AIG, Congress and the pot of gold

As a management story, it just doesn’t get any better than this. It has all the elements, good guys, liars, betrayal. How did we get here, and how do we put up with all of the excuses being thrown around? Most of us are feeling buyer’s remorse. We spend too much money to bail out a big bank and now we want a refund. Unfortunately, it is past the three day limit and we are not going to get a refund. Even if AIG paid all of the money back tomorrow, Congress would find some other rat hole to throw it down, all under the auspices of doing the “right” thing. What we as a people struggle with is sometimes doing nothing is the right thing. If we had not bailed out AIG, we would have had mortgages and other subprime assets on the books a while longer. They would not have been able to foreclose on homes as the staff necessary to complete those tasks would no longer be employed. The loans would have been either written down or off as part of the bankruptcy filing and the assets would have been acquired by either a Chinese, Dutch or British bank.

We keep making excuses for failure, and this is why we fail. It is not considered polite to actually say that someone failed. We all know that there are always extenuating circumstances. What we have seen over the last week has been outright lying, on the part of Geithner, Congress and AIG. The week started out that no one knew anything and by the end of the week we knew that the bonuses were actually spelled out in the deal. I actually am siding with AIG on this one, since they had the deal signed and everyone knew that these bonuses are in line with the industry and that they were within the standard compensation packages, I think the government’s team should be explaining how that language made it through in the first place. The only reason anyone said anything about this is the fact that it was leaked to the news and thus the political engine took over. Had none of this been reported then no one would have ever known. The reaction was evident in the wall street journal article “The WSJ’s Future of Finance: The Problem With Populism”. The finance community feels betrayed by the obvious playing to the gallery grandstanding that congress has engaged and Obama is trying to mitigate.

If you look back at my previous entry, I noted that the financial group bailout was done in the back room while the auto manufacturers were completed in full view with the posturing up front. Now as the details of these deals become available, people are suddenly shocked, and those involved are looking for plausible deniability. They are also looking to take the outrage and channel it into the authority to take greater liberties with the tax code and target individuals. This is a very dangerous activity. Unfortunately, most do not see the danger. By “punishing” the people who took approved bonuses (under the guise of excessive bonuses) they will establish precedence. This precedence will allow them to target any group for any reason that may be unpopular. See “AIG's Bonus Unit Now in IRS's Sights” is an example of the lengths that business go in order to minimize the tax burden, and why the tax law is currently untenable. It is very simple for Congress to initiate rules that would add penalties for some and loopholes for others. With millions of lines of legal code how would the average person understand or know was or is being taxed. As an accountant, this level of complexity guarantees that people and companies will not be able to comply. Thus making the decision as to whether or not you will break the law into which one will you least likely be caught breaking? AIG did not break any laws, they paid bonuses they were contractually obligated to pay. Whether this was a good decision or not will never be determined because of the emotional fury being spent. Things that Congress could help fix would be to allow shareholders to write-in board nominees during shareholder voting, and to hold board members liable for at least a limited amount of damages. Unfortunately, we are looking at the problem and spend little time talking about realistic solutions rather than punishing the inappropriate people. If we wanted to hold the people responsible for the AIG bonuses accountable, at least a dozen members of congress, a good delegation from the Treasury department and a number of AIG executives would all be out of jobs tomorrow. Unfortunately, most people will forget about this a week after the media stops reporting. The 24 hour news cycle keeps us so focused on the immediacy of what is happening without being able to focus on the root causes that we never complain about everything and solve nothing. But it does sell advertising time.

G.M. Lays Its Future on Washington’s Doorstep

“Danger Will Robinson! Danger!”
http://www.nytimes.com/2009/02/27/business/27auto.html?_r=2&ref=business

We need to have our own little Robby robot for just this type of warning. GM goes into bankruptcy… Let’s look at facts, they are outsourcing and off-shoring most of their labor already. How much is still an American company? More Toyota and Honda cars are manufactured here than Ford, Chrysler, and GM combined. The Unions have strangled not only GM but it’s suppliers to the point that they cannot be competitive. I was watching the Discovery Science channel and the really interesting innovations for electric and hydrogen powered vehicles was from France. France? Why are we not the leaders of innovation? Have we lost our ability to compete? Are we too far gone? We have the ability to compete again, but we need to shed our illusions and begin dealing with reality. President Obama is doing what he and his party have been espousing for many years, a highly involved government with influence and the muscle to back it up. He has maintained his election promises and is poised to expand. Let’s face facts; GM (while in general much better run than Chrysler) has placed itself on the verge of disaster. With a bloated bureaucracy and a rigid structure they reflected a government entity in many ways. New ideas had to submit a form for approval, had to pass a standards committee.

This is nothing new but merely a reflection upon an organization that has lost its focus on the primary mission. When were they going to build better faster, more fuel efficient, greener cars? They gave up the lead thinking that being the biggest meant being the best. Bill Gates at Microsoft was always accused of being paranoid; now look at Microsoft in the market.

I started to think about how much creativity 19,000,000,000 or 19 billion dollars could buy. That pays 200,000 people 95,000 dollars up front. This is only for 6 months for GM. This tells me that most of their employees are making more than 95,000 per year, and that utilities, IT and other expenses are equally high. It does not sound like a place where creativity or innovation would be allowed to flourish. There have been many books written about this danger and how the larger the organization the less productive and the more bureaucratic in nature (explains many of the issues facing our government). This bureaucracy degrades the quality and ability to generate new innovative products. Many companies have tried to institutionalize innovation such as 3M, GE, and Apple. Although, I believe Apple will struggle once Steve Jobs disappears from the scene as he is such a huge force within the company and the industry. GM does not have a Steve Jobs, they do not even have daring leadership. The GM story is about playing it safe and showing acceptable numbers, “Meeting expectations”. This is dangerous for not only companies but people. If you always take the safe and easy route you do not grow. Companies are the same way. All of the automotive companies in the US, and a few that have started down that path. Microsoft will be where GM is currently if they do not do some drastic changes, like separating the OS from and applications business. Going to war with European regulators, and the US anti-trust groups has proven that they cannot play the political game, so in order to use the 42 billion dollar war chest they either must pay dividends or go on a buying spree. Now is not the time for timidity, but for bold action that goes contrary to playing it safe. While I disagree with the use of funds I have to admire the president for taking large steps. I just hope they are not off the end of the cliff. That is the danger with large bold steps, sometimes you fail boldly and miserably. On the upside your success is written up and studied. Have faith be bold and things will work out. Do not give up on the little failures as these are really lessons for your success. The only failure is when you stop trying.

GM and Chrysler got comfortable, got lazy. Management and the board voted themselves large salaries, and the unions used that to negotiate wages far and above where the rest of the world. Because of this we are funding investments that will come under more and more pressure, and without the tough skills of bringing the company back on their own, they will continue to fail. Tata is waiting in the wind with the purchase of Jaguar to expand. India does not have anti-trust regulation and they will be happy to attend a fire sale. GM and Chrysler should take the companies into chapter 11, and reorganize if they want to survive. They may still do that, but I do not know if they will have the courage to transform themselves into companies that will be able to compete in the global market. While GM has Opal and other subsidiaries, they do not behave as a single company, nor do they play together well. Chrysler has similar issues with their subsidiaries. Instead of off-shoring the engineering groups maybe they should create global engineering groups that collaborate, not just chase the lower salaries.

Nineteen billion, enough to pay 200,000 people $95,000. We need to think about our investments. That could take us to the moon, develop hydrogen fueled vehicles, or install solar panels on every house in America. Should the tax payer save a failing company, or something that has a future? If GM and Chrysler can turn things around then they have earned the right to survive and they will be stronger, leaner, and better able to survive the future. Time to get off the laurels and get busy.