Archive for March 2009

What’s Wrong With GM?

March 31, 2009

If you own a GM product or you have seen the 2009 new models, you might scratch your head and ask what anyone could see wrong with GM cars and trucks.  Some may be quick to say, “oh, they do not have any fuel efficient cars or trucks, no hybrids, and all they make are large cars with lousy quality”.  Surprisingly that is not true.

GM’s quality and product line up is very competitive and represents a good value for the consumer.  The problems with GM lie elsewhere.  The chronic problem is that GM makes too little money for each car or truck it sells to cover its overhead and put money away for a rainy day.

The selling price of GM products is largely set by competition who also make wonderful cars and trucks too.  The answer lies on the cost side where GM’s legacy costs, their current wage rates and work rules, and their breadth of models has driven up their unit cost.  New UAW contracts will help but they will not be enough.  GM must shrink their product pallet considerably in order to get inventories in line and to be able to concentrate better on fewer models.  While difficult, this will help a lot, but still not enough.

When we consider, however, legacy costs we find the sins of the past.  Retiree health and pension costs, once thought acceptable, are sinking the GM corporation today.  These costs are considerably higher than like industries and far more than what Toyota or Honda must pay.  Dealing with the reduction of these costs is a sensitive and King Solomon like problem.  When these costs are cut, someone else is gets the hardship.  Hopefully there is a lower level, more similar to like industries that GM can afford and will not over burden their former workers.

The more silent but dangerous legacy cost comes from the corporate bond holders who in the past financed “blue chip” GM’s rich life style.  When GM needed cash (for anything), banks and investors would come forward with plenty of cash but of course for a price.  GM was considered a safe corporate bond and trusted to pay bond holders under all conditions.  Often that came from selling more bonds in order to keep current on the current outstanding ones.  (Sound like a ponzi scheme?)  The total bond obligation today is eating GM’s cash supply and leaving too little left to run the rest of the business.  The Obama Administration’s talk about restructuring, if necessary, and wanting to see GM stakeholders with more skin in the game, targets these bond holders.  The message, “take 50 cents on the dollar or face looking at less”.

On top of all these systemic problems, GM, like all other car companies, is selling into a low demand market.  It will need government cash to weather this storm and survive until car sales go up again.  The key, however to long term success is to reduce these underlying costs and then compete upon quality, attractive models, and great customer service.

Should Ron Gettelfinger Be Next?

March 30, 2009

If the world was fair and full on honest and noble people, Ron Gettelfinger, President of the UAW, would step forward and resign.  Like Rick Wagoner, Gettelfinger’s resignation would not symbolize “his” failure but rather the long history of distructive “win-lose” UAW-Big Three negotiations.  In the end, all parties (union, management, bond holders, and dealers) will be losers.

The UAW celebrated often in the past about how good a contract they had negotiated.  UAW members came to believe that their healthcare, pay, work rules, and penion plans were the just do for very difficult work.  Sadly, union workers now are finding out that the benefits negotiated are far richer than the average American’s, and their work was no more difficult than most other industries.  The UAW, if it were to be honest with itself, would also realize that it did little or nothing to bring its members into the 21st century and prepare them for a global economy.

Gettelfinger’s resignation would be the first step in restructuring auto worker labor.  It is a lot to expect that Ron would be replaced with a reformist leader but frankly that is the only way for the Union to survive.  Chapter 11 can be harsh on unreasonable union demands.  Rebuilding GM (and probably Chrysler) presents a wonderful opportunity for both labor and management.

Rick Wagoner Has Gone

March 29, 2009

Rick Wagoner, CEO of General Motors, has done the honorable act and resigned as chairman of General Motors.  He has withstood pressure and negotiated tirelessly until he could present his best plan to the Obama Administration in pursuit of bail out bridge loans.  It appears he has been successful and in good Japanese style, he has fallen on his sword.

It must be made very clear that Wagoner is not the direct cause of GM’s problems.  He is, however, the CEO who could have done battle with the fire eating dragons but he chose not to.  The UAW, the calcified dealer distribution network, and the customer oriented non-responsive management team were things Wagoner could have and should have fixed but did not.

More importantly, Wagoner was the point person extracting concessions from the bond holders, the UAW, and the dealer network now.  As a result, a man of honor is duty bound to resign as a sign of respect for the concession of the others.  At the end of the day, Wagoner was a man of honor.

Neo-G-20

March 29, 2009

President Barack Obama heads off this week to the G-20 meeting in London.  Following 8 years of George W Bush empty rhetoric and open disdain for the other partners, President Obama should come as a promising relief.  First, Obama will listen before speaking and will stop short of insulting when firm words are needed.  Second, the Obama Administration has already launched the US on a far more sensible and pragmatic foreign policy path.   World economic development should experiece much less gratuitous disturbances from America’s neoconservatives.  This offers the chance of a neo-G-20 meeting.

Most of the G-20 countries will want to hear how the US will restart its economy, stamp out the problems with the financial services sector, and promise sufficient oversight to never let the recent collapse happen again.  They will not want to hear that most of their banks also bought the “free lunch” mortgage backed securities now dubbed “toxic assets”.  It just goes to show that greed is universal.  They will also not want to be asked to deficit spend as a means to stimulate their own economies.  They will point to their safety net of social programs and claim that controling inflation is their prime goal.  A wise Obama will listen and if he says anything, he should say don’t blame the US when its economy is humming again in a few years and yours is not.

There is much opportunity for the G-20 to attack world poverty.  This objective makes sense from a humanitarian view but can be easily justified from a world security perspective.  Do you think there will be a lot of traction for this objective?  I suspect there will be words but not much in the deeds department since the poor regions of the world sit upon valuable resources and are often good customers for arms and munitions suppliers and manufacturers.  I wonder whether President Obama can cut through this fog and help a neo-G-20 shine?

Are We There Yet

March 28, 2009

The Obama Presidency is about 60 days old and the question this post asks, “are we there yet?  Where you might ask?  Well of course, have we regained the center, or are we on a fast bus to the left?

Sixty days is a relatively short time for measuring accomplishments.  Never the less, the right wing ideological pundits, along with the Republican Party leadership, have seen enough and have proclaimed President Obama a tax and spend liberal from the past.  Socialism is around the corner and the collapse of our economy is imminent.

These are the same wise men who worship President George W Bush and his policies and seem somehow not able to connect the sorry state of our world affairs, our economy, or the near disaster of the world’s financial services sector to our past President.  As a result I would not use these people as a gage for measuring the Obama Administration.

It is much too soon to measure whether Obama is heading for the center or just passing through.  What is certain is that President Obama is in the corner of science, common sense, and the reality on the ground.  While these qualities could have been cornerstones of the Bush Administration, pushing half baked ideology or social views that will not work is much easier if fantasy is used in favor of fact.

President Obama is determined to fix healthcare, invest in education, and attempt to narrow the gulf between the rich and the poor, or so it seems.  Depending where you are in your thinking, you may see this as an assault on your bank account.  If done correctly, everyone should pay a fair share but the idea that no one should pay and consequently we should avoid facing up to these obligations is wrong headed thinking.

For sure there is a chance that government mechinery will deliver poorly upon healthcare reform, education, and income opportunities for all, and if so, President Obama should be held accountable.  Attempting to deliver, however, is courageous and an act from the center.

Healthcare Reform

March 26, 2009

President Obama has promised that a center piece of his Administration will be the reform of our health care system and the inclusion of millions of people currently uninsured.  The President speaks of this quest as more a moral or ethical responsibility and see the exclusion of 40 million citizens as a stain on America’s image,  This reform will be easier said than done.

Any reform must take into account that our current health care methods are completely out of control with respect to cost.  American companies typically provide health insurance to their employees and are finding that their insurance premiums are making their products too expensive in the market place, case in point are GM, Ford, and Chrysler.

All the usual suspects in the current health care delivery system voice support for reform but they are dead set on maintaining their share of the profit.  Drug companies, insurance providers, trial lawyers, and hospitals all have reform ideas that preserve their economic well being.

The role of individual responsibility such as seeking preventive health care or choosing healthy life styles is rarely mentioned in reform discussions.  Without each citizen exercising far more responsibility for their own health, any reform of health care will result in opening the flood gates and another Government give away program.

I wonder what would happen if the Administration opened a dialogue on various options and what it will cost to achieve these options.  In order to facilitate this dialogue, the government might lay out with a few principles:

  • Everyone is entitled to healthcare coverage (no exclusions for pre-existing conditions).
  • Everyone should pay the same basic cost for the same basic coverage (the principle being that everyone must be fully involved with the cost of healthcare.  There can be reasonable tax code relief for those unable to afford full premiums).
  • Everyone should be able to purchase higher levels of coverage (for spa-like luxury treatments) or pay for health services at their selected point of use (like with private schools, those who wish to pay may select their preferred doctors and treatments.  Similarly the public system (today’s system of hospitals) must be kept top notch and provide services without unnecessary restrictions).
  • Anyone declining healthcare insurance coverage, not seeking preventive care, or engaging in unhealthy life styles will be restricted to emergency care service for life threatening situations.

These are starting point ideas.  The core thought is that healthcare is a universal right and it comes with individual responsibilities.  Unless individuals accept their responsibilities, society can deny access to healthcare beyond life threatening or ending conditions.

Reads Fast, Talks Slow

March 25, 2009

President Obama gave another “made for TV” news conference last evening.  He stuck  to his proven formula of reading from a teleprompter in dynamically making his main points.  Obama is so good at that that he looks like he is speaking to anyone listening.  Following the prepared remarks, he took questions and then we witnessed his “area for improvement”.  These extemporaneous remarks are delivered slowly with ample pauses as if President Obama is trying to select the best words to describe the answer.  The listener is left unsure whether he is trying to recall his previously coached answers or whether he was searching for new ground breaking answers.

These professorial answers are a bit dangerous in that they do not seem natural and are delivered completely differently from  the teleprompter answers.  For the present, this style is still new and Obama’s presidency is in its early days.  If events turn out as Obama has predicted (or promised), then there will be little damage and we will all get used to this style.  But one must expect some mistakes and a fair share of bad luck, and I wonder whether this pausing style will still communicate thoughtfulness or will morph into an image of uncertainty?

Last evening, if you had the stamina to wait out Obama’s response to reporters’ questions, one should have been impressed with the consistency of his message.  But you had to listen.

The weakest area, in my opinion, was his justification for the large deficits projected in his budget.  In particular, Obama attributed a large part of the deficits on “investments” aimed at saving money.  He pointed out how an investment in electronic medical records would help lower health costs.  There was no mention of the size of this investment nor an explanation of the size of the savings.  With so much evidence already at hand that medical costs are out of control due to a combination of use abuses such as emergency room use, high drug costs, and over prescription of tests to avoid malpractice suites, the role of electronic medical records certainly can not lie at the heart of the healthcare cost issue.

The budget issue and the size of the deficit is not going to go away.  Moderation and pay as you go must win out.

Budget Debate

March 24, 2009

It is amazing when the Dow jumps a lot, like yesterday, how discussion of the Obama stimulus plan dies down to un-audible levels.  The sages of Wall Street claim the market was responding to the President’s announcement of how the Administration would deal with toxic assets.  Yea right.

It certainly would be good news if investors felt that a large impediment (read a disabled financial system) to full economic recovery (read jobs) had been put on a track for removal.  In any case it was good to see the positive news.  Now, maybe we can face up to the long term aspects of the Obama budget.

There is a general consensus that the government must spend mightily to jolt the economy back to an expansionist trend line.  The problem facing Obama is that his budget, which begins understandably with a huge deficit, does not return to a balanced state in its four year projection.  The reason behind this is the inclusion of all the other programs (like healthcare, energy independence, social security reform, education etc) that President Obama promised during his campaign.  There is no way the country will swallow this large a series of unbalanced budgets once the pundits get to play with it.

The President can get the elements of his budget approved if he can convince us that the underlying budget is (or will be) balanced, and all these new programs can be paid for in some defined way (like higher taxes, lower government spending).  In addition, most of these new programs are mini lightning rods where there are three groups, one strongly favor, one strongly disapproves, and the largest that is undecided.  For the good of the country, the President needs to facilitate a clear conversation on the merits of each.  To do this, at a very minimum, President Obama should promise that he will not sign any new programs into law (beyond those in the stimulus package) that are not fully funded without borrowing.

Incentive Pay

March 23, 2009

Any competent public relations firm would be counseling senior executives of  large financial services firms (and especially those that received TARP funds) that they are in a no win game. “Keep quiet, speak of the American Way, and don’t do interviews”.  The game they speak of is the rhetoric around the size of the executives’ remuneration packages, both base pay and of course their bonus packages.  I wonder what the top earners are actually thinking?

  • I can’t do without….  Just fill in the item.  Fancy car, beach home, downtown flat, children’s private schools, and winter weeks in Aspin are just examples of the type of white knuckle fear that is running through traders and top executives.
  • I earned that money...  Just imagine what someone would think if huge bonuses had been their way of life as when that person was particularly good at winning (read beating colleagues) by bringing in more revenue.
  • I’ll go someplace else, if necessary, and take my customers…  Denial at its best is summed up here.  This type of person truly believes that world is full of fools and he is there to catch them.
  • I am living the American dream where working hard has its rewards…  This is another example of denial and a person who is great believer in laissez faire.
  • I can see that some others have abused the system and new controls are inevitable, I better begin thinking of other methods to earn big bucks…  This is the pragmatist who never the less is more interested in taking home the 7 figure bonuses.

In short, it is unlikely that the TARP receiving part of the financial services sector will be able to reform itself.  The corruption and bending of individual values has probably gone too far and too deep.  For those firms dramatic change is needed and it is doubtful the inmates can do it.  But what should be done?

First we must understand what is the real problem.   The current “mission” of TARP receiving firms is to make money for share holders (owners) and selected employees (traders and top executives).  Think about it.  Do you select a bank or investment firm that places your interests second to their own interests?  Financial services firms exist to serve the needs of their customers and all government regulatory agencies should be viewing the corporate (or private) behavior in that light.  People put money in banks or invest in stocks, bonds, or funds with the thought that their money is safe and will grow in size for future uses (college education, retirement, second homes, etc).  This is a key aspect of how our country grows.

Second, we must reward institutions that meet the customer focus needs and act towards other institutions in a way that prevents their growth and making false promises to customers.  There are plenty of banks, investment firms, and insurance companies that are reputable and can easily replace the role of the current TARP crowd.  With transparency and accountability, these other firms should be able to grow (without acquisitions) and gradually replace the Citibank and AIGs of the world.  Remember the underlying role of these institutions is to receive money from customers, keep it safe while putting the money to work, and return the money at some time in the future with the promised (read reasonable) return.

For the TARP crowd, the path forward should involve a change in their Boards and top management.

One Dollar A Year

March 22, 2009

The AIG notoriety is spurring a lot of pure nonsense talk that it would be laughable if it were not so serious.  The underlying issues, that is what went wrong to get AIG to its failed state, are not the subject.  Rather it is the piling on over the bonus payments made.  This has degenerated into a holier than thou discussion of “pay on wall street”.

For sure multi-million dollar bonuses and total compensation packages of $25 million or more seem from a common sense perspective indefensible.  What makes them more incredible is the total failure associated with the performance of the companies making those payments.  But is the answer a federal law fixing compensation levels?

In my opinion two things are clear.  (1) Most of the top executives in the financial services sector receive far too much remuneration, and (2) the last organization that should pass judgement is the political mess we call Congress.  When Congressmen feel comfortable running election campaigns costing 10’s and 100’s of millions for jobs paying about $ 150,000 a year, I would think they would have the good sense to reform themselves first.

I wonder whether the heavy thinkers, who are weighing in on Wall Street are ready also to regulate writers, entertainers, sports stars, or already rich people who live off their investments.  The most practical answer to the “high pay” issue involves transparency (full disclosure), accountability (consequences when results are not satisfactory), and government controls from allowing companies to grow too large by acquisition.