Tuesday, November 18, 2008

bailouts = disaster

Read this first.

Ok, long, protracted recessions are bad, yes? The goal must be long-term health, not short-term job preservation. Job preservation is not job creation either. Our actions cannot be a pathetic attempt to forestall disaster until [insert political motivation here]. Let's not act surprised that AIG has circled around for more money. The thirteenth largest company (by revenue) in this country is not too big to fail. And neither is the fourth largest.

No company is too big to fail. The only entity for which failure would be catastrophic is the United States government. And if we keep throwing good money after bad, then that time is only getting closer and closer. I cannot even say we are mortgaging the future away. We already did that years ago. We're mortgaging away magic money, just printing it from thin air as if it grew on trees when everyone knows that it's made from cotton (and some linen).

At this point, it is imperative that a major automaker, possibly two, fail and cease operations. Chrysler first (you deserve this Bob Nardelli for whom I have an irrational dislike of) due to their weak product line. GM is the next option. Yes, this would be disastrous for their employees and their many parts suppliers. But these are not healthy companies. A bailout now won't change their underfunded pensions, overburdened medical plans, moronic unions, wretchedly bad management, and obscenely massive retiree obligations. (One of the morals of the story is to never take the pension option, always go with the 401(k). Your money will always be yours, I hope. Pension money is not really yours.) No, a merger won't help. Hey, let's combine two debt-laden companies and magically we'll get what? A well capitalized, fiscally responsible entity with visionary management that isn't obsessed with revivalist pony cars? (I have to admit, the new Camaro is pretty sweet but I would never buy one and that's about all that matters.) No. We end up with a bigger mess where managers on both sides responsible for their previous failures are deeply entrenched with golden parachutes.

(For these reasons, I was rather upset that America West bought US Airways in 2005. It would have helped the entire industry to see a major airline go out of business. At least airlines have gotten on board with fee-based schemes, which, while not great for travelers now, is probably best for everyone in the long run.)

Back to the regular programming. If you believe a merger would benefit the auto industry, then perhaps I can sell you a bundle of sub-prime mortgages. See, when you pool a bunch of high-risk mortgages together, you end up with a financial instrument that is low risk, right? Uh, not exactly. That only works in a magical world where prices never go down. You cannot statistically manipulate risk to zero. Risk can be reduced through changes in procedure, process, and control, not magic.

What about the banks? Take back the bailout money already given out, force companies into bankruptcy, force certain (read: lots) of key managers into jail, impose corporal punishment and public floggings, and generally take names and kick ass. Capitalism is supposed to reward risk-takers who are successful, not the unsuccessful ones who happen to be well-connected. If we want to go (more) socialist, then this country needs to have a gut check moment and decide what direction it wishes to go.

4 comments:

Anonymous said...

Wow, heavy stuff. Have you been reading The Economist lately? People (Auto Execs and many of your elected officials) still think Detroit can make a come back like they did in the 50’s. Hey, back then there were no Japanese made cars. There were no Korean made cars. Soon, there will be Chinese made cars flood into the US. Then the Indian (Tata) will follow. How in the world Detroit can make a come back!!! Yup, let them fold.

Watch the BBC, France 24 (vingt-quatre) and DW-TV tonight, the EU also will sink a lot of money into the bailouts for their auto industry.

Don't forget, politicians only look for a quick fix and short term solution.

Anonymous said...

Let's do a review of this post in 25 years and see how your position has changed. You think it will not have? You might be surprised. Just wait until your life, family, and career are dependent upon the status quo. Just wait -- your position will change.

Anonymous said...

I beg to differ. 25 billions, would you lend money to the big 3 auto manufactures that have run themselves into the ground, let alone bail them out. They all flew into DC on their private jet to beg for our hard earned tax $$$ yesterday. They came in without reorganized business plans and other strategies. All they did say if you don’t give us money, everyone one will suffer. That a bunch of #%*. Scare tactic would work if this isn’t so tragic. Did they learn anything since 1972? We should let them go belly up and the Japanese may buy up their assets and start over. May be the Japanese won’t buy their meager assets. Get rid off the high price/high demand from the union. The UAW will wake up and rethink about their position. The Union heads and the company heads are in this together. They put a lot of money into the election, you don’t think they don’t expect anything in return? If you vote Democrat, the auto companies will be saved. The unions spent millions in advertising for 0bama presidential run, and they are expecting a BIG return on that investment. Chit collecting time.

Chapter 11 may be the way to go.

Scott Hayman said...

I am in full accordance. I think companies need to learn from others' failure. CEOs need to look at their competition and say "oh shit- they just got the axe, and we're doing the same thing they were... Maybe we should rethink how we do things..."

On the flip side, I think it would be interesting to see what would happen if the Oil companies bailed out the auto industry. I mean hell- they made $90 billion in profits last year- what's a $25 billion bailout to your largest profit contributor?

The problem with that would be the oil companies getting to dictate the energy technology that goes into the cars.

I think that would be devastating in the long run.


At any rate, we picked a shitty time to graduate college and go into the private sector.

I should have been a fucking professional student.