Does this Worry You?

I‘m one of the first folks to argue that government intervention is necessary in a failed market and is usually a positive thing.  There are several US markets that need rebooting and government oversight and participation is the only way.  In my opinion, the markets for health care, financial services, and transportation are all pretty messed up.  There’s always this fine line, however, between rebooting a market so that it works again and booting the failed market deeper into a hell realm.  That’s why I’m concerned about the auto industry.  While the financial markets have been assigned to limbo, the automobile industry appears to be waiting in purgatory for the final blow.

I have to say that I’m mostly displeased about the way government has been handling the auto industry in this country.  They have ignored the foreign owned plants which also contribute to our GDP and create local jobs and suppliers.  They initially wanted to drag Ford, which is relatively healthy, into the bailout equation.  They extended loans in the fall with nearly everyone knowing that they were stopgap at best.  I believe this was because of the election and neither party wanted to compromise seats in states with UAW, creditors, and small businesses dependent on the industry. The Bush administration punted.  The Obama administration has a fair catch but appears unable to to move the ball forward.  They’ve called a time out. They’ve replaced one of the coaches, mid-game. They’ve put in referees that primarily represent creditors.  I own some Ford stock so I have a bet on this game and I can’t stand it when the rules and the players are changed while the action is still on.

The car business  just appears to be getting worse.  We’ve learned that investment bankers have generally screwed the pooch in just about every recent endeavor, yet Obama has put one  in charge of the GM and Chrysler ultimatums.  The first move, seen last week, was quite investment banker-like.  Chrylser is being married off to a perceived white knight, Fiat.  GM’s CEO was told to walk the plank.  At first I wasn’t sure if POTUS was just trying to challenge Donald Trump’s standing in TV ratings with the District version of  “You’re Fired!” or trying to remove public attention from AIG anger.

Obama also announced (Treasury Secretary Geithner by his side) a series of initiatives meant to calm potential US auto buyers.  Will these cheer up already nervous American consumers?

He also announced several steps to reassure consumers, and improve the chances that U.S. automakers will be able to sell their cars and trucks. The president said the government will now stand behind warranties issued by the carmakers, a sweeping new guarantee that some in Congress had sought.

He also noted that the economic stimulus legislation he recently signed allows the purchasers of new domestic cars to deduct the cost of any sales and excise taxes.

Obama said this provision could “save families hundreds of dollars and lead to as many as 100,000 new car sales.” He also said funds ticketed for the purchase of new vehicles for government agencies would be spent as quickly as possible.

It will be interesting to see exactly how the market handles these moves.  Today’s Market Watch announced that both Ford and GM had experienced Sales declines in excess of 40%.  Chrysler, Honda and Toyota also experienced declines but not to that extent.

“Despite some improvements this month, we just don’t expect to see a big recovery this year,” Edmunds.com analyst Jesse Toprak said. He added, however, that there’s now more upside to his 2009 sales target of 10 million vehicles than there is downside.

The monthly results, no matter how promising, take a back seat to further speculation as to what’s next for GM. With the CEO Rick Wagoner gone and a new deadline imposed by the White House, viability concerns are again dogging the company.

“Bankruptcy risk is real and running higher than ever for GM and Chrysler, even though the automakers and the government will do whatever it takes to avoid it,” Toprak said.

Still, President Barack Obama reportedly said he believes a “quick and surgical” bankruptcy for GM is most likely the next step.

So, that’s what we’ve seen to date, but what worries me is what comes next.  We’ve just had the US government basically remove a CEO and several board members of one of the largest companies in the US.   What role will the US government play in the future?  How will they influence the pick of a new CEO and new board members?  What exactly will be their priorities?  Will it be corporate governance changes?  More efficient operations?  Payment to creditors above all us?  Fair dealings with the unions?  This is unprecedented territory and I’m not sure we can actually speculate about this.

Today’s Washington Post has brought the topic up.  What does it mean to give the government control over a major US manufacturer?

The president’s auto task force plans to consult with the company as it replaces a majority of its board, a White House official said. The board today largely consists of the current and former chiefs of major U.S. corporations such as Coca-Cola, Ernst & Young, Pfizer and Eastman Kodak. It is not known which of the 12 board members will leave.

The president said Monday that “the United States government has no interest in running GM.” But in practice it is already exerting tremendous influence over it, a situation that has triggered fierce debate over how much power the government should wield over the companies that it aids.

Kent Kresa, 71, GM’s new chairman, said yesterday that company officials will seek to replace a majority on the board by August, as the automaker moves to restructure operations.

Downsizing GM means downsizing supply chains and dealer networks.  It means deciding which small town keeps its

Goverment Motors?

major employer and which small town dies.  It means one little league team will keep its sponsor and another one will have to look for another.  I’m the daughter of a retired Ford dealer raised in small town, middle america.  My dad was head of the local chamber of commerce at one time.  He also served as chair of the United Way Fund drive.  We employed a large number of people in our small little Iowa town.  I was trained by Dr. W. Edwards Deming in the 1980s to go around and help auto suppliers in small town Nebraska and Iowa implement SPC to keep their GM and FORD contracts.  These are towns that are totally reliant on one or two little manufacturing units.  Which town will live and which town will die?  Who is going to decide and on what basis?

Republicans are worried about the move because they worry Obama’s a socialist and wants to control all businesses.  You can see this argument every where from Rush to the Halls of Congress.

Some critics characterize the White House’s removal of Wagoner as a move toward European socialism. In addition to forcing leadership changes at GM, President Obama on Monday said that Chrysler must strike a partnership with Italian automaker Fiat, and that GM must further cut its already shrunken workforce and product lines.

“They have opened Pandora’s box — the U.S. government has decided they know better than the private company,” said Sen. Bob Corker (R-Tenn.) “There is no question that this country is moving down a very different and foreign path. We have crossed this threshold: We own this company and we are telling it what to do.”

I’m more worried about the criteria used to do what I just highlighted in that quote above.  Who decides and how are they going to decide how to shrink their workforce and product lines?  If you have politicians making the decisions then it seems to me that politics will become part of that criteria.  THAT is what worries me.  It worries me even more given the uneven treatment afforded investment bankers compared to auto workers.   What about the product lines?  Who decides now what cars America will drive?

But the coordination with the government affects what appear to be smaller matters as well.

For example, yesterday GM announced a new “Total Confidence” program for consumers that offers a warranty, an OnStar traveler’s assistance system and a promise to pick up as much as $500 a month of car payments for buyers who lose their jobs.

“The government is aware of it, completely supports it,” Mark LaNeve, head of GM’s U.S. field marketing, said yesterday in announcing the program.

This is basically a marketing and product decision. I’m not sure I’ve ever trusted the marketing division to decide what I want in a car but who says I trust some political appointee in the Obama administration more?  Oh, and back to the fact that I own a little stock in Ford (thankfully, not GM).

Under the government’s proposed reorganization for General Motors, the union health plan and the company’s bondholders would give up much or most of those claims in exchange for an equity stake in the reformed GM.

Given the magnitude of the swap, many analysts think those two entities could wind up with a majority of company stock.

This deal is most interesting.  This dilutes the ownership rights of the current stockholders and the right to the residual earnings and it replaces safer deals promised to bondholders and workers with essentially highly diluted equity.  I’m not sure I’d want that deal if I were in the shoes of either of these three groups.

So, let me get back to the Corporate Governance issue and provide you a quote from a Corporate Governance expert.

Another key stakeholder in the company, of course, would be the government, which has lent the company money but does not own any shares. And many analysts believe that whoever the shareholders may be, the government’s interest will matter most.

“Obviously, the government has a voice as an investor,” said Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware. “But it’s not like the government speaks as one voice among many. It becomes the overwhelming voice.”

The government, bondholders and the union will all be competing for influence, said Ronald J. Gilson, a law professor at Stanford and Columbia, who is a corporate governance expert.

We’re not used to the government being a key stakeholder in a major corporation.  There are really very few ground rules in place for this.  Does this means political appointees may sit on the Board of GM?  If so, what will be the criteria for their appointment and will their only interest be protecting the taxpayer’s interest.  All, I can look towards as an example are all the other boards that are subject to political appointees and then worry. But, maybe I’m just excessively pessimistic since I live in the most corrupt state in the Union.

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