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Keep Bailing: GMAC Needs More of YOUR Money

Posted by Larry Doyle on October 27th, 2009 8:33 PM |

Turning the corner? No more bailouts? You didn’t actually believe the wizards in Washington, did you? Why?

GMAC is back in line for another injection of YOUR money. Recall that GMAC was bailed out initially during the government takeover of GM. GMAC was then spun off in order for Uncle Sam to effectively provide taxpayer funded consumer auto loans and mortgages.

GMAC is not a public entity and thus not currently able to hoodwink investors and raise equity capital. What’s a cash strapped entity to do? Let’s play some more of that ‘bailout bonanza.’ The Wall Street Journal just reported on this developing story and writes, GMAC Asks for Fresh Lifeline:

In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said.

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government’s 34% stake in the company could increase if existing shares eventually are converted into common equity. (more…)

GM: General Motors, Government Motors, or Going, Going, Gone Motors?

Posted by Larry Doyle on June 3rd, 2009 6:00 PM |

What will the future hold for GM? I believe there are three potential scenarios, with likely overlap in the short run but less overlap over the long haul. Let’s see if the real GM is behind:

Door #1: A Revitalized and Profitable General Motors

Behind this door, for GM to be a viable entity they need to address the deeply embedded culture and values within the organization. In order to effect change, the people of GM need to understand dramatically different expectations, define and live a new value structure, and execute.

Why do losing teams in professional sports change general managers and coaches? Culture. GM has a culture that allowed a failed financial framework to gain a foothold and ultimately crush the organization.

Without new management at the senior level and throughout the organization, how does the new culture – predicated on total discipline – get established?

Some may argue that Chrysler came out of bankruptcy with no cost to the taxpayer. That is a fair point. Time will tell, though, if the same can happen with GM.

In my opinion, Chrysler benefitted from the growth of the shadow banking system in the mid 1980s which increased leverage throughout the economy. Currently our economy and culture are headed in an opposite direction, that is, consumers and corporations are delevering and will likely continue to delever going forward. As such, I do not envision vehicle sales rebounding as strongly as GM needs to prosper.

Sense on Cents handicaps a vibrant General Motors as a longshot.

Door #2: A Bureaucratic “Government Motors”

Behind this door, I see an entity burdened by red tape, sluggish proceedings, and social agendas. Why?

Any organization is ultimately a reflection of the people and its ability to attract dynamic, entrepreneurial, intelligent leaders at all levels. With all due respect to those currently working at GM, I have a hard time believing this organiztion will be able to attract sufficient numbers of these leaders going forward. Why?

Leaders of that ilk do not tend to enjoy and thrive within an environment burdened by systems, processes, and hurdles inhibiting its success. With government ownership, those hurdles just got much higher.

What are the hurdles?

– How will success be measured? Will it be bottom line profitability? Market share? New vehicles? Social goals, such as environmentally efficient vehicles?

– Is it better to survive than thrive? Organizations in the private sector take prudent risks to drive growth. Will GM be risk averse in an attempt to maintain stability rather than pushing ahead in the spirit of venture capitalists?

Sense on Cents handicaps a bureaucratic Government Motors as a better than even money bet over the next 5 years.

Door #3: A “Going, Going, Gone Motors”

Behind this door, I see an entity that will ultimately utilize the $60 billion (and potentially more) government injection of equity capital as nothing more than an interim bridge loan.

Is the new GM on the other side of the bridge? No. Behind this door, GM will have been flushed down the river and out to sea unable to compete in the Brave New World.

The equity injection of government funds will actually be utilized as more of a stopgap to prevent the immediate dissolution of the company.

Robert Reich addresses this likelihood at Wall Street Pit.

Reich flies in the face of his Democratic Party leaders in asserting that the true motive of the government takeover of GM is ultimately:

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise.

Reich views the GM situation from a macro standpoint and in the context of a shift in our economy and the world to new technologies. GM is not well positioned currently to adapt and thrive in that environment. Over and above that, GM will be downsizing and not in a position to invest the necessary human and financial capital to lead the company and the industry.

Although Reich’s assessment is not exactly a rosy picture, I give him credit for voicing his opinion and looking beyond the immediate landscape. While Reich sits in the comforts of academia, where are the political leaders who are willing to take these risks in making these statements. As Reich asserts:

US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60 billion to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

So once again the American public is forced to deal with a correction based
upon the lapse of time. What do we know about time?

“Can you teach me about tomorrow
and all the pain and sorrow running free?
Cause tomorrow’s just another day
and I don’t believe in time
Time, why you punish me?”

– Hootie & the Blowfish


GM: A Question of Trust

Posted by Larry Doyle on June 2nd, 2009 8:00 AM |

“Trust me.”

Have you ever walked away from a discussion with a person–be it a boss, a business associate, a prospective partner–in which you wondered why they felt the need to make that statement?

In regard to trust, I feel much more comfortable when others assert, “you can trust him” rather than an individual asserting, “trust me.”  Why? Very simply, trust is a virtue. As such, it is not given like a cheap bauble. Trust is earned. The foundation of our capitalist system is trust. When a basic trust is violated, regulators are compelled to act to rectify that violation.

Let’s enter the Brave New World of the Uncle Sam economy and address the credibility of this virtue known as trust.

CNBC recently aired a fabulous roundtable discussion, “The Future of Capitalism,” which touched on many of the economic issues currently debated. In the midst of the discussion, Mohamed El-Erian of Pimco strongly asserted that capitalism is ultimately a system based upon trust. Without trust, investors will not willingly commit capital to drive future economic growth.

As with any virtue, trust is not a one way street. While trust is earned, it needs to be rewarded so as to promote even greater trust. In so doing, the model of trust is displayed as the shining beacon for personal and professional relationships, whether between two people or amongst three hundred million.

Let’s get more specific. Investors who committed capital to General Motors in the form of equity took the greatest risk. In so doing, they positioned themselves to reap the greatest reward were the company to prosper. The company entered bankruptcy; the shareholders got wiped out. That is the way capitalism works. Or does it?

Investors who committed capital to General Motors in the form of senior debt took lesser risk. In so doing, they positioned themselves to receive a lower fixed return knowing if the company failed they would be first in line. They made this investment based upon trust in longstanding rules of bankruptcy proceedings. These investors include large institutions and thousands of individuals. Their trust was violated in the GM bankruptcy proceedings. They were not first in line. Junior creditors, specifically the UAW, received substantially better treatment. What happened? Uncle Sam rationalized this “violation of trust” as being in the common good of our country. Regrettably, this violation received no real debate in our court system and limited debate within our general media.

Uncle Sam, in the persons of Barack Obama and Tim Geithner, have put forth that the automotive situation is a special case; standard bankruptcy proceedings will continue to be practiced elsewhere. I would counter that we have a responsibility to future generations of investors to challenge Obama and team on this point. The future of capitalism itself rests on this debate.

The true costs of this violation will be borne by future iterations of unionized companies that can not easily access the capital markets. I personally would only commit capital to such an entity at a much higher rate of return knowing full well the risks I am taking are now greater given the precedent set via the Chrysler and GM bankruptcies.

Analysts, government officials, and others will continue to rationalize this violation of trust. In my opinion, this rationalization is akin to “the ends justifying the means.” That is a dangerous weapon.

This “question of trust” will certainly be an ongoing theme as we venture further into the Brave New World of the Uncle Sam economy. In the process of making investment decisions, we now need to more aggressively question just how much we trust our counterparties, especially Uncle Sam.

Please share your insights and thoughts so we can collectively be more diligent in navigating the economic landscape.


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