But It's Even Worse, Isn't It?

If you wait long enough, somebody's probably going to articulate what you are thinking, and probably say it better. Case in point: I haven't had much time to type out my thoughts on the nation's fear of "nationalization", but Robert Reich does a pretty good job of describing something that's been bothering me:

The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.

In terms of the companies lining up for bailouts,

If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second -- before taxpayers get stuck with the astonishingly-large bill -- I would like to hear it.

I completely agree. But there's something Reich doesn't mention that concerns me: Our current bailouts aren't working. That is, it may cost us more to continue bailing out loser companies while declining to nationalize them than it would if we nationalized them, ate their bad debt and, as quickly as possible, restored them to private ownership. (Part of the reason, of course, is the appalling greed of incompetent managers.)

I can also tell you this, not far off from one of Reich's points - Chrysler is a black hole. If it weren't, Cerberus would be bailing it out itself. They shouldn't be invited back for more "loans" or bailout funds, save perhaps a bridge loan to help them seal a takeover deal with a viable company.
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Addendum: "Moral haz... whuttard?" David Ignatius flat-out calls for subsidy:

How will the managers of the Bad Bank coax the gremlins out of hiding? With money, of course -- buying up an estimated $1 trillion to $2 trillion in toxic paper. Will the government overpay? Of course it will, especially at first, as it discovers fair prices for securitized debt for which there isn't now a functioning market.

Anybody even casually conversant with this crisis knows that the government will overpay because to do otherwise won't help the banks. We can buy them for the pretend value the banks presently use, knowing we're paying probably two, three, four times their actual value, removing a huge liability from the banks' shoulders, then hope that with actual assets back in their coffers banks will return to "business as usual". Or we can try to come up with something approximating market value, force banks to report multi-billion dollar losses on those assets, and... then most of them have to admit insolvency.

At least people seem to be through arguing that if the taxpayer ends up owning these toxic assets, there's a chance of "turning a profit". Does Larry Kudlow blush when he reads crap like this, or does he shrug, smile at the corporate interests he serves and say, "It was worth a shot."

Because That's What They Would Be Doing?

Thomas Friedman sings a tired old refrain,

To top it off, we’ve fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money - rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.

Now, I'm not saying that people who become MBA's or lawyers couldn't have productive lives as engineers and computer programmers. But how many of them do you suppose wanted to enter those professions? Friedman also seems to believe that pretty much all of the "best and the brightest" want nothing more than to chase the almighty dollar. Not everybody chooses to work for Wall Street or BigLaw.

I suspected long before I reached that point, but my second semester of organic chemistry sent home the message that I wasn't going to be spending my career in a chemistry lab. Please, don't judge chemistry by organic chemistry alone - a tedious bore of a subject that is best "mastered" through rote memorization - but for goodness sake, not everybody who is good at crunching numbers on Wall Street would be particularly useful in scientific or engineering fields. Maybe they would be accountants or lawyers, or economists, or politicians.

For that matter, who says the people who crashed and burned the world financial system are "the best and brightest" at all? Friedman seems to be falling for a pretty typical American conceit that anybody who makes a lot of money is among the "best and brightest", even if they can't change a light bulb unassisted. What makes the people who crashed Bear Stearns, Lehman Brothers and WaMu any better than the people who crashed Chrysler and General Motors? If it's such a big deal that GM is gushing red ink to the tune of $74 billion over four years "yet you can count on one hand the number of executives who have been reassigned or lost their job", what's the body count over at Citigroup? It's the auto companies that are "giant wealth-destruction machines"?

When we look at the decline of the nation's newspapers, including the New York Times, can we turn a mirror on Friedman? Friedman likes to look down on GM, but what about his own employer? At what point do we declare that newspapers have "become giant wealth-destruction machines", and insist that it's ridiculous to pay people six figure salaries to write syndicated columns when they could be out inventing something?

I know, I know.... "That's different."

Externally Imposed Business Models

Remember that externally imposed business model that some people and politicians, including Thomas Friedman, want to impose on the Big 3? Greener, more fuel efficient cars, with hybrid engines? Here's a bit of market reality to remind us that the Prius isn't quite the same as Friedman's "iPod of luxury SUV's", the Lexus RX400h.

No, potentially the worst piece of [U.S. economic] news passed by almost without notice: the decision by the Japanese carmaker Toyota to hit the brakes on its construction of a new factory in Mississippi. That decision wrapped up the past and future prospects for the US into one unhappy package. If Toyota cancels its plant, the US economy won't collapse, of course. But it is more than just a bad omen. It's a warning of what is to come for the Federal Reserve and the incoming Obama administration.

Toyota's new car plant wasn't just any assembly line. It was to be the first US factory to make the famous Prius hybrid. Toyota had already invested $300m in it – but it may prefer to kiss that money goodbye than commit the extra $1bn needed to open it.

Prius sales are way down - "in November 2007 Toyota sold more than 16,000 Prius models. Last month it sold just 8,000." But that's not just because gas prices have dipped; it's also a symptom of the bad consumer credit market.

Disdain for Factory Workers

William Kristol, who at times seems to look down on everybody, cautions both parties and the media about looking down at auto workers.

Today, G.M., Ford and Chrysler get no respect. Maybe they don’t deserve much. Detroit has many sins to answer for, and it’s been doing plenty of answering. But — and I say this as someone who grew up in non-car-driving family in New York and who is the furthest thing from an auto aficionado — there is a kind of undeserved disdain, even casual contempt, that seems to characterize the attitude of the political and media elites toward the American auto industry.

Was noblesse oblige a lesson taught at Irving Kristol's dinner table? Today, the wealthiest like to pretend that they were born with no advantage, that no serendipity, inheritance, and nepotism played no role in their success, and that if you are less fortunate it's an indictment of your lack of resolve.

By way of example, has Mitt Romney ever admitted the significance of his father's success and name to his own achievements, let alone acknowledged that he's the millionaire son of a millionaire in no small part due to the efforts of unionized auto workers? When he speaks of his father's blown opportunity to negotiate a new type of labor-management relationship with the UAW, could it be because George shared (perhaps inculcated) Mitt's contemptuousness of unions? Can you imagine candid admissions of how privileged childhoods and powerful parents paved a path to easy prominence from, say, Jonah Goldberg, George W. Bush, David Frum, John Podhoretz, Michael Reagan, Robert and Fred Kagan.... I'm not sure that Kristol has ever candidly acknowledged his own privilege, but this editorial suggests that he is aware of it. Sure, there's a cynical part of me that thinks he's advancing the political reality described by Dick Cheney - that causing the Big Three to fail will turn the Republican Party into the "Party of Hoover," and I'm not endorsing his simplistic analysis of the motivations of either party - but for now I'll give him the benefit of the doubt. Particularly given this:

Now there are other ways to explain the disparate treatment of G.M. and Citigroup. Finance is different from manufacturing, and banks from auto companies. It may be that the case for a huge bank bailout was strong, and that the case for a more modest auto package is not. Still, it seems to me true that the financial big shots haven’t been treated nearly as roughly in Congress or in the media as the auto executives, who have done nothing remotely as irresponsible as their Wall Street counterparts.

As you know, it's worse than that. Companies that would have collapsed in a free market are paying shareholder dividends, gargantuan salaries, and even larger "retention bonuses" (to workers who would otherwise... go where?) with taxpayer money.

Meanwhile, on the right, free-market analysts have explained that our regulatory scheme of fuel-efficiency standards is counterproductive. But despite the fact that the government is partly responsible for the Big Three’s problems, the right hasn’t really been stirred to enthusiastically promote a deregulatory agenda to help the auto companies. What excites it is mobilizing to oppose bailouts for unionized workers.

I have to take issue with that. Kristol's point might be stronger but for the fact that every major car company that is not failing is headquartered in a nation that imposes greater regulation, and in which tax policies have long created high gas prices. Congress has been complicit in preventing the regulations it passes from having teeth, such that the domestic auto makes were able to build huge gas guzzling fleets outside of the limits set by CAFE, but it now appears that had those regulations been more comprehensive, the Big Three would not have experienced their huge drop off in sales the second gas hit $4/gallon. If a regulatory lesson is to be learned, it's that Congress could have better shaped the product line of domestic manufacturers by raising gas taxes than through a body of complex, loophole ridden regulations.

Last week, Senate Republicans picked a fight with the U.A.W. on union pay scales — despite the fact that it’s the legacy benefits for retirees, not pay for current workers, that’s really hurting Detroit, and despite the additional fact that, in any case, labor amounts to only about 10 percent of the cost of a car. But the Republicans were fighting Big Labor! They were standing firm against bailouts! Some of the same conservatives who (correctly, in my view) made the case for $700 billion for Wall Street pitched a fit over $14 billion in loans for the automakers.

Whoah - Kristol's actually bringing facts into the debate. Is that allowed?

I personally don't think the case was made for the $700 billion financial industry bailout, save in the sense that "we don't know what will happen if we don't try to bail out the banks". Sure, you can get my support to build a $700 billion wall between myself and a freight train if I can't otherwise avoid being hit, but that leaves no time for serious reflection or evaluation of how that money is best spent. I'm not convinced at this point that we should continue to bail out financial institutions - they have not been responsible with the money that's been given to them, they're not using the injected liquidity to increase lending, and there does not appear to be any good reason why the government can't tell them, "You have time to put together Chapter 11 plans, so do that. If you're failing, come to us and we'll try to arrange for you to be taken over by a stable institution, or perhaps help ease you into that Chapter 11 reorganization."

The real issue is, should it be the role of government to bail out businesses? Should we (supposedly) champion free markets then declare, "That company is 'too big to fail'" the moment managerial incompetence threatens the viability of a large company, stepping in with a multi-billion dollar bailout? Kristol is right to question why self-professed conservatives are pitching a fit over a $14 billion bailout after signing on to a $700 billion bailout. But he errs in suggesting that it's the size that matters - that if you support the large, it follows that you should support the small. The fundamental question, if you actually believe in free markets, is whether you should bail out any companies at all. Had the managers of these financial giants seriously believed that Uncle Sam would tell them to go to bankruptcy court, at least some of them would probably have made better decisions. And it would be harder to feel sorry for those who didn't. (Assuming it's possible to feel sorry for them.) But back to Kristol's larger point:

Whichever party can liberate itself from its well-worn rut to propose policies that help both American businesses and workers has a great opportunity. That party’s leaders could begin by offering management and labor at the Big Three a little more sympathy, and heaping upon them a little less calumny.

Oh, I'm not sure how much sympathy they deserve, and I somehow doubt that Kristol is the hugging type. But some understanding?

All You Need Is A Perfect Product!

After months of describing how the Big Three need to be forcibly reinvented, and required to build cars under government-imposed environmental and fuel efficiency standards that don't apply to their foreign competitors, Thomas Friedman has shifted course. Sort of.

Over the years, Detroit bosses kept repeating: “We have to make the cars people want.” That’s why they’re in trouble. Their job is to make the cars people don’t know they want but will buy like crazy when they see them. I would have been happy with my Sony Walkman had Apple not invented the iPod. Now I can’t live without my iPod. I didn’t know I wanted it, but Apple did. Same with my Toyota hybrid.

It says something about Friedman's candor that he writes "Toyota" instead of "Lexus", and "hybrid" instead of "SUV hybrid". There's a world of difference between Toyota's least fuel efficient hybrid and the Prius. Had Friedman wanted a roughly equivalent vehicle at a slightly lower price, with slightly greater fuel efficiency, he would have purchased a Highlander hybrid. Was he paying extra for the additional power of the Lexus, even at the expense of fuel efficiency? Real wood trim instead of plastic?

I have a Toyota hybrid. It's nice, it's quiet, it has very low emissions, it's... fuel efficient for a car with its feature set, but hardly the most fuel efficient vehicle on the market. Could I live without it, or easily substitute another vehicle for it? Sure. It's a car. I would love to hear Friedman explain why he can't live without his hybrid, rather than having him simply suggest that it rounds out his life like his... iPod. The fact is, Friedman can easily afford a luxury SUV. He can easily afford the gas that fills it, and could easily afford it at $4, $6, or $10/gallon. When he has argued for higher gas taxes to force consumers to buy vehicles like... his? He sounds a bit like a modern Marie Antoinette.

As for building the cars people want to buy, let's go back a year ago to Friedman's et tu, Toyota, after that company joined the Big Three in opposing more stringent CAFE standards.

Now why would Toyota, which has used the Prius to brand itself as the greenest car company, pull such a stunt? Is it because Toyota wants to slow down innovation in Detroit on more energy efficient vehicles, which Toyota already dominates, while also keeping mileage room to build giant pickup trucks, like the Toyota Tundra, at the gas-guzzler end of the U.S. market?

“Toyota wants to keep its green halo and beat G.M. in the big trucks, too,” said Deron Lovaas, vehicles expert at the Natural Resources Defense Council.

Friedman has consistently conflated two different questions - what vehicles consumers want, and how gas prices affect their choices. Remove gas prices from the equation and, as I quipped the other day, it appears that Americans want a vehicle the size of a small house that does 0-60 in less than 10 seconds and is available for a price between $20-$30K. Toyota's ability to produce vehicles that people want in an era of high gas prices comes, in no small part, from the fact that their domestic market has faced very high gas taxes, and thus very high gas prices, for many years. They, like the Big Three, also wanted to be able to take advantage of U.S. consumer preferences for large, low MPG vehicles.

When I was last shopping for cars, I really didn't see anything transformational. I saw a lot of sameness from one auto manufacturer to the next - domestic, European, Japanese, Korean.... Within the category of vehicles I was considering (and giant SUV's, trucks and Hummers weren't under consideration), my decision was made in part on fuel efficiency (a hybrid versus a non-hybrid model), but that was well behind issues of vehicle quality and expected longevity on my "wish list". My sentiment is apparently not atypical, and presumably is why Lexus offers Friedman's SUV in a better-selling non-hybrid model, and Toyota offers the Camry and Highlander in better-selling non-hybrid models.

But isn't that the rub? Friedman wants Detroit to develop a one-size-fits-all vehicle, popular with consumers regardless of gas prices, but also green and fuel-efficient. A wonderful concept, but something that nobody in the auto industry, including the most innovative, efficient, environmentally conscious manufacturers, believes exists. You want to force consumer choices in that direction? Go back to arguing for high gas taxes or setting floors on gas prices, such that consumers are compelled to buy the vehicles you want them to buy, but don't pretend that you're arguing for a context in which they will be able to buy the vehicles they want.

What A Pathetic Display

The Washington Post, observing that the only proposal to save the auto industry is failing in the Senate - due to, of all things, a Republican demand for what amount to wage caps on auto workers - "What's Plan B?" It astonishes me that a Republican President can't convince enough of his own party's senators of the urgency of action, that they drop their filibuster threat. In what seems like "business as usual", a scheduled vacation appears more important to the Democrats than actually forcing the Republicans to break out their encyclopedias and, if they truly wish to block the bill, actually filibuster.

The short answer to the question, "What's Plan B", appears to be to use TARP money for the bail-out, which could mean that none of the restrictions, compromises, or demands placed upon the Big Three by the bailout bill will be implemented. The Republican Party may be giddy with the idea of harming or breaking the UAW and benefitting the foreign auto manufacturers who are located in "red states", but G.W. is worried about the tattered remnants of his legacy.

"Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," Treasury spokeswoman Brookly McLaughlin said.

And, White House spokeswoman Dana Perino said it is considering using the Wall Street rescue fund to prevent the USA's strapped carmakers from failing.

I like that - it's "because Congress failed to act", rather than, "Because the President couldn't convince his own party to back a bill he supports." Perino elaborated that "it would be 'irresponsible' to further erode the economy by allowing failure in Detroit", but how about some honesty here about just who it is that the President is describing as irresponsible.

The Washington Post repeats some common, yet silly, complaints about the auto industry,

Furthermore, if the Detroit carmakers are going to survive, they will have to completely overhaul the way they do business - and start building cars that people will buy.

Lets look back a whole year:

General Motors announced today that it sold 9,369,524 vehicles worldwide in 2007, which puts it in a dead heat with Toyota for the title of world's best-selling automaker.

Now the Big Three deserve criticism for disregarding the end of cheap oil, but really... but for the spike in gas prices this summer and the current financial crises, at current gas prices those highly profitable gas guzzling vehicles "that no one wants" would be flying off of car lots across the nation. (If auto makers booked their profits when those vehicles sold, as opposed to when they were shipped to dealerships, they would be looking a lot healthier right now - because sales appear to be picking up.)

For that, they are going to need new leadership, a rational assessment of their long record of failure and, yes, a much larger infusion of government cash.

We're back to that "new leadership" thing.... Something the Post isn't demanding of the finance industry, despite a perhaps unparalleled record of failure and incompetence by its leaders. Heck, the Post doesn't even appear upset by the astronomical wages, bonuses, and even stock dividends that bailed-out financial companies are paying with taxpayer money.

Perhaps we need a financial industry czar - somebody who saw that derivatives were, let's say, a "time bomb" or as "financial weapons of mass destruction"... Oh, but let's be realistic. Nobody could have seen the financial industry's problems coming. We need to find a Warren Buffett for the intelligence community, and apparently we need a Warren Buffett for the auto industry. It's truly a shame we can't find a Warren Buffett for the financial industry.

I've already commented, but it bears repeating - where exactly does the Post imagine that the Big Three will find "magic men" to lead them in a new direction? Ford got its CEO from Boeing; Chrysler's CEO used to head, of all things, Home Depot. How far outside the industry is far enough to satisfy this ridiculous demand - and what's wrong with looking for people within the industry who actually know about cars and may even have a track record of developing vehicles that are suited to the future?

Nobody - including the carmakers - fully understands the depth of Detroit’s problems or how much money it will take to dig them out. Mark Zandi, chief economist at Moody’s Economy.com, told Congress last week that rescuing the companies would cost taxpayers $75 billion to $125 billion over the next two years. And that’s probably optimistic.

Now that's a fair criticism. Chrysler, for example, is pretending that the bailout will result in a quick return to profitability. Does it believe that, or is it spinning a fairy tale? If the former, there's good cause to question the competence of its leadership. If the latter, it appears to be part of a mendacious plan by Cerberus Capital Management to get a taxpayer subsidy that allows it to avoid taking a loss on a bad investment. As you already know, I think it's the latter.

If the Big Three are glossing over a future that, realistically, will require a taxpayer bailout exceeding $100 billion, we should be sending them back to revise their plans to reflect that reality - and to demonstrate how they could recover with a smaller infusion of taxpayer money.

Beyond the Post's dream that the Big Three will find "magic men" to take over for their present leadership, it whines,

And the bill doesn’t set any conditions to ensure automakers invest in fuel-efficient vehicles. Any long-term plan must make sure the automakers don’t simply keep making gas-guzzling trucks and sport-utility vehicles, whose popularity - unfortunately - has recovered as gas prices have declined.

There's not even a slight effort to achieve internal consistency. If the idea is to force auto manufacturers to build cars that consumers want, it appears that they are doing so - as long as gas prices are low. If the idea is to force them to give up their gas guzzlers in favor of fuel-sipping vehicles, that's something quite apart from getting them to build the vehicles people want to buy. Let's be blunt - if you could build a car the size of a small house, have it get 25 MPG, do 0-60 in less than ten seconds, and sell it in various forms for $20-$30K, it would be the most popular car in America. (The auto manufacturers are about as likely to be able to create such a car as they are to find the Post's "magic man" leaders, so don't accuse me of being unrealistic.)

It should go without saying, but it doesn't - so here we go again. If the goal is to create a competitive domestic auto industry, you can't do that by hamstringing auto makers and forcing them to build under fuel efficiency standards that don't apply to their competitors. If you want more fuel efficient cars on the road, build an even playing field by instituting new, meaningful CAFE standards that apply to everyone.

If the Post is correct, that it's going to take $75 - $125 billion to turn around the domestic auto industry, then perhaps its time to think about something far different from a bailout that tries to keep the three auto makers in business. There are a number of options, short of and including bankruptcy, that should be considered in the new year. Assuming GM and Chrysler aren't already in bankruptcy by then.

But how about at least passing a contingency plan - an authorization of aid to parts suppliers to keep them out of bankruptcy in the event that Chrysler and/or GM file Chapter 11. If we're going to risk that they fail, let's at least try to keep them from dragging Ford down with them.

Argh, No!

Thomas Friedman again announces how the auto industry must design future products if it is to be rescued:

You want my tax dollars? Then I want to see the precise production plans and timetables for the hybridization of all your cars and trucks within 36 months. I want every bailed-out car company to move to hybrid electric drive trains, because nothing would both improve mileage and emissions more - and also stimulate a whole new 21st-century, job-creating industry: batteries.

Hybrids represent a tiny percentage of the domestic auto market, and represented a tiny percentage even when gas prices peaked. Hybrid technology is expensive. The cheaper, more efficient batteries Friedman wants? They're still vaporware - they don't exist. And there aren't factories lined up to manufacture millions of batteries for new hybrids - with the increased demand for the Prius this past year, Toyota had to disappoint prospective purchasers with long waits because the supply of batteries is limited.

If anything has been vindicated by the fall of the Big Three, it's Friedman's long-standing (and sometimes peculiar) call for higher gas taxes. What happened when gas prices hit $4/gallon? Friedman's dreams came true - the conspiracy between the Big 3 and Congress to carve enormous exceptions to CAFE standards collapsed, and the market for gas guzzling vehicles plummeted. That is to say, until Congress grows a backbone, the better approach to trying to change the vehicles that Americans buy is by hitting them in the pocketbook.

If Friedman's ideas are adopted, domestic autos may be modestly more fuel efficient than imports, but due to the cost of the hybrid technology it will cost about $2,000 more for a roughly equivalent car. People already have the choice of paying a premium for hybrid technology and, in overwhelming numbers, they're keeping that $2,000 in their pockets and buying more fuel efficient, conventionally powered vehicles.

Set an even floor. If it makes sense that every vehicle on the road be a hybrid (and, as the owner of a hybrid, in my opinion it does not make sense), then require that of every car manufacturer serving the U.S. market. Don't handicap the domestic manufacturers at a point in time when they're struggling to stay alive by pricing them into a segment of the market that, even as gas prices peaked, couldn't get more than 3% market penetration. Given Friedman's concern for emissions, it's worth noting that battery technology is pretty dirty - mining and smelting nickel is dirty enough, but Friedman's demand for instant hybrid gratification will probably lead to the wide use of lead-based batteries.

Meanwhile, perhaps Friedman should take a step back and ask, which car company is it that's trying to use breakthrough, cleaner battery technology in a future generation of hybrids. Not that I want to diminish the advances Toyota has made with its NiCad hybrids, but, could it be... GM with the LIon-powered Chevy Volt?

Friedman also presupposes that nothing better will come along. Forcing the domestic auto makers to spend tens of billions locking themselves into a 100% hybrid fleet, and to do it so quickly that they really have no other room for R&D (even assuming Friedman's proposed law permits them to explore other technologies), may make Friedman feel better, but it puts them at a disadvantage in developing other forms of clean, fuel efficient vehicles.

Yes, the Big 3 need to change their ways. Yes, their past contempt for fuel efficiency is part of why they're in so deep a hole. Yes, their past contempt for environmental concerns is reproachable. (And is it ancient history to bring up how they helped destroy public transportation?) But for all of their faults, dictating the details of their future products has the potential to impair their future competitiveness, preventing them from developing fuel-efficient gasoline and flex fuel vehicles, while impeding the development of cleaner, more fuel-efficient non-hybrid vehicles.

At the end of the day, it's a bit like calling on Congress to legislate that the New York Times overcome its financial struggles and create a newspaper for a new century by publishing entirely through Twitter. It's one thing to know enough about something to be dangerous; Friedman's not even quite to the point of knowing that much about cars.

Well, There You Go....

Rumor has it, Cerberus sees Chrysler as being worth more as a write-off than as an investment:

Meanwhile, Chrysler is understood to have retained a law firm that specialises in bankruptcy proceedings to begin a liquidation process if Congress does not agree to lend the money it needs to survive.

Cerberus doesn't need government money to keep Chrysler afloat. It needs government money to avoid taking a loss on what turned out to be a bad investment.

I reiterate:

I would offer Chrysler loans on one of two conditions:

1. Cerberus first sells Chrysler to a publicly traded firm, divesting itself of any and all interest in Chrysler (and yes, this still works as a subsidy to Cerberus, as it will increase the selling price); or

2. Cerberus guarantees the money Chrysler borrows, putting up its portfolio of investments as security.

If they are asking that this money be loaned to Chrysler Holdings LLC, with no recourse against Cerberus itself, I would tell them to kiss off.

That, of course, is exactly what they're asking.

Bailing Out Chrysler

When Cerberus Capital Management, LP, comes to Washington D.C. to ask taxpayers to bail out its failed investment, I can't help but think, "No!"

My objection doesn't arise from a lack of concern for the workers. I know some Chrysler workers who are likely to be laid off whether or not there is a bailout. Hate unions if you will, but auto industry job losses will cause extreme hardship for a lot of good people.

But here's the wrinkle. Unlike GM and Ford, Chrysler is not a public company. It's in the portfolio of a wealthy private equity firm:

Cerberus Capital Management, L.P. is one of the world's leading private investment firms. Cerberus specializes in providing both financial resources and operational expertise to help transform undervalued companies into industry leaders for long-term success and value creation....

Cerberus holds controlling or significant minority interests in companies around the world. In aggregate, these companies currently generate over $100 billion in annual revenues.

That's right - a company that is supposedly a leader in providing financial resources and operating expertise to failing companies wants U.S. taxpayers to paper over its losses.

As a private company, Chrysler doesn't have to publish financial statements and it doesn't appear that Cerberus is going to open its books. We're told that CEO Bob Nardelli gets a salary of only $1, with no benefits, but he receives other income that's not disclosed - what is it, and why is it a secret? Given his glorious golden parachute from Home Depot, he doesn't actually need to be paid, but let's not pretend he's actually earning a mere dollar. Chrysler has told Congress that it expects an operating profit of $2.6 billion in 2010, with slightly lower profits in 2011 and 2001. If that's what they truly believe, why isn't Cerberus happily financing its own bail-out? Why is it suggesting that absent an infusion of taxpayer money, Chrysler is likely to enter bankruptcy?

If Chrysler is going to fail without additional working capital, it's not because Cerberus can't afford to pay. If it wished, it could sell part or all of one or more of its other holdings or borrow money against those holdings to keep Chrysler running. If it won't, it's safe to conclude that it doesn't think Chrysler is a safe or worthy investment. And if that's what it thinks, why should taxpayers subsidize their billionaire's version of "flip this house"?

Further, there's cause to question whether Chrysler can survive as an independent company. If it cannot, why should taxpayers bear part or all of the loss Cerberus faces as it carves up the company and sells off its viable parts? From what I can see of its present cost-cutting measures, it is not planning to remain independent - given the manner in which it has reduced its professional workforce, it's not even clear that it still has the capacity to develop a new generation of vehicles. At the same time, the announced round of job cuts will save a suitor a lot of trouble, as there will be a much lower level of redundancy if Chrysler is acquired by another auto company.

I would offer Chrysler loans on one of two conditions:

1. Cerberus first sells Chrysler to a publicly traded firm, divesting itself of any and all interest in Chrysler (and yes, this still works as a subsidy to Cerberus, as it will increase the selling price); or
2. Cerberus guarantees the money Chrysler borrows, putting up its portfolio of investments as security.

If they are asking that this money be loaned to Chrysler Holdings LLC, with no recourse against Cerberus itself, I would tell them to kiss off.

More On The Financial Mess

The AP covers how, in 2005, the Bush Administration's contemptuousness of regulation and deference to lobbyists led to its rejecting regulations that could have helped diminish the bad lending practices that contributed to the housing bubble.

The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

Also, CJR covers a Wall Street Journal article observing that, while the financial industry is presently being given a free pass for the incompetence of its management, it has a lot more in common with the auto industry than Congress has so far acknowledged:

For their part, banks have found lots of causes for their predicament aside from their own failings. The crisis, they have argued, is down to an impossible-to-predict perfect storm, predatory hedge funds, panicked investors, unrealistic accounting rules and economic changes that emerged so quickly there was no way to be prepared for them.

If only. The reality is the crisis is due to bad lending and investment decisions. And those, after all, form the core of the banking business. In auto terms, it’s as if banks designed cars that suffer from catastrophic mechanical failures, or can’t be driven during snow storms.

CJR concludes that the author is "right to point out there’s more urgency with fixing the banking system, and right to point out that doesn’t mean they should come out looking the same."Bush

Coordinated Bankruptcy for the Auto Industry

The Times offers an interesting editorial proposing that the federal government facilitate the simultaneous bankruptcy of the "Big Three" auto makers, accompanied by extension of sufficient credit to sustain their operations through that process. This beats the current congressional proposal of, "Come to us with a business plan we like and maybe we'll lend you money," as it would allow the auto companies to address problems they cannot discuss as part of such a business plan - for example, how to eliminate failing brands and close hundreds of auto dealerships. If Ford announces, "We're going to close down Mercury," or even more modestly, "We're going to close it down as an independent line, while making select Mercury models available through Lincoln dealerships", they would create immediate consumer concern about Mercury vehicles, and would be immediately sued by Mercury dealers. If they say, "To control expenses, we need to cut the number of dealerships by a third," again they would be facing lawsuits by car dealers afraid of being among that third.

Meanwhile, the fact is that the manner in which cars are sold and distributed in this country is out-of-date, excessively costly, and anything but consumer friendly. At this point if you want to buy an iPod and only an iPod, you can go online to the Apple Store and buy one. But if you want to price shop or compare the iPod to other brands, you can choose from thousands of online and retail vendors who carry multiple brands of MP3 players. While iPhone sales are more constrained, once again you can find stores that offer contracts through multiple services, so you can go in and choose between an iPhone and a variety of service plans, and similar products from other vendors and service providers.

Try that with a car.

What if you're interested in offering a new type of dealership - a concierge type service that caters to professionals at their offices, allows them to arrange to drive a car model of their choice on their schedule, and offers the full range of makes and models they are apt to want to buy? Good luck with that.

What if an auto maker wishes to take the Saturn model to its next logical level, and build a Dell-style website where customers can pick a model - any model they offer - customize it, and have it delivered in days to a dealership with them with no haggling, no surprises, no post-sale pressure for "paint protection" or similar add-ons, no concern about financing (you've already been approved online) or confusing over rates. Get a good price, don't worry that you're paying more than the next guy or being otherwise hoodwinked, and show up at the dealership to inspect your vehicle, go over any special features, and drive away. The manufacturers are already about 90% of the way there with their "design your own vehicle" features on their websites. But do you think there's any chance that the crucial remaining 10% will get past NADA?

Bankruptcy only touches on these issues - facilitating the dropping of brands and closure of dealerships - but it doesn't do anything to overcome anachronistic, protectionist state laws that prevent innovation in vehicle distribution and sales, reduce manufacturer and customer cost, and increase customer convenience. But really, you're unlikely to hear anything about this from the CEO's of the Big Three.

I continue to favor something similar to bankruptcy but legislated by Congress, as opposed to Chapter 11, as being a possible path to reforming the auto industry with a much lower risk of failure. For those who complain, "Foreign auto makers will think it's unfair," I say, "They're not complaining about protectionism in their own nations, and you know what else - they're welcome to join in." If Congress is unwilling to act, cannot act with sufficient speed (as the authors of the editorial surmise), or forces bankruptcy upon the domestic auto industry, I think it's fair to say that it will be the result of a failure of leadership - in Congress, the auto industry, the UAW, and the nation's auto dealers and their "union", NADA (who are strangely omitted from most discussions of the industry's problems).

Mitch Albom Plays Auto Executive

And in their (hypothetical) voice notes,

Ask fair questions. Demand accountability. But knock it off with the holier than thou crap, OK? You got us into this mess with greed, a bad Fed policy and too little regulation. Don't kick our tires to make yourselves look better.

I'm really not a fan of gotcha politics; the grandstanding over auto executives' flying in by private jet was cute, but politicians should remember that turnabout is fair play. If the new rule is that executives of troubled or failing businesses, or those seeking tens of billions of dollars in federal aid can't fly their corporate jets, where is the comeuppance for AIG and Citigroup? (And dare I joke about G.W. having two spectacular private jets, given the mess he's made of pretty much everything he's touched?)

Meanwhile in England

Because the domestic auto industry's situation is unique.

I Wonder If We'll Ever Learn....

A few months back, I suggested that Mitt Romney's campaign song should be Everclear's "Everything to Everyone".

A song about a habitual appeaser for a man who will say anything to get elected, even if he said something completely different fifteen seconds earlier. The song is about how appeasement leads to failure, and I suspect that it will prove to be on the mark.

You remember Mitt Romney - the guy who got rich as a corporate raider, trading in no small part on his daddy's name and connections, became governor in Massachusetts, despite being a Republican professed a wide range of beliefs better associated with liberalism, passed a bunch of expensive legislation, and skipped town to run for President before his popularity might be tarnished by its cost. Oh, you can find more flattering biographies, even hagiographies, I'm sure... But from what I saw of the man running for President, I can't see how they're deserved. Oh, I know, his defenders say he never got a chance to "introduce himself", but... why are we still waiting for this mythic figure to step forward and fill the shoes of the doppleganger we have met?

Oh yeah, you do what they tell you to do,
You say what you say,
You try to be everything to everyone...

Not quite a year ago, when campaigning in Michigan, Mitt had this to say:

“If we are going to be the world’s greatest economic power, we must invest in our future. It’s time to be bold.” He continued, “First, I will make a five-fold increase – from $4 billion dollars to $20 billion dollars – in our national investment in energy research, fuel technology, materials science, and automotive technology.”

He said Washington has to invest in Michigan and not just bemoan the high unemployment rate and failing economy:

“Look how industries in other states have thrived from the spin out of technologies from our investment in these areas. So if we can invest in health care, in defense, and in space, why not also invest in energy and fuel technology here in Michigan?”

In a veiled attack on his rival here, he said that Washington is pessimistic about jobs coming back to Michigan, something John McCain has said previously, but has backed away from in the days before the primary:

“Washington politicians look at Michigan and see a rust belt. But the real rust is in Washington.” The former Massachusetts governor continued, “The pessimist will point to an empty factory and a laid off worker and say they have no future. Instead, I see a vital infrastructure, a skilled workforce, and an innovative spirit all worthy of an optimistic vision and deserving of a leader who will work tirelessly to deliver the power and potential of Michigan and the American people.”

In addition to offering to throw as much as $20 billion at the auto industry, Romney took a decidedly anti-environmentalist, anti-conservationist stance, but seemed to stand squarely behind the CEO's of the Big Three with no doubt about their ability to lead the transformation of the auto industry:

He criticized Mr. McCain for backing a bill that would have pushed to cap and trade greenhouse gas emissions, which Mr. Romney called a "job killer." And he promised to bring representatives from the automotive industry, unions, Congress, and the state of Michigan together in his first 100 to come up with a plan to "rebuild America's automotive leadership."

He unabashedly courted the union vote:

"I'm committed to fighting for every good job in this country and Michigan and across the country, and that connection I have to the state is just enough to help bring people who are normally thinking to vote toward the Democratic side to vote for me," he said.

When John McCain offered some genuine straight talk, that there had been a significant loss of manufacturing jobs in Michigan and "some of those jobs aren't coming back", Romney jumped down his throat:

Mr. Romney seized on Mr. McCain's "straight talk" as an example of Washington's pessimism and indifference to Detroit.
"A lot of Washington politicians are aware of Michigan's pain, but they haven't done anything about it," Mr. Romney said. "There are some people who don't think there's a future for the domestic automobile industry. They think the industry and its jobs are gone forever. They are wrong."

But remember, that wasn't the real Mitt Romney - we hadn't been introduced to him at that point.

You know all the right people,
You play all the right games,
You always try to be everything to everyone...

Now, unbelievably, it appears that Mitt Romney is trying to position himself as the heir to the Republican Party. This puts him in a rarefied league presently otherwise composed of Sarah Palin and, yes, Newt Gingrich. So what does Mr. Appeaser do when confronted with a crisis in the auto industry, and finds the leadership of his party suggesting that good manufacturing jobs are gone forever, don't have any concern for Michigan's pain, and have even less desire to do something about it? People he says are "wrong"? Did he hold true to his promise to bring the auto executives together to forge a new path for the industry? You guessed it - he's arguing that we should Let Detroit Go Bankrupt....

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

* * *

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

Break the union and fire the management teams for the Big Three? He's not making a policy statement - he's pandering to a faction of the Republican Party that sees little value in maintaining an American industrial base, and sees union busting as a leading civic virtue. As Motor Trend puts it,

"The financial straits that the Big Three find themselves in is not the product of our current economic downturn," harrumphed Senator Richard Shelby, senior Republican on the Banking Committee in a written statement, "but instead is the legacy of its manufacturing and labor force."

Well, yes, GM and Ford Motor Company haven't posted profits for years. And Chrysler, shielded first by Daimler and now Cerberus, is in worse shape. Cerberus has finally dropped the ruse that it's in the car business for the long-term.

Most of us would love just a portion of the UAW's health care benefits. But Shelby is typical of so many of our leaders who don't care about manufacturing, let alone automobile manufacturing. He's senior Republican of the Senate Banking Committee, after all.

Please excuse the following redundancy, but I can't emphasize it enough: making cars and trucks takes loads of time and money.

If you work for, or with, the banking or finance industries, you might someday come to realize this (as Cerberus has), but you won't like it. Wall Street, and much of Capitol Hill, likes "industry" to make "financial products," computer software and websites, things that can be made out of thin air or by college grads who don't ask for health benefits. Ask New York Times Pulitzer winner Thomas Friedman, who apparently believes Steve Jobs could have a Chevy iCar on the road in a year if the Apple chief took over GM.

We knew all along that Mitt was most at home in the banking and finance industries; he's apparently now out to prove that, with all of his claims of inherited wisdom about autos, he's not just another anti-manufacturing, anti-union Republican, he's ready to be their leader.

I think you like to be their simple toy,
I think you like to be their clown....

As Motor Trend notes, even those most sympathetic to the auto industry are anticipating significant structural changes, plant closures and union concessions, in all likelihood including the resignation of GM's CEO.

But while many Republicans see the fall of Detroit as just reward for the UAW, Democrats in Congress are ready to impose sacrifice on the UAW as well as automakers, in exchange for loan guarantees. Congressman [Elijah] Cummings [(D-MD)]... told MSNBC he supports bailing out GM, Ford and Chrysler, but that the automakers "may have to change union contracts."

The problem here isn't that Romney has pulled yet another of his flip-flops - his abdications of everything he once supposedly stood for in the name of advancing himself politically. If you've watched Romney at all, you know that the man (again, doppleganger Romney, as we haven't yet met the real one) will say and do anything to advance himself, even if it means repudiating what he professed only minutes before to be his deepest and most heart-felt beliefs. The problem isn't that he's calling for serious reforms by the beneficiaries of federal aid before it's granted (not that he's in favor of granting it... today). It's not that he's stupid. Perhaps it's the opposite. The man has an above-average mind, yet he spews nonsense that betrays either that he's fundamentally ignorant of his area of supposed expertise, or that he's lying.

Let's take a look at his two main criticisms of the auto industry. First, they're supposedly being broken by labor costs, and apparently nothing has been done to address this problem:

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

Oh, you mean like, to a substantial degree, what they've already done? If I assumed Romney to be an idiot, his ignorance might be excusable, but he's not an idiot. Also, just because the process of shifting responsibility for retiree benefits and pensions from the Big Three onto the unions isn't yet complete doesn't mean it's not well underway. Does he truly not know this, or is he lying?

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

This man has been in business? Truly? If we accept his figure, he believes that costs are fixed per vehicle, such that you should assign the same labor cost to a subcompact sedan as you would assign to a luxury SUV? With no consideration of actual cost or plant efficiency? He doesn't understand that the Big Three aren't building vehicles using $2,000 less in materials per car - they don't build cars for less, which is why on a per vehicle basis they lose money on those sales. As somebody who supposedly knows about business, if he truly believes that the Big Three are producing competitive products with better paid labor for $2,000 less per vehicle, why isn't he championing their management (like he used to) instead of calling for a decapitation?

Second, management as is must go. New faces should be recruited from unrelated industries - from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

That's great idea! Ford should bring in a CEO from a company like Boeing! Oh... They did that? Then Chrysler should get taken over by a covey of Romney-style corporate raiders who can take it private, clean house and... Oh... They did that? Beyond that, did Romney fail to notice, growing up, that his Daddy rose to be CEO of AMC by virtue of his years of experience within the auto industry? Is his present contempt for industry experience, if not feigned, some sort of Oedipal thing? Really, assuming that it's dead wrong to use executives who are experienced with an industry to run or revive that industry, whence Romney's "magic men" from the outside who will achieve a 21st century transformation? According to Romney, after all, Cerberus couldn't find one, and their financial wizards are paying tens of millions in bonuses to hang on to the "failed" team they have in place.

The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”

Wait a minute... so forty or fifty years ago his father, either on his way to being or already installed as CEO of AMC, discussed these crucial issues with the head of the UAW, the UAW guy described them as being on an unsustainable path and... daddy squandered the opportunity? Seriously, what am I supposed to make of this anecdote?

I love this part, not because it's not a valid point, but because it's industry-specific:

Get rid of the planes, the executive dining rooms - all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Where's Romney's similar call for sacrifice by the financial industry? No more executive dining rooms, corporate jets and the like, until the economy's back on track? There's unquestionably a culture of overcompensation among this nation's executive class, but it's silly to use the issue to attack the auto industry or to pretend that it is somehow unique. Assuming that it truly has ended its post-collapse luxury junkets, has AIG shuttered its executive dining room and grounded its corporate jets? Where's Romney's lament? Scheduling conflicts excluded, has Mitt himself ever declined a ride on a corporate jet or a free dinner in an executive dining room?

As a practical matter, the "fixes" Romney proposes can't go through unless the Big Three go through bankruptcy or something like it. And (assuming he doesn't flip-flop again tomorrow, or hasn't flip-flopped while I was writing this), if we don't put form over substance, I'm on the same page as him in terms of their being a need for some serious changes. But Romney's eager pandering to anti-union factions of the Republican Party, in breach of both word and supposed bond with the state he sort of claims as his own, is pretty revolting. I'm not willing to pretend that his flip-flops and misrepresentations are anything but posturing and positioning, in the hope of advancing himself politically - even if it harms the country.

"You Give Me... Money?"

Many years ago when I was in Paris, a young man approached me. He launched into an extensive narrative, in rapid-fire French. When he finished, I indicated to him in my very limited French that I didn't understand him. He paused for a moment then, you guessed it, asked, "You Give Me... Money?"

Some things just don't sound as good in translation.

Executives from the Big Three and the President of the UAW testified before the Senate today. The short version seems to be, "You give us money, and everything will work out." There seems to be a general unwillingness to even admit to some of the structural problems that will continue to cause problems with profitability and complicate the streamlining of their businesses. They were able to identify a lot of problems that could or would result from Chapter 11 bankruptcy, but skipped over the benefits of that process (or a "bankruptcy lite" conducted under the auspices of federal bailout legislation). And while I don't want to understate the amount of progress the Big Three have made in recent years, to overcome years of poor management decisions and business planning, I am left with the question of, "What happens if the economy doesn't pick up (big time) before the money runs out?" And the answer seems to be, a call for bailout, round two.

"Vous me donnez... l'argent?"

I don't want to dwell on the negative, and maybe (as Annie says) the sun will come out tomorrow, but I would have liked to have heard some more candid statements about the state of the industry and those factors that are unlikely to improve without some form of bankruptcy or "bankruptcy lite". Admittedly, it would be very difficult for these executives to discuss those issues in public. How could you discuss the need to eliminate brands or close hundreds of dealerships without creating anger and fear among your dealers, or making customers wary of any brand you mention is on the chopping block (or all of your brands if you are circumspect)?

Yet dealerships aren't going to close without a very expensive buyout and inevitable litigation (as happened with Oldsmobile), unless the closure is part of a bankruptcy process or a federal bill that preempts state laws on manufacturer-dealer relations. How do you admit that a huge factor in your not wanting your company to go through bankruptcy is that the people you work for - be they the shareholders or a private equity fund - and both you and the people you work with (who hold a lot of stock options, and probably also a whole lot of stock), really fear being wiped out? Chrysler CEO Robert Nardelli is apparently willing to work for $1/year, but tell me that will hold true if his equity stake is wiped out.

And tell me it's not about the share values and equity stakes when you have Cerberus "generously" offering to give up its profit in a future sale of Chrysler if it gets bailed out. Here's an idea - go to a Chrysler dealer, buy a car, drive it around the block, then ask them to loan you almost the entire value of the car on the promise that if you later sell it you'll waive your profit. Seriously - they paid $7.4 billion for Chrysler, and now they propose borrowing $7 billion.

My answer to Cerberus, really, is "I would be happier if you paid off your loan and still made a profit". Why? Because that would mean they turned the business around. I understand not wanting to tell your investors, "We lost your entire investment inside of two years," but the bailout should be about helping these companies succeed in the long-term, not just to let them scrabble through a year until they can find a way to dump their stake somewhere near break-even.

This is really tough - I'm not trying to kill off the UAW, and I care about the U.S. economy and industrial base, so I'm not among those who are happy to dig the Big Three a grave. But if we're putting this much (and probably more) taxpayer money on the line, I think we deserve something better than the status quo and the promise, "Even though we haven't changed our business models as a consequence of this unexpected crisis, what we're already doing is working. Trust us." And I suspect that the Big Three need a dose of tough love, something that both enables and compels their making serious structural reforms if they want billions of federal dollars, even if it causes their owners and shareholders to lose some equity, or the unfortunate closure of some plants and dealerships.

Is It "Unfair" To Let Detroit Collapse

Leave it to a conservative. In comments, CWD raises the question of whether it's fair to allow domestic auto makers to fail given the gargantuan financial industry bailout. Oh, I kid CWD. He actually argues, quite correctly, "I've pretty much always been opposed to the idea that we have to do something stupid and wasteful again just because it wouldn't be 'fair' not to do so".

Certain ideologues who favored the financial industry bail-out, while opposing an auto industry bailout, are engaged in some interesting contortions to avoid admitting their hypocrisy. Charles Krauthammer tells us that one's okay but not the other, because the financial industry is a "utility" - directly analogous to the electrical company. Except the government is not regulating the financial industry in the manner that it regulates utilities - is that something Krauthammer wants? Nor was it ever likely that the entire economy would shut down absent a bailout of the financial industry. It's not clear what would have happened, and fear has played a big role in the size of the bailout and the inadequacy of oversight. And I don't recall the federal government rushing in to save California from brownouts and rolling blackouts back in the glory days of Enron, or rushing in to update the electrical grid after the 2003 blackout.

David Brooks is more poetic in his explanation of the difference,

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Well, no. In the same sense that Brooks contends that keeping the big three from collapsing would retard "creative destruction", so does the choice to prop up large financial institutions instead of letting them fail, or letting them be carved up and sold off in smaller pieces. There's no sense in arguing the glory of "creative destruction" if you're going to simultaneously exempt from its forces the institutions that supposedly drive it. Also, isn't "creative destruction" about more than destruction - what does Brooks propose will be created in the place of the destroyed automobile industry? (One wonders, also, why Brooks isn't spending any time describing how his employer might avoid "creative destruction", beyond suggesting that it should get a bailout if Detroit is rescued.)

In an interesting series of posts at the Atlantic, Megan McArdle takes on the question of fairness, asking in some earnestness if an auto industry bailout means that the government should also bail out companies like Kodak. But that's a slippery slope argument, already implicated by the financial industry bailout. If we can draw a line before bailing out the auto industry, we can draw a line afterward. McArdle correctly argues that the bailout is unlikely to change "business as usual" at a domestic auto company or the UAW. True, but that's not a distinction from the bailout of the financial industry, which is now preparing to shower its workers with generous bonuses and pay dividends to shareholders courtesy of the U.S. taxpayer.

There are also fundamental differences between allowing a company like Kodak to fail because it didn't sufficiently anticipate and respond to the rise of digital technologies and its effect on the sales of photo chemicals, and allowing the auto industry to fail. Sorry, Kodak, but you represent a much smaller, less vital part of our economy. And unlike a context where a dinosaur is allowed to dwindle or die because it didn't respond to the market calling for a different product, this is a failure in competition between companies offering similar products. Suggestions to the contrary aside, assuming for example that GM fails, a post-collapse consumer is going to buy a roughly equivalent car from one of the remaining auto makers.

Hype green technologies all you want, but the consumer's choice is more likely to be driven by gas prices than by the availability of hybrid or flex fuel technologies, and the Japanese auto companies sell trucks and SUV's with gas engines in order to meet that demand. If the big three fail, cars will continue to be made, but the profits from those sales will flow to foreign companies and the instinct of those companies, faced with economies like the one we're in, will likely be to shutter U.S. plants ahead of those situated in the countries where they are based. High tech jobs in the auto fields will filter out of the U.S., so we need to ask ourselves whether those are the jobs we want to lose? (And that's before considering the jobs and businesses that would collapse across the country in the event of an auto industry collapse. No matter how much you hate unions, it's insane to be hoping for the death of the Big Three.)

I'm less concerned about an unlikely future where this leads to our bailing out Kodak, than I am of GM coming back in thee years, or maybe three months, begging for more cash - can we offer this bail-out without doing exactly what Henry Paulson and GW are doing with the metastatic financial industry bailout?

McArdle is correct in suggesting that any bailout should return a net gain to society, and that it is not clear that the current proposal would do so. Would bankruptcy? The fallout from bankruptcy for GM itself may be worse, but what if you instead used that bailout money to soften those consequences, or held it in reserve to potentially help a stripped-down, post-bankruptcy GM? I'm not big on the Thomas Friedman model of trying to force the Big Three to reinvent their vehicle line-up in his preferred image. The priority needs to be on creating viable companies, not on forcing them to incorporate technologies into their fleets that will either require massive government subsidies or price their vehicles far above competing models.

The WSJ proposal that if we're bailing out the auto industry to the tune of $25 billion or more, existing shareholders should be wiped out, seems to be on the mark. If we prefer a bail-out to bankruptcy, make it "bankruptcy lite" - a more efficient, industry focused version of bankruptcy, but with pretty much the same goals in mind. Not long-term stewardship, micromanagement, or redesigning vehicle fleets by committee. If you want to impose green reforms, do them legislatively and impose them on all new vehicles, so that the "new GM" can compete on equal ground. Perhaps more importantly, it isn't clear that an auto manufacture could survive bankruptcy - that they could maintain the cash flow necessary to stay in operation if they're unable to obtain and maintain enormous lines of credit. A specially legislated "bankruptcy lite" might bring about the benefits of bankruptcy without killing the company or impairing its ability to sell cars.

Something that seems to get lost in the noise, particularly the anti-union, "those workers get paid too much" noise, is that it's not only the labor cost differential that makes it hard for the Big Three to profitably sell smaller, cheaper cars. Take a look at vehicle sales in recent years. If domestic auto makers could avoid the discounting they have to offer to make their "comparable" cars competitive with cars from companies like Toyota or Honda, this would be much less of an issue. Instead, the labor cost differential is magnified by the need to offer discounts and incentives to people who are prepared to pay close to MSRP for a "comparable" quality vehicle.

Some painful truths. It isn't clear at this point that a financial industry-style bailout (no strings attached, here are billions to spend on whatever you think is best) would do more for the auto industry than forestall their collapse by a period of months or maybe years. It does not appear that, left to their own devices, the domestic auto manufacturers will get it together to manufacture vehicles that compete in terms of quality, design, or economy (in what I personally regard as an inevitable return to high gas prices) before they again hit a financial wall. But it isn't clear that any bailout, bankruptcy, or "bankruptcy lite" will turn them into viable companies - the context is created for that possibility, but these are sick giants with a corporate culture that has largely fought, tooth and nail, against the type of evolution that is required. Their progress over the past few years gives some hope, but it's only a modest beginning.

But doing nothing, if it leads to the collapse of one or more of these companies, will almost certainly deepen and prolong our recession while effectively ceding a big money, high tech manufacturing industry to foreign companies. So all said, at this point I would argue for "bankruptcy lite", for any of the Big Three that feels it cannot otherwise survive, and otherwise let market forces prevail.

Meanwhile, In Japan

Because the domestic auto industry's situation is unique, and car manufacturers wouldn't be in this situation if they only built more cars like the Prius, right?

Plans to make the Toyota Prius at the carmaker's new U.S. plant in Mississippi are being reviewed by a new emergency task force charged with propping up the company's profits.

U.S. production of the Prius, originally scheduled to begin in 2010, could now be pushed back to 2011 or later, Japan's Nikkei newspaper reported November 14, without citing sources.

Okay, but if had the domestic auto manufacturers focused on quality, smaller, more fuel efficient vehicles, or didn't have so many UAW plants, they would still be rolling in dough, right?

The task force, chaired by President Katsuaki Watanabe, was formed after Toyota booked an operating loss in North America for the first half and slashed its full-year earnings forecast.

What this illustrates is not that the Big Three have been unduly criticized for their bad management and poor strategies. It highlights how, in an economic downturn, even the best run companies can lose money. And how nothing the critics of an auto industry bailout are advocating is likely to quickly, and perhaps not even slowly, turn around the plight of domestic auto makers. Not even if Toyota handed them its hybrid technology and the keys to its Mississippi manufacturing plant.

Meanwhile, let's keep in mind that the Big Three have a point, in that a lot of domestic auto buyers really do want a huge, overpriced, gas guzzling SUV sitting in their driveway. Gas prices are down this month? Do I even need to tell you what that means, or have you guessed - SUV sales are up. If not for the economic downturn, burst housing bubble and credit crunch, the Big Three would probably be seeing SUV sales figures as high as last year's, as if the summer's record gas prices never happened.

Although the Big Three have improved their quality over the past few decades, they still lag behind major foreign auto manufacturers. I don't want to understate the importance of their ceding short- and (moreso) long-term quality to companies like Honda and Toyota. But there's something else to keep in mind: One of the reasons that auto manufacturers coming out of Europe or Japan build compact, fuel efficient vehicles is that's what their domestic consumers want. It's what we want when gas hits $4/gallon - prices comparable to those long seen in Europe or Japan? Is that supposed to surprise us - we truly believed Europeans and Japanese to be alien creatures who love packing themselves into tiny cars? Are we supposed to be surprised that gas prices hit the $4 mark and, despite the current drop, are going to hit and exceed that mark in the future?

The myopia here is not just out of Detroit - far from it. Congress worked hand-in-hand with domestic auto makers to create the context for this crisis. You know what might have forced the Big Three to develop a business model that is more realistic in a world of $4/gallon gas? Not carving out dishonest exceptions from CAFE standards to avoid classifying SUV's as passenger vehicles.

The very same members of Congress who are presently blocking a bail-out are the ones who happily went along with that deceit, concurred with Dick Cheney's notion that doing otherwise would somehow destroy an American way of life in which consumption is king and conservation is for wusses is a "personal virtue", and gleefully chanted "drill, baby, drill" during the presidential race. They're they types who giggled along with caricatures of "Prius-driving liberals". They were backed up by pundits like George Will, who would happily regurgitate any anti-hybrid propaganda, no matter how absurd, such as the fabrication that a Prius costs $3.25 per mile over its lifetime, while a Hummer costs only $1.95. And now they're lecturing the auto industry that they should have been leading the hybrid race? Or that the Big Three exemplify a failure of leadership? Or that they know more about these issues than, say, heads of cabbage? (Not that those who favor the bailout are necessarily any better.)

I know, I know. Building an economy propped up by debt-driven consumer spending and low energy prices was "the free market at work", and preparing for an inevitable future of higher energy costs or reduced credit would have... somehow... been wrong, even if it might have diminished or prevented the present collapse of the economy.

The Infuriating U.S. Auto Industry

Living in a state that seems to be in a permanent recession, and where it sometimes appears that the state government's leading solution to decades of economic decline is, "Wait until the auto industry rebounds," it's frustrating to see how short-sighted the domestic auto industry is. The auto industry's decline has been actively abetted by Congress which, rather than pressing for fuel economy standards that make sense in the context of the world's oil supply and demand, has time and time again favored consumption over conservation.

Right now the auto industry is hoping to get its hands on $25 billion in loans, already approved by the Bush Administration, to build more fuel efficient vehicles. How fuel efficient? So that they can meet a 35 mpg CAFE standard by 2020. You know, like the Civic Hybrid's 42 mpg combined average, or the 46 mpg achieved by the Toyota Prius. Oh, let's give the domestic auto industry its due - Ford's compact hybrid SUV's combined average is 34 mpg - they're almost there. Too bad it will take another twelve years and $25 billion to get that extra 1 mpg.

If you approach gas mileage honestly, you already know you don't need hybrid technology to achieve 35 mpg. In 1989, 20 years ago, Honda introduced its CRX HF, which achieved a 45 mpg combined average. The Geo Metro achieved similar fuel efficiency. In fairness, the method for calculating fuel efficiency has changed, and these cars would probably get about 38 mpg combined averages by today's standards, probably a bit less for the Metro, although by the same token we could presently build even more fuel efficient versions of those same cars. What those cars do is demonstrate that if you put a small, fuel efficient motor in a small, light car, you can achieve high fuel efficiency - something that, surprisingly, still needs to be said. This is a context where I'll be the first to admit, the CRX and Metro weren't and aren't the cars for everyone. But let's not pretend it's about technology, as opposed to wanting a large set of features and amenities that increase vehicle weight and decrease fuel efficiency. A huge part of the investment in fuel efficiency is about how to squeeze V8 power out of a V6 engine, or how to reduce vehicle weight without reducing size, performance, or amenities.

Criticisms of the auto industry almost always include a potshot at organized labor, if not an outright call to bust the unions. The history of generous union contracts plays a role in the current plight of the automakers, but not in the way that is typically depicted on the Wall Street Journal's editorial page. The Big Three have actually done a respectable job of paring down their labor costs and raising plant efficiency, to the point where the cost of labor provides only a marginal advantage to foreign auto manufacturers. They are weighed down by their huge obligations to retirees - health and pension benefits. A big part of GM's present cash flow problem comes from its obligation to pay billions of dollars to the UAW, to as part of a deal to transfer pension and retiree health care obligations from its books and onto the union.

But unions do remain a part of the problem, in that their lobbying efforts have largely followed those of the Big Three. When the Big Three were making a lot of money selling inefficient, high margin vehicles, the UAW had their back. Big profits mean profit sharing checks, and a possibility to negotiate higher wages during the next round of contract negotiations. I don't find that insidious, so much as short-sighted. It's their job to try to get more money for their members. But while the auto manufacturers themselves bear responsibility for lobbying (and obtaining) fuel efficiency standards and exceptions that let them "build the cars people want" (when gas is less than $4/gallon), and let them avoid investing in the technologies that might allow them to build comparable cars with much greater efficiency, I think that a union has an obligation to look at the long-term as well. Unions are often very willing to ignore the long-term financial picture for an employer or industry, and to sell out new members in favor of obtaining preferential treatment or benefits for their existing members. A union has an obligation to negotiate for the benefit of its members, but UAW-type negotiations seem to focus on existing membership (often at the literal expense of future members, and sometimes also of retirees) over the short term, without regard for the long-term effects on the employer or even themselves.

Is it needless to say? The UAW has joined GM in its quest for a federal bailout. Getting billions in federal money lets everybody avoid making tough decisions, while avoiding the consequences of decades of selfishness, short-sightedness and incompetence. Many opponents of the bailout suggest that it will simply enable "business as usual", and there's little reason to doubt that's what GM and the UAW most desire.

Fred Wilson, a venture capitalist focusing on technology companies, suggests that we should break up the Big Three instead of bailing them out. Unfortunately, it's not that easy. There's no clean way to divide any of the auto makers by product line, let alone to maintain supply contracts and product distribution by product line. I think that forcing the auto manufacturers to become smaller, more nimble, and able to quickly develop and manufacture new products is a good goal; I just don't see that it can be done by breaking them into smaller manufacturers. (If it were feasible to divide a major auto manufacturer and there were buyers willing to purchase individual car brands, I suspect Cerberus would already be taking bids for the various Chrysler brands.)

Thomas Friedman endorses a WSJ-style solution - and I mean that quite literally. He endorses a proposal by Paul Ingrassia, former Detroit bureau chief for the WSJ, as published in the WSJ (and as linked above).

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver - someone hard-nosed and nonpolitical - should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

To me, that proposal seems silly. I am not aware of the magic wand you can wave over a major corporation to replace its upper management with "better people" and instantly transform the company into something lean and competitive. If Ingrassia were honest about it, he would be admitting that's what the Cerberus acquisition of Chrysler was supposed to be about - brilliant financial wizards take the company private, install new management, streamline operations, and transform it into a dazzling success. Yet Cerberus has failed in that effort, and Chrysler stands alongside GM and Ford in seeking a multi-billion dollar handout. It also seems absurd to me that a supposedly conservative, pro-business paper would be suggesting yet another socialization of major American companies, with government-appointed management being the cure-all for the failures of the market. The contempt for contracts is also a curious phenomenon - why are WSJ-brand conservatives so quick to call for the shredding of contracts, when the entire business world revolves around reliance on contractual relationships?

Ingrassia should also be aware that the problem with the Big Three's contracts with suppliers is not that they're overpaying. It's that they've always focused on price, and the squeezing of price concessions out of their suppliers, as a first line approach to cost savings. While a company like Toyota works closely with its parts suppliers to increase efficiency and quality - to save money while maintaining or improving quality - the Big Three have had little regard for anything but the bottom line. Even assuming that the suppliers are able to stay in business after a WSJ-style shredding of their contracts, where's the evidence that turning contracts into confetti will translate into even a penny in cost savings? Similarly, given that the largest burden imposed by union contracts has already been incurred and the cost of labor is no longer much higher for the Big Three than for their non-unionized (or largely non-unionized) competitors, how much will the shredding union contracts actually help? And, as with shredding contracts with suppliers, what of the risk that it will disrupt their ability to make cars? Finally, if the shredding of their contracts is of such import, why not refer them to a bankruptcy court where they can do that through a Chapter 11 filing?

Friedman also has some demands of his own:

Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.

I'm not sure what that means. Is Friedman proposing that all new vehicles incorporate those technologies? That they have the capacity to be "upgraded" to hybrid/flex-fuel vehicles? If he wants those technologies built into every new car, does he believe that the path to prosperity involves increasing the cost of every vehicle by a couple of thousand dollars, while we operate on the assumption that ethanol production will become more green (and be less subsidized) in the future? Seriously, I applaud efforts to increase fuel efficiency, achieve energy independence, make cars cleaner and greener, etc., but I don't see much point in creating a context where the government has to grant a multi-thousand dollar subsidy for pretty much every domestically manufactured vehicle in order for it to be price competitive with imports.

Lastly, somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.

This is cute, but it's a bit like a simplified version of Ingrassia's receiver who will magically replace the upper management of the Big Three with people who know how to run car companies. (People from other industries?) Friedman believes that a culture of innovation (let alone a culture of quality) can be instilled in a company simply by switching it's CEO, but how often does that actually happen? History suggests that the opposite is more likely - an ill-suited CEO will damage or crush a culture of innovation (see, e.g., Hewlett-Packard, Yahoo!, Apple during the non-Jobs years, etc.) Also, sometimes those creative, brilliant leaders bring quirks to their companies that can be as problematic as having boring, conservative, rule-by-committee CEO's. (Remember the period when Apple wouldn't build a desktop PC that required an internal fan?).

Although something of an aside, whatever criticism may be fairly directed at GM's leadership, or to idiotic statements on global warming, this assertion by Friedman seems like a cheap shot:

Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.”

Lutz is more fully quoted as saying that Prius-style hybrids make no economic sense because their price will never come down. As I interpret his comments, he was simultaneously talking up GM's plug-in hybrid technology (i.e., the Chevy Volt), talking down a competing product (the Prius) and noting what is pretty obvious: current hybrid technology comes at a premium price and, if you can't eliminate that premium, you're unlikely to get the type of market penetration that people like Friedman supposedly want. Further, he made the comments several years ago, and related them specifically to the price of gas at that time.

It just doesn't make environmental or economic sense to try to put an expensive dual-powertrain system into less expensive cars which already get good mileage, Lutz said at the North American International Auto Show.

* * *

"Hybrids are an interesting curiosity and we will do some," he said. "But do they make sense at $1.50 a gallon? No, they do not."

It seems unlikely that Lutz was arguing that there's no place for current hybrid technology in the GM line-up, as it's offered in a number of models and he was suggesting at the time that it would be added to GM trucks. It may turn out that Lutz is incorrect, and the current hybrid technologies come down in price, but it's also possible that he's correct and the best and cheapest way to bring hybrid technology to the mass market is through plug-in hybrids. But it is clear that in the four years (actually, almost five years) since he made the statement, current hybrid technologies have not come down in price and you continue to pay a significant premium for hybrid cars. That's why, even with record gas prices driving record sales, hybrids make up only about 3% of the U.S. car market.

What do I want to see for the domestic auto industry? I want to see private capital deliver on its promises, rather than "yet another display" of the supposedly brilliant financiers behind companies like Cerberus getting a public handout when they screw up an investment or prove that they're even less capable than the former managers of the companies they're supposedly rescuing. I would like to see GM find a way to get private money to finance its way through this crisis, even if that means making some unpleasant concessions. I would like the auto manufacturers and their workers to internalize the lesson that you can't make up for deficits in quality by creating a context where new car buyers reliably trade in their cars every two years, passing along the defects to the next guy, while your competitors make cars that are remarkably reliable for people who prefer long-term ownership. Yeah, right.

Finally, the one thing I don't want to hear is anybody who supported the financial industry bailout oppose an auto industry bailout on the basis that the domestic auto industry has collapsed due to incompetent management, greed, poor planning, badly designed products, or overpaid employees - that's a distinction without a difference.