Unintended Consequences

So much to say so little time.

Bloomberg has a blow by blow story of how the Obama Administration concluded that GM Must Go Bankrupt.  The people on the task force are the same Harvard MBA types that have destroyed the U.S. Radio business – believing that businesses are run by free cash flows, leverage ratios and LIBOR interest rate swaps – get the numbers right in the spread sheets and your job is done .

My ire rose to the level to write this when I read “One member of the task force said he was surprised to learn that Japanese manufacturers can charge more than GM for a similar car because of their superior brand image.“.  Oh God, We’re all doomed.  How could someone involved in deciding the future of the car business and firing Rick Wagoner be so completely ignorant of the underlying business problems?

This is not a new observation.  When Ford and Mazda created their joint facility in Flat Rock, Michigan (1987) and GM and Toyota formed the partnership in Fremont California.(1984), both companies learned (or should have learned) a very important lesson.   The same plant with the same workers using the same parts producing essentially identical cars – people waited in line to buy the Japanese version and you couldn’t give away the American version.  This is 25 years ago.   If you don’t figure out why that is, no amount of “government backstopping” is going to turn the company around.   They should have started by spending a weekend speed reading “The Decline and Fall of the American Auto Industry” by Brock Yates.  [See what he is saying lately [here]).   While the car companies and their products have improved since the 1980s, you aren’t going to fix their problems until you ask the right questions.

There are two basic trains of thought on why this “brand image” problem persists.  One version is that prior to the arrival of serious foreign competition, GM, Ford and Chrysler produced cars that were increasingly cheap shoddy, unreliable, and poorly engineered and resisted any change to improve the technology, like radial tires, fuel injection, overhead cam engines, turbochargers, electronic ignition, antilock braking, air bags, catalytic converters, etc…   and cars were designed to wear out the day the warranty ran out.   People’s perceptions of “American” cars are that they are shoddy pieces of crap – even if they aren’t.  Once people believe you make junk, you won’t get a second chance….  and people talk to each other about their experiences…. and Consumer Reports systematically documents that you’re selling crap.  And Oldsmobile tries to create a diesel engine from an old Gasoline engine block, and then tries to run away from the disaster they created.

The other train of thought is that the issue has less to do with the cars than with the dealers and the “screw the customer” corporate culture.  Even if people understand that the Toyota and GM car were made at the same plant by the same workers from the same parts, they’ll pay $1000s more for the Toyota because they trust the dealership.  With the companies shifting corporate profits to the financing arms (so they can claim to the UAW that they’re losing money by making cars), the profit was in the financing, not selling the cars – dealers had any number of strategies to cheat the customer.  

One heard over and over on Clark Howard and Tom Martino’s radio shows follow the same basic script.   I went in to look at cars.   They sold me a car and told me a monthly payment and we signed a contract.  They told me to take the new car home and come back tomorrow to finish up the paperwork.  Tomorrow comes, and the dealer declares that unfortunately, the financing didn’t get approved because their credit isn’t good enough [which of course the dealer knew when they pulled the credit report], so the buyer doesn’t qualify for the interest on the contract (which had in small print “Subject to Credit Approval”).  So sorry for the misunderstanding.  So the payment is going to be *way* higher than the amount that was agreed to.   When the buyer says they want to back out because the dealer didn’t honor the agreement, the dealer informs them that unfortunately their old car has already been shipped out of state, and it isn’t possible to give them their old car back, so they can sign the new paperwork or take the dealer to court and sue them to try to get their old car back.  In a year or so, the buyer can’t afford the higher payments and the car ends up being repossessed.

Do that once and you make yourself some extra money…. but it guarantees that person will never ever buy a car from your company again.   Nor will anyone who ever hears that story.   The perception is that this isn’t a rogue dealer here or there, but a systematic way taught at Car Dealer School to screw the customer.  And this is only one of the strategies, let alone what the Repair Department is going to do to you for the next 5 years.

The basic conclusion of the Auto Task force about the way to ‘close the gap’ on the price gap between the GM and Toyota is to shut down GM dealerships and make it harder to get to a GM dealer and negotiate with more than one of  them    Only a Harvard MBA could come up with that as the solution (or a Detroit area GM car dealer).  Don’t they know you can now negotiate and buy the car on the internet, and merely have it delivered to the local dealer for pickup?

I wish some enterprising reporter would interview the members of the Auto Task force and ask them:

• Do you drive yourself to work in a car you pay for?
• Is it an “American” Car?
• When is the last time you personally bought a car from a dealer?
• Did you finance the purchase or pay cash?  Did you pay list price?
• When your car is in the shop, do you go to the dealership or does someone else do that for you?

Congress chastised the U.S. Auto executives for flying to Washington on a private plane and being “out of touch” with what real people have to deal with.   The same standard needs to apply to the Auto Task Force.  And ask President Obama if you can see his Driver’s license and what kind of car he drove before becoming President.   And spend an hour asking Brock Yates what his opinion is.

*** update ***

The New York Times has aa [profile] of the 31 year old man who had never been inside a car plant, that is the member of the Auto Task force deciding how to dismember G.M.  So that partially answers the question – he was 6 years old when G.M. learned what he just found out.

Perhaps it is better to not think you know what is coming.  Everyone who has had even a 1st year economics course knows you can’t monetize debt and not have consequences.  

The FDIC is out of money.  The banks (other than the “too big to fail” money center banks) are really pissed.  Geither has used the money they’ve been paying into FDIC for 50 years to bail out American Express and Goldman Sachs, who never paid a penny into the FDIC.  The FDIC wants to surcharge all of the country’s banks to build the fund back up.  The banks (via the ABA) are actively opposed to that plan.   Geithner’s plan B is to let the FDIC borrow $100 billion from the US treasury to keep destroying the banks he designates as the next target.  

Geithner has been threatening banks with seizure if they don’t cooperate with him.   Ben Bernanke does not run the Federal Reserve, the Board does.    The regional banks are controlled by their member banks.   People who run banks are smart and they are probably the only ones that have the power to “bell the cat”.

Tim Geithner has convinced current Fed Chairman Ben Bernanke to buy up  debt that Geithner needs to sell to finance the explosion of spending needed to fund the Geithner $700 billion fund to destroy all businesses.    If the Federal Reserve wasn’t cooperating, Secretary Geithner would have to sell US Treasury Bills (less than a year), Notes (1-10 years), and Bonds (10-30 years) .  For the government to acquire more power without the consent of the taxpayers, they have to borrow money from somewhere else.

In an unguarded moment (translation: no teleprompter), President Obama told the host on C-SPAN that the government is out of money.   [The dimwit host had reversed debt and deficit in his question, but at least he got a useful answer]. 

Well, we’ve reached the point that Geithner is losing control of the Bernie Madoff like game he has been playing.   People are not showing up to buy the instruments.  Bond Rating agencies are sending signals they may need to  downgrade US treasuries. 

Coercing the bond holders at Chrysler to surrender their “first in line” status in favor of the UAW will destroy the Bond market if this is allowed to stand.   Those bonds are held by folks like Pension Funds and Insurance companies that are holding annuity money.   If one person can wave his hand and make 400 years of commercial law “go away”, the entire system is doomed.   They cannot let his action stand.   It has turned into “it’s us or them”.   (Obama+Geithern vs capitalism).  Only one is going to survive.

This week’s competitive bid auctions are finding lenders wanting a higher interest rate from the US Treasury.    China seems to be looking to B razil as a place to start sending its investment money.  The market interventions of the past 8 months by the world’s central banks has been to try to force interest rates down to zero, because there is a huge consequence to interest rate swaps and LIBOR based credit facilities if the interest rates go up. 

All it’s going to take is one big event – like the government in Pakistan falling, Iran and Israel exchanging weapons fire, or South and North Korea turning into a hot war, and all bets are off.  The GM bankruptcy itself may be enough to start the chain reaction (since we’ve known it’s been coming for 6 months, proabably most people have already taken evasive action wtih GM).  The U.S. dollar has also been declining over the past few weeks – so be cautious about interpreting the stock market going up as meaning anything.    The two forces cancel out each other (for those people whose assets are not in U.S. dollars)

I wish I had a magic bag of pixie dust to spread around and make this all go away. 

Here is the [Bloomberg Story] today that provoked this rant.

[New York Times] is raising the alarm, too.