The Auto Makers Are Already Bankrupt

Admitting the obvious is their best chance to restructure.

The moment of truth in the nation’s automotive bailout debate might have come this week. As the CEOs of GM, Ford and Chrysler begged Congress for federal aid, a Detroit radio talk-show host asked whether Michigan, as well as the car companies, should get assistance. The state is being hit by an economic hurricane, he said, just as New Orleans was hit by a natural hurricane.

[Commentary] AP

From left, UAW president Ron Gettelfinger, Ford CEO Alan Mulally, Chrysler CEO Robert Nardelli, and GM CEO Rick Wagoner.

Huh? Will the victimology myth never end? Hurricane Katrina was an act of God. The car crisis is an act of man. For the difference, consult the Bible. Any version will do.

Yesterday, congressional leaders gave the car companies until Dec. 2 to come up with viable business plans and renew their request for aid. Meanwhile, it’s worth examining the myths that are shaping this debate. One is GM’s assertion that “bankruptcy is not an option.” In truth, GM already has conceded that it’s bankrupt — by publicly stating it’s nearly out of cash and needs emergency assistance. The company hasn’t made a formal bankruptcy filing, which is no small matter. But it has declared bankruptcy everywhere else. Chrysler, at this week’s Senate committee hearing, did the same.

A second myth is that management changes in Detroit would be pointless. GM CEO Rick Wagoner said he wouldn’t resign to secure federal aid for his company. This was like Louis XIV saying, “L’État c’est moi.” Mr. Wagoner explained that he didn’t see “what purpose would be served.” Well, the same one served by the presidential election in this country three weeks ago: to bring in somebody new to try some fresh ideas to fix things.

Mr. Wagoner has been GM’s chief executive officer for eight years. Even before this year’s calamity struck (the company lost $181,000 per minute in the second quarter), the company’s U.S. market share, financial results and stock price had plunged precipitously.

At Chrysler, CEO Robert Nardelli has been on the scene just a year. Before that he was at Home Depot, where he took a $210 million departure package when the board wanted him out. There’s no reason to begrudge Mr. Nardelli that money. But any plan to save Chrysler will inflict great hardship on dealers, suppliers, workers and managers — and even if Mr. Nardelli is a great executive talent, he isn’t the guy to lead the clarion call for sacrifice, despite his recent offer to work for $1 a year. Symbols are important here, which is why the spectacle of the Detroit CEOs swooping into Washington on corporate jets to ask for money was so jarring.

Ford CEO Alan Mullaly has been on the job just over two years. He seems to be making the right moves — cutting costs, eliminating the dividend early on, revamping product plans, mortgaging assets to raise money to fund the turnaround, etc. That’s why Ford, while not in great shape, is in a materially better position than the other two.

Mr. Mullaly is the Detroit chief executive I’d keep on the job. But that still doesn’t mean it’s right to hand federal aid to Ford or any of the other companies without requiring a bankruptcy restructuring in return.

Which raises the third myth: Bankruptcy means death. In fact, it means getting a second chance. Detroit’s car companies point, correctly, to the cost cuts, labor concessions and other stringent measures that they’ve enacted in recent years. Ron Gettelfinger, the president of the United Auto Workers union, got his members to accept two-tier wages and big concessions on the health-care and retirement plans.

Nonetheless, far too many valid contractual claims remain on the car companies’ revenue streams from dealers, employees, retirees and others for these companies to survive — even if we get a modest economic recovery soon. The companies remain saddled with cumbersome contracts with the UAW that make work rules and plant procedures a constant challenge. A bankruptcy trustee or receiver could cut through all this quickly and give the companies a fresh start.

Myth number four is that banning executive bonuses or requiring more fuel-efficient cars will save Detroit, and are strings that should come with any federal aid. Executive pay isn’t the problem in Detroit; and the companies will have to build more fuel-efficient cars to satisfy the market, not to meet mandates. These would be pseudo-strings designed to appease organized labor and the environmental lobby. Instead of saving Detroit, they’ll pave the way for a bigger bailout later on.

Finally, the fifth myth is that a merger of GM and Chrysler will propel both companies to prosperity. Some of the slide-shows making the rounds on Wall Street assume that a merged company would have a 30% market share, slightly less than the two companies now have combined. It isn’t true. The elimination of duplicate brands, models and dealers would push a combined market share down to 25% or less. The revenue projections behind a potential merger seem greatly inflated. GM has massive problems of its own to address without taking on those of Chrysler, which needs a profitable, and committed, foreign buyer.

The biggest beneficiaries of a GM-Chrysler merger would be Cerberus, the private-equity firm that owns Chrysler, and the big banks that hold billions of Chrysler bonds that they haven’t been able to sell. The bonds were used in Cerberus’s purchase of Chrysler from Daimler. The banks expected to sell the bonds to investors, but have been left holding billions in Chrysler debt that they’d dearly love to unload.

Cerberus has offered to forego any profits on a sale of Chrysler, but that’s phony. There won’t be any profits. Just relieving Cerberus of the need to keep funding Chrysler would provide the private-equity moguls with a bonanza. As for the banks holding Chrysler bonds, didn’t we already bail them out? Why should we have to do it again?

Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper.

The New Deal at 75: An Inspiration, Not a Blueprint

newdeal1.png

Whatever your political perspective, Americans need to admire the New Deal for, if nothing else, its ambitious agenda. In a way unparalleled in the 20th Century, the New Deal left us a legacy of achievement – one that we can still see in big cities like San Francisco and small towns like Wishek, North Dakota.

The great genius of the New Deal lay not in ideology but in its pragmatism and practicality. People were out of work so it created jobs. The country’s infrastructure, particularly in the rural areas, was primitive, so it took on the task of modernization.

In some ways, this paralleled what was also being done under the Communists in the Soviet Union as well as under Fascists in Italy and under the National Socialists in Germany. This has led some conservatives, such as “Liberal Fascism” author Jonah Goldberg, to conflate the New Deal legacy with fascism. But this assertion is belied by the fact that we still live under a democratic and liberal political structure, one that by the 1980s had turned to oppose much of that legacy.

Yet I believe that even Ronald Reagan – himself once an avid New Dealer – would admit that the New Deal did much to expand America’s middle class. It did so not by promoting redistribution and welfarism or by moral cajoling – characteristics Mike Lind identifies with the more elite Progressives – but by practical actions that gave people the tools with which to build their own individual prosperity.

Economically speaking, it is also true that the New Deal failed to recreate prosperity (at least until the onset of the Second World War). But it cannot be denied that it literally brought light to large parts of the country – particularly the Southeast and the rural Great Plains – into the 20th Century. Among the New Deal’s great accomplishments, as Andy Sywak discusses, are its public works.A partial list of these accomplishments include:

• 22,428 road projects
• 7488 educational buildings
• Over 7000 sewer, water and other public buildings
• Employed over 3,000,000 workers earning who helped support 10,000,000 dependents
• Employed 125,000 engineers, social workers, accountants, superintendents, foremen and timekeepers scattered in every state and community

Ultimately, notes scholar Jason Scott Smith, the New Deal touched intimately the lives of more than fifty million out of a total U.S. population in 1933 of 125 million. Yet its legacy went well beyond the Roosevelt years, extending from Roosevelt and Truman all the way to Eisenhower, Kennedy, Johnson and, even to some extent, Richard Nixon.

As Sherle Schwenninger points out, The New Deal created the basis for the great, and widely shared, national prosperity of the post-war period. Through infrastructure spending, housing programs, the GI Bill and government-funded scientific research, the New Deal directly and indirectly helped make the United States the premier power on the world scene and by far its strongest economy.

America remains the preeminent country in the world, but there is a great, widely held belief that this status is slipping as other countries – China, Russia, Brazil, India – enact what amounts to their own New Deals. Our once vibrant middle class is under siege, our infrastructure is aging and even “progressives” seem more interested in promoting avant garde cultural values than in economic growth, upward mobility or maintaining technological excellence. Even in the field of conservation, a core value of the New Deal and progressive traditions, the focus is increasing less about preserving resources and open space for people, and more about how to preserve and insulate nature from the ill-effects of human carbon-based life forms.

Yet if we can be inspired by the New Deal, we can not simply repeat it. For one thing, our crisis today is less palpable and immediate, making it all but impossible to mobilize resources in the same way. At the same time, the public sector, small at the onset of New Deal, has already swollen to gargantuan size. The power of organized public employees, largely a non-factor in the 1930s and 1940s, threatens any government initiative by siphoning off too many local and federal resources due to their often extravagant demands in everything from salaries and work rules to pensions.

This can be seen in the morphing of the New Deal legacy in large cities including the greatest of all, New York. Under Mayor Fiorella La Guardia, a maverick Republican of the Theodore Roosevelt stripe, the city built new parks, playgrounds, swimming pools, roads, and sanitation systems with an almost messianic fervor. At one time, New York City was receiving one-seventh of all funds dispersed by the Works Progress Administration (WPA).

Yet La Guardia’s expanded city government, notes Cooper Union historian Fred Siegel, still operated under an efficiency-oriented progressive administration. La Guardia and his parks commissioner, Robert Moses fired political appointees and dismissed incumbents, leading some public employees to identify him with the Italian dictator Mussolini. Rejecting narrow ideology, La Guardia famously claimed: “There is no Republican or Democratic way to clean streets.”

La Guardia’s successors, in New York and elsewhere, did not stick to this moral and administrative rigor. The share government workers in New York’s workforce expanded from 10 percent in 1950 to over 17 percent in 1970s but with increasingly little accountability. If a new New Deal means a large expansion of the unionized public workforce, in New York or elsewhere, it will be largely doomed.

So as we admire the achievements of the New Deal, we also need to keep in mind the shortcomings that grew out of its success. That we need a new powerful commitment to infrastructure and economic growth is undoubted, but in pursuing this we need to make sure it does not serve primarily the public employee lobbies and the well-organized rent-seeking private interests.

New solutions, such as tapping abundant capital resources from both here and abroad, need to be tried out. And given the overconcentration of power already in Washington, and the spread of technical expertise to states and regions, a greater emphasis on locally based initiatives may work better this time around.

Yet in the end, American still requires some form of broad initiative to overcome its current doldrums. This requires the same kind of bold, innovative and pragmatic spirit characteristic of the New Deal that three quarters of a century later remains its most useful legacy.

In Ethnic Enclaves, The U.S. Economy Thrives

Joel Kotkin

Asian and Latino communities benefit from doing business in cash.

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Dr. Alethea Hsu has a strange-seeming prescription for terrible times: She is opening a new shopping center on Saturday. In addition, more amazingly, the 114,000 square foot Irvine, Calif., retail complex, the third for the Taiwan native’s Diamond Development Group, is just about fully leased.

How can this be in the midst of a consumer crack-up, with credit card defaults and big players like General Growth struggling for their existence? The answer is simple: Hsu’s mostly Asian customers–Korean, Chinese, Taiwanese, Japanese–still have cash. “These are people who have savings and money to spend,” she explains. “Asians in Orange County are mostly professionals and don’t have the subprime business.”

To Hsu, culture explains the growing divergence between ethnic markets and that of the general population. Asians, she notes, whether in their native lands or here in California, tend to be big savers. In tough times, they still have the cash to buy goods, while others stay home or go way down-market.

Nor is the Diamond Development Group’s experience an isolated case. Throughout the country, ethnic-based businesses continue to expand, even as mainstream centers suffer or go out of business. The key difference, notes Houston real estate investor Andrew Segal, lies in the immigrants’ greater reliance on cash. “When cash is king,” observers Segal, president of Boxer Properties, “immigrants rule.”

This is true not just of well-heeled Asians or Middle Easterners, but also for Hispanics, who generally have lower incomes, notes Segal’s partner, Latino retail specialist Jose de Jesus Legaspi. For example, the recession has barely taken hold at La Gran Plaza, the recently opened 1.1 million square foot retail center in Ft. Worth, Texas, where Legaspi serves as part owner and operating partner.

The center, reconstructed from a failing old mainstream mall purchased in 2005, is now roughly 90% occupied. “We are doing so well that we are expanding the mercado,” Legaspi says, referring to the thriving centers dominated by very small businesses run from attached stalls that are a popular feature of many Latino-themed centers. “It’s all cash economy. They pay their bills with cash. The banks and credit card companies are not involved. It’s true capitalism, and it works.”

Latino shoppers, he suggests, also have been less impacted by the stock market collapse than other consumers. After all, relatively few, particularly immigrants, have large investments on Wall Street. In addition, even if they have lost their jobs, particularly in construction, Legaspi adds, they tend to pick up other employment, even at lower wages, often in the underground economy. “They get paid in cash, and they pay in cash.”

This tendency of their customers to pay with greenbacks, and resist bulging credit card debt, also represents one big advantage for immigrant-oriented entrepreneurs. This means less concern about looming credit card debt among customers and, as almost everyone close to the scene acknowledges, the cash economy allows them to hide some of their profits from revenue-seeking governments.

Another key advantage lies in close connections many ethnic merchants have to economies such as Korea, China, Taiwan and India, where enormous amounts of cash have accumulated in recent years. “Many of these merchants have family and other ties to the international economy,” observes Thomas Tseng, a principal at New American Dimensions, a multicultural marketing group in Los Angeles.

The media focuses on huge surpluses spent by major corporations or sovereign wealth funds, but a substantial amount of the money being made in places like China or India also accumulates into family networks. They often funnel this cash to relatives’ enterprises in North America, where many also retain second homes and often educate their children.

This combination of cash-spending customers and well-endowed investors explains why in many places, the immigrant market remains one of the few still aggressively expanding. Even in thriving Houston, notes architect Tim Cisneros, the credit crunch has stopped many projects by clients from the mainstream real estate development community. In contrast, Cisneros’ Chinese, Indian and other Asian clients continue to build and expand.

“I am doing an Asian-Mexican sushi chain that isn’t hurt by the credit crunch since they are doing this out of the checkbook,” Cisneros told me. “And the Indian reception hall I am building is doing well. The action is from these developing companies much more than the old Anglo groups.”

If the immigrant markets helping Cisneros through the credit crush represent one of the few bright spots in the present, they also will likely become even more important in the future–even if immigration slows down dramatically. By 2000, one in five American children already were the progeny of immigrants, mostly Asian or Latino; by 2015, they will make up as much as one-third of American kids.

Given these underlying trends, look for developers like Dr. Hsu to keep prescribing more of what she calls “multicultural shopping centers,” focused both on immigrants and their children. As long as these newcomers, both affluent and working class, continue to save, covet cash and work hard, they are likely to continue thriving through the recession and beyond.

“We are leased up, and we think the supply [of shopping] is not enough,” Hsu says. “We are ready to go Saturday and feel great trust in the future.” At a time when most mainstream American retailers are hiding under their desks, such sentiments are not only welcome; they may also indicate who might be leading the retail recovery when it finally comes.

Joel Kotkin is a presidential fellow in Urban Futures at Chapman University and executive editor of www.newgeography.com. Author of The City: A Global History, he is finishing a book on the American future.

Democrats eye huge economic boost

Nancy Pelosi, Speaker of the House of Representatives

Congressional Democrats hope to pass a plan before Obama takes office

Senior Democrats in the US Congress are considering backing a huge economic stimulus package to try and steer the country clear of recession.

Nancy Pelosi, speaker of the House of Representatives, said economists were suggesting a package worth “several hundred billion” dollars was needed.

During the US election campaign President-elect Barack Obama pledged to pass a $175bn (£118bn) stimulus plan.

Mr Obama is to unveil Timothy Geithner as his treasury secretary on Monday.

Mr Geithner, 47, who currently heads the Federal Reserve Bank of New York, is expected to work alongside Lawrence Summers, a former treasury secretary in the Bill Clinton White House who has also served as president of Harvard University.

‘No blank cheque’

Speaking to CBS News on Sunday, Ms Pelosi said any stimulus package should be aimed at creating jobs immediately, and could contain a tax cut.

“Something of several hundred billion would have to be some investment into the future, plus creating jobs immediately, and a tax cut,” she said.

Another senior Democrat, New York Senator Charles Schumer, told ABC News that a package of between $500bn and $700bn was needed to overcome the current economic crisis.

The president-elect’s new economic team will be charged with revitalising the US economy, which is faltering badly amid the global downturn.

On Saturday, Mr Obama said the economy needed to create 2.5m jobs by 2011.

In a weekly address, he said he wanted to rebuild America’s ageing infrastructure, including roads and bridges, as well as develop sources of renewable energy.

KEY APPOINTMENTS
Chief of staff: Rahm Emanuel, a deputy chief of staff to Bill Clinton
Senior advisers: David Axelrod, Valerie Jarrett, Peter Rouse and John Podesta (formerly chief of staff to Bill Clinton)
Press secretary: Robert Gibbs
White House counsel: Greg Craig, formerly special counsel to Bill Clinton
Vice-president’s chief of staff: Ron Klain, formerly chief of staff to Al Gore
Staff secretary: Lisa Brown, formerly counsel to Al Gore

David Axelrod, the senior campaign strategist who will become a top presidential advisor in the Obama administration, tacitly admitted that the eventual stimulus plan would come in at more than the $175bn pledged during the election campaign.

The president-elect would do “what’s necessary”, Mr Axelrod told ABC, adding: “I think we’re going to have to do a combination of things to get the economy moving again.”

Mr Axelrod also said plans to repeal President George W Bush tax cuts for top earners, another campaign pledge of Mr Obama’s, were being reconsidered.

The tax cuts are currently due to expire in 2010, but Mr Obama had promised to roll them back upon taking office.

Mr Axelrod ruled out a “blank cheque” bail-out of struggling auto manufacturers, who saw their requests for federal funding turned down by the outgoing Congress during the week.

They would be asked to return to Congress in December with a plan, not just “an expression of need”, he said.

Experience

Discussing the imminent appointment of Mr Geithner, Mr Axelrod described him as the “right man” for the high-profile job.

Timothy Geithner - 24/7/2008

Timothy Geithner has been heavily involved in tackling the credit crisis

“Tim Geithner is someone who had experience in dealing with economic crises as the assistant secretary of treasury for international affairs in the ’90s,” he said.

“He’s intimately involved with the situation now in his role as president of New York Fed [Federal Reserve].

“By temperament and experience, he’s the right man to lead the Treasury now,” Mr Axelrod added.

Unconfirmed reports naming Mr Geithner first came on Friday, boosting New York shares by 6.5% after days of losses.

Mr Summers is likely to be named as head of the president’s National Economic Council, reports have said.

The pair worked together closely at the Treasury during the 1990s, with reports suggesting they have a strong working relationship.

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