In the legend of Faust, the protagonist sells his soul to the Devil in exchange for knowledge and power. Needless to say, things end badly for one member of the transaction (hint: it’s not the guy with the horns on his head). A “Faustian bargain” has come to mean a deal where you surrender what’s truly important to achieve an ultimately worthless goal. Yes, I’m talking about GM. If the artist once known as the world’s largest automaker avoids Chapter 11 via a bailout deal with Washington (a.k.a. Mephistopheles), the contract will ensure its final, irretrievable doom.
In this case, as in so many others, the road to Hell is paved with good intentions. Ostensibly, bailout supporters want to “protect” Uncle Sam’s “investment” in GM– otherwise known as fighting a rearguard action against those who see a GM bailout as GMAB (Good Money After Bad). To that end, lawmakers crafting the $25b-plus suckle are talking-up the “strings” attached to the cash.
Speaking on yesterday’s Face the Nation, Barney Frank laid out his prophylactic proposals. The Massachusetts representative tasked with writing and proposing the bailout bill says the feds will only tender taxypayers’ money to Motown mismanagers if the beneficiaries agree to end to shareholder dividends, ban bonuses for employees who earn more than $200k a year, and submit to a government oversight board with power to veto corporate decisions.
First, the idea that GM would pay out shareholder dividends when it’s nose-up in the North Atlantic makes no sense at all. Oh wait. They already did that, didn’t they? For years. OK, well, what difference does a dividend payment make when GM is burning through one— make that two billion dollars per month? More to the point, since when does the U.S. federal government have the right to decide if and when a publicly-held company should or should not set a dividend? Frankly, Frank, it’s none of your goddamn business. At least it SHOULDN’T be.
As even a casual reader of this series will know, I consider GM CEO Rick Wagoner’s tenure at the top an utter failure. The GM Board of Bystanders that elevated and supported Red Ink Rick in his Reign of Torpor is criminally liable. In fact, there is but one group of people on planet Earth who could make more of a mess of GM than its current administration: politicians. To wit…
For better or worse (worse), politicians are paid a flat fee. Here in the real world, executives work for a salary and an annual bonus. In the ideal real world, the bonus is tied to something called “performance,” sometimes involving a personal target, sometimes company-wide. Many times, the system works (hence its existence). Other times (i.e. Rick Wagoner), it doesn’t (hence GM’s destruction). Normally, the free market cleans up the mess.
Removing the executive bonus system to satisfy a politician’s idea of class warfare is patently ridiculous. If GM is to recover, it needs [NEW] top executive talent. To attract same, it can either pay-out bonuses for top performance or… what? Inflate the base salary and benefits to skirt the issue? Maybe so. But again, is anyone more uniquely unqualified to make that decision than Washington politicians?
This brings us to the third leg of this inherently unstable federal stool: an oversight committee. With veto powers, no less.
The Wall Street Journal reports that the bailout bill will require the automakers and their unions to draw up plans on “how the companies would return to financial health in the longer term.” Congress will then appoint “guardians” who will tell GM how to implement the Congress-approved plans. Oh, and there could also be a Car Czar to tell the oversight committee what to tell GM executives.
Yeah, I want to buy a car from THAT company.
In truth, I’d rather the feds just GIVE GM the $25b, no strings attached. At least GM would have to come back with their begging bowl after they’ve pissed the cash away, rather than simply slipping an item into next year’s appropriations bill. I mean, when was the last time a federal organization said, right, we’re done. Disband us, close the office and fire the secretaries so we can all go home?
The federal proposal to “save” GM et al. is not a bailout. Not anymore. Now it’s a Faustian bargain between a failed company and a power-mad government. If approved, it will allow your duly elected representatives to gain control of an American carmaker to manipulate it for their own ends. Anyone who thinks those ends will be determined by a desire to create product and customer service excellence is seriously, dangerously deluded.
If I’m Dick Wagoner, I sign the deal in a heartbeat. It is all about maintaining his paycheck now. It stopped being about making tough decisions and running a profitable corporation a LONG time ago.
In truth, I’d rather the feds just GIVE GM the $25b, no strings attached, and say “Here. Spend it any way you like.”
Okay I’ll bang the drum (slowly) once more. We have one compatible precedent to which we can refer: Chrysler, 1979. This bailout was not tossed at Lee et al to be used carte blanche. A gov’t committee, no less, was appointed to regulate the process. Oh, and it worked, in spite of the legions and legions of naysayers.
If GM is to recover, it needs [NEW] top executive talent.
I agree “that top executive talent” is crucial, but let’s remember, it can be notoriously difficult to find. We all thought Jim Press was the cat’s meow back a couple of years ago.
Think British Leyland done on a “grand scale” by an entirely bankrupt (morally and fiscally) government, and you’ll see what faustian bargains REALLY are made of.
Can anyone picture hyperinflation in America’s future? I can. Starting in about 12-18 months, as a guess.
Just wait until next summer. Those of us lucky (or unlucky?) enough to survive it will henceforth look back upon it and call it the summer from Hell. Speaking of the Devil…
@TexN
Like recycled sports coaches who suddenly become prospective messiahs at their next stop, methinks Wags would quickly wind up in the driver’s seat at some other company, should he desire. That compensation plus his GM retirement plus the (probable) benefit of getting the heck out of Michigan should stand him in good stead.
This question has been on my mind for awhile.
OK so Rick has mentioned time and time again.
“chapter 11 is NOT an option” Right so Uncle Sam says no.For the record Sam is not my Uncle.
So if chapter 11 is not an option and the bailout
fails WTF is the other option?
Look, the bailout’s going to happen; the devil’s now in the details.
As it stands, the bailout’s details are guaranteed to wipe GM out. If you think product planning’s screwed up now, just wait until the Government is in charge.
Do you think the government will allow GM to shutter brands, cut off dealers, and abrogate their union contracts?
Will they allow GM to roll out niche vehicles like the Corvette ZR-1?
Will they approve profitable but gas-consuming new trucks?
Will they force management changes? And who would they get to manage GM in this scenario?
NO, no, no, and no
A bad deal, but one we’re gonna get whether it makes sense or not.
Just wait until Congress mandates that the taxpayers pony up for GM’s retiree and health care benefits. And if you think the UAW Job Bank is stupid, wait until we’re all paying for most of GM’s remaining union workforce to go fishing.
This is a boondoggle of the highest order.
“when was the last time a federal organization said, right, we’re done. Disband us, close the office, fire the secretaries so we can all go home?”
Good point. The amount of narcotics on the streets of America only exploded after the establishment of the DEA. Of course the DEA “had” to expand exponentially in turn. Problem with doctors is that they thrive on disease.
One group who shows that they’re still operating in the early 20th century mode is the UAW. They still don’t seem to understand how big their stake is in this. Rather than clamoring for a “bailout,” they should be stepping up and and really trying to come up with some sort of compensation plan for their members that will allow the Big 2.5 to stay in business. But as of today, they’re still saying, “we won’t cut wages or benefits.”
Heck, GM’s market cap is low enough that the UAW could just buy it outright and run it anyway they want.
Where is it written that a salary must include an additional bonus for performance? I’ve never gotten a bonus in my life, even when I was working for a salary, and other than one lawyer friend, nobody I know gets one.
Obviously I don’t move in bonus-rich circles, but it does seem a relatively recent abomination, this bonus thing, and I think an American thing as well.
Bonuses are required to attract the top talent? Oh? Is that who they’ve been attracting? I don’t think so. An employee (which is what a CEO is) who doesn’t get a bonus, only a $10 million salary, won’t work as hard? Where did that idea come from?
A chapter 11 reorganization is a can of worms – but so is a bail out called a “bridge loan to somewhere”. Honestly, I doubt that the shareholders have much say any more.
So, I’d prefer that GM would have to go before the courts and then if taxpayers feel generous – give them an expensive hand in the recovery.
Moral Hazard – there are consequences to holding on to a post WW II business model well into the 21st Century. GM only needs two or three North American divisions, tops.
… and don’t forget to give Rick a couple of Fiats on his way out.
Be careful what you wish for… GM has two choices: A. Chapter 11 and your creditor chose your fate. B. Government Bailout and Uncle Sam decides what’s best for you.
Hey if you want to live on government cheese, you can’t complain about the lack of smoked Gouda…
You know the “perp walk” where the Feds intentionally handcuff the rich/famous thief out through the front door in front of a thousand flashing cameras ostensibly to shame them? Well, I don’t know what the corporate equivalent of the perp walk is, but the GM execs and their enabling board who destroyed the wealth and reputation of a once fabled American company certainly qualify for it.
Although, come to think of it, I don’t think the word shame exists anywhere in their DNA.
Hey this bailout/oversight thing sounds like a good idea. We should let the gubment run healthcare too. It’ll be free! Sounds like a great plan.
“Hey if you want to live on government cheese, you can’t complain about the lack of smoked Gouda…”
Yes, Mr. Smith we can get you scheduled for an MRI. Would 2010 or 2011 be better for you?
Funny, the whole argument made me think of ‘stool’ too, but not the three-legged variety.
Barney Frank had a gay prostitution service operating out of his D.C. apartment at one time. Since GM is looking to screw its shareholders, vendors, workers, retirees, dealers, customers and taxpayers in one great big federally-funded orgy, Congressman Frank might have just the specialized managerial qualifications that will be needed for the company’s next phase.
Who painted that picture and what is the name of the painting?
Cicero, funny.
Can a “bail out” work at GM?
Yes, but only one way. There must be a charismatic leader to run the company. A leader that can inspire the employees, and “SELL” the American public on buying a car from a bankrupt comapany. It can be done. Sadly, if such a leader existed at GM or Chrysler, he/she already would have put the comapany into bankruptcy protection a long time ago, and would have focused on selling it as a good deal for the company, the public, and consumers. Instead we have a bunch wee, sleekit, cow’rin, tim’rous little beaties! Cowards who are content to have the company dragged kicking and screaming through a reorganization one way or the other. A reorganization that is inevitable.
Bankruptcy is a tool, that when used agressivley and timely can save a company. Any business executive that rules out bankruptcy as an option is a delusionional ego driven coward that cannot face the reality of being labled a failure, at least temporarily. But…Reality is coming anyway.
Who in GM or Chrysler can lead this process?
Cetainly not Red Ink Rick!
Snivleing cowards, all of them.
I said it once and I’ll say it again – GM should be left to fend for themselves. They made the mess, they need to deal with it.
And anyone that thinks we’re going to a social health care system in the US needs to put the pipe down. It at least isn’t going to happen in my lifetime.
This editorial doesn’t make much sense to me at all.
I pick only on one issue that I believe is a lot more important that it’s understood, the revenue distribution within a private enterprise.
It’s a standard defense the executives put out when their exorbitant salaries and bonuses are questioned; “we have to pay top dollar to top talent to attract it”. Except you and they have it backwards. The top talent doesn’t work too hard and is not motivated once the top dollar is paid. The top dollar is what motivates some of the top talent. But the real top talent is rarely motivated by dollars but rather various other aspects of the job.
The gov should just buy GM at its market cap. Then they can run the company any way they please. Freed from the greed of investors, GM could fire all of the managers and board members, replace them with cheaper managers of their choice, concentrate on building affordable green cars, and make sure that the workers get affordable wages and secure pensions.
In short, they could do anything and everything they want. And the cost to own is far less than the bailout amounts that are being bandied about.
ra_pro : But the real top talent is rarely motivated by dollars but rather various other aspects of the job.
This is very true. The best in almost any field do it for the love of the ‘game’, of the challenge, of seeing just how far they can go. For most corporate execs in America today the ‘game’ is how big a paycheck they can pull down and not how they can better a company or change an industry. (Compare a Wagoner to a Steve Jobs.) Their game is not too inspiring when you get right down to it: “I bankrupted the company but I got a huge payout!” (Looking at you Nardelli.)
The people saying “We have to pay top dollars to attract top talent” are also saying “Because if we don’t, they will embezzle the company”. Which would say a lot about said talents priorities. Ask yourself if it’s not a system fault in the economic system itself. Look around in that 700 billion dollar economic bail out, and ask yourself, who has gained money, and who has lost? Rick Wagoners annual fourteen million is bankruptcy proof. Who elses?
What it is all about, is embezzlement and extortion on a very high scale, an economic system that has built into itself the right to steal money, legally. It has nothing to do with keeping talents in town, but everything to do with grand theft on a large scale. Greed is good? Not so, when You end up paying the bill.
Can’t the government realize that its involvement will make GM worse, not better? Instead of getting involved in running the company, the government should:
— make GM declare bankruptcy,
— get rid of Wagoner and Lutz, and
— put up some cash to reassure customers that warranties will be honored.
Nothing else. That’s the only way forward that makes sense to me.
Indications today for a “Christmas Present” from congress to RIR Wagner look weak.
I doubt it is an onset of sanity, but we will take what we can get. Perhaps if GM has to declare before Barry,Harry, Nancy and co. can act, and the world doesn’t end (shock), we may get a shot at a new Debt-roit.
I’m curious-does anyone have an estimate on the cost per GM vehicle of the interest on their debt?
I am truely curious as to what the figure would be.
RF-Might make an interesting topic for a deathwatch.
Bunter
…and submit to a government oversight board with power to veto corporate decisions.
If this oversight board vetoes money for the next Corvette or Camaro, God help us all…
I bet more than half the folks who want a bail-out and “defend the American worker” and all that, probably drive some decideley non-union, non-American iron like a Toyota or a Bimmer.
As a poster here for about a year, and a reader of TTAC for I think two years now, I’ve never seen such relative support for the latest D3 fiasco. The Yanks have been hammered on this site when it comes to things like mind-boggling product decisions (Sclade hybrid anyone?), bone-headed branding, slacktastic workmanship and quality control in the product…the list goes on. But when the bell actually is pulled back for the final toll, everyone gets all teary eyed and remembers that lovably broken and dangerous Vega they had back in college as the good ‘ol days. Weird.
Everything has been according to Farago’s plan, the horse is behind the barn and the gun is drawn, PULL THAT TRIGGER ALREADY!
“…ban bonuses for employees who earn more than $200k a year…”
So RedInk Rick’s renewed contract will be for $199,999.00 plus bonuses of $24 Million?
Gov’t oversite??? I’m reaching for my bourbon and a very large tumbler when I click the Submit Comment button…
GM apologists rejoice! Barney’s on the case and he’ll take care of everything.
That guy’s going to do to GM what he did for Freddie and Fannie!!
I mean, when was the last time a federal organization said, right, we’re done. Disband us, close the office and fire the secretaries so we can all go home?
There was the RTC in the early 90s. Conrail started life as a fully nationalized entity and was brought to profitability and sold to the private sector. Maybe the followup question should be, “Which governmental organizations were created to deal with the sorts of problems that can be ‘solved’ and then forgotten about?” Because it’s not like we’re going to some day say, “Wow, we sure licked that national defense problem, time to plywood up the doors to the Pentagon.”
I think the absolute worst case scenario would be the blank check. Second worse would be out-and-out nationalization a la Conrail. Ideally, have the feds provide DIP financing after the Big 3 go Chapter 11.
Even Chapter 7 wouldn’t be too bad, in the long run; maybe some better-run organization could enter the domestic market with a low enough cost basis to be profitable.
It is an outrage to burden workers that make on average 25 $/hr to bail out lesser qualified and motivated ones that make 75 $/hr.
If this passes without major concessions by management and the unions, then every citizen should boycott these products in principle, not just because they are uncompetitive.
If B Frank wants to go through with this, then he must understand that this would be a long, drawn out affair. There should be very well though out five year long-term planning.
I understand there are lots of unemployed five year planners from the x-Soviet Union who are looking for employment.
Remember the original Chrysler loan bailout? All sorts of government bureaucrats and so-called ‘consumer advocates’ came out of the woodwork screaming that with the government $$ Chrysler should only be making K-cars with manual transmissions and no air conditioning.
After all, saving fuel was all-important. Whether anybody would buy those cars was another issue.
If govt. designs cars, who shall force us to buy the result ?
If you liked the “thought” behind the 85 mph speedo, get ready !
Corvair, that’s a fine story, but it’s false. The government held no non-economic sway in the Chrysler recovery. If I recall correctly (I may not after all this time), Chrysler actually made too many of the loaded luxury models, where customers were expecting to buy low-end (cheap) strippers.
Many times, the system works (hence its existence). Other times (i.e. Rick Wagoner), it doesn’t (hence GM’s destruction). Normally, the free market cleans up the mess.
I cannot recall ever seeing, hearing of, or witnessing a time when, applied at the level of executive managment, this system worked. Individual contributors and lower-level management, yes. The free market never cleans up the messes it makes. It just makes them larger and larger until corrected through regulation.
Man, McCain has really freed the nascent socialism in this country. Pretty awesome.
This is one of the best DW’s yet.
“If approved, it will allow your duly elected representatives to gain control of an American carmaker to manipulate it for their own ends. Anyone who thinks those ends will be determined by a desire to create product and customer service excellence is seriously, dangerously deluded.”
Regardless of your political affiliation, I don’t see how you could disagree with this statement.
faster_than_rabbit: The government held no non-economic sway in the Chrysler recovery.
The government “suggested” that Chrysler kill the R-bodies and larger V-8s as a condition for the loan guarantees (which effectively put Chrysler out of the recreational vehicle business). Since R-body sales had collapsed for 1980, and everyone thought that gas would be $3 a gallon (in 1979 dollars) by 1985, Chrysler didn’t put up any protest.
It transferred the Fifth Avenue nameplate to the M-body LeBaron…and watched sales skyrocket in the mid-1980s, as many traditional customers went back to real-wheel-drive cars.
Recreational vehicle sales eventually recovered, too, but Chrysler was basically out of that business by then.
faster_than_rabbit: If I recall correctly (I may not after all this time), Chrysler actually made too many of the loaded luxury models, where customers were expecting to buy low-end (cheap) strippers.
Yes, Chrysler initially sent well-optioned K-cars to dealers, as it was desperate for the profits from the loaded models. Only problem was that we were in a severe recession in the fall of 1980 (when the K-cars were launched), and historically buyers of Dodge and Plymouth compacts were more interested in basic transportation than luxury compacts.
faster_than_rabbit: The free market never cleans up the messes it makes. It just makes them larger and larger until corrected through regulation.
The free market is doing a good job of punishing auto makers who have failed to produce vehicles that customers want, or are poorly managed with too many brands or too high structural costs. The only problem is that management, labor and the sky-is-falling-because-GM-may-collapse crowd expect government to intervene and prevent the free market from working as it should. People love success, but have to accept that for the free market to work, failure is a critical part of the equation.
Mikey:
You think Red Ink Rick is the only guy who can declare GM Bankrupt? Its creditors can force them into Chapter 11 too. The only question is, will they?
I’m trying to see how this economy is going to recover, but frankly, I can’t.
First I graduate from college into a jobless recovery, now I graduate from law school into a recession. Wonderful.
And another thing: I heard people using the words “jobless recovery” up until like, last year. You mean to tell me that for the past 7 years we’ve just been “recovering” from the .com collapse?
Its no wonder people like Western European Social Democracy. At least over there when you get so frustrated looking for a job you give up you can walk around town and see pretty buildings!
Robert, you wrote,
“Removing the executive bonus system to satisfy a politician’s idea of class warfare is patently ridiculous. If GM is to recover, it needs [NEW] top executive talent. To attract same, it can either pay-out bonuses for top performance or… what?”
Point taken, of course, but I, uh, suspect that you, or I, or Stephen Lang or many others among us would do the job way better, for free.
No ? C’mon, nice view of Canada from RenCen, corner office at Saarinen’s Tech Center, unlimited track time at Milford, (and the Nordschliefe), Design Studio tours, travel to Europe, Australia, Japan, China ?
I’d pay them for this gig…
So Ford, Gm and Cry-sler can’t make money on cars in America? So how did Toyota, Honda, Nissan even Hyundai do it? Why aren’t they sucking on the tit? The UAW has ridiculously high contract costs? Why don’t the others? So because they all decided to settle rather than weather a strike or two many years ago we take it in the rear?
Can you just imagine what kind of cars the government will tell GM to build? And if we don’t buy them the government will install taxes and tariffs on cars they DON”T have a business interest in. Even if they make other cars cost way more people are still going to buy them, and buy used ones in greater numbers than domestics.
Politicizing the auto industry is not going to save jobs, for the transplants are going to cut too if they start to lose market share to US motors Inc.
A bit off topic, but to those (ok, one in particular) seemingly blaming the free-market for our current hardhip I ask: what free market? What we have is not even remotely close to a laissez-faire free market. It is closer to a command economy than a market one. The overwhelming ignorance of economics in this country allows craven ideologues in the media and politics to blame everything on capitalism and the evil capitalists for our troubles and thus appropriate ever more power and control.
A good economists’ take on this: http://www.georgereisman.com/blog/
Chrysler, 1979. This bailout was not tossed at Lee et al to be used carte blanche. A gov’t committee, no less, was appointed to regulate the process. Oh, and it worked, in spite of the legions and legions of naysayers.
It worked? So Chrysler’s NOT in Washington right now with the beggar’s cup outstretched? It’s OK for a company to have to be bailed out by the federal government every 20 years?
The Chrysler bailout was a failure; today’s events prove that. Chrysler SHOULD have been allowed to die, and THAT might have proved to be the best thing that could ever have happened to GM and Ford.
Kevin: It worked? So Chrysler’s NOT in Washington right now with the beggar’s cup outstretched? It’s OK for a company to have to be bailed out by the federal government every 20 years?
The Chrysler bailout was a failure; today’s events prove that. Chrysler SHOULD have been allowed to die, and THAT might have proved to be the best thing that could ever have happened to GM and Ford.
Bull. It did work. During the 90’s, Chrysler was on top of the world. They could design cars with the best of them, and could do it cheaper and faster.
But instead of correcting the problems with the cars by using better materials and what not, Eaton bailed and threw Chrysler to Daimler, who proceeded to drop Chrysler off a cliff to make Mercedes look good.
It had nothing to do with the 1979 bailout. Chrysler was a successful business in between there and now.
So Ford, Gm and Cry-sler can’t make money on cars in America? So how did Toyota, Honda, Nissan even Hyundai do it?By not having massive legacy costs, and by having flexible labor contracts. They were able to watch the Big Three and their labor contracts and say “let’s not get ourselves some of that.”