair price from a foreign player interested in taking an iconic position in the North American market. GM will go Chapter 11 and Ford will quickly follow and together they must “fix it right” to give the patients a chance for a healthy financial future. This is not time for a botox treatment—this is open heart surgery. Only in bankruptcy court can the legacy costs be stripped away. There will be fewer brands, plants, dealers and workers. Shareholders will be wiped out—the price they will pay for allowing management to evade reality so long. Bondholders will have an opportunity to trade debt for equity and stop being enablers of a failed strategy. Management housecleaning will be complete.
Is there a role for the government here? Sure, as an honest facilitator of this transformation in bankruptcy court by sweeping away impediments to change, preempting state dealer laws, transition for worker pensions and other constructive implementation efforts of the reorganization plan the parties negotiate in the restructuring proceeding before the judge.
If we’re lucky, someday my grandson will proudly drive up to show me his new GM car and I will nostalgically wink at him and say—this is a “babe magnet”.
Putting “Greed” to Work to Fix the Economy
Today’s pain is a lagging indicator as the economy turns the corner. But fear is still the primary driver of the economy and markets today. The headlines are full of “the sky is falling” reports. And, indeed, we are seeing wrenching layoffs, housing foreclosures, and plummeting retail sales. This first quarter 2009 will surely be ugly, but in all this pain we may be seeing the bottom. Ironically, for all the doomsayers, these signals appear to be on track for the historical average of 16 months for recessions.
I think there are several clues to this bottoming out, and the best signal is the accelerating shift of sentiment from fear back to greed because GREED is what we need to restore confidence in our economy and get people back to work.
Why do I say this?
Bankers Smell Profits. The dressing down of bankers in front of Barney Frank’s committee this week in Congress only reinforces their desire to pay back TARP funds ASAP. I believe most banks that received these funds will do so NOT to avoid these repeated woodshed trips, but because they can now MAKE MONEY as confidence is restored and the market roars back.
Lending is Back. Libor is at very reasonable rates which signal that banks are confident about lending money to each other. Credit default swaps have fallen rapidly signaling the market perception that default risk on corporate debt is returning to normal. Junk bond yields are attractive but falling as investors chase yield.
Putting “Greed” to Work to solve the Problem. Hank Paulson, Ben Bernanke and now Tim Geithner have been alternatively hailed and hammered through this panic. But each was present at creation in crafting strategies to respond to the panic, flood the system with liquidity, and now purge it of poison.
I believe that when this panic passes these guys will justly deserve a Nobel Prize more than a “raspberry” for steering us through this carnage. While Geithner is being panned for this latest—admittedly vague—explanation of the Obama strategy, what seems to be emerging is the market tested concept of a “specialist” who will purge the poison by buying, holding, repackaging and guaranteeing structured transactions over time for these toxic assets.
Like a Resolution Trust Corp on steroids this is a smart, efficient, daring and ruthlessly effective way of engaging the market to solve the problem using the same “greed” that got us into it to create a market frenzy around the millions—make that trillions, to be made from the appreciation in value of all these assets being marked down to market in this recession. That’s why there is such little incentive to change the M2M rules. It protects investors through transparency, punishes the stupid—and occasionally the guilty, and clears the market of weak players and foreclosed assets faster than any other approach—without the risk of “earmarks”, political speeches or campaign contributions.
M2M also enables the survivors to pick up the pieces and the big potential profits from recovery, and restore their market caps—and big paydays.
It just might work!
