Monday, March 30, 2009

The Stick and the Carrot

I've been hearing some things said about the Obama team's auto plan I feel I must weigh in on. For those saying 'O' doesn't get it, I think they are the ones who don't get it.

High Stakes Poker With a Twist
The problem the O-man has at this point is trying to communicate to the public and protect his 'hand' at the same time. If you are in a poker game it is hard to play that game (where bluffing is a critical skill) and talk about your hand at the same time.

Perception Vs Reality
For those of you who want to dump on the automakers for not getting a deal on time, understand that everyone knows the score: suppliers, the UAW, stock holders, bond holders- everyone, knows that the government has deep pockets and has dug in deeply for banks, so why not for autos? These players do not want to give in if they can have it all. One group does not want to give a concession if another won't. And so on. Its a game. It's a strategy. It's better than reality TV. It's very hard for GM and Chrysler to get good deals when its counterparties think the government will bankroll just about anything. The Obama team is trying to change that perception.

The stick is out and he is whacking GM...
Obama's plan puts several forces in play, competing forces. He offers some money, but holds back the big bucks. He addresses GM in public. He has fired its head but does not besmirch the Wagoner's reputation- he says its time for a new approach. This suggests to me that O understands that the auto dealers, while naturally, were caught in a circumstance that was partly of their own making, are also riddled by events beyond their control. Moreover the auto industry had been making progress when this crisis hit. He wants the bond holders and stock holders and others to see that he is willing wreak some havoc on them. Firing GM's Wagoner did that.

The carrot is a stick too
By saying the government would stand behind auto warranties he covered on of the biggest fears of bankruptcy, arguably making it less painful and more likely as an alternative. He then said we would use all the tools and mentioned bankruptcy as one, saying that such an approach could allow the company to jettison bad contracts and debts. Here he was also speaking to dealers that have contractual arrangements they do not wish to give up. Anyone that has looked at it knows that one reason GM's progress has been slow is because of all the competing interests with real leverage. So bondholders think they can hold out for 1oo cents on the dollar? Maybe they will get a lot less under bankruptcy. The government is trying to make sure its money is not simply downstreamed to players who should take losses. This IS harder ball than it or the Fed played with the banks, however. Don't want to be converted to an equity stake from bond stake? Ok I'll match your gambit and raise you one warranty guarantee... What now?

Why tougher on Gratiot that on Wall street?
For those out of the know, 'Gratiot' is a uniquely named major artery in Detroit. I think the Administration is paying harder here because it thinks it knows the agenda and the risk better. Undoubtedly the Fed and the administration regret all the monies dispersed with such little good effect in the financial sector. But there, things were just too complicated and entangled and no one really knew how much would unravel if they pulled one loose thread. Autos are different. The risk seems more tractable and better known.

Don't short sell the admin effort
This does not mean that O does not understand how painful and drawn out bankruptcy can be. He does not want to OWN and RUN GM or Chrysler. But he wants more concessions. Those with skin in the game have to lose a little. This is no bail out... Well it's not a complete bail out... He needs to get them back to the table to bargain more, to offer more. To do that they must understand that they have a lot more to lose.

Far better to be banker than an automaker
The automakers are in a different stew than the bankers. In autoland executives stew in their own juices. In banking, the customer does the stewing. True, automakers have been under-performing and losing market share for a longer time. Bankers pretended to be masters of the universe and paid out huge bonuses even after it became clear they were abject failures. Automakers also have been upgrading their product, while the banker's product is still undergoing one of the most painful and drawn-out 'recalls' on record. What's interesting in banking is that when you have a dysfunctional product, the buyer has to pay, not the seller. In autoland if you sell a lemon you must stand behind it and fix it or replace it. Are bankers 'replacing' bad mortgage products sold under illusion and false promises? Why are the 'property rights' for mortgages so different than for autos? In both cases a buyer made the decision to buy it. Only the purchasers of financial products are considered to be idiots when they are hornswaggled. I guess physical engineering is harder to understand than financial engineering... Really? All of these are important auto-banker differences.

The bail out that did not occur
Since union agreements and legacy health care costs are a big part of the automaker problem it is hard to look at the industry and the execs as the same sort of corporate bad guys as bankers. Automakers gave pay and benefits to the rank and file. Bankers paid lavishly those at the top (themselves). Nationwide medical reform could have bailed GM out. But we never got there.

Finally good tactics from Team-O
As a tactical plan I think I like what O and his crew are doing. They were dealt a bad hand but they are playing it with gusto and grit, stretching the game out and bluffing in a very credible way. Maybe they even are serious. about the bankruptcy 'threat.' Not knowing is what makes it credible.

So, yes, there have been a lot of mis-steps, in this crisis but autoland is one place where the effort seems to be going much better.

Go O!

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