The rationale behind the $700bn bailout for US Financial Institutions goes something like this: Buying distressed securities at a marked down price on favourable terms. Warren Buffett for example made a deal with Goldman Sachs in very favourable terms - not something which retail investors can make. The idea is, if the US treasury buys distressed securities at current market prices and with the low cost of borrowing that the US Govt can enjoy, and the staying power it has, its going to make money in the long run. The key thing is to buy at market. That these assets will be worth more over time is the main reason why this bailout plan does not punish the tax payers.
This is exactly the problem with a similar idea for GM. Firstly; it is unadulterated nonsense that GM's ills are a ripple effect of the collapsing US economy. Detroit has been declining for a long time now. It is true that tough economic conditions have affected sales, but it has just accelerated GM on the road to bankruptcy which it is already in. In the case of Detroit, the chance that tax payers’ money is squandered away is high. GM made the electric car first in 1996, but ultimately withdrew it. It has always been poorly managed and having this extremely short sighted view of the market. Secondly, it is also not true that the failure of the American auto firms would mean the collapse of the American auto industry. Toyota makes its cars in the US. Nissan, Honda and others have their plants all around. Lastly, there is nothing that makes buying into the big three a sound investment. To quote Ben Graham: "An investment operation is one which upon thorough analysis promises safety of principal and a satisfactory return." If we are to believe that the government is only investing the tax payer money and not squandering it away GM or other companies must satisfy criteria like having good management, sustainable earning power etc.
If it’s not a bail out but only a loan, which I assume is going to be something like that which was made to Chrysler, where do we have somebody like a Lee Iacocca? Iacocca before joining Chrysler had several successes, most notable of them being the Mustang. Are there managers with such a track record today? Look at what Carlos Ghosn has done to Nissan. Ghosn is an icon in Japan. Does the US have an answer? Where are the managers who can face reality and make better cars? Detroit has very consistently demonstrated a lack of leadership. Their answer to the superior Toyota Production System initially was that it had something to do with Japanese culture. Then they lobbied for protectionism. Japan proved them wrong by implementing the TPS right in the US. They even taught GM in the NUMMI plant.
Auto majors have not demonstrated a consistent earning power either. AIG for instance was a sound company before the financial tsunami struck, but Detroit sucked even before the meltdown. The meltdown has in fact helped GM and others hide their stupidity. GM is losing about forty dollars a share which is priced at about three dollars. GM has a minus 110% five year average return on equity. That's underperforming the industry by a 122%. Honda has a return on Equity of 13.7%. Ford has a -22.24% five year average ROE.
So, here is what the Fed is thinking if they do invest in these companies - a company with poor management, myopic vision, no earning power, falling sales, lousy cars, negative ROE etc. promises safety of principal and a satisfactory return to the tax payers' money. Where the hell is capitalism? Why should these companies be saved?
The fact is, the bailout is not going to solve the long term problems. Even an Iacocca and the Federal loan could not help Chrysler from falling now (Actually, Daimler is one of the causes behind Chrysler's ills). Probably a way out could be to do away with myopic managers, put a new management team which is advised by managers like Ghosn, and study how exactly does Detroit plan to get itself out of the mess before committing hard earned money. That they plan to do this by investing in technology, and which is why they need capital sounds a hollow claim. The benefit of new technology is eventually going to go to the customers not to the owners. Technology is necessary but not sufficient. Another way to solve this is by breaking up GM and make a distress sale of the brands like the sale of JLR and forget about American auto companies. That can actually save more jobs, and bring in a new management.
Also read: http://online.wsj.com/article/SB122688631448632421.html
This is exactly the problem with a similar idea for GM. Firstly; it is unadulterated nonsense that GM's ills are a ripple effect of the collapsing US economy. Detroit has been declining for a long time now. It is true that tough economic conditions have affected sales, but it has just accelerated GM on the road to bankruptcy which it is already in. In the case of Detroit, the chance that tax payers’ money is squandered away is high. GM made the electric car first in 1996, but ultimately withdrew it. It has always been poorly managed and having this extremely short sighted view of the market. Secondly, it is also not true that the failure of the American auto firms would mean the collapse of the American auto industry. Toyota makes its cars in the US. Nissan, Honda and others have their plants all around. Lastly, there is nothing that makes buying into the big three a sound investment. To quote Ben Graham: "An investment operation is one which upon thorough analysis promises safety of principal and a satisfactory return." If we are to believe that the government is only investing the tax payer money and not squandering it away GM or other companies must satisfy criteria like having good management, sustainable earning power etc.
If it’s not a bail out but only a loan, which I assume is going to be something like that which was made to Chrysler, where do we have somebody like a Lee Iacocca? Iacocca before joining Chrysler had several successes, most notable of them being the Mustang. Are there managers with such a track record today? Look at what Carlos Ghosn has done to Nissan. Ghosn is an icon in Japan. Does the US have an answer? Where are the managers who can face reality and make better cars? Detroit has very consistently demonstrated a lack of leadership. Their answer to the superior Toyota Production System initially was that it had something to do with Japanese culture. Then they lobbied for protectionism. Japan proved them wrong by implementing the TPS right in the US. They even taught GM in the NUMMI plant.
Auto majors have not demonstrated a consistent earning power either. AIG for instance was a sound company before the financial tsunami struck, but Detroit sucked even before the meltdown. The meltdown has in fact helped GM and others hide their stupidity. GM is losing about forty dollars a share which is priced at about three dollars. GM has a minus 110% five year average return on equity. That's underperforming the industry by a 122%. Honda has a return on Equity of 13.7%. Ford has a -22.24% five year average ROE.
So, here is what the Fed is thinking if they do invest in these companies - a company with poor management, myopic vision, no earning power, falling sales, lousy cars, negative ROE etc. promises safety of principal and a satisfactory return to the tax payers' money. Where the hell is capitalism? Why should these companies be saved?
The fact is, the bailout is not going to solve the long term problems. Even an Iacocca and the Federal loan could not help Chrysler from falling now (Actually, Daimler is one of the causes behind Chrysler's ills). Probably a way out could be to do away with myopic managers, put a new management team which is advised by managers like Ghosn, and study how exactly does Detroit plan to get itself out of the mess before committing hard earned money. That they plan to do this by investing in technology, and which is why they need capital sounds a hollow claim. The benefit of new technology is eventually going to go to the customers not to the owners. Technology is necessary but not sufficient. Another way to solve this is by breaking up GM and make a distress sale of the brands like the sale of JLR and forget about American auto companies. That can actually save more jobs, and bring in a new management.
Also read: http://online.wsj.com/article/SB122688631448632421.html
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