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.

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.

Obama at the Augean Stables

Maureen Dowd, The New York Times


We missed Maureen Dowd's columns throughout her December hiatus. She returned this week with fresh themes for a new administration: the novelty of "hot nerds" in the Cabinet and the looming internal conflict between fiscal stimulus and deficit control. Most intriguingly, she compares Obama's challenge of managing the Clintons to the Fifth Labor of Hercules, cleaning the Augean Stables.

Dowd writes as sparingly as a poet, asking the reader to complete her inferences. Wikipedia tells us this about the Augean stables:

The fifth of the Twelve Labors set to Hercules was to clean the Augean stables in a single day. The reasoning behind this being set as a labor was twofold: firstly, all the previous labors exalted Hercules in the eyes of the people and this one would surely degrade him; secondly, as the livestock were a divine gift to Augeas they were immune from disease and thus the amount of dirt and filth amassed in the uncleaned stables made the task surely impossible. However, Hercules succeeded by rerouting the rivers Alpheus and Peneus to wash out the filth.

One is left to wonder how far she meant to carry the analogy.

Dowd, who wrote an entire column in mock Latin this past October, makes frequent references to mythology and classical literature. In her book, Bushworld: Enter at Your Own Risk, she cast George W. Bush in the role of Oedipus, in psychological battle with his father as he unwittingly brought down the House of Thebes. This is at least her second reference to Obama and the Twelve Labors, the other occurring in her July 12, 2008 column about Obama's European trip, Ich Bin Ein Jetsetter. In that column she refers to Ms. Clinton as "the Amazon Warrior Queen Hillary." When Dowd says "I have a girlfriend in New York who puts her boyfriends through Feats of Strength," we suspect she is putting Mr. Obama through the same paces, just as she did with earlier references to him as Obambi, a fawn cowering under the withering gaze of Mrs. Clinton during the debates.

Like the devoted followers of the famous Sunday crossword puzzles of The Times, one is encouraged to have reference materials handy when reading Ms. Dowd. The columns are worthy of the effort.

Myths, neither histories nor fates, are sung anew by each generation.

See Bushworld: Enter at Your Own Risk, by Maureen Dowd (Penguin Group, New York, 2004).

For a translation of Dowd's witty but intractable column in Latin, Are We Romans, Tu Betchus, see the blog Ablative Absolute. The comments that follow the post offer further refinements. The translation reveals just how biting Ms. Dowd's satire can be when cloaked by a dead tongue.

To learn more about our work in consulting you may read a few of our Case Studies or Contact us directly.

McDonald's: Relevant Retailer for a Down Economy

McDonald's restaurant, circa 1960


The lead business story in this Sunday's New York Times on the continuing success of McDonald's Corporation sounds a number of themes that readers of this column will find familiar.

The chain has broadened its merchandising appeal beyond kids and young parents just as management's renewed focus on value, quality, service, and cleanliness has taken hold.

Minor adjustments in the menu in the form of fresher food, better coffee and more savory seasonings (including a return to the Big Mac sauce in use when CEO Jim Skinner and I worked on McDonald's crews in 1971) appeal to the tastes of an aging population. Reformatted restaurants feature more comfortable seating, faster drive-thru operations, and flat-screen TV monitors.

Under Skinner this is a company that has rediscovered the secret sauce.

See our newsletter on Restaurant Lifecycle Management here.

See also McDonald's Strategy: Meat, Potatoes and Coffee and Brand, Menu and Store Design and Chain Restaurant Development or visit our Google Group page featuring articles about McDonald's Corporation.

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.

Paul Volcker's Harsh Economic Medicine

Paul Volcker, former Chairman, U.S. Federal Reserve Bank


Paul Volcker speaks in a voice not quite up to the challenge of transiting his imposing frame. It is the voice of a man with nothing to prove: a leader chosen by acclamation when the Vandals have stood at the Gate.

Schooled at Princeton, Harvard and the London School of Economics in liberal arts, political economy and government, Mr. Volcker began his career as a summer research assistant at the Federal Reserve Bank of New York in 1949 and 1950. He returned twice, first as a research economist, then as President in 1975. By then he had already served two stints at Chase Manhattan (first as a research economist, later as vice president and director of forward planning), two stints at the US Treasury during the Kennedy and Nixon administrations, and a senior fellowship at the Woodrow Wilson School of Public and International Affairs at Princeton University.

President Carter, burdened by a deepening economic malaise with inflation running at 13.3%, appointed Volcker to a four-year term as Chairman of the US Federal Reserve Bank in August, 1979. Chairman Volcker immediately set about restricting the growth in the money supply, intent on getting inflation under control.

Ronald Reagan defeated Carter for the US Presidency in 1980, pledging to rebuild the military and restore confidence in the US economy. His economic plan rested on the postulate of USC economist Arthur Laffer that under special circumstances lowering the income tax rate might increase tax revenue by stimulating growth. Reagan's budget featured a massive tax cut concentrated in the upper income brackets. It also included a net increase in government spending, with defense spending increases overtaking the much publicized cuts in other budgets.

While Volcker was encouraged by members of the Reagan administration to continue to restrict monetary growth, he publicly worried in 1981 about the consequences of simultaneously pursuing restrictive monetary policy and expansionary fiscal policy:

I know that in concept a case can be made that restraint on money and credit alone, sustained long enough and strong enough, could control inflation and thus lay the ground for renewed growth. But is that a realistic, believable and tolerable course if other instruments of policy and opinion are running counter to our purposes? Will the sustainability of the policy be credible if the costs in growth and employment seem excessive? And the costs fall unfairly on the industry and elements of the population most dependent on credit?**

He had concisely laid bare the inherent contradiction in the policies of the Reagan team: supply side theory was to be crushed by a predictable monetarist outcome. When the excess demand for money set off by the unprecedented budget deficit was not accommodated by the Federal Reserve, interest rates spiked (spectacularly), inducing the recession of 1981-82.

Volcker seems to have set the terms for the harmonization of monetary and fiscal policy that ensued in 1982. Volcker began to loosen his grip on the money supply just as Reagan put through a major tax increase to check increases in the federal deficit, taking back 1/3 of the value of the 1981 tax cut. Reagan again raised taxes in 1983 and 1984, enacting a major increase in taxes to fund Social Security, increasing taxes on gasoline, and closing certain business tax loopholes.

Many remember Reagan's tough stands against the strike of the air traffic controllers in 1981 and his unrelenting escalation of the arms race that contributed to the virtual bankruptcy of the Soviet Union. Nonetheless, in large part the economic success achieved during Reagan's second term was due to his willingness to follow the advice of his equally resolute Fed chief. By forcing Treasury Secretary Don Regan to finance the arms race with higher taxes, Volcker burst the inflationary bubble and set the stage for two more decades of prosperity. When President Reagan reappointed Volcker in 1983 the rate of inflation was 3.2%.

Perhaps Obama is looking to the doctor of the 1980 economy to administer some bitter medicine early in his own first term.


*To view his Oct. 9, 2009 interview with Charlie Rose in its entirety and other clips featuring Paul Volcker, see the Charlie Rose website.

**Secrets of the Temple: How the Federal Reserve Runs the Country, by William Greider (Simon & Schuster, 1989), pp.358-359

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.

Responses from Readers: Auto Industry Bailout

Chevy Suburban

Last week we posed a simple question to readers of some of the new discussion boards on LinkedIn:

Do you think funds from TARP (Troubled Asset Relief Program) should be used to help the U.S. automotive industry? How about other troubled industries, like retail?

Readers from the Strategic Business and Competitive Intelligence board had the least sympathy for the industry. Eric Garland's first post favored the market-oriented approach:

If we really believe business is about innovation, then having businesses "too big to fail" is likely incompatible with future success. Plus, as a U.S. taxpayer, this is starting to get maddeningly expensive. Break them up, or let them fail.

Jorge Buhler-Vidal added a few populist licks:

I am generally not sympathetic to a bailout to an industry led by people that have consistently ignored trends towards better quality, higher fuel efficiency and safety, while collecting high bonuses and keeping their golden parachutes.

Some cited the high cost of U.S. health care and the generous U.S. auto industry benefits packages as factors that reduced American competitiveness.

The US does not have "socialized" health care, the costs are directly in the vehicles. For Europe and Japan, the health care costs are a bit removed and spread out in the form of higher taxes for their national health care. - Bryan Gavini

The cost structure of health in the U.S. is strangling the nation's ability to compete. Once we lose a few vital industries, corporate executives will be crying out for some form of social net that doesn't sit on their balance sheets. - Eric Garland

Until the Big 3 can at least shed the legacy costs saddling them from the UAW, I don't see why they should get relief from us. - Anders Bjork

Responses to the University of Michigan Alumni board tended to show greater concern for the welfare of workers and pay less heed to free market thinking.

I would support a bailout if the funds were used to lessen/deplete the legacy costs (retiree benefits) alone. We're going to pay to support the retirees if the companies go under anyway. We're also going to pay a ton to support the 3 million unemployed. If we could remove the legacy costs from the balance sheets, re-negotiate the UAW contracts and fix our trade agreements, maybe we could pull out of it. -Jennifer Ray

The financial bailout has done nothing to help credit markets as of now. No credit markets have been thawed and the banks are being admonished for not lending the money. This has led to the further spiral of the auto industry because customers with good credit are being turned away because they cannot qualify for a loan.
I am disturbed by anyone who invokes the "free market" as if we are a purely capitalistic society. We are not. There is no such thing as a pure capitalistic society because each and every system has some sort of government control to either prevent catastrophic success (i.e., a monopoly) or catastrophic failure (what is going on now). The US did not emerge from the Great Depression by letting the free market have its way. -Jon Liu

Guy Powell on the Executive Decision board wondered how best to manage our way out of the crisis.

If the auto industry goes bankrupt, then it takes money out of the banks. Will this then ripple over to the banking market again causing another higher bailout of the banks. It would seem that 'in for a penny, in for a pound.'

Respondents to our board, A Management Consultant @ Large, took a long-term view.

The longer term fix is to retool that work in Michigan to cars that fit a better vision of low energy usage and elimination of emissions. -Rudy Westervelt

Consolidation appears inevitable, given the ferocious international competition and sustained overcapacity in the industry -- so why not have two (or even all three) of the Big Three merge together as part of the bailout? -Ben Petree

What if GM & Ford could "draft" assets from Chrysler--would they take any? How about people? -Joe McKinney

The US auto industry (as distinct from the auto industry in the US) reminds me of the UK situation 40 years ago. Government bailouts failed. The lesson learned is that the best government involvement is that which greases the skids of change, and not that which just delays the change. Tax policy can be used as an incentive for value-added entrepreneur progress, and for humane retraining. -Robert Munro

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.

↑ Grab this Headline Animator