Friday, December 19, 2008

Beyond The Burning Bush..and the chaffing Cheney

Bush burns
The President is caught between dissenting views. The 5 Benedict Arnold Southern Senators (5BASS) and likely Dick Cheney pressured the President into putting very difficult stipulations on the auto companies' receipt of funds from the government.

Stipulations Vs facts
While some of these changes will have to be implemented before 2009, others give the automakers until March 2009. That will mean a new President, a new Congress, and a Congress with a very different partisan composition, will be monitoring and enforcing this deal. GM amd Chrysler have been given access to funds. Ford is left out since it only sought a credit line (just in case). Ford is better off because it had pre-secured money by borrowing in anticipation of a worsening economy. GM and Chrysler did not do so; they are caught in the full blown crisis like the rest of the world's automakers. YOOHOO.Washington. THE AUTO COMPANY PROBLEMS ARE GLOBAL!! Mazda has exited Grand Prix racing and Toyota is cutting back output deeply, just to name two. Saab and Volvo are getting help in Sweden, to name two more... France is considering aid... The CBI in the UK has recommend aid to the INDUSTRY there, calling it a vital industry...and so on. But its not vital to our 5 large mouth (pea brain?) BASS.

The LEVERAGE of bankruptcy without bankruptcy...
The idea of using the provisions of these monies to force the unions to change work rules, to cut salaries and benefits and to get concessions from suppliers and dealers is a good idea. I have long maintained that you have to get change in some key respects before you lend any money to the automakers. My position has been to use the THREAT of bankruptcy to get the same concessions you could only get in bankruptcy by making it clear that either you get these concessions or you will get them in bankruptcy where the automakers survival is not assured. That approach will resonate with many, but not all auto creditors, since some have lent secured by assets. So some exceptions may have to be made when the creditor is impervious to such threats. This deal does not acknowledge that reality...

Unintended Fallout: Congress makes mischief
Some of the recent lenders to the auto companies lent against assets precisely because they had credit worries. Now the President, urged by these five idiot Senators and others wants them to abandon that security and become shareholders for a portion of their debt. That is a STUPID requirement: to make a lender with foresight and turn him into an unwilling at risk borrower as a condition for the auto company to get a loan. Such a provision could suckerpunch the corporate debt market.

Salving the hand that feeds you...
Since suppliers and the UAW have vested interests in GM/Chrysler survival it makes sense for them take the medicine now and suffer the side effects. They will have to give up something in return for GM's and Chrysler's survival. As a science teacher once said to me:

It is a poor parasite that destroys its host
Limits on bargaining and contracts-AKA: Legal obligations
The suppliers and UAW are not parasites but they do have a symbiosis with GM and Chrysler. That is the key to understanding their bargaining position. SURVIVAL is in everyone's best interests - even the government's, given the potential dislocations and the costs failure would imply for social welfare programs. In a world with free trade the UAW cannot procure above market wages and compensation for its workers. As trade has gotten freer and as cheaper wage countries have joined in the world trading system, the UAW's 'franchise' also has lost value. With foreign 'transplants' operating in the same country in 'right-to-work states' the UAW cannot use market power to raise wages unless it is by ripping any brand-specific or excess profits GM or Chrysler would have made. That the brands are worth anything of that sort anymore is highly doubtful. Cars still have their differentiation. That has held in autos more than in electronics where names increasingly mean less (even Sony is having a hard time selling its stuff at a premium).

Problems with the deal
The main problem with this deal is trying to cram down too much change too soon. In some sense the automakers must welcome the mandate to do some of the things they have not been able to achieve themselves in collective bargaining. The government backing for paring down previously agreed to deals and the very public nature of the process will help GM. The simple fact is that the collective bargaining and the pattern bargaining tactics that unions have implemented have given them too much power because it has led to a situation where the auto firms have agreed to wages and work rules and benefits that are now bankrupting them. Why did they do that? To survive in the short run. To avoid debilitatiing strikes... to bargain another day.

Hard to swallow
One interesting thing that GM retirees won't like is the idea that the VEBA agreement must accept GM shares for half of the payoff. That sounds risky but in truth it is not.

..but good for digestion?
Every employee that gets benefits paid by a company in retirement is in jeopardy to the survival of the firm that has agreed to provide those benefits. If GM goes bankrupt, guys your bennies go bye bye, except of course if they are in a funded pension system or are 401k benefits. So if putting stock in the VEBA helps GM survive, it is a good thing. Another aspect of this it that might turn out to be a very big favor. GM is still a very successful company by many metrics. Once the recession passes and GM survives due to the 'good graces' of government, it should emerge as a much more profitable company. Its share values will rise and the VEBA will get a BONANAZA from that. So the UAW should not squawk too much over that provision.

Humor as insight...
While the President's heart seemed to be in the right place from the start this President always has lacked backbone. His policies have been run by his advisers who have very strong views - the SNL skit where 'he' explains the role of VP to 'Sarah Palin" is very telling --funny -- but probably all too true. (see clip below)

Lessons: teach your children well
There are economics and political science lessons here about what policy can do. There is a lesson about what collective bargaining can and cannot do as well as what it can reach and maybe be able to grasp but may not be able to sustain a hold on. There is a lesson to firms about paying benefits and wages that they cannot afford. There is a lesson about North/South US politics. There is a lesson about Republican/Democrat US politics. Is there also is a warning shot across the Obama administration's bow from the 5Bass?

Why is 'Auto' a four-letter word but not 'Bank'?
Banks were given help on short notice but not the automakers. Why? Well banks are the conduit of commerce and they can't be allowed to fail. OK, I buy that. But beyond that bankers have put financial products into the market that simply don't work. Banks have done things that make no sense. Bank management has made terrible decisions in an industry where judgment is everything. And I speak of BANKS up and down the line - not just a few. Meanwhile management at these banks largely has not been removed. The auto companies, in contrast, have been selling products of very improved quality. They continue to have some of the best brands in their respective auto/truck class. While bank management is largely being left in place, everyone wants the scalps of the automakers who have improved their products. Curious development isn't it? Autos have been suckerpunched by a severe recession and have had their capital leeched from them by banks that would not lend to customers (auto buyers) who suddenly were not creditworthy enough. House loan with no proof of income? Sure! House loan with no down payment Yea baby! Auto loan with poor credit score? NO WAY! And if you can't borrow you can't buy a car. Automakers were also sucker punched by oil prices, rising to nearly $150/bbl. Nice help with policy on that one Washington! Once again, someone else's bumbling torpedoes Detroit.

2 B Fixed
Now automakers do have a bad product mix and other issues with contracts that must be modified for their survival, but these are things that can be fixed. GM has some bad contracts it has not been able to expunge, as discussed above. But all these auto companies do know how to make cars and trucks and good ones at that. In contrast, the bankers that Congress bailed out wouldn't know a good investment if it came up and bit them on the bottom --as many many bad loans actually did and are still doing..

SPITE! Git-Back
Republicans may be seeing their clout diminished but they were sure to strike a blow below the belt before they left office. A more charitable view of this is that they were afraid to set a precedent for helping an industrial company. But that is a bogus excuse. This move was help to an industry, not a company. The last time US industries came under so much pressure it was Steel and Autos and 'orderly market agreements' stemmed the flood of imports to help buy time. That was the move that brought the transplant factories to the US. In the trade act of 1974 the cut in tariffs protecting footwear and textiles were slashed but the bill provided for adjustment assistance and training and money for affected firms to adjust- not bankruptcy as an option. Bankrupting a key industry is hardly a plan for success. This time the foreign auto makers are under the door and over the transom with plants in the South and they have domestic advocates - the Benedict Arnold Senators in the South who would ravage the North the way the North ravaged Atlanta in what is now the auto civil war. Payback is a bit**.