But I don’t know how anyone thought a bankster–and particularly this bankster–could say this and still wield any credibility.
From Washington’s point of view, divesting its remaining shares will end an uncomfortable and distinctly un-American period of government ownership in a major industrial company.
Sure. Rattner places this sentiment in “Washington’s point of view.” Still, consider the messenger.
After all, he barely mentions here–as he did in his book–that this was not just a bailout of some industrial companies. It was also a bailout of two finance companies, Chrysler Finance and GMAC (he mentions that the government still owns Ally/GMAC, but still calls the scorecard, “nearly complete”). As such, it was also the bailout of the Private Equity firm, Cerberus, that had spent the previous years stripping Chrysler in the hopes of retaining just the finance arms.
He also neglects to mention that the government still pursues the un-American policy of treating banks according to a different set of rules, not only providing them free money, but seemingly exempting them from all laws.
Finally, he shows no self-awareness of his own history, including paying kickbacks so his firm could make big money off of New York State (for which he, like all banksters, got a mere wrist-slap).
I’m not saying the government should hold onto its GM stake forever (though unlike Rattner, executive compensation is the last reason I’d cite to applaud this sale). But having someone like Rattner call government intervention in purportedly capitalist companies un-American only perpetuates the idea that industrial companies should have to abide by so-called rules of capitalism that the titans of capitalism, the banksters, have all but discarded.
Let me say at the outset that the GM bailout was far, far better handled than the bankster bailouts. And as a Michigan resident whose family still has ties to the auto business, I am tremendously grateful for that bailout.
That said, this is why I have not declared mission accomplished, in spite of the successful IPO last year.
You see, no one will be able to weigh the success or failure of the GM bailout for another year or so–until such time as the cars developed entirely under the leadership team picked by a bunch of people who knew nothing about the auto industry start rolling off the lines. As I noted last year, the success of the IPO was significantly premised on a number of business decisions made by Rick Wagoner and others fired during the bailout. Wagoner deserves the credit for his emphasis on China (and places like Brazil), which is the biggest source of GM’s profit these days and was widely touted as the reason it made a good stock buy. And Bob Lutz deserves the credit for GM’s improved product line.
So we won’t know whether the bailout succeeded until we see whether the guys now in charge can make decisions that are as smart as those made by the guys fired in the bailout.
Yet, as MSNBC lays out, thus far, it looks like the finance guys Steven Rattner brought in to run a car company have, predictably, made some really stupid decisions.
[GM CEO Daniel] Akerson recently told the Wall Street Journal that a GM car was just like the can of Diet Coke he was drinking during the interview.
“It’s a consumer product,” he said. “GM has to start acting like a consumer-driven, not engineering-driven, company. We sell a consumer product — our can just costs $30,000.”
Industry insiders with a memory of the 1990s immediately blasted this view as a return to [GM]’s failed [early 1990s] strategy to commoditize a product for which a strong emotional connection is important to drive sales and to cultivate brand loyalty.
“The only difference between GM then and GM now is that this is a company that has only recently emerged from the abyss of bankruptcy, one that can ill-afford a single misstep brought upon by misguided leadership, even though it has the most competitive lineup (of vehicles) it has had in decades,” [auto writer Peter] Delorenzo said.
It’s one thing to try to sell sugar water with nothing more than emotional attachment. But so long as there are well-engineered vehicles like Hondas on the road, you can’t dismiss the importance of engineering in designing cars.
In addition, Akerson (like Ed Whitacre before him) is trying to cut the time to market for GM’s cars.
Now Akerson says speed and cost are the aspects on which he will concentrate, telling the Journal that “during World War II, GM produced tanks and equipment within four years. Why should it take four years to put a car out?”
There have, historically, been two models for cutting the time to market for cars. There’s the model Chrysler used in the late 1990s, which led to the introduction of things like the PT Cruiser that were cute but which weren’t really good cars; that’s one of the things that led to a serious decline in Chrysler’s quality. Then there’s Toyota’s quality driven approach, which has served as the standard for Ford and GM in recent years as they have accelerated their own development time frame.
But as Toyota’s recent troubles show, not even Toyota can make cars in as short a time frame as they do and ensure their quality. What makes Akerson think GM can do what Toyota can’t?
As promised over the weekend before I realized I had forgotten my Toobz, I wanted to compare the behavior of two bailout recipients, the UAW and the banksters.
A number of people have pointed to this intriguing interview about the Korea Trade deal with the UAW’s President Bob King. In addition to confirming my math showing that the most the UAW could reasonably expect to get out of his deal is 75,000 additional exports–or 800 extra jobs for the UAW–King also had this to say:
It was important to endorse in order to reward the administration for its good behavior of including labor in negotiations.
While not directly an admission that UAW endorsed this NAFTA-style trade deal in thanks for the US bailout of the auto industry, it does seem to support that overall sentiment. The UAW capitulated further when it endorsed the Obama-McConnell tax deal giving 2 years of relief to the very rich, 1 year to the medium-term unemployed, and nothing to the 99ers whose Unemployment Insurance has expired (many of whom used to work for the auto companies).
Compare that to the behavior of JP Morgan Chase Vice Chairman Jimmy Lee during negotiations under the Chrysler bailout. According to Steven Rattner, Lee,
demanded to know why, if the government thought banks important enough to give them tens of billions in TARP money, it wanted to squeeze them on [the Chrysler] deal.
Mind you, JPMC wasn’t getting squeezed. Timmeh Geithner had specifically instructed Rattner not to ask for any special favors because the government had also bailed out JPMC (Timmeh apparently didn’t mention the additional support JPMC got from the Fed).
Tim had instructed me not to be taken in [by Lee’s complaints] but to maintain strict neutrality. I was not to demand anything of JPMorgan just because it had received an infusion of TARP money; nor was I to show it favor because of Bear Stearns or anything else.
And as Rattner calculates, Lee was asking for full value on their debt even while it was only worth about $.15 on the dollar.
In our phone calls, he also relentlessly reminded me that creditors deserve to be paid. “When you lend somebody $6.9 billion,” he would say, “you expect to get $6.9 billion back. And not a penny less.” I listened knowing that Jimmy’s position was patently ridiculous. Chrysler debt was trading at around 15 cents on the dollar (admittedly, infrequently), and according to Chrysler’s own analysis, the liquidation value of the company was perhaps as low as $1 billion. Clearly, Jimmy didn’t believe that the Obama administration would be willing to push back and let the banks take over Chrysler rather than cave in to their demands.
So unlike the UAW–which endorsed the kind of trade deal it has spent the last decade railing against–JP Morgan Chase responded to getting bailed out by asking for more special deals.
When Steven Rattner published this piece on the GM IPO in HuffPo, he had not yet been sued by NY’s Attorney General for allegedly being “willing to do whatever it took to get his hands on pension fund money including paying kickbacks, orchestrating a movie deal, and funneling campaign contributions,” nor had he yet settled–with no admission of guilt–the SEC investigation that alleges he, “delivered special favors and conducted sham transactions that corrupted the Retirement Fund’s investment process.” Thus, it would go too far to call the Steven Rattner that published that piece a fraudster, or even an alleged fraudster.
But a big part of this victory lap is fraudulent.
A key part of Rattner’s argument is that by fixing management issues, Team Auto dramatically altered GM’s value.
A fashionable bit of revisionist history maintains that former GM chief executive Richard Wagoner should not have been fired, especially by a bunch of Wall Street guys turned government bureaucrats. Yet, Ford — which not only avoided bankruptcy but will achieve record profits this year — faced exactly the same challenges as GM: the same United Auto Workers, the same competition from Asian transplants, the same oscillating gasoline prices and the same credit crisis. Why did the two automakers end up on such different paths? Management.
Now, I don’t much agonize over Rattner’s decision to fire Wagoner. I absolutely support the idea of firing CEOs whose companies have to be bailed out. Hell, I even agree that Wagoner’s firing is probably a key part of getting the banksters to trust GM again. But I recognize–as Rattner doesn’t–that Wagoner had started along the same path that Ford’s Alan Mulally had, only about a year and a half behind Mulally, meaning those efforts were more directly affected by the disaster caused by Rattner’s buddies on Wall Street. But on balance, I’m perfectly happy with Rattner’s decision to fire Wagoner.
What I’m not fine with, though, is Rattner’s attack on Wagoner in the same piece he takes credit for two or three business decisions that Wagoner made. Wagoner indubitably presided over GM’s emphasis on China and Brazil, which Rattner calls “enormously successful.”
He likewise oversaw–with Bob Lutz–the development of the GM products now experiencing success in the marketplace, particularly the Malibu, Equinox, and Camaro, which rolled out just as the government came in (the interim team shares credit for the Cruze and Volt).
Its products, while vastly improved in recent years, still do not match those of Ford and its non-U.S. competitors.
And at 15 million, General Motors — with its improved products, tighter management, lower cost structure and better balance sheet — will be gushing profits.
And by negotiating VEBA, Wagoner also had a significant role in setting up the conditions that enabled Team Auto to take retiree health care off GM’s books, a big part of the structural costs Rattner takes credit for.
At least $8 billion of annual structural costs sliced from the company’s bleeding North American operations.
If you want to pump up GM’s IPO price based significantly on its improved product quality and its success in China and Brazil, then you cannot at the same time make the firing of Rick Wagoner a central part of your argument for the value of the company. Either Wagoner did a good job on market and product issues, in which case Rattner’s friends are justified to stress improved product quality and great growth potential in China and Brazil, or Wagoner was a complete failure, in which case the folks pushing this IPO are pushing shit. (I believe GM has a great deal of value, though wouldn’t presume to describe its the fair market value of its stock.)
And if all of that doesn’t lead you to question Rattner’s motives and credibility here, check out whom he designates as the appropriate person to pick stocks.
I’ll leave the stock picking to Jim Cramer while observing that GM’s IPO was priced at a discount to Ford’s trading multiple. That’s understandable, given the uncertainties around GM. At the same time, proving itself to Wall Street and closing that multiple gap remains a source of upside for the newly public automaker.
Jim Cramer, famous above all for pumping up stocks with his overheated bluster.
Look, I’m all in favor of Rattner having the benefit of the doubt as he defends himself against charges of fraud. I’m thrilled that GM had a successful stock offering today, even if I’m cautious about what it means. But I’m not in favor of pumping up the stock price of GM based on a specious argument claiming credit for things Rick Wagoner did, even while pointing to Wagoner’s firing as a key part of GM’s value proposition.
Wall Street and the Administration are hailing the GM IPO and claiming victory.
General Motors Co GM.UL pulled off the biggest initial public offering in U.S. history on Wednesday, raising $20.1 billion after pricing shares at the top of the proposed range in response to huge investor demand.
GM sold 478 million common shares at $33 each, raising $15.77 billion, as well as $4.35 billion in preferred shares, more than the initially planned $4 billion.
Including an option that would allow underwriters to sell more shares, expected to be exercised in coming days, GM looks set to raise $23.1 billion, making it the biggest initial public offering ever.
The strong response to the stock sale reflects a groundswell of investor confidence that GM is moving beyond its unpopular, taxpayer-funded bankruptcy in June 2009 with sharply lower costs and higher profit potential.
Now, don’t get me wrong. I will always remain grateful that Obama bailed out the auto industry, and I am a direct beneficiary of that policy. And I do think many of the decisions and actions Team Auto took last year–most notably the fast track bankruptcy–were the right decisions, incredibly well executed. And I think the cars currently in GM showrooms are good cars.
But this IPO is no great reflection, one way or another, on the success of the bailout.
Indeed, it may be something far worse. It may be a propaganda stunt that will allow the banksters–the ones in charge of the bailout, as well as the current private equity CEO, as well as the firm which consulted on the IPO whose Chairman is auditioning to take on a top advisory role in the Administration, as well as the big banks involved in the IPO whose TBTF status the Administration has fiercely protected–to claim victory. And of course, every single one of those banksters has a huge incentive to create a stunt that will allow the Administration to claim victory. But that won’t say much about or do much to ensure GM’s long-term value.
Mind you, I hope that’s not true. I hope the universe of possible car buyers believe that GM’s cars reflect a value of $33/share or more (the banksters think they’ll be able to drive up the share price in the coming days). More importantly, I hope GM sustains recent improvements in their product line even as the new top executives–particularly the ones who had nothing to do with the currently improved products who have changed the process and people that produced those cars–remain in charge.
But we won’t know the answer to that question for another 2 years or so. And we won’t know whether GM will improve its brand image enough to make cars more profitable for some time yet, either.
And, too, I hope those banksters driving up the price of GM’s stock keep that stock for the long term. I hope this doesn’t resemble a 90s style, pump and dump, IPO. But we won’t know that for a little while either.
What we know is that the bankster-CEO pointed to lower costs (which the bailout did make possible) and GM’s strong position in China (which the purportedly failed Rick Wagoner implemented long before the bailout but which didn’t, by itself, do much for GM’s value before the bailout) in his pitch for the IPO.
In a road show for investors spearheaded by GM Chief Executive Dan Akerson and Chief Financial Officer Chris Liddell, the automaker has emphasized both its sharply lower costs and its exposure to key growth markets like China.
But it’s not clear he said much about the cars. The cars that, one way or another, will ultimately determine the success or failure of the bailout.
In other words, what this IPO seems to reflect is the successful sale of a new balance sheet tied to a market mix that, before the bailout, Wall Street was none too impressed by. It seems to reflect the enduring belief on the part of the banksters that the only value worth measuring is that determined by Wall Street, and not that value measured by the ultimate consumers of a product.
The GM products shepherded through by Rick Wagoner and Bob Lutz are selling well at stores. The GM balance sheet shepherded through by Steven Rattner is selling well on Wall Street.
But what remains to be seen is whether the cars produced in two years by the development process implemented by Ed Whitacre and Dan Akerson will sustain and increase the value of cars in showrooms to match the $33/share value pitched by the banksters.
Good luck and happy GM day.
He probably shouldn’t have, seeing as how some of his evidence against Wagoner is that “he wasn’t able or willing to cull failing brands like Pontiac, for example, or get his arms around out-of-control legacy costs.” Steven Rattner himself admits, of course, that Wagoner’s the one who negotiated VEBA with the UAW and got the legacy costs of retiree health care off of GM’s books, even if he doesn’t emphasize that point.
But what’s most hysterical is that Sorkin’s defense of private equity guys…
Indeed, the private equity industry and its many lobbyists have been fighting for years to prove their value to the public, producing all sorts of studies and white papers to back up their claims.And yet, Mr. Gladwell gets to the nub of the image problem confronting the industry in the blink of a sentence (pun intended): “The mythology of the business is that the specialists who swoop in from Wall Street are not economic opportunists, buying, stripping and selling companies in order to extract millions in fees, but architects of rebirth.”
He’s right: the GM turnaround is ultimately an act of financial engineering. While “financial engineering” has become an expletive of sorts, in this case it is actually a good thing. Indeed, G.M.’s turnaround should become a case study for when and why the private equity and restructuring business can work.
But for certain companies — and only in certain circumstances — there is something to be said about bringing in an outsider with this credential on the résumé: financial engineering experience.
… doesn’t once mention that other company that got bailed out by Team Auto: Chrysler Cerberus.
For what it’s worth, I am willing to concede (and have) that it makes sense to bring in guys with “financial engineering” experience to revamp failed businesses (though just as critical is having someone with basic business expertise from outside of the culture of the industry in question).
But one of the biggest differences between Cerberus’ spectacular failure with Chrysler and Team Auto’s initial success with Chrysler Cerberus and GM is that Team Auto was not trying to suck the last bits of value out of a company (as Cerberus was trying to extract the finance part of Chrysler while screwing the manufacturing side).
An astute journalist probably would have acknowledged that point.
Update: This post originally called Sorkin “Aaron,” not “Andrew. Apologies to Aaron Sorkin and thanks to pdaly for pointing out my mistake.
In Steven Rattner’s book, he describes newly elected Barack Obama asking his advisors “Why can’t [the US automakers] make a Corolla?” Implicitly, of course, he was asking “why can’t they make a Corolla in the United States.” His economic advisors, according to Rattner, admitted they didn’t know: “We wish we knew.”
The correct answer to the question would point to a number of things. Executive stupidity would be one important cause. Legacy costs would be another. Market structure and profitability requirements would be another. Weak branding would be another. You could even–pointing to the Ford Focus–argue that one of “them” can make a Corolla, or something reasonably competitive.
But one of the factors that partially explains why American manufacturers can’t make a Corolla would be healthcare costs. (With Toyota’s move of the Corolla-based Matrix production to Canada, you could even argue that Toyota can’t make a Corolla anymore, not here, anyway, even putting aside the quality problems the Corolla has had of late.)
Now, back on the campaign trail, Obama admitted that healthcare is one of the things that makes our companies less competitive. And in his big address to Congress on healthcare on September 9, 2009, Obama even singled out the auto industry as one which our exorbitant healthcare costs made less competitive internationally.
Then there’s the problem of rising costs. We spend one-and-a-half times more per person on health care than any other country, but we aren’t any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages. It’s why so many employers – especially small businesses – are forcing their employees to pay more for insurance, or are dropping their coverage entirely.
It’s why so many aspiring entrepreneurs cannot afford to open a business in the first place, and why American businesses that compete internationally – like our automakers – are at a huge disadvantage.
Which is why I was surprised to see no discussion about healthcare (as opposed to VEBA, the fund the UAW now uses to pay for retiree healthcare) in Rattner’s entire book.
It seemed odd to me that, at a time when our country was rethinking our healthcare system, and at a time when the government was spending a boatload of money to try to make our auto companies competitive again, the teams pursuing those initiatives wouldn’t at least touch base, to test whether healthcare even addressed the problems that contributed to the automakers difficulties.
So I asked Rattner during the book salon.
emptywheel: Aside from a technical discussion of VEBA (for those not familiar, that’s the fund that the Big 2.5 negotiated with the UAW, which the UAW now uses to pay health benefits for retirees, which was a critical issue during negotiations), there was virtually no discussion of health care costs and the way that contributes to profitability (or lack thereof) for car companies that manufacture in the US, as reflected most obviously in Toyota’s repeated decisions to source from Canada because it offers the best mix of highly skilled workers and affordable health care.
Is that in fact right? No one talked about the burden health care costs put on manufacturing in his country during the bailout? I find that particularly shocking given that the bailout took place at the time when all the policy decisions on health care reform took place, and if anything, health care reform will make manufacturing health care costs worse.
Rattner: I wasn’t involved in the broader discussions about health care reform, nor am I a health care expert. We were certainly aware of the burden that health care costs put on the Detroit 3, but the creation of the VEBA’s solved that problem with respect to the retirees.
emptywheel: Right. But in all your coversations [sic] with Geithner and Summers and Rahm, was there honestly never a discussion about health care? No comment about ways the health care reform could have been formulated to contribute to the success of the bailout (and, more importantly, make sure that the effort ended up keeping the jobs that were saved in the US).
Rattner: No. There simply wasn’t time.
I understand the time constraints of all this. Though one of the parts of healthcare reform that will most directly affect the automaker healthcare costs, in a bad way, is the excise tax, and that wasn’t finalized until months after Rattner left government, which left five months for him to remind his buddies in the White House that their plan for healthcare was not going to bring down costs for US manufacturing companies, and it might well make them higher. Furthermore, it seems like an important enough issue–given the investment in both programs–to make time to address this issue.
Then again, I guess the healthcare team was too busy talking to Pharma to make time to talk to manufacturing.
I’m going to have a few follow-up posts about Steven Rattner’s Overhaul generally and Saturday’s book salon on it. But for the moment, I wanted to add something to two excellent reviews of it by Malcom Gladwell and Felix Salmon. Together, they both distinguish between the product GM makes and the debt it had. Here’s Salmon:
That Rattner’s team managed not one but two insanely complex bankruptcies in a hitherto unimaginably short timeframe is a real and noteworthy achievement of the Obama administration. Rattner is right about that. But Gladwell’s got a good point too. This kind of biz-school restructuring is easy to show off about. What’s hard is making millions of cars which are so good that the picky US consumer will buy them rather than the incredibly well-made competition — and making a profit by doing so. Eliminating GM’s monstrous debt burden by sending it through bankruptcy was a necessary step in getting there. But it’s not at heart what managing a company like GM is or should be about.
And here’s Gladwell making a point bmaz and I argued, that Rick Wagoner, whatever his faults, had done significant work to fix GM before the overhaul.
Wagoner was not a perfect manager, by any means. Unlike Alan Mulally, the C.E.O. at Ford, he failed to build up cash reserves in anticipation of the economic downturn, which might have kept his company out of bankruptcy. He can be faulted for riding the S.U.V. wave too long, and for being too slow to develop a credible small-car alternative. But, especially given the mess that Wagoner inherited when he took over, in 2000—and the inherent difficulty of running a company that had to pay pension and medical benefits to half a million retirees—he accomplished a tremendous amount during his eight-year tenure. He cut the workforce from three hundred and ninety thousand to two hundred and seventeen thousand. He built a hugely profitable business in China almost from scratch: a G.M. joint venture is the leading automaker in what is now the world’s largest automobile market. In 1995, it took forty-six man-hours to build the typical G.M. car, versus twenty-nine hours for the typical Toyota. Under Wagoner’s watch, the productivity gap closed almost entirely.
Most important, Wagoner—along with his counterparts at Ford and Chrysler—was responsible for a historic agreement with the United Auto Workers. Under that contract, which was concluded in 2007, new hires at G.M. receive between fourteen and seventeen dollars an hour—instead of the twenty-eight to thirty-three dollars an hour that preëxisting employees get—and give up all rights to the traditional retiree benefit package. The 2007 deal also transferred all responsibility for paying for the health care of G.M.’s retirees to a special fund, administered by the U.A.W. It is hard to overstate the importance of that second provision. G.M. has five hundred and seventeen thousand retirees. Between 1993 and 2007, the company paid out a hundred and three billion dollars to those former workers—a burden unimaginable to its foreign competitors. In the 2007 deal, G.M. agreed to make a series of lump-sum payments to the U.A.W. over ten years, worth some thirty-two billion dollars—at which point the company would be free of its outsized retiree health-care burden. It is estimated that, within a few years, G.M.’s labor costs—which were once almost fifty per cent higher than the domestic operations of Toyota, Nissan, and Honda—will be lower than its competitors’.
In the same period, G.M.’s product line was transformed. In 1989, to give one example, Chevrolet’s main midsize sedan had something like twice as many reported defects as its competitors at Honda and Toyota, according to the J. D. Power “initial quality” metrics. Those differences no longer exist. The first major new car built on Wagoner’s watch—the midsize Chevy Malibu—scores equal to or better than the Honda Accord and Toyota Camry. G.M. earned more than a billion dollars in profits in the last quarter because American consumers have started to buy the cars that Wagoner brought to market—the Buick Regal and LaCrosse, the Envoy, the Cadillac CTS, the Chevy Malibu and Cruze, and others. They represent the most competitive lineup that G.M. has fielded since the nineteen-sixties. (Both the CTS and the Malibu have been named to Car and Driver’s annual “10 Best Cars” list.)
What Wagoner meant in his testimony before the Senate, in other words, was something like this: “At G.M., we are finally producing world-class cars. We have brought our costs, quality, and productivity into line with those of our competitors. We have finally disposed of the crippling burden of our legacy retiree costs. We have expanded into the world’s fastest-growing markets more effectively than any other company in the United States. But the effort required to bring about that transformation has left our balance sheet thin—and, at the very moment that we need a couple of years of normal economic activity to refill our coffers, auto sales have fallen off a cliff. Do you mind giving us a hand until things get back to normal?” [my emphasis)
Now, FWIW, I’m agnostic about keeping Wagoner on as CEO. Gladwell makes the same points bmaz and I were making. But I am utterly sympathetic to the notion that any CEO getting a bailout should be fired as part of the deal. The best solution, IMO, would have been to keep Fritz Henderson on as CEO. That’s partly based on my impression–developed during my visit to GM’s Tech Center just a few weeks after Fritz took over as CEO–that he had begun to implement the same kind of cultural change that I saw very quickly at Ford after Alan Mulally took over.
But neither Salmon’s nor Gladwell’s review mention two key details that I think are important to this debate. The first is Rattner’s description of learning about the dire straits of the auto finance companies on April 1, 2009.
I entered the byzantine world of the fincos the very next day, April Fool’s Day, as it happened. We faced off in a Treasury Department conference room against an imposing lineup of businesspeople: the top management from Chrysler Financial, GMAC, and Chrysler, plus Steve Feinberg and the guys from Cerberus. They all knew more about automotive finance than we did. We were trying to fly solo without having taken flying lessons, and I hoped we wouldn’t crash and burn.
Pretty quickly I discovered that the fincos posed a bigger problem than I’d imagined. Auto finance companise are a lot like banks, but there is one crucial distinction: Banks rely on deposits form consumers and businesses for most of the money they use for loans. Finance companies have no such depositors unless they happen to own a bank: instead they must depend on larger borrowings from banks and investors for the cash that they lend to car buyers (known as the retail trade) and auto daelers (known as the wholesale or floor-plan borrowers).
I began to understand how the collapse of the financial markets had created havoc for automakers. As a result of the credit crunch, both GMAC and Chrysler Financial had seen their ability to borrow form banks severely curtailed. Continue reading
I wanted to return to a detail I mentioned in yesterday’s book salon. As I noted, in his book on the auto bailout, Steven Rattner described Citi as being worried during the Chrysler negotiations that retail customers would retaliate if Citi played hard ball.
Bankers for Goldman and Citi had advised [JP Morgan Chase VP and the Chrysler bondholder’s lead negotiator] Jimmy Lee to make the best of a bad situation. Privately they felt his brinksmanship was embarrassing and potentially costly. Citi especially wanted to avoid a liquidation. Its analysis showed it would recover no more than 20 cents on the dollar in that instance. Citi also feared losing business in its branches in states like Michigan and Ohio where consumers might blame it for Chrysler’s demise. (173)
That didn’t make sense to me given that Citi doesn’t have branches in MI and OH; the closest actual branches are in Chicago. Compare that to Chase, which just took over from Comerica as the biggest bank in MI by deposits and was presumably second at the time of the bailout negotiations. Citi should only fear retaliation from consumers elsewhere, in those urban areas that actually have Citi branches, or they should fear retaliation some other way, presumably through their credit card business. I asked Rattner why Citi was worried, but JP Morgan Chase was not, given its much greater involvement in the auto states. He responded, “Yes, they were definitely worried.”
Frankly, I don’t know what to make of this. Given the context of the claim–in which Goldman and Citi are portrayed as talking Jimmy Lee down from a hardass negotiating position–JPMC appears not to have been sufficiently worried to change its behavior. And the Citi claim doesn’t make sense on its face. Perhaps Citi was worried about something else. Perhaps they were just more worried because they were insolvent? There are a few details he pretty clearly got wrong in his book (such as his claim that Nissan’s consideration of a deal with Chrysler was secret), but this seems instead like one of the abundant examples of where Rattner is an unreliable narrator. Rattner chose to portray Citi as worried (and quickly agree the hard-bargaining JPMC was, too), but it’s unclear whether that was really true or just nice spin on the banks.
What Rattner probably didn’t know was that FDL was trying to increase this worry at the time by encouraging people to take their money out of Chase. That was a mostly unsuccessful effort (let me tell you, Chrysler is no more popular in this country than the big banks) to target the banksters for actions that hurt the communities they’re in.
As unsuccessful as our effort was in terms of numbers, if Rattner-the-unreliable-narrator’s claim has any basis in fact, then our effort to pressure JPMC to behave better worked. Sort of.
Since then, Arianna’s Move Your Money campaign has more successfully advocated for people and institutions to move their money out of the big banks. By April, they claimed $5 billion had been moved. And it does seem like some of the banks are losing market share to smaller banks.
The largest banks in Michigan are losing market share and Chase Bank now has the most deposits in the state, according to new data released Thursday by the Federal Deposit Insurance Corp.
As of June 30, the five biggest banks in Michigan — Chase Bank, Comerica Bank, PNC Bank, Bank of America and Fifth Third Bank — accounted for 55% of all deposits in the state. That’s down from 57.3% on June 30, 2009.
I raise all this because of another interesting discussion about whether consumer action might more effectively target the banks. Via Yves Smith, I found this Playboy article on Edmundo Braverman’s WallStreetOasis.com’s proposal on How to Destroy a Bank (Yup, it appears you have to have a pierced navel and no pubic hair to be a Playboy model these days).
This article set forth a plan for how consumers could destroy one of America’s four largest banks. Customers would deliver a series of escalating threats against Wells Fargo, Bank of America, JPMorgan Chase and Citibank, demanding policy changes. The threats would culminate in a series of flash-mob bank runs that targeted one of the banks.
In a comment in Yves thread, Braverman acknowledged his idea was a thought exercise to take Move Your Money the next step.
The whole thing was inspired by Arianna Huffington’s “Move Your Money” idea. I thought it was a good idea, but not one that would be dramatic enough to produce any changes in the way the banks did business. So I asked myself, “What would have an impact on the banks?” and that’s when I came up with the Tank-A-Bank plan.
It was always just a thought exercise, and never something I advocated.
Yves seems to be thinking more about this; what can consumers do that won’t get them jailed as terrorists but will get us to a point where the finance industry isn’t dragging our country down even while stealing our money in the process?
I come to Steven Rattner’s Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry from a very particular perspective. As a Michigander whose husband still works in the auto industry and whose town has benefited from battery subsidies, I’m a grateful direct beneficiary of the work the Obama Administration did to save the auto industry. But that also means I read this book, which might have been subtitled, “Wall Street gapes at Detroit” from the perspective, “Detroit gapes back at Wall Street.”
The Key to the Bailout: Section 363
There are key parts of the story I was eager to read, particularly the inside details on how Team Auto brought GM and Chrysler through bankruptcy in such short time. The decision–which Rattner traces to a suggestion he made in December 2008–to use Section 363 of the bankruptcy code is what made the whole bailout work. It allowed Team Auto to move the viable parts of Chrysler and GM into new companies, leaving much of the debt and underperforming parts of the companies (like Saturn or Pontiac) behind. As Rattner describes, preparing for 363 took a lot of negotiations with stakeholders–notably the UAW and bondholders–ahead of the actual bankruptcy filings to bring the time they’d spend in BK down from the 6 to 15 months originally projected, to the month or two it ultimately took. Much of the book’s narrative is about the deal-making Rattner himself led. Some interesting details of that deal-making: that Tim Geithner instructed Rattner not to make any special demands of TARP recipients who were also Chrysler bondholders, that Citi feared consumers would take their branch banking in MI and OH elsewhere if it played hardball, and that JPMorgan Chase’s chief negotiator Jimmy Lee,
demanded to know why, if the government thought banks important enough to give them tens of billions in TARP money, it wanted to squeeze them on [the Chrysler] deal.
In additional to this central drama, Rattner provides worthwhile details of what he learned over the course of this intervention. Some of these are details widely known in car country, but dismissed by much of the rest of the country: that GM had closed most of the gap in labor costs with transplants by the beginning of the restructuring, that GM plants really were competitive in terms of productivity, and that trimming the number of dealers was crucial to the success of the restructured companies. Rattner also added to my understanding of why GM needed help: he described the sheer ineptitude of GM CFO Ray Young and what Rattner describes as the ineffectiveness of GM’s chief lobbyist. And the last chapter, in which Rattner provides a partial explanation for the quick departure of Ed Whitacre, answers some, but not all, of my questions about the transition from GM CEO to CEO over the last two years.
One Missing Detail: Cerberus’ Role
One part of the story I wish Rattner had told more fully is the role of Cerberus in the bailout. There were a number of questions about Cerberus’ role in the initial negotiations with the Bush White House, particularly since that initial loan underfunded Chrysler in comparison to GM. But Rattner tells a story that is very favorable to Cerberus. For example, he rather amusingly attributes Cerberus’ offer–in December 2008–to just hand over Chrysler to the government for a dollar, to patriotism. Rattner makes that claim by neglecting any mention of Cerberus’ own desperate straits at the time. He doesn’t mention, for instance, that Cerberus had limited withdrawals from some funds, citing a desire for liquidity and invoking a “‘perfect storm’ in the auto and housing sectors.” And it’s over a hundred pages after his description of that December 2008 offer before he mentions GMAC’s successful effort to gain bank status and receive TARP funds, a move approved in that same December period and which has been an area of TARP that has come in for particularly sharp criticism. It turns out that private equity guy Steven Rattner tells a story that focuses primarily on the incompetence of manufacturing companies, even though private equity fund Cerberus’ failures and demands for a free ride were very much a part of the story of the auto bailout.
And these areas, where Rattner’s Wall Street perspective displays his own biases, are as interesting as the details about the bailout.
The Cost and Benefits of an Outsider
Take Rattner’s inconsistency over whether appointees overseeing industries should have any expertise in those industries. On page 48, Rattner repeats his complaint about politicians (in this case Debbie Stabenow and Carl Levin) questioning his qualifications for the job. But then, on the very next page, he endorses a view that the Treasury Secretary had to be someone with credibility in the financial world, precisely the equivalent of what Stabenow and Levin were asking for the Auto Czar position.
Essentially, only Larry and Tim had the necessary government experience, along with the credibility vital in the financial world.
This unquestioning endorsement of an insider for the finance world is shortly followed, on page 52, by one of the details that shocked me the most in the book: the report that neither Rattner, nor Geithner, nor Summers were cognizant of the degree to which the auto slowdown would affect (and was already affecting) the suppliers.
Automotive suppliers started to fail, which was how I discovered that the scope of my assignment was much broader than I’d anticipated. GM and Chrysler had dominated the conversations with Tim and Larry. None of us appreciated that, with auto sales down 40 percent, the collateral damage among related businesses would be vast.
Now, the stress the suppliers were (and are) under was a known fact to anyone with a basic understanding of the industry. The Center for Automotive Research (a group Rattner later relied on for industry analysis) produced a widely-cited report on the economic consequences of an auto collapse in November 2008, which projected the dire impact on suppliers in case of an auto contraction. And reports explaining Toyota’s support for a bailout covered the supplier issues as well. Yet, even as an inexperienced Rattner was learning this well-known fact on the job, thousands of supplier employees were already losing their jobs. (Rattner describes a similar rather belated discovery–how the financial collapse had dramatically hurt the auto finance companies, and with them the debt-driven market they supported–on page 145.)
Mind you, Rattner makes a good case in this book for bringing in outsiders to restructure any industry the government bails out, even while the evidence he presents, with this story and a few others like it, hint at the costs of having no one with expertise involved.
Which brings me to the question I’ll end this post with. So, to Steven: You suggest that the unhappiness with the bank bailouts has to do with the absence of the same shared sacrifice the auto bailout demanded. But that’s only half of it: The big problem is that finance is still broken, it’s still dragging the rest of the country down. Putting the question of firing CEOs aside, how did the Obama Administration insist on a complete overhaul for one industry, but status quo for the other? And what could be done, particularly as we learn more about the foreclosure fraud engaged in by top TARP recipients, to undertake the kind of overhaul that has served the auto industry so well? (Note, Rattner does address some of this in the book. He provides several–to me, unconvincing–explanations for the disparate treatment of the bankers and the auto makers–see pages 115, 216–and states he would have fired the bank CEOs that needed government help.)