***Honorable Representatives Steven LaTourette and Thaddeus McCotter
Congress of the United States
Washington, DC
[Via Internet Website]
Congressmen:
I watched your recent presentation on the fate of the automobile dealership closings on the employment level with great interest.
I have been an independent consultant to both Chrysler and General Motors assembly plants for over 25 years. Your presentation was the first that dealt with real issues and presented factual information to the audience. Albeit, your colleagues lack of attendance speaks loudly of their policy positions.
Your presentation centered upon the economic ramifications of the dealerships in the communities where they dwell. It was both informative and enlightening. Please by aware there are greater losses to all of the small towns economies throughout the entire US, with MI, OH and IN as the center of the automobile industry.
I address two separate components of the issue that may project greater impact on your states as well as the forty seven states.
Background, I am one of those vendor suppliers to both Chrysler and GM. I have worked in production plants, finance offices, leasing offices, and administrative offices of the companies, their subsidiaries, dealerships, suppliers, vendors and repair facilities for over 25 years. I possess experience and expertise in executive management and have been fixing problems and broken companies for that same period of time. Even with all of my experience, I would hardly be capable of assuming the helm of either Chrysler or GM (the originals). My background can be found on our website.
I make this statement because one thing I know about the auto industry is that it is an industry unto itself. The American Auto Industry is a micro-economic entity unto itself and has an economic effect greater than some countries. Its effects are worldwide. How then could a 30 year old law school graduate without any business, industrial, production, marketing or sales experience suddenly make decisions affecting two-thirds of the industry? In the beginning of this takeover, the President wanted to appoint a czar to oversee the industry. No one would accept the position. Instead, the president appointed a 10 person committee of non-industrial political appointees consisting of 10 people without a background in executive management, business, production management, engineering, tool and die making, marketing, sales, advertising, machinery operations, or any of hundreds of other jobs requisite to operate an auto company. This is an affront by the government against every worker in the industry from top to bottom and everywhere in between. Invoking that this committee of ten persons one of which does not own an auto and only two who own American autos, can better manage the industry because they graduated from law school insults every professional and worker at every level. I ask: How many lawyers could be accepted into engineering school, undergrad or graduate level? How many would be able to complete the technical training of the production workers?
With that said, here are two focal points: some additional data to enhance your argument and a second area that has not been discussed anywhere to date – the suppliers and supply chain.
Dealership Closings
First, you presented a solid prima facie employment picture of the dealerships. The true effects of the dealership closings are far greater and run much deeper than your presentation.
You stated: auto dealerships are the center of activity in their communities. They are members of Rotary, Lions, Boy Scouts, Little League, etc. They sponsor the 4th of July events, the holiday events, parades and all the town and county events that benefit all of the citizens. They are core employment centers in their counties. Your analysis used an average of 60 employees per dealership. Our calculations find that number to be low. Our findings are closer to 80 employees as the mode. In some MSAs, the big box stores average exceeds 100 employees. It is not surprising then that applicants seek these well paid positions for repair technicians - body repairs and mechanical work, to sales, to IT and internet operations, to accounting, administrative and management positions. Dealerships never pay minimum wages. Their employees are well trained and well paid. Your calculations show a loss of 150,000 jobs from the closings; our calculation brings the job loss to 220,000 jobs from dealerships alone. Either calculation far exceeds the 40,000 job loss projected by the Committee of Ten.
What has not been entered into the calculations? There is a secondary level of the dealerships’ suppliers and the effects on their local economies. These include: suppliers of auto and body parts (other than manufacturer parts), tools and machinery, repairs and maintenance, printing, promotional items and office supplies. Other vendors include: local accountant firms, attorneys, insurance brokers, banks, utility companies (telephone, internet, electric (lots of lights), cleaning services, building repairs and maintenance firms, office equipment sales and much more. The automobile industry is the leading purchaser of newspaper and magazine, radio and TV advertising. The closing of dealerships will further reduce the advertising line space and revenues of the newspapers and mass media. The depth of the local spending has not been imputed into any equations to date from Washington. What will be the ultimate effect on the local taxes paid by the dealers? As their mission statements have been altered, so also will their assets be reduced in value the result will be reduced tax revenues affecting the services for police, fire and education and for those expenses previously paid by the good citizen dealers – those parades and other events.
Please note the dealers will not receive their Contractual Cancellation Buyouts per their Operating Agreements. This leaves the owners without their cash. Without their Operating Agreements, they will have little to offer banks as security on their lines of credit, reducing their ability to retire their overhead from used car sales only. Eventually, those big shiny buildings will have to be razed unless they can procure new agreements with foreign automobile manufacturers. If the buildings are razed, there will be a further reduction in tax revenues to the counties and states to cover greater unemployment entitlements.
This event should never have been a dash and slash of dealerships. To close out a dealership is costly and has major negative effects on the entire community. The “quick hatchet is more apt to chop off a limb than a leaf”. At hand, the Committee of Ten led the charge. Yet, they do not know or understand the complexities of the dealerships. They have created havoc where none was needed. The effects will surface piecemeal over the next six to twelve months. These lesser described “details” will appear and no linkage reference will be made unless you and your colleagues make everyone aware. It was easy to cut the number of dealers to save on company funded dealer advertising budgets. The hard decision would have been to calculate how these dealers were the face of the manufacturers and bore the scars of the lemons and production errors over the faceless manufacturer or assembly line workers.
The Manufacturing
The media has accepted a simplistic figure of 40,000 jobs to be lost, including administrative and assembly line workers, in the closing of the firms. The press has not requested either documentation or a full analysis. The effects of the manufacturers’ employment will be far more extensive than the dealerships’ closings. The Administration proffers a loss of 40,000 jobs. The press accepts it and that is the evening news 17 second sound bite. This number is the tip of the iceberg.
The calculation is seriously under reported. Cynically I proffer that is because they “say so” and because the Committee does not know or understand the industry intricacies and the relationship of the Supply Chains. The Supply Chains have not been referenced from the White House Committee or Czar. This is where the most damage will occur and affect not only OH, MI and IN (God Bless the IN employees pension funds that were chastised as greedy and cut out at the bankruptcy funding) and almost every state in the union. These manufacturers have thousands of companies, some as small as 1 or 2 workers to very large companies with 1000’s, as suppliers and vendors.
What we do know. While an assembly plant employs 10’s of direct workers, the number of indirect employees is far greater. Without quantifying the numbers, I suggest the supply chain is where the greatest employee layoffs will occur. The closure of plants will be more severe to the local economy than any dealership. The Assembly Plants employee several hundred well paid people. Plants utilize all levels of talents from minimum abilities to hi-tech well educated positions. These jobs cannot be easily replicated to other industries; especially for those in the higher level technical fields. Those folks with less sophisticated positions will not be compensated as well or have the benefits they now enjoy. The local municipalities will experience an enhanced decline of revenue and increased usage of entitlements creating greater pressure on the local governments.
What has not been mentioned are the losses by local suppliers of goods and services to these plants: raw materials, tools, machinery, repair services, taxes, utilities, office supplies, fuel and oil, printing, Sales and Marketing services (newspaper, radio and TV advertising), food concessions and on.
A greater loss is in the Supply Chain. Manufacturers’ Supply Chains cover many 1000’s of suppliers residing in every state. The Supply Chain runs very deep. By Deep, I refer to what economists call the Multiplier Effect. Every dollar spent goes through the economy 9 times. Use this calculation to estimate the number of levels of a Supply Chain.
By Way of Explanation: the Supply Chain provides the raw materials, parts and sub-assemblies to assemble a car; such as engines, frames, tires, dashboards, seats, etc. Each of those suppliers in turn contracts for raw materials, parts and sub-assemblies from their Supply Chain; such as sheet metal, rubber, gaskets, glass, etc. This Supply Chain progression continues many levels until you arrive at the smallest of parts and unrefined raw materials; example, a small job shop that extrudes brake lines, a job shop making screws, a job shop making spacers and the hundreds of suppliers providing them raw materials. At the bottom of this Supply Chain you will find mom and pop providers of materiel to either any level of the Supply Chain – the manufacturer, parts manufacture or sub-assembly manufacturers.
Seeing that GM and Chrysler were heading to Bankruptcy Court many of these Supply Chain providers filed for reorganization protection for non-payment by the manufacturers. The consequence of the government using the 363 filing became horrific to these suppliers descending from the secondary level to the smallest job shopper.
A quick outline of the crippling effects of the 363:
1. The suppliers will not be paid for materials sold to Chrysler enforcing non-payment to all levels of the supply chain; if the president uses the same tactic at GM, then those suppliers will not be paid on those parts and components either;
2. These suppliers will not meet the terms of their Financing Agreements at now crippled banks, hence they will not be able to borrow to meet their supply chain contractual obligations nor will they be able to borrow fresh funds for new projects at the new GM and Chrysler;
3. The cascading non-payment by senior partners at every level, defaults on banking agreements will increase, financial losses will be unsustainable and the weakened financial conditions creates an inability to borrow fresh funds for the new post bankruptcy manufacturers. At the lower ends of the supply chain, the small business suppliers who can’t meet their bank loans will fail and go out of business.
Draw a mental picture of this cascading default and you will see that the negative effects are huge, untold and uncalculated at the white house. “They don’t know what they don’t know and they don’t know what they won’t know!”
What happens to the all new and improved Chrysler and GM? What effect does the above outline have? Let’s see:
First, Chrysler, if successful, will be absorbed into Fiat (by fiat, excuse the pun). Chrysler will need to retool all of its plants to produce mini-cars designed by Fiat. Chrysler will not need American design engineers as the plans are coming from Italy. Plans will be redrawn and there will be new production contracts between the union and the union ownership (spelled government and UAW). Next, Fiat will make available its vehicles through the slimmed down dealership network (Please note: Fiat has tried twice unsuccessfully to penetrate the US market failing to get footings due to quality control and design issues.) Lastly, the newly retooled plants will need to reach Supply Chain contracts for raw materials, parts and sub-assemblies. The maimed and crippled American Supply Chain members which swallowed, but not absorbed, the losses from the bankruptcy will be too stressed to finance any new contracts. The American Supply Chain is broken. Some parts suppliers may survive if they change payment terms to CIA (Cash In Advance). This means the government will have to infuse cash to prepay the suppliers. (After all, who can be trusted GM or the government that refused to pay the existing bills?) In the alternative, Fiat will rely on its existing parts suppliers from its European Supply Chain and circumvent the US vendors. This means the loss of millions of Supply Chain manufacturing jobs in the US.
What about GM? The characteristics are the same but to a greater degree. The precursor action of the White House and the UAW – the forced GM CEO change and the decision to not build the smaller prototype mini-cars in China rather return production to the US, prefaces the government’s plan to follow the same 363 route. Where will the engineering and re-engineering of the new parts be headquartered? Where will they be manufactured? Where will the parts and sub-assemblies be built? The hostile action of not paying the millions of dollars of suppliers’ bills implemented by the new Ownership Team, the UAW and Government, will not make building a new Supply Chain easy. There will be little choice for GM to sub-contract out the raw materials, parts and sub-assemblies to Daiwa in China. This will allow minimum final assembly in the US. The job losses, the income losses, the financial losses will all be born by the local town and county governments seeking bailout funding from the federal government. The 9 billion dollars that the UAW receives from Fiat should have the proviso that the UAW absorbs all of the social costs of the plant and dealership local closings – not simply for union employees but for the remainder of the supply chain beginning with the specialty vendors who are mom and pops.
CONCLUSION
There is no denying that Chrysler and GM needed a thorough overhaul of their girth. Chrysler was too fat despite all its JIT &, Lean Management techniques. Chrysler is an example of a once great company brought to its knees by non-auto leadership. It was given a new lease on life by a great motor-head, Lee Iacocca. After Iacocca, the internal turmoil returned due to managements own interference, interloping non-auto type investors and inexplicable union rules. Ultimately, it was banker operated – the economic kiss of death. I have expressed this to both companies for over 10 years and through 3 managements at Chrysler.
Am I a Waggoner or Nardelli fan? No. I have said that Waggoner many times they should not have been given the position; Waggoner is a very smart man with great auto knowledge but did not have the physical mien or presence to maintain control and change systemic problems. Nardelli? Why him?
The two companies needed to go into Chapter 11 and reorganize two years ago or without political interference last year, definitely before their companies imploded. The current Committee of Ten goals would have been met very soon after being in reorganization: the two top officials would have been swept aside, payments would have been rescheduled to meet cash flow, the union contracts that created the labor cost burden and inefficiencies would have been renegotiated under court supervision, the legacy costs would have been transferred to the Pension Board which in turn would recalculate, reset and standardize the terms and conditions to meet the norm for all pensioners. All creditors would be settled openly and fairly in line with standard operational court procedures.
The transfer of legacy costs (depending on make and model, $2300 to $2700 per unit) would make funds available to the manufacturers for R&D. The lack of R&D funds is a major issue when discussing Clean Air Act changes and competition with foreign auto makers. The lack of R&D funds makes keeping up with the Hondas very difficult.
What did the government takeover provide? A shifting of legacy pension costs the government to fund however at the current cost levels that crippled the industry.
We have crippled the American Supply Chain partners. The all new GM and Chrysler will require an all new Supply Chain to be negotiated with suppliers and sub-assembly manufacturers crippled by the new ownership Committee of Ten. The negotiations will be acrimonious at best to provide best pricing and terms for automobile parts and materials to subsidized manufactured cars that marketing analysis has proven US buyers do not want and in some cases cannot fit into.
Some thoughts to provide to your colleagues to review when in these discussions:
1. What and When is the End Game for the Government? No one will buy the Government’s ownership position as long as the UAW owns substantial interest and protects the employment agreements they put into place; the corollary is that no one will want to buy the UAW stock if the US government is the big dog in the house. To sell the company, there will have to be a short fall to both in order entities to close on a price and terms. The government will not quickly get its money back.
2. There have been massive losses due to the Chrysler bankruptcy born by persons and entities yet to be determined and amounts that will be cloaked in mis-speak and relegated to page 50 little box entries in the news and not covered in the news. What about these people and companies?
3. The stated loss of jobs is the tip of an iceberg; the losses as outlined above are systemic and will surface piecemeal over the next several months without knowledge, comment or notice by the Committee of Ten. The inference being what they don’t know – doesn’t happen! Since it is a committee, there is no individual responsibility or accountability they are protected in a miasma of words and ideas.
4. We will be transferring more of our auto manufacturing industry abroad as we have stomped on the “little people” who make the basest components that are bundled and rebundled into components and sub-assemblies. Analogy: the seed growers are shut down to save the tree farming industry. Query: Hummer being sold to China? What about our military needs?
5. The next 363 that the government sends to bankruptcy court needs your vocal opposition to prevent the total evaporation of the industry. Those Dealers, suppliers and vendors are your constituents and the cost of their demise will be born by your towns, counties and states. You need to be heard now or you will be fighting their fight in arrears – seeking entitlement programs for the people that were hard working tax-paying people who are the heart and soul, if not the face of the industry.
Sirs: thank you for taking the time to review this piece. We can make additional material available to you on this topic. As a first step, please review our webpage [www.chesapeakebayassociates.com ] for additional information (( Menu:: Opinions and Newsletters)). In the alternative, You can contact the writer by telephone and / or email at [T: 610.259.3178 or johnK@cbayassoc.com ] for discussion or other materials. The effect of these bankruptcies is a death sentence to small businesses throughout the country. - jjk
*** Pre-Published
Tuesday, June 16. 2009
'Boycotting Chrysler and GM is a bad road'
Reply to Michael Smerconish June 14, 2009 --- Chrysler - GM Bailouts
In reply to your article on the Chrysler / GM transformation to becoming a government run institution. There is a great difference between the Lee Iaccocca turnaround of Chrysler Corp of the 1980's and this bailout situation.
To differentiate The Iaccocca Fix versus the Government Fix. First and foremost is Mr. Iaccocca himself was a "motor head". He was an educated and trained automotive engineer before moving to the Marketing and Sales portion of Ford Motors where he led the design, development, production and marketing of the iconic Mustang brand. He was an auto guy. He came over to Chrysler and brought intrinsic industry knowledge of how to design, build, maintain, market, sell and finance a car. He knew autos.
What was the first appearance that there would be problems? The president tried to appoint an "auto czar". No one accepted the position. Ultimately, a committee of ten was created. Operationally, this amounts to No Individual Accountability of decision making. The most important job of an executive is decision making and responsibility. A committee eradicates individual responsibility.
The second problem was the appointment of ten committee members who had zero knowledge of automobile, Production, Manufacturing, Marketing or Sales. The committee was to be lead by a young law school grad with no business experience. In fact one member does not own a car and two own American made cars! Their knowledge base of the industry is not even tangential.
The most grievous offense was the direct involvement in corporate policies. While the president publically states he has taken no direct involvement in the operations of the company, he relieved Waggoner from his dutiesat GM, cut the marketing budget in half at Chrusler after initially cutting it to zero and now has hand picked the new Chairman of the Board - a retired AT&T executive with no automotive experience.
The current auto bailout began for all the wrong reasons and has escalated for even more wrong reasons. All decided by non-auto people. The original loans in the fall of '08 were for R&D to investigate greater fuel efficiency (mileage) capabilities. Subsequently, the congress has passed the president's fuel economy standards moving the target dates up ten years. The problem with the fuel efficiency was there was little R&D money at the Big 3 - now 1.
Then came, by today's measure, a small loan for working capital because the financial markets and industry had collapsed. The auto industry was shut out from working capital loans, commercial paper and bond markets and end loan auto financing lines of credit. One cannot sell the autos unless the masses can have financing to pay for them.
Quick note to understand the interconnection of the above problems. The "profit" on the auto is in the end loan financing and insurance sales not the product sales. An unfortunate system that has been the current history of the auto industry. Problem: accounting and finance systems hiding the production and management errors. As the money markets denied the consumers, the producers could not maintain the turns of cash to cover current payments. A problem every small business experiences when one large customer fails to pay his bill. The difference being here is that the auto industry is bigger than life, larger than some countries GDP. When GM sneezes Joe Schmo's Job Shop or Henry Hudson's sheet metal shop fails.
Why the current course? Car people have been calling for the auto industry to do a thorough housecleaning reorganization in bankruptcy court for several years now. Manufacturer and Political Ego considerations were the main reason to stay out of Chapter 11. The heads of the Manufacturers could not see their way to taking the "greatest" industry into bankruptcy. The vaunted American car manufacturers in bankruptcy? The repercussions around the world would be enormous. However, last fall and throughout the first quarter, the companies were at that point of no return. Enter the politicos. Friends in high places that owe you big are expected to pay back big - that is the RULE of Chicago politics. Everyone in the industry knows the largest component of the cost of an American automobile is the Legacy cost - the cost of the retirees. The cost of the retired employees is greater than the current labor cost in some models. I wrote about this in our newsletter last year including the numerics of those costs. The government has now assumed a large part of those legacy costs. These legacy costs would have been jetisoned in an open bankruptcy; the difference is that the costs to the taxpayer would be lower as the Federal Pension Insurance Fund would recast the benefits in line with all other industries - not the current 100% benefit pay plan. The other major event would be the current union employment contract and its work rules would be voided and a brand new one negotiated "de novo" with all of the pressure transferred to the union to negotiate in good faith and to comply.
Using the 363 section of the bankruptcy law and appointing the Union as a "Joint Venture Partner with the US Government" has precluded all of the above. The secured bond holders - normally in first position got bounced, many dealers were dropped and will not recieve their contractual buyouts, suppliers of raw materials, parts, sub-assemblies and equipment and materials will not be paid. They will take the loss. Had the normal 11 taken place, these folks may not have received a hundred per cent of their investment; however, they would receive something.
Now we here from the president and the vice-president they are creating jobs, the stats say otherwise. They state the employment retention will kick in beginning in September. This coincides with the return of the school teachers - the largest portion of the stimulus package is education. However, they say nothing of the over 200,000 job losses in the dealerships alone. The numbers in the supply chain will run another 150,000 jobs and then there are the small business owners who will probably go out of business completely.
Now in conclusion, we have a committee of ten very inteligent people on a committee, lead by a law school graduate, making recommendations on these companies to the President to make final decisions. NOT one of which has executive, automotive or production experience (excepting the union reps who worked in the shops). The president appointed a former ATT executive to Chair the Board - he admits no knowledge of the industry. The microcosm of the auto industry in very deep, employees train in their jobs for years to become part of management and then more time to learn more and more. Am I to believe that in six months this committee has learned the entire industry and its components. If they did learn the industry en toto, they would never announce 40,000 lost jobs unless they were bald face lying to us. The industry cannot calculate the losses at this juncture because the depths are unknown.
The plan is for all of us to drive cars like the Smart Car - not fuel efficient for its size and to assist with those who seek only the end of the internal combustion engine - see books by Al Gore. "Your pickup truck is an offense against humanity" mantra says the chanter doesn't get it. How does a contractor / farmer / anyone get a load of anything into a minicar. Note to non motor heads, Fiat has tried to enter US markets twice before and the products they offered were not accepted by the public for size, price and quality reasons. What of the supply chain for the new companies? Once we put all these rich suppliers out of business, who will supply the parts and assemblies? Start looking to the Chinese and Indians and to Europe. Once we bankrupt the supply chain, who will fund their revival? Who will make them whole? No Cash, No Suppliers (many of which are destroyed by this weeks actions as well) more lost jobs for hundreds of thousands of people.
The job looks easy if you don't know what it is, what it entails, or never been to a showroom let alone an assembly line.
In light of the above, good cash has chased bad cash and hopes of retrieval are miniscule. The source of repayment is to have the companies on their feet, making profits, generating cash and then be sold to private investors. Who wants a minority share of a government majority owned company. Where the other half of ownership is the same union that assists in preserving the balance of the problems. (This can also be said of the bank bailouts, especially when the president is making the final decisions on his own.) - jjK
In reply to your article on the Chrysler / GM transformation to becoming a government run institution. There is a great difference between the Lee Iaccocca turnaround of Chrysler Corp of the 1980's and this bailout situation.
To differentiate The Iaccocca Fix versus the Government Fix. First and foremost is Mr. Iaccocca himself was a "motor head". He was an educated and trained automotive engineer before moving to the Marketing and Sales portion of Ford Motors where he led the design, development, production and marketing of the iconic Mustang brand. He was an auto guy. He came over to Chrysler and brought intrinsic industry knowledge of how to design, build, maintain, market, sell and finance a car. He knew autos.
What was the first appearance that there would be problems? The president tried to appoint an "auto czar". No one accepted the position. Ultimately, a committee of ten was created. Operationally, this amounts to No Individual Accountability of decision making. The most important job of an executive is decision making and responsibility. A committee eradicates individual responsibility.
The second problem was the appointment of ten committee members who had zero knowledge of automobile, Production, Manufacturing, Marketing or Sales. The committee was to be lead by a young law school grad with no business experience. In fact one member does not own a car and two own American made cars! Their knowledge base of the industry is not even tangential.
The most grievous offense was the direct involvement in corporate policies. While the president publically states he has taken no direct involvement in the operations of the company, he relieved Waggoner from his dutiesat GM, cut the marketing budget in half at Chrusler after initially cutting it to zero and now has hand picked the new Chairman of the Board - a retired AT&T executive with no automotive experience.
The current auto bailout began for all the wrong reasons and has escalated for even more wrong reasons. All decided by non-auto people. The original loans in the fall of '08 were for R&D to investigate greater fuel efficiency (mileage) capabilities. Subsequently, the congress has passed the president's fuel economy standards moving the target dates up ten years. The problem with the fuel efficiency was there was little R&D money at the Big 3 - now 1.
Then came, by today's measure, a small loan for working capital because the financial markets and industry had collapsed. The auto industry was shut out from working capital loans, commercial paper and bond markets and end loan auto financing lines of credit. One cannot sell the autos unless the masses can have financing to pay for them.
Quick note to understand the interconnection of the above problems. The "profit" on the auto is in the end loan financing and insurance sales not the product sales. An unfortunate system that has been the current history of the auto industry. Problem: accounting and finance systems hiding the production and management errors. As the money markets denied the consumers, the producers could not maintain the turns of cash to cover current payments. A problem every small business experiences when one large customer fails to pay his bill. The difference being here is that the auto industry is bigger than life, larger than some countries GDP. When GM sneezes Joe Schmo's Job Shop or Henry Hudson's sheet metal shop fails.
Why the current course? Car people have been calling for the auto industry to do a thorough housecleaning reorganization in bankruptcy court for several years now. Manufacturer and Political Ego considerations were the main reason to stay out of Chapter 11. The heads of the Manufacturers could not see their way to taking the "greatest" industry into bankruptcy. The vaunted American car manufacturers in bankruptcy? The repercussions around the world would be enormous. However, last fall and throughout the first quarter, the companies were at that point of no return. Enter the politicos. Friends in high places that owe you big are expected to pay back big - that is the RULE of Chicago politics. Everyone in the industry knows the largest component of the cost of an American automobile is the Legacy cost - the cost of the retirees. The cost of the retired employees is greater than the current labor cost in some models. I wrote about this in our newsletter last year including the numerics of those costs. The government has now assumed a large part of those legacy costs. These legacy costs would have been jetisoned in an open bankruptcy; the difference is that the costs to the taxpayer would be lower as the Federal Pension Insurance Fund would recast the benefits in line with all other industries - not the current 100% benefit pay plan. The other major event would be the current union employment contract and its work rules would be voided and a brand new one negotiated "de novo" with all of the pressure transferred to the union to negotiate in good faith and to comply.
Using the 363 section of the bankruptcy law and appointing the Union as a "Joint Venture Partner with the US Government" has precluded all of the above. The secured bond holders - normally in first position got bounced, many dealers were dropped and will not recieve their contractual buyouts, suppliers of raw materials, parts, sub-assemblies and equipment and materials will not be paid. They will take the loss. Had the normal 11 taken place, these folks may not have received a hundred per cent of their investment; however, they would receive something.
Now we here from the president and the vice-president they are creating jobs, the stats say otherwise. They state the employment retention will kick in beginning in September. This coincides with the return of the school teachers - the largest portion of the stimulus package is education. However, they say nothing of the over 200,000 job losses in the dealerships alone. The numbers in the supply chain will run another 150,000 jobs and then there are the small business owners who will probably go out of business completely.
Now in conclusion, we have a committee of ten very inteligent people on a committee, lead by a law school graduate, making recommendations on these companies to the President to make final decisions. NOT one of which has executive, automotive or production experience (excepting the union reps who worked in the shops). The president appointed a former ATT executive to Chair the Board - he admits no knowledge of the industry. The microcosm of the auto industry in very deep, employees train in their jobs for years to become part of management and then more time to learn more and more. Am I to believe that in six months this committee has learned the entire industry and its components. If they did learn the industry en toto, they would never announce 40,000 lost jobs unless they were bald face lying to us. The industry cannot calculate the losses at this juncture because the depths are unknown.
The plan is for all of us to drive cars like the Smart Car - not fuel efficient for its size and to assist with those who seek only the end of the internal combustion engine - see books by Al Gore. "Your pickup truck is an offense against humanity" mantra says the chanter doesn't get it. How does a contractor / farmer / anyone get a load of anything into a minicar. Note to non motor heads, Fiat has tried to enter US markets twice before and the products they offered were not accepted by the public for size, price and quality reasons. What of the supply chain for the new companies? Once we put all these rich suppliers out of business, who will supply the parts and assemblies? Start looking to the Chinese and Indians and to Europe. Once we bankrupt the supply chain, who will fund their revival? Who will make them whole? No Cash, No Suppliers (many of which are destroyed by this weeks actions as well) more lost jobs for hundreds of thousands of people.
The job looks easy if you don't know what it is, what it entails, or never been to a showroom let alone an assembly line.
In light of the above, good cash has chased bad cash and hopes of retrieval are miniscule. The source of repayment is to have the companies on their feet, making profits, generating cash and then be sold to private investors. Who wants a minority share of a government majority owned company. Where the other half of ownership is the same union that assists in preserving the balance of the problems. (This can also be said of the bank bailouts, especially when the president is making the final decisions on his own.) - jjK
Thursday, June 11. 2009
Credit Card Reform
Several months ago, in our published newsletter, we called for reforms of the credit card industry as a requirement of TARP funding (not that we agree in any way with TARP, we don’t). At that time we referred to them as the ten commandments of credit cards that had to be mandated, monitored and regulated. Some of those items have been approached “qualitatively” but not “quantitatively”. Meaning: the banks can determine the spirit of the regulation and meet compliance. As we have seen with the Hedge Funds and Mr. Madoff and others, the spirit of the regulation is meaningless except as feel good legislation. For $25,000 worth of legal work, the banks will have worked through and around this inconvenience. Therefore, the true meaning of the legislation has to be quantified.
Some examples of the commandments that need to be included:
1. Fees: the banks are charging fees for everything including late payments and over the limit fees (as you discussed in your article)
a. The fees should be regulated and not punitive, $30, $35 or $45 (if you are a poor borrower and there credit line is $500, this fee approaches 10% of the credit line) is not a notice that you forgot that is punishment; these fees should be capped at a cost of service level – how much does it cost to process a late fee and to electronically determine lateness? Esoteric question, yes; but the result is $5 to 10 – the fee must be reasonable;
b. Late fees should not be accrued on the due date rather they should be accrued based on the “typical” late fee imposition of other bank credit facilities, that is after 7, 10 or 15 days;
c. Over the Limit fees should not be incurred when the bank creates the over the limit level; that is, the bank unilaterally reduces your credit limit to the existing balance because of their credit policy changes, thus when the bank adds the new interest amount, the account goes over the limit and the payment and interest rates are readjusted again.
d. Banks cannot raise rates on any account owner more than one time per twelve month period – there are instances when credit card company A raises rates on accounts across the board to increase its income; credit card A then sells the cards to credit card company B who immediately raises the rates to cover the cost of buying the debts.
e. Universal Credit Analysis and Automated Updating should be banned. This policy states that if you are late on any other credit facility to any the creditor or any other creditor, then you account is flagged for credit rate increases; from the bank stand point you have devalued your credit, from the borrower stand point he has met his legal obligations to the bank;
f. 70% usage rule – this also should be banned, in this case certain lenders issue your credit line, if your use exceeds 70% of the credit line, they flag your account and began to reduce your overall credit availability. If a bank tells you that your credit line is $1000, they should stand by that so the borrower knows his financial capabilities
g. Timing: the banks should not be allowed to increase rates or fees without regulatory approval, as insurance rates, traditional bank rates and fees
h. Implementation of the new rules as stated in your article is scheduled for February 1020. In light of the timing for 1 through g above, implementation should be immediate, legal stricture may require 90 days.
i. Rate Ceilings should be implemented. The credit card companies worked hard to find locations where they would have employment power to have states fight to abandon existing usury laws; that is the reason for the concentration of bank credit cards in DE and SD; Federal Regulation would be required to control the interest rates. Currently, the borrowing window is at 0+% to the bank and they are charging 20 - 35% on accounts with balances. Bank loan spreads of 2% to 4% are the norm, is it any wonder they want to put all the small business people on credit cards instead of hiring and training lenders to do the lending.
j. The bank cannot unilaterally close accounts or reduce lines of credit when the customer has not used it for a period of time. This is a positive that the customer is utilizing his credit appropriately on a need only basis. This recent phenomenon of the last nine months is for the convenience of the bank to reduce its outstanding contingent liability for regulatory compliance purposes - bank regulations measure loans outstanding over paid in capital.
This represents only the tip of one iceberg of the banking industry. The banks through all of the above have been counting on the small personal and business accounts to increase fee income to support a larger portion of operations as they pursue other avenues to recover their capitalization.
Effectiveness looms large as a question one with the new legislation. The other big question becomes, now that the government is the de facto owner of the largest bank and credit card issuer, is there a conflict of interest in the covered legislation and the timing of those changes? Is this is the reason implementation is scheduled for February 2010 and not sooner.
From this writer’s seat, “The Tail Is (Still) Wagging the Dog”. As good intentioned as the congressional committees may be, they still are following the Lead Dog and the Lead Dog is the NY Banking Community! - jjKilleen
Some examples of the commandments that need to be included:
1. Fees: the banks are charging fees for everything including late payments and over the limit fees (as you discussed in your article)
a. The fees should be regulated and not punitive, $30, $35 or $45 (if you are a poor borrower and there credit line is $500, this fee approaches 10% of the credit line) is not a notice that you forgot that is punishment; these fees should be capped at a cost of service level – how much does it cost to process a late fee and to electronically determine lateness? Esoteric question, yes; but the result is $5 to 10 – the fee must be reasonable;
b. Late fees should not be accrued on the due date rather they should be accrued based on the “typical” late fee imposition of other bank credit facilities, that is after 7, 10 or 15 days;
c. Over the Limit fees should not be incurred when the bank creates the over the limit level; that is, the bank unilaterally reduces your credit limit to the existing balance because of their credit policy changes, thus when the bank adds the new interest amount, the account goes over the limit and the payment and interest rates are readjusted again.
d. Banks cannot raise rates on any account owner more than one time per twelve month period – there are instances when credit card company A raises rates on accounts across the board to increase its income; credit card A then sells the cards to credit card company B who immediately raises the rates to cover the cost of buying the debts.
e. Universal Credit Analysis and Automated Updating should be banned. This policy states that if you are late on any other credit facility to any the creditor or any other creditor, then you account is flagged for credit rate increases; from the bank stand point you have devalued your credit, from the borrower stand point he has met his legal obligations to the bank;
f. 70% usage rule – this also should be banned, in this case certain lenders issue your credit line, if your use exceeds 70% of the credit line, they flag your account and began to reduce your overall credit availability. If a bank tells you that your credit line is $1000, they should stand by that so the borrower knows his financial capabilities
g. Timing: the banks should not be allowed to increase rates or fees without regulatory approval, as insurance rates, traditional bank rates and fees
h. Implementation of the new rules as stated in your article is scheduled for February 1020. In light of the timing for 1 through g above, implementation should be immediate, legal stricture may require 90 days.
i. Rate Ceilings should be implemented. The credit card companies worked hard to find locations where they would have employment power to have states fight to abandon existing usury laws; that is the reason for the concentration of bank credit cards in DE and SD; Federal Regulation would be required to control the interest rates. Currently, the borrowing window is at 0+% to the bank and they are charging 20 - 35% on accounts with balances. Bank loan spreads of 2% to 4% are the norm, is it any wonder they want to put all the small business people on credit cards instead of hiring and training lenders to do the lending.
j. The bank cannot unilaterally close accounts or reduce lines of credit when the customer has not used it for a period of time. This is a positive that the customer is utilizing his credit appropriately on a need only basis. This recent phenomenon of the last nine months is for the convenience of the bank to reduce its outstanding contingent liability for regulatory compliance purposes - bank regulations measure loans outstanding over paid in capital.
This represents only the tip of one iceberg of the banking industry. The banks through all of the above have been counting on the small personal and business accounts to increase fee income to support a larger portion of operations as they pursue other avenues to recover their capitalization.
Effectiveness looms large as a question one with the new legislation. The other big question becomes, now that the government is the de facto owner of the largest bank and credit card issuer, is there a conflict of interest in the covered legislation and the timing of those changes? Is this is the reason implementation is scheduled for February 2010 and not sooner.
From this writer’s seat, “The Tail Is (Still) Wagging the Dog”. As good intentioned as the congressional committees may be, they still are following the Lead Dog and the Lead Dog is the NY Banking Community! - jjKilleen
What Now in Bankruptcy?
Chrysler secured creditors applied to the Supreme Court for help in the bankruptcy of Chrysler Motors. They received a one day stay only. What does it mean?
Chrysler’s prime assets were sold to Fiat for no money. Fiat is bringing its proprietary small car manufacturing technology to the company in lieu of cash. The US and Canadian governments receive seventy two per cent of a new company; the UAW receives $9 billion in cash and 17% of the company. The secured creditors (bond holders - mostly pension funds, principally the Indiana Teachers, Public Workers & Police Pension Fund) who had liens on all of the assets transferred and not transferred receives about 10% for its $27 billion cash input. Seven Hundred dealers across the US had there franchises revoked without Chrysler paying their buyout fees. Supply Chain Partners, administrative claims and unsecured creditors will not be paid. These downstream losses are in the billions with more billion dollar losses coming when the GM bankruptcy is added.
What next? How has bankruptcy laws changed? What does that mean to the creditors and the borrowers? More to the point, what does it mean to you, the company owner?
Precedence has been set by this case for the GM case that has begun percolating in the bankruptcy court. The government will try to follow this same model. It will be complicated further as congress wants to get its fingers into the cookie jar to preserve local jobs. After all, no politician wants to lose jobs in their district.
The current outcome: Supply Chain Partners (some have already filed Bankruptcy in advance of the Chrysler and GM filings) because they were not being paid and now will not be paid more than thirteen cents on the dollar – probably less – and there is no way for them to pay their Supply Chain Partners. Administrative and unsecured claims are now at two cents at best. Auto Dealers with 70, 80, 90 histories with Chrysler, Dodge or Jeep are losing their franchises. They will not be paid their contractual termination fees. These sales units bore the frontline of all the mistakes and errors of the manufacturer – this is their reward for being trustworthy, faithful and dedicated to the medallion of the nose of those vehicles.
As stuff rolls downhill, so do these losses. The lower in the food chain the more severe the losses. Example: Dodge has sub-assemblers, parts and raw materials delivered to the assembly plant, in turn those suppliers have their supply chain partners bring raw materials and subassemblies to them, and on and on down the line to include single product job shops cutting, shaping, extruding, etc materials for delivery to the beginning of the manufacturing process. If the direct Supply Chain Partner is not paid, then each subsequent tier goes unpaid until you reach the job shoppers. These lower tier supplier companies and the dealers are in all fifty states, in thousands of towns and cities (think Toledo, Cleveland, Indiana). They are the stalwart employers for these towns and regions. This process just shut down many of those specialized job shops and manufacturers in small towns everywhere now must lay off payroll.
In other words, without the Supply Chain being paid, the All – New Fiat led Chrysler will not have the same reliable parts partners to build those new mini-cars. Parts will have to be imported from Europe-Asia to fill the void as many of the US partners have now been bankrupted. More lost auto manufacturing related jobs gone. Company owners and dealership owners employee tens of thousands more. This is the first shoe to drop. The GM proceedings will produce greater losses to many of these same suppliers. When the Pontiac, Saturn medallions are retired and the Hummer trucks move to China where do all of those jobs go?
The auto industry is not a simple model. It is an economy unto itself - larger than most countries. It is extremely more complex than other industries, including governments. It is purely simplistic to believe that these “shot gun” bankruptcies affect only the existing bondholders. As presented above, the effects of the auto industry are worldwide affecting industries such as finance, insurance, retail sales, tanning, plastics and nylon, chemical, engineering, accounting, printing and many more in addition to assembly manufacturing. The thought that a law school graduate is now the point person for the paternalistic de facto CEO demeans all those employed at every level of the industry. In corporations, the Quick and Simple Solutions never develop into lasting profitable solutions.
The political favors have been paid. The winners have been determined. The losers have been punished including those Indiana Pension Funds that lent the money to keep Indiana jobs safe while funding the excesses in Detroit. The collateral damage is immeasurable at this juncture. Whatever the total losses amount to, know this: your ability to obtain credit has been greatly hampered by three key factors: Banks have limited cash to lend to their customers; the banks have just been notified that the Bankruptcy Rules can be bent to deny secured creditors in favor of government loans; finally, the cram down losses will negatively affect the companies and their owners capacity to repay existing credits and negatively affect the individual creditworthiness of individual owners. jjKilleen
Chrysler’s prime assets were sold to Fiat for no money. Fiat is bringing its proprietary small car manufacturing technology to the company in lieu of cash. The US and Canadian governments receive seventy two per cent of a new company; the UAW receives $9 billion in cash and 17% of the company. The secured creditors (bond holders - mostly pension funds, principally the Indiana Teachers, Public Workers & Police Pension Fund) who had liens on all of the assets transferred and not transferred receives about 10% for its $27 billion cash input. Seven Hundred dealers across the US had there franchises revoked without Chrysler paying their buyout fees. Supply Chain Partners, administrative claims and unsecured creditors will not be paid. These downstream losses are in the billions with more billion dollar losses coming when the GM bankruptcy is added.
What next? How has bankruptcy laws changed? What does that mean to the creditors and the borrowers? More to the point, what does it mean to you, the company owner?
Precedence has been set by this case for the GM case that has begun percolating in the bankruptcy court. The government will try to follow this same model. It will be complicated further as congress wants to get its fingers into the cookie jar to preserve local jobs. After all, no politician wants to lose jobs in their district.
The current outcome: Supply Chain Partners (some have already filed Bankruptcy in advance of the Chrysler and GM filings) because they were not being paid and now will not be paid more than thirteen cents on the dollar – probably less – and there is no way for them to pay their Supply Chain Partners. Administrative and unsecured claims are now at two cents at best. Auto Dealers with 70, 80, 90 histories with Chrysler, Dodge or Jeep are losing their franchises. They will not be paid their contractual termination fees. These sales units bore the frontline of all the mistakes and errors of the manufacturer – this is their reward for being trustworthy, faithful and dedicated to the medallion of the nose of those vehicles.
As stuff rolls downhill, so do these losses. The lower in the food chain the more severe the losses. Example: Dodge has sub-assemblers, parts and raw materials delivered to the assembly plant, in turn those suppliers have their supply chain partners bring raw materials and subassemblies to them, and on and on down the line to include single product job shops cutting, shaping, extruding, etc materials for delivery to the beginning of the manufacturing process. If the direct Supply Chain Partner is not paid, then each subsequent tier goes unpaid until you reach the job shoppers. These lower tier supplier companies and the dealers are in all fifty states, in thousands of towns and cities (think Toledo, Cleveland, Indiana). They are the stalwart employers for these towns and regions. This process just shut down many of those specialized job shops and manufacturers in small towns everywhere now must lay off payroll.
In other words, without the Supply Chain being paid, the All – New Fiat led Chrysler will not have the same reliable parts partners to build those new mini-cars. Parts will have to be imported from Europe-Asia to fill the void as many of the US partners have now been bankrupted. More lost auto manufacturing related jobs gone. Company owners and dealership owners employee tens of thousands more. This is the first shoe to drop. The GM proceedings will produce greater losses to many of these same suppliers. When the Pontiac, Saturn medallions are retired and the Hummer trucks move to China where do all of those jobs go?
The auto industry is not a simple model. It is an economy unto itself - larger than most countries. It is extremely more complex than other industries, including governments. It is purely simplistic to believe that these “shot gun” bankruptcies affect only the existing bondholders. As presented above, the effects of the auto industry are worldwide affecting industries such as finance, insurance, retail sales, tanning, plastics and nylon, chemical, engineering, accounting, printing and many more in addition to assembly manufacturing. The thought that a law school graduate is now the point person for the paternalistic de facto CEO demeans all those employed at every level of the industry. In corporations, the Quick and Simple Solutions never develop into lasting profitable solutions.
The political favors have been paid. The winners have been determined. The losers have been punished including those Indiana Pension Funds that lent the money to keep Indiana jobs safe while funding the excesses in Detroit. The collateral damage is immeasurable at this juncture. Whatever the total losses amount to, know this: your ability to obtain credit has been greatly hampered by three key factors: Banks have limited cash to lend to their customers; the banks have just been notified that the Bankruptcy Rules can be bent to deny secured creditors in favor of government loans; finally, the cram down losses will negatively affect the companies and their owners capacity to repay existing credits and negatively affect the individual creditworthiness of individual owners. jjKilleen
President Obama Survey
Evaluation of the President’s performance should not be immediate. All new CEO’s deserve “ramp up period” to implement their agenda. However, the actions of this administration are galloping through complicated issues with simple solutions. Throw dollars at it and it will fix itself is not a solution.
I serve a clientele of several hundred small businesses throughout the US. They have been dealing with the effects of the economy on small businesses for the last two years. At this time, there is no relief for small businesses nor recognition of their travails.
The bank bailout did not assist any small business. There are still no funds available for small businesses. The bailout assisted the top 20 banks and insurance firms. It would have been less costly on the taxpayers had the government spent bailout funds to repay the depositor accounts allowing them to recover the 17 -30% they lost in pension, 401(k), IRA, savings, insurance company reserves, etc funds. Allow the big money executives who lost the depositors’ funds to fail and lose their personal funds. Not be enriched for their incompetence.
As to the auto industry, the bailouts go well beyond the manufacturers. The transactions will create major losses on the participating small businesses in the supply chain. What about the subcontractors who built the drive trains, the seats, the engines? What of their suppliers of materials and the small machine shops who worked supplied them? All of these folks are about to lose the monies they were owed from the supply chain. Some have already filed for Chapter 11. Some will not recover and lose everything. Others will be severely incapacitated. What about of the franchise dealer owners? These companies have worked their lives to achieve success and now the rug is pulled from under them by the government. Bankruptcies and layoffs will follow in numbers well beyond the 40,000 at the GM plants promulgated from Washington DC.
We now have a new precedent in Bankruptcy Court. Political Standing and a governmental LIFO unsecured quasi-equity capital infusion takes precedence over the documented loans of the secured bond holders for distribution of the corporate carcass. What of these pension fund recipients? In the short term, Why would banks want to lend to small businesses if their perfected Security Lien is valueless. The ripple effect is that there will be less money available for small businesses.
The problem is one of political “spoils” driving economic policy: DC Intelligentsia Paternalism intent on protecting oppressed blue collar peons. The problem is the intelligentsia doesn’t know what it doesn’t know. That is they do not know or understand how a business operates to create money and jobs. Jobs are created from profitable companies expanding and growing. Law schools do not teach engineering, production management, sales and marketing, accounting and finance, etc. Placing a 30 year old law school graduate over GM and Chrysler demeans the knowledge base of an entire industry from CEO to Load Dock Technician. The rules of the game have changed. By overriding existing bankruptcy laws, the government has replaced the lid of Pandora’s Box with a prism to prevent scrutiny.
I have been tracking these problems for some time now. Feel free to review some of the articles in the newsletter and blog archives on our website. Please honor acknowledgement rules if you wish to borrow some of the materials. Permissions are granted easily, however, we do request to use the materials in advance. jjKilleen
*In response to Karen Klein's article in the Los Angeles Times
I serve a clientele of several hundred small businesses throughout the US. They have been dealing with the effects of the economy on small businesses for the last two years. At this time, there is no relief for small businesses nor recognition of their travails.
The bank bailout did not assist any small business. There are still no funds available for small businesses. The bailout assisted the top 20 banks and insurance firms. It would have been less costly on the taxpayers had the government spent bailout funds to repay the depositor accounts allowing them to recover the 17 -30% they lost in pension, 401(k), IRA, savings, insurance company reserves, etc funds. Allow the big money executives who lost the depositors’ funds to fail and lose their personal funds. Not be enriched for their incompetence.
As to the auto industry, the bailouts go well beyond the manufacturers. The transactions will create major losses on the participating small businesses in the supply chain. What about the subcontractors who built the drive trains, the seats, the engines? What of their suppliers of materials and the small machine shops who worked supplied them? All of these folks are about to lose the monies they were owed from the supply chain. Some have already filed for Chapter 11. Some will not recover and lose everything. Others will be severely incapacitated. What about of the franchise dealer owners? These companies have worked their lives to achieve success and now the rug is pulled from under them by the government. Bankruptcies and layoffs will follow in numbers well beyond the 40,000 at the GM plants promulgated from Washington DC.
We now have a new precedent in Bankruptcy Court. Political Standing and a governmental LIFO unsecured quasi-equity capital infusion takes precedence over the documented loans of the secured bond holders for distribution of the corporate carcass. What of these pension fund recipients? In the short term, Why would banks want to lend to small businesses if their perfected Security Lien is valueless. The ripple effect is that there will be less money available for small businesses.
The problem is one of political “spoils” driving economic policy: DC Intelligentsia Paternalism intent on protecting oppressed blue collar peons. The problem is the intelligentsia doesn’t know what it doesn’t know. That is they do not know or understand how a business operates to create money and jobs. Jobs are created from profitable companies expanding and growing. Law schools do not teach engineering, production management, sales and marketing, accounting and finance, etc. Placing a 30 year old law school graduate over GM and Chrysler demeans the knowledge base of an entire industry from CEO to Load Dock Technician. The rules of the game have changed. By overriding existing bankruptcy laws, the government has replaced the lid of Pandora’s Box with a prism to prevent scrutiny.
I have been tracking these problems for some time now. Feel free to review some of the articles in the newsletter and blog archives on our website. Please honor acknowledgement rules if you wish to borrow some of the materials. Permissions are granted easily, however, we do request to use the materials in advance. jjKilleen
*In response to Karen Klein's article in the Los Angeles Times
Wednesday, June 3. 2009
Farewell to Life Long Friends
Yesterday marked a sad day for me personally, professionally and for all Americans. It is the day the earth stood still. GM is no more. Farewell Bonneville, GTO, 442, Delta and Rocket 88 and 98’s! Good by plastic car from the planet Saturn. There were many good rides and many good times in those vehicles.
Yesterday also marked the day that the carcass of Chrysler was brought to its final resting place by a modern Joseph of Arimethea - Fiat Motors, the Italian auto manufacturer. We have grieved this loss several times over the past twenty years and have always had our hearts dashed. Lee Iacocca breathed a new life and spirit to this grand dame after Mr. Richards’ dastardly rape of the engineering superstar. Chrysler is a mongrel now after abusive ownership stints by previous European owners. This may well be the final wake that I attended for her. So farewell to the Hemi, The Road Runner, the ‘Cuda - Baccaruda and the Charger too! Farewell my Lovelies, Rest In Peace.
Your mortal souls have been turned over to a government committee lead by a 31 year old law school grad and a young president with no business experience who will lead by fiat (no pun intended). They proclaimed they will not handle the day to day operations – only set the policy goals and guidelines. It would be nice if either of them had a modicum of market analysis experience and some financial management experience.
To date, the Auto Manufacturer in Chief has exhibited an ability to throw good dollars after bad and elect himself as the Ultimate Executive Officer to decide on policy, product, standards and how to spend dollars, ex. cutting the Chrysler Marketing budget in half.
Survival of Chrysler Labels such as Jeep will probably continue. The engineering wonder of Jeep’s 4 wheel drive operation is still the major patents of the corporation. The motor configurations may need to be tuned and will be by the loose engineering of Fiat. Maybe the engineering from Chrysler can clean up the Fiat errors. There is no clear answer to the Chrysler dealer network on their fate although one could presume that it is not positive. It may be a couple of weeks before their future is in writing, though many are not waiting for the next shoe to drop and closing shop or changing medallions now. Good Luck to all of you. You served Chrysler well.
GM Dealers now have to contend with the Bankruptcy Court in NY overseeing everything the Federal Government and the UAW want. The crumbs on the table for the bond holders, creditors and dealers are scant for all the investment they have made to the company. The company is to be broken into two pieces, the Old GM and the New GM. Old GM will be owned by the existing stockholders. The New GM will be owned by the US Government and the UAW. A minor share will be owned by selected creditors, including the bondholders, many of whom are GM retirees who live on the interest checks monthly, other retirement funds, estates, and pension funds. For their investments to keep the boat afloat, they will receive a minor equity position, although their debts are over two times greater than the UAW claim. Banks, Credit Companies, Distributors, Parts Manufacturers and other trade creditors are on their own. The secured creditors of Old GM will receive title to the valueless assets that served as collateral security.
Hopefully for the Chrysler dealership network, Fiat will provide product to sell and services to offer. For GM Dealers, including the 1/3 more dealerships that GM will close this year following a year of over 1200 dealers of all brands closing, the story appears bleak.
In the micro sense this is mortality looking dealers in the squarely in the face. These are the same folks who made all the local parades, picnics and other town and county functions work for so many years. Every philanthropic need started at the dealerships. These dealers were the communities. They and their businesses will be sorely missed.
In the Macro, the economy will suffer greatly from this cut and run bankruptcy. A year ago we defined the job position of a politician, no where in any of those descriptive words was a listing for CEO of GM. The only politician I can recall that was a motorhead or motorwonk was George Romney, the ex-governor of Michigan.
Burning Mega-Cash is easy, even for a politician. Earning it is something politicians never learned. Telling the American people they will only buy and use “rice burners” and will be squished into oversized suitcases flies in the face of the American spirit. There is a limited market for these products. Example: will members of congress submit to be shuttled in Prius’s? I dare say not. So why do they want to put 6 foot plus men into vehicles built for 5 foot 5 inch women? Are they in league with Atkins or the South Beach diet folks or vegans?
Unemployment is critical to righting the economic ship. Auto workers are the tip of the iceberg. The government is telling us that the medallion cuts and the slamming shut of factories will layoff 20,000 more people. Union insiders anonymously declare this might approach 40,000. I believe the latter will be closer when we add to these numbers the employees of parts suppliers, engine manufacturers and dealerships.
The manufacturing and dealership employees are going to be hard pressed to find new work when their marketplace is being reduced to less than one-half its current size. These are talented professionals from: welders, mechanics, computer techs, technical service, mechanical and body service, sales, accountants and bookkeepers, management personnel.
The dealership loss affects the media through reduced newspapers, radio and TV advertising budgets. They were the leading advertising industry. To continue one step more, the news media is already hit be declining readership which holds down the advertising rates, now to lose the advertising buyers means the loss of more jobs in the newspapers – printers, ad copy persons, sales positions and the associated staff to support all of the above. Result more newspaper closings. More paper closings means more losses in the paper mills and the forestry industries, the equipment makers and the parts suppliers. It spirals on and on.
The secondary parts manufacturers might gain in supplying parts for Chrysler and GM models beginning in 2011 IF and WHEN Fiat decides the fate of Chrysler MoPar. Also, what will come of GM part manufacturer Daiwa? Delta Autobody? Detroit Diesel and Allison? Trane and others? What happens to all of those workers and families?
The adage “as goes GM, goes the American economy” was a vestige of Americanism. Now what? - John Killeen
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Tuesday, June 2. 2009
The Economic Bailout
The talk goes on and now the concentration is on AIG. AIG failed to realize the basic tenant of insurance "to insure risks by spreading the risks over many participants".
AIG elected to insure an entire industry by itself. They forgot that Pigs get fat, Hogs get slaughtered! Every farm boy knows that. I the roaring "00's", the newbies on Wall Street did not pay attention to the adage.
Why AIG is in the limelight is because it chose to insure all the reckless financial packages prepared, presented, sold and packaged by the Investment Bankers worldwide. AIG's insurance made the packages of CDO's bankable or investable depending on the financial institution.
Most unfortunately for AIG was the knowledge of the financing industry. While everyone looked at consumer credit scores to approve loans, the credit reporting agencies at D&B, Moody's and S&P were still giving excellent ratings to the CDO market which is wholly non-regulated. Note that CDO's are not MBS's. The former is a product of unregulated hedge funds and the latter is a regulated product of the commercial and investment banking industries. It was extremely necessary to have the product portfolios insured (AIG) since the ideal product has a tacit insurance of FANNIE, FREDDIE, SALLIE MAES and the US Government. That is the bride was dressed to look like a MBS. As it turns out, the bride was the Bride of Frankenstein to the nth degree.
AIG contractually was insuring the quality of the products; however, it appears that they were the insurance to the viability of the industry.
So the bailout of AIG became necessary to maintain the banking industry worldwide from collapsing en masse. The bailout funds are being used to payout the claims to the banks (also receiving bail out funds) on the lost loan portfolios generated by the banks.
So the deceivers are receiving insurance from AIG (the deceived, yet greedy) for the deceptions they placed on the balance of the world markets. All the while, they collect bailout financing to put their houses back in order.
How will this help the consumer or small business person? You can bet your premiums will rise.
Possible Bailout Solution
It may be cheaper in the for the government to look to the IRA's and KEOUGH, Retirement Plans, Mutual Funds, Savings Accounts and CD's and calculate the losses to the consumers.
Then instead of writing checks to the banks and insurance companies for them to use, redeposit the lost funds.
Presto, the consumer is made whole for the sins of the bankers and the financial industry is reconstituted the old fashioned way with deposits. Now the bankers will have to go back to being bankers and pay attention to their needs or they will fail again. No more get rich quick schemes from the biggest banks. - John Killeen
TARP and Bank Bailout Hearings - a follow up
I sat through whole days of hearings waiting for Tim Geithner to detail the "Plan". Eventually, I longed only for an outline of a plan. Then a sniff of a planned outcome. No Plan, No Details.
The president gave speeches and no details. He did state that Mr. Geithner will present the plan. No Plan forthcoming. Just a couple trial balloons released to the public.
I can only surmise there is no plan except that we need added taxes to assist in the bailouts.
Bank Industry and Auto Manufacturers Hearings before Congress
After initial the initial travel faux pas, the auto industry leaders gave a state of the industry presentation to the congress. Some good 17 second sound bites and a pledge for more details coming.
After all the hearings and show and tell, it is time to go back to basics and let the auto and banks use the tried an true system of the bankruptcy courts to reorganize their business models. Of course, the auto unions fear this more than management, ergo the congress will work overtime to assist the unions’ positions here. What I enjoy more is that the banks need to be funneled into bankruptcy court to clean out their erroneous ways. Only, the banks don't want to be subjected to the same increased court rules they lobbied congress so hard to enact restricting the rights of the petitioner(s).
Where's the Economic Plan?
Key to a lack of any Plan in the White House is the current four headed economic policy machine. There are four different offices with four distinct leaders and seemingly there is no unified acceptance of who is in charge.
If this situation continues, I believe Mr. Bernanke will roll past all of them and start action at the Fed and bypass the entire Executive Branch.
What Rights Congress Should Have Protected with the Bank Bailout
Congress Should Have Mandated a few restraints on the right of banks to destroy the small business community. The huge bank mentality is beginning anew with increased fees, rates and accelerated payment schedules. This is their method of reducing outstanding credits to improve Loan / Equity and Loan / Liability ratios. The increased fees generate more cash by not returning all the deposited funds to the customer all the while continuing a policy of non-lending to the small business person. Over the last year plus, banks continue running credit on their borrowers, yet do not issue credit. The effect of which is to reduce the credit worthiness of the customer when the banks do return to the business of lending. I believe the following are minimum requirements that should have been imposed on the banks before they received dollar one of federal money. My requirements would have been:
*Thou shalt not raise credit interest rates on the small business person, in fact the rates should be capped;
*Interest rates should be limited to the Cost of Funds plus five per cent (current laws exist to limit cash secured loan rates to two per cent);
*Banking Fees should be limited to a "daily" and not "per item" fees - that is, if you do create an overdraft the fee is for the day and not the number of items processed;
*Fees should be Cost of Computer Operations based and not Punitive - that is limited to $5 or $7 and not $30 - $35/ per item;
*Banks that fund small business using credit cards only should have the same interest ceiling as loans listed above;
*Banks should not be allowed to accelerate repayment schedules or change, amend, cancel lines of credit because the bank is in financial distress;
*Bank Loan Portfolios should be metered to assure there is a balance of total dollars for small business credit to equal that which is granted to larger companies - no credit for lending to finance companies to lend to the small business community;
*Elimination of the Credit Scoring System - this system has been utilized by the bank to arbitrarily not issue small business credit simply by raising the required score beyond the average of the applicants;
*Banks loan applications must be handled expeditiously, that is in less than 30 days;
*Banks caught taking applications for business credit and not issuing loans should have their license put on the FDIC watch list and published - Senior execs including the CEO, President, Chairman of the Board, Chief Lending Officer - each will be fined one weeks salary per applicant;
*Banks caught taking applications while not in lending mode will suffer the same consequences as those who sit on the applications;
These are the minimum requirements. Those banks that do not want to work with small business can go fish, cut bait or find bailout funds elsewhere. It is not equitable in any stretch of the imagination to have taxpayers’ funds - a large portion of which is from owners of small business owners - be used to bail out the banks and restore the requisite numerics to qualify the bank leaders for their bonuses. - John Killeen
What's Next with the TARP program?
Simply put TARP is a bail out of a corrupt system created by unbridled intelligent greed with operating approval by intelligent professional politicians. Unfortunately, politicians do not know the industry or its inner workings nor do they possess the business acumen requisite to understand how the systems work. They don't know what they don't know! Unfortunately, those in charge at the largest banks have not been able to harness the nightmares they unleashed.
A state of the Blind leading the Blind!
TARP's proviso "Don't Fail"! This is tantamount to saying to a three year old, eat candy because the castor oil is horrible. There is no vision of what a bailout program will do, only what it is hoped won't happen. At this stage, it is purely hypothetical; therefore realistically I believe that propping the banks will not cure the problems.
Capitalism requires that those who fail are allowed to fail. If the institution must remain, then those in charge must be negatively rewarded for their failures to achieve. TARP must require that the members of the Board and the Senior Execs that caused or allowed this debacle to occur - exit in disgrace without any parachute - golden, silver, tin, tissue paper. None! You lost the value of the bank - you are not to be rewarded!
The Back Story to the Hybrid
The auto industry has enough problems right now without the government mandating how to engineer new cars. Mandating greater fuel efficiency is step one; however, what if engineering and science cannot produce the government targets? No one speculates because only the non-scientific mind demands outcomes that do not currently occur in fact.
At present, we have the vaunted "hybrid engine". The hybrid is not a solution to the problem; it is an interim step toward the solution. Why not the solution?
The nasty secret of the Hybrid is it is a battery! All batteries, including rechargeable ones, lose their serviceable life and die. Batteries contain heavy metals and require disposal. So we trade one form of eco resolution for another, cleaner air for toxic waste in the land.
More importantly, it should be noted that the hybrid is less a cost savings to the owner than presented. In light of above, what is the value of an automobile without a power source? All cars depreciate from the moment they leave the showroom. The serviceable life can be seven, ten, fifteen years. With a Hybrid, the service life is limited to Five Years. Why? The battery manufacturers recognize the usable life of the battery as sixty months. The batteries will have to be replaced.
There are two major after costs with the existing hybrid model; first, the replacement cost of the operating battery and the support battery (one or two, depending on make), and second, the accelerated depreciation value - only this case it is not paper depreciation, it is physical.
First, the cost of replacement of the main hybrid battery is currently priced to be $7000 plus install, plus the replacement of the other battery(ies). One heck of a service appointment at the dealership. This replacement cost is one more problem for auto dealers to manage. There is no way around it, that his their cost.
Second, is worse than the first. Since, the power supply is limited to sixty months, the car value at the end of sixty months is zero until you replace the battery(ies). Once the battery dies, your new mode of transport is the tow truck. This continues to save on fuel; however, the additional charges are humongous. Additionally, you have seen in public that auto leasing has been eliminated at most dealerships. The safe way to have bypassed the system was to lease these vehicles. However, the leasing companies now know that they will have to pay the $7000 at the end of the lease. This lowers the residual, increases the front end fees. Eliminating the leases solves the leasing company problem. But not for those of you who purchased the vehicle. Start saving the gas money you saved to offset your new battery because there is no trade in value for a vehicle without a power source.
There are a lot of black market practices that can arise out of this situation. There will be those to take advantage of unknowing purchasers of 48 to 60 month old vehicles that will die shortly after purchase.
Let the scientist continue to work on fuel cells and the government fund investigative research into a new infrastructure to manage liquid gas and nitrogen supplies. Now we are talking long term with positive outcomes. - John Killeen
Why the Auto Industry Bailout will not work?
Many issues revolve around TARP; keynote of them remains there is no economic or business operational policy corrected by this act. It is a band-aid on the core manufacturing industry in the US at a time when the industry is bleeding profusely both internally and externally. Too little and too late.
The problem of the industry is internal and no level of funding will overcome those fundamental internal problems. Each of the companies requires major overhaul in both its Structure and its Mission Statement. The companies have long lost sight of the mission. Adding new functions to adapt to the existing problems - such as internal finance companies for floor planning and customer loans. The idea is good except that it delayed the inevitable loss on the sale of the vehicle. The process in the best of times transferred the company profits from the manufactured product to the interest income on the loan or lease.
Until the industry comes to grip with this fact; it will continue in its own morass. A side effect of the industry downturn is the City of Detroit. Economically how does the host city survive the slow rotting death of the industry that brought it to life in the early 20th century?
As a kid we always spoke of Detroit has Nirvana - when October was a pre-Christmas time with all the new models being revealed. Today when we now speak of Detroit, we refer to a city in turmoil. The cause of that turmoil has been the continued downward slope the US auto industry has been sliding. Detroit the city will come back when Detroit the manufacturing hub is revived or when the next Microsoft surfaces in a downtown garage. So no matter what the politicians say, Detroit needs major surgery.
The only way for the companies to right the ship is using existing bankruptcy laws to totally reorganize the business and the business model. This cannot be limited to resetting labor contracts alone. While these contracts are kindred to a carbine in the mouth, they are not the sole problem. The companies must reevaluate their position on R&D Development, Product Differentiation, Managerial Bureaucracies, Structure of all Divisions and Subsidiaries sufficed to the requirement that a true profit is obtained at each Subsidiary, each Division, each Company, each Plant and each Department. All overhead departments be reevaluated for efficiency and performance. No office including that of the Chairman's office is sacrosanct from the cost cutters (Sorry, flying coach can be fun and adventurous! Just ask your auditors, employees and suppliers.)
Why TARP will not work?
The "plan" is to shore up the banks and free up the credit markets. This is not a plan; this is a goal.
As presented, ideally the government would reconstitute RTC creating a 50 - 50 purchaser to buy the worst assets. This would relieve liquidity in the banking system. News reports state that the aim would be to take all the bad assets. The problem here is what constitutes a "bad, toxic or humpty-dumpty asset"? Only the seller knows. Normally, this would give the banks a chance to "restock" their portfolios. In today’s world the banks do not own the assets they created. They have been sold into vast international markets of investors and investment companies. These investor owners are pools of funds, not individuals. No one person or company holds ownership title. The sole link to the end owners are the servicing agents.
While the underlying assets have been labeled as "toxic" the true problem is the system is toxic. Without clear ownership, only investor pools, it is much more difficult to restart the financial engine which currently relies on the sale of "asset pools" through the investment banking operations. This end requires the IB's sales staff to sell the assets to investors and investment pools that have taken direct cash losses. The investor may be repurchasing the same assets in a new format.
The resale is the ultimate loss. The assets have been deemed unsafe and uncollectible. Now, we are saying take more of a loss. Use your remaining funds to repurchase your investment - making your original loss larger. You in turn will have a clean asset from RTC - which is a long-term asset.
This is a big sales job for investment bankers who destroyed their client base around the world with the current operation. The RTC type of bailout will have to go on by the government until someone can restore the credibility in the investment banking system which is reliant on reforms from the commercial and mortgage banking industries. - John Killeen
