Brain-Jockey

Hedge Manager Dares to Speak Out On Obama

Written by Audrie Zettick on May 6, 2009

A departure from my usual longer posts (and something I’ll be doing more of). 

Here’s something worth reading and viewing, given President Obama’s bashing of Hedge Fund managers who supposedly held up the Chrysler bankruptcy because they wanted more than 30 cents on the dollar for their clients.  No matter what your view on Wall Street, hedge funds and big business, it’s worth the listen.

I Want My SUV: More Unintended Consequences On The Horizon

Written by Audrie Zettick on April 27, 2009

Being involved in government policy making is like watching sausage being made: after you’ve seen it done, you want no part of it. 

Guess that’s why I managed to escape my policy stints in some of the world’s largest government bureaucracies with a modicum of increased wisdom based on experience and a healthy dose of skepticism about government.  Among my lessons: 

Always assume your first try at a new policy won’t go as planned.  Triple the probability of it going wrong if you’re hell-bent on rocketing warp speed toward change. 

For good or ill (and usually for ill), there will be unintended consequences. Among many misfires we have had this year:

·         Banks on the dole.  Call it corporate welfare, bailout or stimulus, I was amused to see the supposedly strange (but predictable) behavior of some financial institutions: buying jets, remodeling offices and the like. (Reminder at old Slate article here:  I See Dead Bankers! Wall Street has become The Sixth Sense-filled with corpses who think they’re still alive.)

·         A knee jerk reaction as the U.S. House passed a bill requiring a whopping 90% tax on bonuses at AIG and other institutions that took TARP money–but it turns out many of these folks were working under a retention contract which promised them pay after they stayed a set length of time…and many were with the financially-healthy subsidiaries of AIG. So are we surprised when the talent needed at companies like this flee? Or that other financial institutions, hesitant to face micromanagement by the feds are scurrying to pay back TARP funds rather than stick with the Obama plan?  Oh, then there’s that problem with the bill being unconstitutional.

·         U.S. automakers GM and Chrysler had to be thrown multiple lifelines in the form of $17.4 billion to avoid bankruptcy, but it’s only the threat of that very bankruptcy that has resulted in movement toward hauling in labor and healthcare costs (see Chrysler in Canada here). 

Which leads me to the next unintended outcome of any new “economic stimulus” measures:  The success of car companies like KIA. 

With the U.S. government at the helm of GM and Chrysler, market forces go out the window.  President Obama has made it clear that he will “remake” the U.S. auto industry, ”forcing” consumers into smaller cars that are clean, economical and green.  During his campaign, he scolded auto makers for focusing on popular SUVS and not cars with improved fuel efficiency.     

Yet, KIA is currently building their first U.S. auto plant where their value-priced SUV, the Sorento, will be built.  My neighbors, many of whom had trailers hooked to their big SUVs at the recycling center this past Saturday to pick up free mulch, will be glad to know at least one company will still provide an SUV.    

Sweden To GM: A Fickle Finger

Written by Audrie Zettick on March 23, 2009

A while back, I wrote about how Bailouts Are Blarney, with the Irish government refusing to bailout failing Waterford Wedgwood PLC, their famous maker of crystal. 

Now, Sweden has put the kibash on bailing out failing Saab.  Who’d a “thunk” it?  This from a country that nationalized its banks.   Seems a bit fickle.

With GM’s withdrawal from Saab, the company filed for protection from creditors.  GM’s bankruptcy, of course, would have forced renegotiation of the union contracts that have hogtied any chance of the renewal of the automaker.

Mind you, GM is the one blamed for destroying the Saab brand; known for its uniqueness and quirkiness, sales plummeted drastically after GM purchased the brand. Once a small but highly-sought brand based on its performance, the brand image became muddied once GM started inserting parts from Opel and making changes to try to compete against BMW. 

The Swedish government saying “no” to a Saab bailout is probably akin to giving the U.S. automaker the finger.   

Bailouts Are Blarney

Written by Audrie Zettick on January 6, 2009

I’ve never been to the Emerald Isle, but I may have to plan a trip soon. 

With bailout mania still underway in the U.S. and Europe, I read about the recent financial troubles of Waterford Wedgwood PLC with more than a passing interest. Waterford Wedgewood, also the parent company to Royal Doulton recently was placed in receivership, after cutting jobs in Ireland and de-listing from the Irish stock exchange in December 2008.  

While the Irish government has said it will do all it can to keep Waterford in Ireland, they’ve also unequivocally said “no way” to a bailout in the form of underwriting the company’s bank loans.  The parallel to the problems with the U.S. auto industry are not obvious at first, but become more evident as you dig deeper.  In the past 12 years, Waterford’s management practices were questioned–everything from what they were producing (moving away from their celebrated hand-cut crystal to machine-produced items) to disputes with the union over work practices. 

In my opinion (remember I’m a marketing instructor), their paramount mistake was drifting from their decades-old competitive advantage: a niche providing high-end hand-cut class.  Instead, they muddied the Waterford brand with ancillary (machine-made) product lines until it’s hard to know just what it being made where–and consequently what the Waterford name stands for (apparently, low-cost overseas labor using machines somehow fits their target market—a trend that looks to continue).  Yes, they were trying to ride the trend of informal dining, but they did it at the cost of their core brand.  The response to cheaper competitors was to cheapen their own brand.  Rolex never responded to Timex that way.  And hard-core collectors of Waterford crystal willing to consider dropping $300 or more on a wine decanter will be hard-pressed to understand why the company touts links with Martha Stewart (whose brand is also found in Kmart).

(Of course, in weird sort of way, I’m reminded of how the Republicans muddied their “brand name” in the past decade or so…..)

But in all fairness, Waterford still touts its artisans and does use hand-cut techniques on the Waterford core crystal products.  But their higher union wages have forced them to look at how to compete with crystal products coming out of Eastern Europe at a lower cost.  

I commend the Irish government for sticking (so far) to their mid-2008 decision to avoid supporting a bailout. And I’m practicing for a trip to Ireland–even if it’s just a virtual one.  Here’s my first attempt:

Ni ceart go cur le cheile (there is no strength without unity).

Give Back the Bucks Before Bailout Redux

Written by Audrie Zettick on December 12, 2008

This latest round of bailout mania was similar to buying new tires for a car that really needs a transmission overhaul.  Nice idea, might be needed, but ultimately won’t make much of a difference.

At the start of bailout mania, it was common knowledge that the companies in trouble from the financial industry were among the biggest contributors to Federal candidates.  Since 2002, the financial sector has given more than $1.1 billion to congressional candidates. This isn’t a partisan issue, it crosses party lines.  

And now comes the auto bailout.  

Some might claim money doesn’t talk, but in this case, it’s screaming.  According to the nonpartisan Center for Responsive Politics (which runs the website OpenSecret.org), House members who voted for the bailout received significantly more money than those who did not.

“House Democrats voting to bail out Detroit’s Big Three have collected 44 percent more money, on average, from auto manufacturers, dealers and unions than Democratic opponents of the bill. Republican supporters have collected 62 percent more than opponents in their party.”

 Can’t wait to see the Senate figures.

 Bankruptcy versus Bailout: Where Money Counts 

For the automakers, one of the major differences between the option of bankruptcy and the government bailout is the effect on the unions.  Bankruptcy would virtually guarantee that union contracts become null and void and/or must be renegotiated. With a government bailout, there is no guarantee of union concessions.  (As a condition of the bailout, Sen. McConnell fought for a legislative alternative that would have required the unions would lower their wages to equal those of foreign car manufacturers who had plants in the U.S.–it didn’t fly)

This why we should all be worried about bailout redux: the United Auto Workers PAC gave $1,899,950  to Democrats in the 2008 election ($12,500 was also given to Republicans……this maybe buys a lug nut, not new tires).  

The money being thrown around by the auto industry itself is more evenly distributed  but GM, Chrysler and Ford still gave significant money.  Auto dealers traditionally give more to Republicans, most likely because their perspective is small business…policies traditionally supported by the GOP.  

Nancy Pelosi, in the 2008 cycle, received  $10,000 from the AFL-CIO  (which includes the United Auto Workers.  Rahm Emanuel received $4,000 directly from the UAW. Might sound paltry until you look at the big picture:    

“The UAW ranks 16^th in “heavy hitters”  for donations since 1989 — having given $25,188,550 (98% to Democrats)”

As Politico.com reported, Chrysler, GM and Ford spent $926,500 on federal candidates and political committees in 2008 — $167,500 of it during the period between Oct. 16 and Nov. 24 alone.

Since analysis shows a trend in how members of Congress vote on this issue based on donations, I call on our elected officials to give back the 2008 donations that appear to be creating a conflict of interest.

No new tires…..I want a new transmission.  

Buying In to Bankruptcy

Written by Audrie Zettick on November 20, 2008

Heritage Foundation’s Morning Bell today shone a light on the need for GM to be financially responsible to stakeholders by making plans for bankruptcy (even if only included in a back-up plan).  Drawing on a WSJ article, they noted that Americans are accustomed to buying from bankrupt organizations. 

Some in the mainstream media (MSM) as well a few (conservative?) pundits have tried to make the point that the bailout is preferable to bankruptcy.  Primarily, their argument is twofold: 1) consumers would cease to buy vehicles from the Big 3 and 2) GM would find it difficult to get funding after bankruptcy. 

I don’t buy these arguments.   On the first point, why would consumers stop buying from GM?  We fly airlines which are in bankruptcy proceedings and don’t seem to be concerned that the jets will fall from the sky.  I take my car to the local garage (not always the dealership) and, if Ford disappeared, I have confidence I could continue to get it repaired (it’s run great so far, in spite of 126,000 miles of wear).  With so many vehicles already on the road, demand for parts would continue, although admittedly there would be some shake up in the supply chain with the Big 3 cutting back on production (but isn’t overproduction one of the issues anyway–see my post on this).

Rick Newman at US News and World Report observes the many ways that GM could benefit from bankruptcy, not the least of which is the opportunity for real reform.  Reform would include the need to condense their divisions, which contain a great deal of overlap between the models in the various lines (but union contract renegotiation comes to mind too).  I’ve frankly never quite understood (aside from some production savings) why the Big 3 historically had cars that were virtual images of each other in different lines (look, there’s Ford Taurus, no, wait, it’s a Mercury Sable).  

Not everyone is concerned with GM’s ability to get financing post-bankruptcy.  Newman, among others, notes that

A bankruptcy filing doesn’t mean GM would go out of business. Some bankrupt companies do, but many write off debt, shed costs, dissolve unprofitable divisions, and emerge as healthier companies.

 

You can’t tell me that there isn’t value in their brand, the number of past customers and the future plans for new vehicles (see Newman’s Ten Cars That Could Salvage Detroit ).  Yes, GM would take a hit, but some saavy investors would step in with funds.  Let the free market reign. 

Tough Love for Detroit: No “Just-In-Time” Bailouts

Written by Audrie Zettick on November 19, 2008

“Google” a phrase like “Detroit auto bailout” and you’ll find thousands of articles, many bemoaning the state of the Big 3 U.S. automakers.  Search on the terms “Honda Indiana Plant” and you’re likely to get a bunch of hits showing articles from 2006 (like this one from CBS News) lauding the possible opening (and lobbying for) an American Honda manufacturing plant in Greensburg, Indiana.  

Be careful when you read your list of hits, though.  You might miss the one or two about the Honda plant that opened this week.  Yes, opened.

On Monday, a Honda plant with over 1,000 employees (expected to eventually employ 2,000 or more workers) opened, beginning the manufacture of the Honda Civic.   This follows expansion of a Toyota plant in Lafayette, Indiana, where the Camry began assembly earlier this year. 

As it should be, Honda is able to respond to marketing and economic conditions by producing the smaller more fuel-efficient Civic.  Toyota is contracting in some areas, adjusting labor and lowering SUV and truck production, to respond to conditions that favor the smaller Camry and Prius hybrid. 

It’s not that the Big Three don’t adjust.   They have tended to overproduce regularly, resulting in having too many cars to move (much to dealer complaints) and the resulting special incentives and worker layoffs.  Of course, prices then rise as, eventually, demand and supply meet a critical point.  This past summer, Chrysler shut down all plants for two weeks.

On the other hand, Toyota historically has held fewer days of inventory than the Detroit automakers.  Most of the time, this keeps them in strong financial position.  Sometimes it backfires, such in this past summer when consumers seeking smaller fuel efficient cars were forced to look elsewhere due to a 6-month waiting list at Toyota.  The irony: Toyota’s demand was up at a time when sales dropped dramatically for U.S. automakers. 

The difference between Toyota’s and Chrysler’s periodic shutdowns is more than scale.  These include:

• Lean Manufacturing: Toyota’s just-in-time inventory (or Lean Manufacturing) approach is part of a larger strategy that allows them to adjust where and what models they make.  Toyota’s renouned approach allows them to cut waste all along their production process. 
• Business risk:  The downside of running lean–running short of cars–has less of an impact on them then overproduction and carrying the inventory at the plant or at the dealers. 
• Economic Impact:  Toyota’s temporary labor reductions and model reshuffling affects the local economies less than Detroit’s actions.  Among the strategic measures implemented by Toyota: shutting production at all plants for two extra days in December, laying off some temporary workers and eliminating one shift making the Toyota Tacoma at the California-based plant they share with GM.  Compare this to Chrysler’s shutting down for two weeks or laying off 1,000 workers.  

We’re not talking cost of labor here, we’re talking plain old business planning.  What makes lawmakers think that bailing out the Big Three will change their management practices?  Or, more frighteningly, having government at the helm (a la Pelosi) will result in effective management? 

Yes, there will be regional economic fallout, but it’s time for tough love for the U.S. auto industry.  Detroit sees us as a source of funding.  Toyota and Honda see us as consumers, and plan accordingly.  I vote for the latter. 

Gluttons for Tax Dollars: Bail-Outs R Us

Written by Audrie Zettick on November 17, 2008

I’m not a big advocate of slippery-slope syndrome.  You know, thinking that every action or policy leads one down a road of incremental steps, until you inevitably end up with some undesireable outcome.  With some exceptions, I don’t look for that slope behind every vote, executive order or policy proposal.  Perhaps it’s because I’ve a healthy respect for less government and assume people see the world the way I do. 

I initially saw the bailout as one of those rare circumstances where government intervention was warranted because one sector of the economy threatened to take down the whole.  Silly me (nerf bat to head).   The $700 billion bailout is a slope with a big incline and we’re careening toward the bottom fast.  Or, more accurately (mixing my metaphors)–the bottom of the trough.

We’ve done government bailouts before and the economy and country lived successfully through them.  The savings and loan crisis (good background here and here) of the 1990s and the Chrysler bailout (see Heritage Foundation here) come to mind.  But as some policymakers point to the (debatable) success of these past efforts, the “gimme” syndrome is upon us, and everyone’s lining up for some of the goodies –unions, automakers (and their supply chain), wall street, even main street.   We’re all shopping at Bailouts R Us. 

I couldn’t agree with Michael Barrett more.   

“Small businesses still cannot get money, people are still getting laid off, and most of the people in our government still have their heads up their butts refusing to acknowledge that the real problem is trying to bailout these companies and banks in the first place. How can a capitalist system work if the government keeps trying to monkey it all up?”

 

 We got into this complicated mess for many complicated reasons, not the least of which is that the federal government injected its policies into the mortgage business via Fannie and Freddie, revised Community Reinvestment Act guidelines that resulted in banks lowering lending standards but passing the risk to others, and HUD directed Fannie and Freddie to make loans to those with below median incomes for their areas of residence.  

Attempts at bailing out AIG are already backfiring, as more funds are needed (they are now also feeding at the $700 billion trough) and its become apparent to some (especially the AIG stakeholders) that private investment might now be a better rescue alternative.   TARP money may be used to bailout Detroit’s bloated union pension obligation.

 Buying Off Main Street – 

Main Street’s trough is ready to be filled:  enticing us to go more in debt on car purchases by allowing write-off of interest, sales tax (see B. Mikulski proposal) and allowing certain mortgage holders to negotiate for lower mortgage payments IF they fall behind by a couple of months payments (FDIC proposal here).  (Don’t get me started with the law of unintended consequences on that last one).  And let’s not forget the proposed Economic Stimulus Package, Round Two. 

Collectively, we all need a bib from chowing down on the slop of tax dollars.  But our kids are going be doing the mopping up. 

Obama: Dodging the Tough Issues Through Resignation

Written by Bill Schaller on November 13, 2008

At this time, is Obama more effective as a Senator or as a President-elect?