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Thursday, September 23, 2010

The Real Problem with the Auto Bailout

Former 'Car Czar' Steven Rattner: Inside Obama's Auto Industry 'Overhaul' : NPR
Rick Wagoner testified that the problems of GM and the automakers were of the making of everybody except the management of GM. And we took some exception to that.

On February 17th, GM filed a so-called viability plan, which we felt was way excessively optimistic and didn't at all comport with the realities of the problems that GM was facing.

And we were looking at a massive infusion of additional government money, more than $30 billion at that moment. And it seemed obvious that it's very hard to put that amount of new money behind a CEO who's not only driven the bus off the cliff but doesn't even realize where the bottom of the cliff is and what has to be done to get back up to the top of the mesa, if you follow the analogy.

SIEGEL: You were learning, you were discovering what the corporate culture of GM was, and it was, in a word, appalling.

Mr. RATTNER: It was appalling, but it was both the culture of GM and the substance of GM. Rick Wagoner told the Congress that with another $10 or $12 billion, they could be viable again. The number ended up being $50 billion.

So the management of GM, just a few months before they went into bankruptcy, had no idea of how much capital it would take to bring the company back to a viable position.

SIEGEL: I mean, his chief financial officer didn't seem to know what the cash flow was at GM, didn't seem to know how much money they were spending.

Mr. RATTNER: GM could not tell you on any given day within $500 million how much cash they had, and the result was they had to operate with over $10 billion, sometimes $11 billion, of cash, far more than any other company of its same size or scale.

And by contrast, Ford, which is not that much smaller of a company, could operate with about $5 billion of cash on hand.
Steven Rattner was the head of the Obama auto bailout program.This recent interview on NPR emphasized just how bad an idea the auto bailout was.

Rattner freely admits that GM was in disarray, it's management couldn't control cash flow and was unrealistic about how precarious their position was.  But instead of letting a clearly failed company actually, you know, fail, the government stepped in and bailed out GM.

The debate has been centered on the cost to taxpayers and whether or not money will be repaid.  But beyond that, what about the opportunity of Ford to capture market share, an opportunity taken away by the government intervention.  There's also the signal sent to other large firms that you can fail, but you really won't fail.  The government will be there to bail you out.  Mr. Rattner seems to be aware of these issues, but they don't seem to matter much.

Ours is a profit and loss system.  It would be nice if removing the loss portion of that relationship resulted in all profit, but that's simply not the case.

3 comments:

Dad29 said...

M could not tell you on any given day within $500 million how much cash they had, and the result was they had to operate with over $10 billion, sometimes $11 billion, of cash, far more than any other company of its same size or scale.

And by contrast, Ford, which is not that much smaller of a company, could operate with about $5 billion of cash on hand.


Rattner is another who hasn't the foggiest idea...

FoMoCo IS smaller, ergo its cash balances CAN be smaller. DOHH!

Granted it would be nice if GM's Treasurer knew, to the penny, what was in the bank any given day--but that's a 24-hour-banking operation with plants, dealers, and distribution all around the GLOBE and with continual debit/credit transactions between them all.

Paul - Berry Laker said...

Seems like the only thing we can do is.

Buy F O R D!

Anonymous said...

A 5% cash-on-hand uncertainty margin is mind-blowing. Ford, while it was smaller than GM at the time, was not half GM's size.

The question is why GM did get bailed out, and the answer is three letters long - UAW. Had GM not been a union shop, where the union donaed heavily to Democrats, it would have been sent down the normal bankruptcy path rather than one that will net the UAW a couple billion in "free" money.