Monday, March 30, 2009

General Motors Surrenders

Steven Rattner (left) and Ron Bloom (right) - Time Magazine

There is an element of politics whenever a chief executive departs, just as there must be in the timing of Rick Wagoner's departure from General Motors. In this case the White House has made quite clear its rationale in strict legal language. This week findings of the Presidential Task Force on the Auto Industry were posted on the White House website, including "Determination of Viability Summary: General Motors Corporation," which states:

The Loan and Security Agreement of December 31, 2008 between the General Motors Corporation and the United States Department of the Treasury ("LSA") laid out conditions that needed to be met by March 31, including the approval of Labor Modifications, VEBA [pension plan] Modifications and the commencement of a Bond Exchange.

As of the date of this memo, the above steps have not been completed, nor are they expected to be completed by March 31. As a result, General Motors has not satisfied the terms of its loan agreement.

The report, which takes exception with a number of key assumptions in the plan put forth by General Motors, goes on to state:
...even under the the Company's optimistic assumptions, the Company continues to experience negative cash flow (before financing but after legacy obligations) through the projection period, failing a fundamental test of viability.
In short, the Task Force put GM's best plan through a "stress test" and it failed.

Those who fear the Administration is being heavy-handed are reminded that it was General Motors that asked for the loan, then asked for another, then failed to produce a viable business plan. Today it became clear that the Administration would enforce market discipline by putting General Motors through the same kind of "financial workout" that other lenders routinely enforce when companies fail to meet their obligations to bondholders.

The Task Force is fully loaded with economists. Headed by Treasury Secretary Tim Geithner and Larry Summers, Director of the National Economic Council, the Task Force includes another seven members of the Cabinet and the Director of the White House Office of Energy and Climate Change, Carol Browner. The staff are directed by Steve Rattner, a corporate workout specialist, and Ron Bloom, whose experience includes advising the United Steelworkers union. Other Official Designees include economists Diana Farrell [no relation to the author], Gene Sperling, Austan Goolsbee, and Jared Bernstein, Chief Economist to Vice President Biden. Goolsbee's agency, headed by former Fed Chairman Paul Volcker, is specifically charged with (among other things) "reducing corporate welfare," according to remarks made today by Office of Management and Budget Director Orszag.

This new toughness on corporate bailouts occurs just as President Obama heads off to London for the G20 (Group of Twenty) Summit. There the Administration faces one more important sales job--that of convincing leaders of the other major world economies to fully and harmoniously participate in resetting the global financial system. A draft communique prepared for issue on April 2, pledges participants to supporting an "open world economy based on market principles, effective regulation, and strong global institutions."

One could fit nearly every version of capitalism within the confines of those broad, competing goals. For General Motors and its stockholders, lenders, suppliers, employees and pensioners, however, the options have decidedly narrowed.

See also Responses from Readers, a summary of reader comments when we asked in November whether the auto industry should be bailed out.

A collection of posts about the US Economy is maintained here.

To learn more about our work in consulting, please see our Profile, download a brochure about our Practice, or check out our Case Studies.

Contact JP Farrell & Associates, Inc.

Sunday, March 15, 2009

Jon Stewart: All Kidding Aside

Jon Stewart (right) and Jim Cramer, The Daily Show, March 12, 2009

Fight of the Century. Comedy Central vs. CNBC. In one corner, Jon Stewart, court jester extraordinaire and master of "fake news;" in the other, Jim Cramer of the adolescent voice, purveyor of fake investment advice.

Stewart takes off his comedy gloves and delivers a series of left jabs as Cramer retreats to the ropes, murmuring apologies. Stewart pulls him to his feet and delivers a hay-maker, forcing Cramer to view a clip of himself explaining to an interviewer some of the tricks he had used to deceive investors back in his trading days.
Bewildered, Cramer staggers from the set. Stewart never cracks a smile. The audience that had come for comedy witnessed bloodsport instead.

It is telling that it was a comedian who focused populist ire against the financial Masters of the Universe and their apologists at CNBC. By the time word of AIG bonuses had leaked out two days later, public rage was in full boil. Congress, which had voted for restrictions on executive pay before they voted against them, scrambled for the low ground. And President Obama, who had spent two months trying to divert public attention from the injustice of the Wall Street bailouts toward the necessity of solving the financial crisis, finally had to begin to address the ways and means of punishing the whinging, unrepentant culprits.

One may well ask what has happened to the Fourth Estate when the most trenchant journalism is left for television comedians to deliver. As mass media has become big business has it lost its taste for controversy?

In his book The Big Con, Jonathan Chait devotes a chapter to "Media: The Dog That Didn't Watch." He laments that mainstream journalists now seem compelled to present at least two sides of every argument, no matter how patently ridiculous the argument may be on one side or the other. Ironically, his point is made by Jim Lehrer, whose Newshour on PBS routinely offers up some of the best reporting on television.
When asked how he treats official statements that are "blatantly untrue," Lehrer responded in the relativistic style that has become the hallmark of mainstream media:

There's always a germ of truth in just about anything...My part of journalism is to present what various people say about it the best we can find out [by] reporting and let others--meaning commentators, readers, viewers, bloggers or whatever...I'm not in the judgment part of journalism. I'm in the reporting part of journalism."

However harsh his delivery, Jon Stewart's message to CNBC and to journalists in general is that reporting goes beyond stenography; that the editorial page is not the exclusive realm of editorial judgment. Professional journalists and media that purport to be something more than publicists for special interests are at least expected to filter the nonsense before they file their reports. By transcending his comedic format to deliver a stinging rebuke, Stewart made the issue personal and identified himself with his outraged viewers. He reminded us that journalism has consequences. Failure to speak truth to power has its cost too.

See The Big Con: the True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, by Jonathon Chait (Houghton Mifflin, New York, 2007).

For our previous posts on the financial crisis, see US Economy and the Bailout.

To learn more about our work in consulting, please see our Profile, download a brochure about our Practice, or check out our Case Studies.

Contact JP Farrell & Associates, Inc.