Trying To Look On the (Automotive Bailout) Bright Side

In the modern world, we tend to focus on the negative a bit more, perhaps, than we should.  Of course, in some areas it’s hard to find much of a silver lining.

Consider the results of the federal government bailout of GM and Chrysler.  Car sales have been off, and GM stock continues to slide downward to new lows.  As a result, the stock the federal government holds in GM continues to decline in value.  Last week the latest Treasury Department report on to Congress on the potential losses on the auto bailouts was released, and it estimates another $3.3 billion increase in likely losses — taking the projected loss on the investment from $21.7 billion to $25.05 billion.

The stated purpose of the bailout was to save jobs and prevent the ripple effect on suppliers that could have occurred if GM and Chrysler had failed.  Defenders of the bailout say a million jobs were saved as a result and that the move kept us from plunging into a serious economic depression.  Opponents of the action say that the jobs wouldn’t have been lost if a standard bankruptcy proceeding had occurred and that such a proceeding would have allowed stronger companies to emerge, without any need for a federal bailout.  We’ll never know, of course, because the standard bankruptcy route wasn’t tried and billions of dollars of federal funds were spent to prop up GM and Chrysler.

But we do know one thing:  it could have been worse.  Rather than investing our tax dollars in GM, the federal government could have bought Facebook shares instead.  Since that company’s ill-fated initial public offering only a few months ago, Facebook shares have gone from a high of $45 per share to a new low of $19.05 at Friday’s close — which is a drop of almost 60 percent.

Halftime In America? (II)

As I suspected, the Clint Eastwood “Halftime in America” commercial for Chrysler that aired during last night’s Super Bowl turned out to be quite controversial.

This AP article discusses some of the reaction to the ad from various points on the political spectrum and quotes Eastwood as saying the ad was not intended to be political, but rather just about job growth and the spirit of America.

Interestingly, some people apparently construed the ad to be a pro-President Obama endorsement of the federal government bailout of Chrysler and GM.  I guess I’m just dense, but I didn’t get that message if it was intended.  In fact, if I were the President I don’t think I would want that ad, with its emphasis on tough times and America needing to come from behind, to be associated with me.  If President Obama wants to highlight what he considers to be positive accomplishments during his term, you’d think he would be able to come up with a better subject than poor, broke, decimated Detroit.

Halftime In America?

I expect that the most talked-about commercial from the Super Bowl is the Chrysler ad featuring Clint Eastwood.

In the commercial, the gravelly voiced Eastwood says that just as it is halftime in the Super Bowl, it’s halftime in America, too.  Times are tough, he says.  We’re down and out of work, we don’t understand each other, and we’re stumbling in a fog of discord and recrimination.  But you can’t knock out America with just one punch.  We need to come together to figure out how to come from behind because the second half is ready to begin.  Detroit is showing us it can be done, Clint says.

Huh?  America as a whole is supposed to follow Detroit’s lead?  For the record, Detroit is on its knees.  The city is losing money and deeply in debt, and the city government and the state of Michigan are trying to figure out whether the city can avoid being governed by an emergency manager who would have the ability to revise union contracts, restructure government, and sell off city assets like parks.  I’m hoping Detroit can pull through, but let’s not kid ourselves — Detroit is no model and no inspiration.

I recognize that the Chrysler commercial provided an excuse to hear the welling music and to see the by-now-standard shots of courageous firefighters, mothers and children, and families standing strong.  But it cheapens our country and its circumstances to compare America to a football game, and it’s jarring to receive a commercial message about coming together and sacrifice in close proximity to an over-the-top Super Bowl halftime show featuring Madonna.

Can’t commercials just stick to selling products, rather than trying to send us irksome, ankle-deep inspirational messages about our country?

A Green Dream

Here’s an interesting piece on GM and “green cars.” The apparent focus of GM and Chrysler on “green cars” as the lever that will move them out of the ditch is wishful thinking. Sure, there are some Americans who will buy “green cars,” regardless of their quality and reliability, just to say that they are driving green cars. (See the classic South Park “smug” episode.) I think the number of those consumers is pretty small, however. Here’s a method of approximating that market — the next time you drive to work during rush hour, look at how many drivers are content with humping along in the slow lane, and then from that number subtract all white-haired drivers and all drivers who are shaving, combing their hair, fiddling with their Blackberry, or performing other morning ablutions. The remainder is a good approximation of the potential audience for hybrids and electric cars. You aren’t going to buy one if you must have a car that can give you the crucial burst of acceleration that allows you to cross three lanes of traffic and pass that slow-moving panel truck that has been getting on your nerves.

The other change in the car market — and one that has been devastating for GM and Chrysler — has been the increased focus of consumers on buying cars that last. When I was a kid, Americans seemed to accept that they needed to buy a new car every few years, just to have the biggest fins or the biggest engines or the station wagon with the most realistic faux wood paneling on the side. Those days are long gone, however. I’ve been driving my car for many years, have put more than 120,000 miles on it, and hope to continue to drive it for years more. The fact is that consumers don’t buy GM and Chrysler cars because they perceive that many of those cars are poorly made and unreliable. I think even “green” consumers will be looking for green technology that is reliable. Why buy a green car from a company that has a well-earned reputation for building poorly made cars when you can buy a proven green car from a company like Honda, whose reputation for quality is unassailable?

And Another Thing . . . .

One other point should be made about the Chrysler bankruptcy issue. Currently, managers of investment funds are measured against a simple performance standard — in effect,they have a fiduciary duty to make as much money as they can, in compliance with the law, through investments that fall within their defined investment area. For example, managers of high-yield debt investment funds have a fiduciary obligation to maximize the legal return on their investments in high-yield debt, by making wise choices in their initial investment decisions and then pursuing every penny of return if the issuer of the debt goes into bankruptcy.

What happens, then, if a manager of a fund that invested in Chrysler debt caves in to government pressure and takes much less than the fund might have recovered through a bankruptcy proceeding? Is that person thereby breaching his or her fiduciary duties? If an investor brings a lawsuit claiming a breach of fiduciary duty, would it be a defense to say: “The President made me do it?”

Capitalism may seem cold-blooded, but the mission of a fund manager to maximize the legal return of an investment is a simple, straightforward obligation that can be assessed and measured. If you start to introduce other variables to the equation — politics, the environment, community goodwill, and so forth — you make the equation much more complicated. If people want to investment in “green” investment funds, or labor-friendly funds, they can do so. Most people, though, simply want their investment managers to provide as much money for their retirement as possible. If those managers allow themselves to be bullied into accepting less than they have a right to obtain, they aren’t really doing their job.

If You Break It, You Bought It

Prior to the invasion of Iraq, Secretary of State Colin Powell supposedly told President Bush: “If you break it, you bought it.” His point was that, if U.S. actions in Iraq caused the Iraqi state to fall into chaos, the U.S. would assume a special long-term responsibility to pay for its actions by ensuring that the Iraq was returned to a state of stability.

I wonder if the same could not be said for what the current Administration is doing with Chrysler and the securities and debt markets. The Administration has inserted itself into the bankruptcy process to an unprecedented degree, browbeating creditors to accept much less than they would be entitled to receive otherwise. That activist approach may have short-term political gains, by advancing the interests of the United Auto Workers and its members who are Chrysler employees, but it also may have a significant long-term negative impact on how our economy operates.

Capitalism works only if investors are willing to assume risk. The priority rule helps to quantify what the risk really is. Under that rule, there is a pecking order that establishes where people line up in the event of a corporate failure. Secured creditors and unsecured creditors, for example, both have priority over simple stockholders.

By injecting politics into the equation, the Administration is changing the risk analysis. Such changes, in turn, inevitably will affect the willingness of investors to assume risk. If investors have no assurance about where their investments will fall on the priority list, they will be less likely to assume the risk of their investment — or will require a higher interest rate to compensate for the risk that the President or Congress will try to intimidate them into accepting less in a bankruptcy than they would have received if the priority rules were inviolate.

We may not care about Chrysler — it builds crappy cars, which is part of the reason why it has failed — but we should all care about continuing to have an economic system where people can make reasoned judgments about investment risk and whether they should assume that risk. Some years ago I worked on a case involving “high-yield debt,” known colloquially as “junk bonds,” and was fascinated to learn a bit about how that part of our economic markets worked. Essentially, the ability to sell high-yield debt gave some struggling companies a possible mechanism for survival, if they could convince investors that they had a business plan that could turn the company around and, if that plan failed, that they had assets sufficient to allow investors to recoup a reasonable portion of their investment in a bankruptcy proceeding. The individuals who managed the high-yield investment funds were impressive, bright, hardworking, savvy individuals who were committed to carefully examining the risks presented by each offering and deciding which companies offering high-yield debt best merited an investment. Many of the companies offering such debt in fact succeeded with their business plans and were able to retire their high-yield debt, return to profitability, and survive to this day. Those companies employ thousands of workers — workers who would not be employed if the high-yield debt offerings were not available. If there had been no certainty in the bankruptcy priority equation, however, those bonds may never have been marketed at all, or perhaps only at crushingly high interest rates that would have made it much more difficult for the issuer companies to pay the interest and principal and survive.

What does this mean? Only that the pieces of our economy are interrelated and are dependent on individual willingness to shoulder economic risk. In its zeal to have Chrysler survive in a fashion that benefits the UAW, the Administration may have undercut investor ability to assess risk, and thereby harmed its ability to count on private investment to help ensure the survival of GM, or struggling banks, or other businesses that are traveling a rocky road in these tough economic times. The potential consequences of such a result are profound indeed.