Monday, November 24, 2008

Thoughts on Bailing out Detroit

Thanks to any of you that are still checking in here from time to time. Life has kept me from writing the last few weeks but I hope to be posting more often for the foreseeable future. There certainly is a lot to talk about!


Despite my lack of writing, I have still been keeping up with current events - particularly the debate over giving GM, Ford and Chrysler another $25 billion dollars.

I guess my summary opinion is this: I reluctantly accept the idea that the current state of our economy makes the failure of GM too dangerous to chance. Therefore, we should hold our nose and guarantee the loans necessary for their survival.

That being said, I take strong issue with the current approach of Congress.

Last week Nancy Pelosi explained Congress's decision to withhold money by saying: "Until they show us the plan, we cannot show them the money".

It is my understanding that Congress ordered the CEOs to return in a couple weeks with a plan to make their companies viable. I have two big problems with this statement and the general approach.

1. Anyone who knows a thing about business should know that these companies won't be able to produce a business strategy worth the paper it's printed on - much less $25 billion - in two weeks. This request for a plan is simply a tactic to provide political cover for what the Democrats have already decided to do.

2. It is stunning to me that there is not a serious discussion about removing the senior management of these companies. I might be persuaded to give some of my children's money to GM (all of mine was already spent on Iraq and Medicare prescription drugs), but not if they are still led by a management team that has clearly failed.

It's important to recognize that GM's current chief executive, Rick Wagoner did not have the misfortune of taking over GM this year or last. He has been the CEO since June of 2000. The company has not been profitable since 2004 and GM's losses during Wagoner's tenure have been almost 5 times their profits. Giving him more money is a horrible idea and it's insulting to the tax payers.

One final thought: it is fashionable right now to blame Detroit's woes entirely on either overly generous union contracts or failure to produce cars with sufficient fuel efficiency. People on both sides of the aisle are using this situation as a hammer to score political points for their pet causes.

This is not surprising, but it is also not very constructive.

Although there is some validity in both claims, I think we should be highly skeptical of arguments that try to simplify the causes of the current situation exclusively back to one of these two reasons.

This situation is very complex - and government will not be able to sort it out. In fact, they could easily make it worse. Their best move is to ensure that fresh and competent leadership replaces the status quo at each of these companies. Detroit's desperate need for this latest cash infusion makes this step easy to execute - if only the political will and wisdom can be found.


Unknown said...

Has the bailout of the financial sector required the ouster of the heads of the banks? If not, oughtn't it, for the same reason?

Jared said...

Yes though in their case, there are also regulations that must prevent the "mistakes" the financial leaders made. Their incentive structures are such that most other management teams probably would have (a might again over the long run) done the same thing - so new leadership is probably not sufficient.