Rick Wagoner Has Gone

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.

The AIG Disease

Every time there is a call for moderation or even a revocation of bonuses awarded to financial services companies’ top executives, I hear the moans of we need to “reward” these top performers or “else they will go someplace else”.  I am inclined to hold the door open and tell them to not let it hit their backside.  But I’m not a financial sector employee, past or present.

I have a guess, however, why these lame sounding excuses are made,  They mask a fundamental flaw in the structure of most of these very large banks, investment companies, and insurance firms.  The flaw is simply that these firms have grown to large and are spending more energy keeping themselves going than looking after their customers’ best interest.

The consequence of their paralyzing size is that the scramble for year over year earnings increases becomes more inefficient everyday.   It requires these companies to “book” more business from either acquisitions of other companies or the sale of new products (CDOs and credit default swaps are examples of new products).  Managing these mega companies becomes more detached each day from the art of running a financial company.

As a consequence, smooth talking, hard driving executives who “do the deal” and bring new revenue to the firm were prized.   In normal times it was felt these prized assets must be rewarded generously in order to motivate them further and to protect against their departure for other firms.    But these are not normal times and we have the additional benefit of hind sight and can see that these deals were reckless at best and criminal at the worst.

The real rot does not lie with these traders but with the senior management that has set the tone at the top.  A simple rule of the street is that the top boss always earns more than anyone in his firm.  These traders brought in billions, they earned many millions, and the top boss made the most while no one was minding the store.

There is nothing inappropriate for executives who are essentially on duty 24/7 running global companies to earn generous remuneration (compared to the average earner).  The question is always “how much”.  Bonuses (pay at risk) must truly be tied to performance, both up and down, and come with sufficient horizon that a company does not reward this year only to find out next year that performance was not what it seemed.  I would think that while Government should not regulate pay in the private sector, they could look a lot harder at anti-trust implications of large or multi-purpose financial institutions and move aggressively to break up these companies with unjustified remuneration plans.

The Future After the Bail Out?

The country is in a huge mess and most people do not know why.  The media and the government tell us every day that America is a great and powerful country.  They insist that everyone in the world envy the America way and if they could, they would live here.  People do know that there are some severe and deep problems here too.  There is the mortgage foreclosure thing and the high interest on my credit card thing too.  And for some, there is a new thing called the “I don’t have a job thing”.  What type of future will this “bail out” thing bring?

There is an underlying assumption in much of America.  It goes like this.  The government will take action and then everything will return to the good old times of the past, and my life will be good again.  Wrong, wrong, wrong.

America has been hemorrhaging jobs for years and has shown no concern during the last 8 years.  Without the replacement of these jobs with good paying, value creating new ones, the newly unemployed can only expect to find lower paying, service industry jobs when the economy does return.  The other surprise for the newly unemployed is that they are joining a hard core group that have been unemployed (or under employed) and never have been at risk of the jobs flight overseas or the recent slow down of our economy.  These are our poor who in addition to being poor, are generally poorly educated and lack basic skills to perform task that might command an above poverty level pay.

So what is the risk from the bail out?  Should the “stimulus package” work and begin putting people back to work, the greatest risk is that too few will realize the underlying weakness in the “quality” of the US job market, and will completely fail to see those who will not be helped by the bail out activities because they lack the necessary skills.  The risk is that this will

• expand the number of people who will look to government first to solve all problems for them, and not see that if the poor were helped, everyone would benefit.
• perpetuate the hopelessness those living below the poverty line by being overlooked again, and therefore reinforce the impression that they are unable to be helped.

I somehow believe that President-elect Obama understands all this and will do his utmost to make fundamental changes.  I do not believe that much of the country understands this and for sure most of our elected officials place their highest priority on getting elected and enriching themselves. While we clearly need short term job stimulus actions, it is critical to recognize we need to generate great jobs again, and on the same basis, it is critical to attack the shameful situation of our poor.  We must find ways to help the poor stop the cycle of poverty and help themselves to becoming full productive citizens.  Government policy can help light the way.

The Smell of Unfairness

Today is a quiet news day as it should be.  On days like this you have the chance to step back and see life in perspective.  For the past 8 years there has been something missing.  The missing item has been “fairness”.  Maybe that is because, as some would like us to believe, the “country has been at war” and “fairness” is simply a casualty. 

 

The Bush Administration has been amazing in seeing so many different issues through dark glasses. 

 

• Screw the environment, science does not count
• Up yours, Russia, we don’t need the ABM Treaty anymore
• Values first, gays, lesbians, and undocumented workers don’t count
• Pro-life, but you must pull yourself up even if you have no boots
• Terri Shaivo, no issue is too private to not be worn on the President’s sleeve
• WMD or not, here we come, we invading and occupying anyways
• Abu Ghraib and no one other than the “bad apples” to blame
• Habeas corpus, due process, and Geneva Convention are out of date
• Science out, “intelligent design” in

In the final hours of this failed presidency, you might think we have seen it all.  But wait, there’s more.  Two hallmarks of past American greatness are the automotive industry and the financial muscle that resides on Wall Street.  Both of these are currently sick institutions.  The auto industry is saddles with too much weight from past reckless and unwise decisions (uncompetitive union contracts and work rules, too rich executive compensation packages, and too many and a weak dealer network).  The financial services industry is also weighted down with a decade of abuse.  It has become the poster child for unbounded greed and arrogance. 

 

So as an outgoing statement, the Bush Administration has offered life lines to both.  However, the life line for the auto industry could be best described as a “break the union” deal, and while the union must give back a lot if the auto industry is to survive, the union’s give backs should be part of a total package.  For the financial services industry, it is difficult to know what is being asked other than to accept 10 times as much money.  There has not even been talk of criminal charges with so much money missing.

 

I am hopeful that the next Administration will find the rule of “fairness” superior to the rule of “ends justify means”.

It’s Only Money

We hear everyday numbers with the suffixes “millions, billions, and trillions”.  The numbers are bantered around as if we common folks can comprehend.  Recognizing that the average annual income in the US is between $40-50,000 depending upon how you figure it, the following list will put into perspective how insignificant the average income is, and how criminally irresponsible many financial service industry leaders have been.

·        $ 0.05  5 cents today can not buy anything

·        $ 0.50  the price of a small piece of candy

·        $ 5.00  the price of a large box of sugar cereal

·        $ 50.00  the price of gas to fill a large SUV

·        $ 500.00  the price of a round trip airline ticket

·        $ 5000.00  the price of two large flat screen TVs

·        $ 50,000.00  annual income of an above average US job

·        $ 500,000.00  the price of a nice home in most places

·        $ 5,000,000.00  the price of a nice home in exclusive places

·        $ 50,000,000.00  about the price of the US automakers’ bail out

·        $ 500,000,000.00  rounding error for the rest of this list

·        $ 5,000,000,000.00  the cost of two weeks of the military in Iraq

·        $ 50,000,000,000.00  the alleged total size of the Madoff fraud

·        $ 500,000,000,000.00  the low side of Obama’s stimulus plan

·        $ 5,000,000,000,000.00  the exposure due to subprime and CDOs

·        $ 50,000,000,000,000.00  the exposure to credit default swaps

Since it is only money, I see no reason why the rich should not be allowed to invest their money as they see fit, even with the risk of a Ponzi scheme like the one just uncovered involving Bernard Madoff.  The issue is that most people can not afford to lose their savings, and they do not have sufficient information (or in most cases the ability to understand) about the myriad of dealings within the financial services company.  They are unable to protect themselves.  When institutions fail or when there is outright fraud, the publics money is often exposed to those risks.  Government must through regulatory requirements insist that savings and investment companies that deal with the public absolutely use other funds in speculation and isolate deposits insured by the government.  If the speculation side of these firms fails, then only that part of the company becomes bankrupt.  This approach will undoubtedly lead to much lower interest rates on savings but tell me again what is wrong with mortgages with real down payments and collaterlized business loans?

Centering on the Stakeholders

In today’s complicated world and especially with large, publicly traded companies, the notion that companies exist only to meet the needs of their shareholders seems out of touch with reality.  Today we are witnessing the largest North American automobile manufacturer (and a publicly traded company), General Motors, grovel for a Government handout.  And their rationale?  Simply stated it is jobs and taxes they pay directly or indirectly through their suppliers and their employees, no loan – no more taxes and jobs.

Here are implications I see if General Motors were to take seriously the responsibilities associated with accepting a loan,it would be balancing the needs of their 4 stakeholders:

Customers.  GM, to its credit, has been updating its product offering and improving the absolute durability and quality of its fleet.  There is, unfortunately, still a gap in what GM offers and what many people want, and even more important is that consumer’s preferences are changing more rapidly than in the past.  GM needs to possess the capability to change more quickly and to offer great cars and trucks at competitive prices.  This implies:

·        More flexible work rules

·        More competitive total labor costs

·        Customer first marketing (including the buying experience)

Employees.  GM has experienced recently a more cooperative UAW relationship.  This spirit has resulted more from desperation than from a genuine concern by management for their employees, or by the Union for the company.  The UAW has been primarily a political party in a one party game.  Its objective has been to dominate representation within the automotive industry and capture as many golden eggs as the Big 3 goose can lay.  The customer, the community, the shareholder, and even the employee have been “after thoughts”.   This implies:

·        GM management becoming leaders and managers of all their employees.  (this is a lot more than giving orders, it is about truly caring about people)

·        UAW embracing six sigma (and other forms of continuous improvement) and fully endorsing union members participating in management sponsored programs.

·        UAW working cooperatively with GM to solve the overhang of retiree pension and benefit costs.  This is a very difficult problem given the promises made in the past and the ability to pay for them today.  Solving this problem today will be crucial to the longer term survival of GM (and all the current jobs that go with it).

Communities.  Communities supply workers, educational opportunities, residential locations, and a wide variety of infrastructure support (rail, roads, water, power, etc).  In some communities without the tax and job contribution of GM, these municipalities could not survive.  The reverse is also true and at great expense GM would have to relocate.  This implies:

·        A long term commitment by GM to each community where it is a significant employer.  Temporary adjustments in employee levels must be transparent (like days inventory of the product made there).  Permanent adjustments in employee levels should follow a considered study where the local community is made a partner in the process to ensure all alternatives are considered.  With permanent reductions, retraining should be offered.

·        Communities should be looking to supply the best level of cost effective infrastructure, education, and residential services they can.  The community’s goal should be to make a pool of the most qualified persons available for GM’s hiring processes.

·        Communities should recognize that the term “community” includes local, state, and regional federal agencies.  It is in all communities greater interest to resist “bidding” against each other for new automotive plants with tax breaks and other cash incentives.

Shareholders.  Owners of common stock deserve a return on their investment.  Normally this return is obtained through dividends and appreciation of stock price.  The efficient and effective operation of the company can deliver a dividend predictably.  The appreciation of the stock price is open to what the market will bare.  We should expect, however, that a well managed company will over time have more and more people wanting to own its shares and therefore we should expect the stock price to rise.  This implies

·        Government rules and regulations that prevent or discourage predatory stock manipulation.

·        GM business plans that include an attractive dividend, and a prospectus on the company that excites potential stock purchasers.

You may be thinking that these ideas are nice but are naïve and go against human nature.  If you think that is so, I suggest you look around and see how the International car companies operating in North America are performing with respect to the 4 stakeholders.  I think you will see they are neither naïve nor are they unsuccessful.

The Medicine Is Going to Hurt

After 8 years of living a risky life style, our country and economy is in need of serious changes, and some of the methods that will inevitably be used, we are going to find that medicine is going to hurt. 

 

1. Exit from Iraq

·        There will be troop reduction from the services (we simply do not need as many.  Where will these soldiers find work?

·        There will be even more “contractors” displaced from their work supporting the military in Iraq.  Where will these citizens find work?

·        There will be military equipment and supply firms that will lose contracts and be forced to lay people off.  Where will they get jobs?

 

2.   Reduction in the Defense Department Budget

 

·        In order to save $ 200 billion for use elsewhere, the Defense budget should return to levels seen in the Clinton years.  What will the firms, people, and researchers do that were funded by the $ 200 billion?

·        Even at a reduced Defense Budget of $ 400 billion, the US will still be spending more than ten times as much as the next largest, but that will not quiet the neoconservative chicken hawks or the greater military industrial community.

·        We will find that the $ 200 billion a year reduction is being spent in just about every State, and the loss of this funding will bring the State to its knees economically.  We will all be embarrassed by these selfish expressions.

 

      3.   Proper bailout of banks, investment firms, and insurance companies

 

·        We must learn that the double digit returns most of the publicly traded financial services firms sought are dangerous and should not be enabled.  Regulations including efforts to break the largest players into smaller and more manageable sized companies should be pursued.

·        Since this involves “big money”, there may be all sorts of unexpected consequences.  We should not panic at this threat and remember that not all financial services firms went over the line and there is nothing similar to brain surgery about banking.  New firms will arise if given the chance.

 

       4.  Lending to the Automotive Industry

 

·        This is a necessary but slippery slope.  The correct end point is with the emergence of a restructured General Motors, Ford, and maybe Chrysler.  This will most likely not come as part of the initial loans.

·        The Big 3 will most probably require many more loans to make it through the current recession.   If the Big 3 do not restructure themselves as a normal course of business, then the Federal Government should seize one and restructure it, and then privatize it again.  One of the Big 3 with a proper Union contract, fresh new management, and a properly sized and motivated dealer network will show the way for the other two.

·        There will be a lot of other companies lining up for Government money until they see the take over.  If the Government does not force the reorganization of the Big 3, there will be no end to the whining of other cash strapped companies.

 

It is ironic, indeed, to think that we did not need to have gotten to this position where this type of medicine is necessary to take.  There was neither the need the Iraq invasion and occupation nor the drastic increase in the Defense Department budget.  Routine performance by the SEC of its duties or the proper curiosity by the President and executive branch could have easily slowed the housing bubble before the sub-prime fiasco and the explosion of casino like credit default swaps.  And with a gentle economic slow down, commercial credit would have been available to the Big 3.

 

But alas, we have not been living in ordinary times.  The medicine I have prescribed, unfortunately, is not guaranteed to work or not produce unintended consequences.  I just know that no action is like voting for 4 more years.

Commander-Less-Chief

Today the heads of the US auto companies will grovel before Congress in hopes of securing Government financing.  The rhetoric leading into today’s testimony was not very promising as political “leaders” were positioning themselves like Pontius Pilot is said to have once done.  Where is our President in all this mess?  It looks like we have a “commander-less-chief” in charge.

 

There are certain traits about the Big 3 crisis that are similar to other Bush leadership demonstrations.  He started the Iraq invasion and occupation and has left it for his successor to extract the US from this dead end street.  He has opened the torture can of worms and doubled down with Guantanamo (the US version of the old Soviet Gulag), and has left both for the next President to figure a way out.  And with similar “what me worry” style, Bush has driven the US economy into its worst state since the Great Depression, and, yes, is leaving it for the next President.

 

The automotive industry is simply too important to the overall US economy to be left to go bankrupt.  At a very minimum there should be a “bridge loan” until the Obama Administration can factor automotive help in with all the other needs.  What is needed now is some creativity on where the money will come from and what collateral should secure the loan. 

 

While I maintain that any path forward should involve

 

• GM – new chairman and CEO, new Board, new Union contract, new Dealer network.
• Ford – new Board (elimination of Ford family influence), new Union contract, new Dealer network
• Chrysler – forced orderly sale of business should financing not last.

 

I am comfortable with these steps being imposed in January or February when the Obama Administration begins.  It is time, however, for President Bush to report for duty, and ensure that the automotive companies survive until the next Administration takes office.

Balancing the Stakeholders

When companies become so large that it makes a difference whether they survive or fail, especially when it involves Government intervention, the question arise, “of their stakeholders which one or ones do they serve or highly favor?”

 

For the purposes of this post the stakeholders are:

 

• Shareholders (often called owners)
• Customers
• Employees
• Communities (places where the company does it business)

 

These stakeholders have a complicated connection and often symbiotic relationship with each other.  For example, a company usually requires roads, sewers, power, and police to operate its offices and plants.  A company needs employees with skills and experience to perform specialized tasks.  These employees are found in certain communities and, together, the company and employees pay taxes also for the infrastructure benefits.  Customers are of course necessary for any company and without them there is no source of earnings to share with anyone. 

 

And then comes the owners (shareholders in public companies).  They want and deserve a return on their investment in the company.  The problem arises when the company’s actions are disproportional and favor of one stakeholder over the others.  In a recent business book, “Vision, Values, and Results” (Outskirts Press), author John R Lewis discusses this balance and how sustained superior results come from maintaining the proper balance.

 

Think about the major banks and lending institutions, and think about the Big 3.  Do you think they had their stakeholders balanced properly?  Here are some observations.

 

• Most of the major banks and the investment firms (and probably AIG) morphed into companies that highly favored employees (mainly top management) and shareholders and took risks that put their customers (and their customers’ customers) in grave danger.

 

• Paradoxically, the actions of these major banks and lending institutions along with the investment houses, through their aggressive risk taking put the communities in which they operated and the wide range of shareholders in danger of capital loss through their desire to reap short term and disproportionate gains.

 

• A similar favoritism can be seen with the Big 3 where shareholders and employees rewards were satisfied first and then the demands of customers were considered when time permitted.  Automotive executives demanded fat remuneration packages (for the record, pay was huge but still below the league of the bankers and investment execs), and then agreed to relatively speaking just as fat union contracts.  The auto industry was an example of symbiotic life centered on the shareholder and the employees.

 

• Left out (at least under represented) in the Big 3 focus on only two stakeholders were customers and communities.  Automotive facilities are large employers and pay a lot of taxes.  The Big 3 should not be so quick to throw away communities when they close factories as communities were their trash. 

 

• Even more glaring is the Big 3 disregard for their customers and life blood.  The Big 3 offered Americans over priced vehicles that sucked gasoline and advertised that Americans were buying the best.  Too many Americans felt differently. 

 

• If the Big 3 really cared about their customers, they would have confronted the Unions and negotiated a competitive contract, and they would have taken major steps to improve their dealer network so that the dealer put the customer first.

 

Companies the size of major banks and investment firms and the Big 3 are by definition “in it for the long term”.  Shareholder returns should reflect long term steady growth and not speculative activity.  Due to the size of these firms they all possess an ethical responsibility to their communities and their customers to operate their businesses in a prudent and trustworthy manner. 

 

Somehow this balance must be restored or these firms will pass, either now or in the near future, with or without Government assistance.

Out of Ideas

Can you recall one idea that John McCain has put forward that will fix three of the largest problems facing the Country?  I am sure you can remember him saying he has experience and “can fix it”.  Don’t you  think it would be useful to hear one or two suggestions?

1. The Iraq invasion and occupation mess.   McCain has argued that a time table for withdrawing our troops is “surrender”.  He has pointed out that he was alone in pushing for the surge and look how good things have gotten.  It is wise not to fall into that trap arguing whether the surge has worked or not.  Rather it is more fertile to point out it was John McCain who along with the Bush and Cheney “chicken hawks” began suggesting right after 9/11 that Saddam Hussein was behind the terrorist attack.  McCain suggested how easy it would be to undertake regime change.  The invasion and subsequent occupation, which has found no nuclear weapons, no other WMDs, and no connection between Hussein and al Qaeda, is now at a point where McCain can not state when our troops can get out.  I don’t think I would be bragging about the successful surge if I were John.  He helped get us into to this mess and now can not get us out.  What’s next John?

2. Fiscal and Monetary Policy leading to a strong dollar (and inherently a strong military).  McCain’s campaign promise is to lower taxes across the board, both for individuals and corporations.  This promise comes on the heels of an Administration that has not balanced the budget once, and has incredibly doubled the national debt in just 7 short years.  The 2009 budget deficit is already north of $ 600 billion and if the Government bail out of the financial industry uses all of its $ 700 billion next year, it is possible the 2009 deficit could rise about $ 1 trillion.  Why worry you might ask.  If we keep printing money like this, everyones savings will be worth less due to inflation.  How can you raise taxes in a recession?  The answer is there must be a combination of spending cuts (like $ 200 billion from Defense and another $ 100 billion from the cost of the Iraq debacle), delays in all other initiative, and increased taxes for everyone (symbollic for those earning under $ 100,000 and Bill Clinton era taxes for everyone else).  Are you hearing any ideas like that from McCain?

3. The economic mess.  We are confronted with two economic battles.  (1) There is a worldwide loss of confidence in the global banking and investment community.  The $ 700 billion relief package is aimed at this problem.  The far greater problem is the underlying lack of productivity both in the US and globally in the face of rising energy and food costs.  For 8 years nothing has been done to address the flight of jobs to China (tarrifs and other blocking strategies are not the answer, increased US productivity and output is).  Where is McCain on any of these issue.  “The economy is fundamentally strong”.  “The workers in Youngstown are the best in the world”.  Yea, right.

It is hard to believe that with these issues so important to the future of America that John has no ideas.  Well, at least no ideas he is willing to discuss.  Instead John is taking his advisors directions and turning to impugning the character of Barack Obama.  Ask yourself, how will these negative attacks fix the foolish Iraq adventure, balance the budget, or restore economic growth in America?  It appears John McCain is simply out of ideas