U.S. Following the GM Model of Failure

Treasury Would Own GM Majority Under Restructuring Plan

April 27, 2009

Detroit News - The U.S. Treasury Department would own a majority stake in General Motors Corp., have the right to appoint all of its directors and have veto power over all shareholder actions under the company's new restructuring plan unveiled Monday.

The Obama administration hasn't agreed to GM's plan yet -- ahead of a June 1 federal deadline. "The administration has made no final decision regarding the treatment of its current loan to GM or with respect to any future investments in the company," the Obama auto task force said in a statement.

White House spokesman Robert Gibbs said Monday the government has "no desire to run an auto company on a day-to-day basis."

But the dramatic move means that at least temporarily the U.S. government would have the right to call all of the shots at the Detroit automaker -- as part of its $15.4 billion in loans to GM to date. GM said Monday it expects to receive another $11.6 billion in loans from the government this year.

"As a result of its ownership of GM common stock, the U.S. Treasury will be able to elect all of our directors and to control the vote on substantially all matters brought for a stockholder vote," GM said in a statement. "In addition, through its stockholder voting rights and election of directors, and its role as a significant lender to us, the U.S. Treasury will be able to exercise significant influence and control over our business if it elects to do so."

Anthony Pratt, an auto analyst at PwC Automotive Institute in Detroit, said the government hasn't been afraid to exercise its influence to date -- noting that the Obama administration had forced out GM Chairman and CEO Rick Wagoner last month. "They have considerable clout," Pratt said of federal officials. "They will have considerably more authority, and I don't think they will be afraid to exercise that authority."

The Obama auto task force also directed GM to replace a majority of its board of directors...

GM's New Road Map: Partial Nationalization

April 28, 2009

Washington Post - Once a symbol of capitalist might and U.S. industrial prowess, General Motors would be half owned by the Treasury under a new sweeping plan that would also shut down GM's Pontiac operations, lay off 21,000 workers, and impose harsh terms on the company's bondholders... If the plan goes forward, it would mean a leaner and less indebted GM, formally controlled by the federal government...

"Government ownership is an unfortunate outcome of this, not a goal," said one person familiar with Obama administration deliberations and who spoke on condition of anonymity in order to preserve his relationships with officials. He said the government "could have gotten nothing for something, or something for something" and that it insisted on a 50 percent stake to leave open the potential to recover some of the $18 billion the Treasury Department has already lent GM and the additional $9 billion that it would inject under the new plan...

GM Told to Prepare for Bankruptcy Filing

April 14, 2009

Reuters - The U.S. Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by June 1, even though the automaker has publicly stated it could reorganize outside of court...

Bush OKs $17.4 Billion Bailout of the Auto Industry

December 19, 2008

Associated Press - Citing imminent danger to the national economy, President Bush ordered an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans and demanding tough concessions from the deeply troubled carmakers and their workers.

Detroit's Big Three cheered the action and vowed to rebuild their once-mighty industry, though they acknowledged the road would be anything but smooth as they fight their way back from the brink of bankruptcy.

The autoworkers union complained the deal was too harsh on its members, while Bush's fellow Republicans in Congress said it was bad business to bail out yet another big industry.

Bush, who signed the massive $700 billion rescue for financial institutions only this fall, said he was reluctant to approve yet another government bailout of private business. But he said that allowing the massive auto industry to collapse in the middle of what is already a severe downturn "could send our suffering economy into a deeper and longer recession."

Speaking at the White House, he also said he didn't want to "leave the next president to confront the demise of a major American industry in his first days of office..."

Some $13.4 billion of the money will be available this month and next — $9.4 billion of it for General Motors Corp. and $4 billion for Chrysler LLC, two auto giants that have said they could be facing bankruptcy soon without government help. GM is slated to receive the remaining $4 billion in loans after more money is released from the financial rescue account. Ford Motor Co. says it doesn't need federal cash now but would be badly damaged if one or both of the other two went under.

Under terms of the loans, the government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry. Bush said the companies' workers should agree to wage and work rules that are competitive with foreign automakers by the end of next year.

And he called for elimination of a "jobs bank" program — negotiated by the United Auto Workers and the companies — under which laid-off workers can receive about 95 percent of their pay and benefits for years. Early this month, the UAW agreed to suspend the program.

Meanwhile, Treasury Secretary Henry Paulson said Congress should release the second $350 billion from the financial rescue fund that it approved in October to bail out huge financial institutions. Tapping the fund for the auto industry basically exhausts the first half of the $700 billion total.

If the carmakers fail to prove viability by March 31, they will be required to repay the loans, which they would find all but impossible. A firm will be deemed viable only if it can show positive cash flow and can fully repay the government loans.

Friday's rescue plan retains the idea of a "car czar" to make sure the companies are keeping their promises and moving toward long-term viability...

As General Motors Goes, So Goes the Nation (Excerpt)

March 3, 2009

The Cutting Edge News - The story of General Motors is in many ways the story of America. In 1953, at the peak of its dominance, its President Charles Wilson declared before Congress that what was good for the country was good for GM and vice versa. Edwin Black’s award-winning book Internal Combustion quotes his exact words when during a Congressional hearing Wilson was asked whether he saw a conflict of interest in his becoming Secretary of Defense:

“I cannot conceive of one," replied Wilson, "because for years I thought what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big.”

GM’s rise to power and decline towards insolvency parallels the rise and fall of the Great American Republic. Overconfidence, hubris, lack of courage, foolish decisions made, and crucial decisions deferred have been the hallmarks of GM and the U.S. ...

The decline of GM is a testament to how poor strategic decisions over the course of decades will ultimately lead to collapse. The United States has followed the GM model of failure for the last three decades. The U.S. has too much debt, too much bureaucracy, too many government supported industries, too many agencies, too many employees, and $53 trillion of unfunded future liabilities. See any similarities to GM? Can the U.S. avoid the fate of GM, or is it too late?...

The best business decisions are made after open debate that includes dissenting opinions and arguments. Only great leaders allow this type of decision making. Alfred Sloan led GM for over 30 years, retiring in 1956. GM’s profit in 1955 had reached $1.2 billion ($8 billion in today’s dollars). It was on top of the world. In 1955, GM employed 624,000 Americans. Their market share peaked at 54 percent in 1954, the same year they sold their 50 millionth automobile.

After the retirement of Sloan, a visionary leader failed to materialize...

GM sold its soul to the devil of debt and its high margin to low mileage vehicles in the 1990’s. SUVs generated a profit of $10,000 to $15,000 per vehicle, even with GM’s bloated cost structure. Rather than improve their assembly line efficiency, product design and quality, or solidify their balance sheet, the company chose to use its GMAC subsidiary to make loans to subprime borrowers at 120 percent of the car’s value. After 9/11, GM showed their dedication to the flag by giving cars away with 0 percent financing. Amazingly, when you provide 0 percent financing to people with 550 credit scores, you can indeed sell millions of Escalades and Hummers.

Giving away cars for free was so successful, GM decided to parlay their expertise into giving homes away for free. They bought Ditech in 1999, just in time to catch the greatest housing bubble of all time. Ditech was a pioneer in offering 125 percent loans, in which the borrower could get more than the property was worth. It specialized in no-documentation mortgages and stated income loans. How could lending someone 125 percent of a home’s value with no proof of income or assets possibly go wrong? To quote Claude Rains from Casablanca, “I'm shocked, shocked to find that gambling is going on in here!” GMAC surprisingly lost $8 billion in the last two years.

Luckily, the American taxpayer has stepped in to provide GMAC with $5 billion of TARP so they can continue to allow GM to sell more cars at a $2,000 loss per car. No need to worry, they’ve hired some Wall Street wizards from Citicorp who have figured out that they can make it up on volume. General Motors has lost $72.5 billion in the last three years. Yet the American taxpayer is still propping up this failed entity!

The United States peaked as a manufacturing economy in 1960, with manufacturing employees making up 26 percent of the workforce. They now make up less than 10 percent of the workforce. The U.S. decided to outsource manufacturing jobs because we were going to do the thinking for the world. Why get your hands dirty creating things when our brilliant MBA trained geniuses could turn loans to deadbeats and frauds into AAA-rated mortgage backed securities? The U.S. decided to take the easy path of financial engineering rather than the hard path of creating products that other countries would buy.

The trade deficit caused by decades of choices by government and industry reached $677 billion in 2008. These deficits were always unsustainable. Borrowing from the Chinese and Japanese to buy stuff produced by China and Japan could never go on forever. Instead of realizing this imbalance and taking actions to gradually rebalance the world financial system, our financial leaders and Federal Reserve reduced interest rates and encouraged the imbalance to grow, until it collapsed in 2008. Now their solution is to lower rates to 0 percent, devalue the currency, and encourage further borrowing. Sounds like choices made by GM in 2001.

When the country produced products that the world wanted, median family income rose at an annual rate of 3.7 percent above inflation. Since 1970, using government-manipulated inflation statistics, median family income has been stagnant. If a true inflation factor was applied, the median family has lower income today than they had 30 years ago. The only way people have “achieved” a better life is through the use of debt, which has been encouraged by the government, Federal Reserve and banks. This encouragement led to the collapse of the great American Ponzi scheme in 2008.

The decades of allowing our economy to be hollowed out and shipped to China is coming home to roost. Our financial geniuses have essentially brought down the worldwide financial system by selling foreign countries an alphabet soup of MBSs, CDOs and ARMs. Manufactured economics--not manufactured goods--has been our contribution to the world in the last eight years. Now, we have delegated the responsibility of our corporations to the U.S. government bureaucracy. Lee Iacocca explained years ago how well the government runs things, when he quipped:

“One of the things the government can't do is run anything. The only things our government runs are the post office and the railroads, and both of them are bankrupt.”

Rather than address the structural problems of our healthcare and social security systems, our government politicians push off the issues until after the next election. They have been doing this for 30 years. This is why former U.S. Comptroller General David Walker has described these cowardly politicians as displaying “laggardship” rather than leadership. Our elected leaders flounder from crisis to crisis using stopgap methods to plug holes in the ship of State while ignoring the huge iceberg on the horizon.

While the U.S. Titanic steams full speed ahead toward the iceberg of unfunded Social Security, Medicare and Medicaid liabilities, our politicians spend our tax dollars on digging holes and then filling them up again. As these future unfunded liabilities continue to rise, the government’s solution is to print money, keep interest rates at 0 percent, devalue the dollar, and hope for the best. The U.S. depends on foreigners to buy more than 50 percent of our newly issued debt. When you owe $10.7 trillion to others, you usually don’t get to dictate the terms. Today, the U.S. is asking foreigners to lend us money for 30 years at 3.5 percent while telling them that we will pay them back in dollars that will be worth 30 percent less in the next five years. Even a Wall Street CEO could figure out this isn’t a good investment.

The burning platform that is the U.S. economy is now a “ten alarm fire." Many say collapse is imminent. Where are the signs indicating that is not the case?