The Fed finally figures out how to take the money back

If you have been following the story of the TARP money, and the government’s quandary as to how to take their money back, then you will be gratified to know that after 4 months and several large interest payments later, our government figured out how to take money back. Ironic, as taking money from others is their primary business. It is interesting that the 10 big banks given approval to return $68 billion in bailout money had to get permission to pay back the money. Most of those banks will welcome the lack of restrictions on salaries, bonuses and other payment structures that the executives missed very much. It is good that the executives from these banks have been exposed to the bad lending practices they practiced. It is also good to see them make the same mistakes that we all make in assuming that we can quickly repay a loan and not get in over our heads. I also found it ironic that it took the treasury 4 months to figure out how to take back the TARP funds, all the while charging interest. I guess the incentive just wasn’t there.

We have a systemic problem of many people who mean well, but have a profound lack of understanding. Mr. Guithner is optimistic that we have turned the corner, while expecting over 1/3 more banks failed thus far this year than all of last year. Without revenues, the banks will not be able to function and businesses will continue to fail. The Small Business Association (SBA) has many programs but they do not control the lending. They merely “facilitate” and provide the rules for guaranteeing loans from banks. As of June 10, 2009, Bank of America has not issued a single SBA loan, while being listed as a preferred lender. The government is not able to help because the rules dictate that they cannot force someone to lend, nor can they show preference, however, they can set the rules for lending. So having a great government program is only in the imagination of the legislature. The problem lies, as always, in the execution. Not enough details are provided in the program design and there is no incentive to move quickly or efficiently to bring these programs to the public. Who would we complain to anyway, the government? Which department has oversight to government abuse and corruption other than our press who has historically been biased and unable to perform even the most basic analysis of the information they provide? When non-government organizations are irresponsible we have remedies such as litigation and regulation. Who regulates the regulators? This is why government providing services is usually a bad idea. If the government wants to save money by cutting administrators of a program and no one returns calls to those trying to access a program offered, who wins? Who would we the people turn to, and how would we find help? When the wolves have become the shepherds, it is not a good time to be a sheep.

Why bankruptcy alone will not save GM or Chrysler

GM has finally declared bankruptcy, unfortunately not before it was nationalized. We have now nationalized our financial service industry and our manufacturing sectors. Welcome to the new socialist world. Read the GM White House fact sheet. The government has repeatedly declared that they do not want to run the company, except that they are dictating that more fuel efficient vehicles be made and the government of Canada is also a part owner. Congratulations, the rules have changed. I have discussed this in past entries, but I think this is the best illustration of rule changes that we have to date. The company’s bond holders have been relegated to last in line, while the common stock holders who “get a greater return because they assume a greater risk” have now been moved to the head of the line. Why? The government who “does not want to have an equity position in a company” now has one, and under the guise of shared sacrifice, appeals to our short term vision and will only extend our pain in the long term. There is no company too large to fail, and it should be painful. These lessons teach us that failure is not the end, but it does hurt and you have to be resilient enough to endure. It seems we have lost the ability to live with failure. We do not hold student’s back, because no child should be left behind. With failure comes lessons and as Henry Ford said after the first assembly line failed “Failure is the opportunity to begin again, more intelligently.” We are failing to learn from the lessons of California, GM, and a host of other examples, because there is no pain. The failure of GM is a psychological failure on a personal and organizational basis. The Unions forgot their missions to keep the company from overstepping reasonable bounds. They took out the reasonable part and went after everything they could get, and were very successful.

Why will bankruptcy not fix GM? The psychology has not changed. Frank Durant the founder of GM decided to go into the car business after his buggy business failed because of Ford. Ironic. This is why we need history. We need the destructive process to create something better. Who knows the best industry creating idea could be just waiting for enough pain to get started, but by supporting a failed company, we reward failure and suppress the very things that make success rewarding. If you look at any story worthwhile, the hero is always terrified, always an inch from death. Do you think the hero or heroine is enjoying themselves through most of the story? Is there a bailout, just in case they don’t make it? As a zen master would say it is the journey that is the reward. Unless we undertake these scary, painful and testing journeys how will we know what we are destined to accomplish? The hero of the story never really plans to go out and be terrified, but in spite of everything they keep trying and have faith they will succeed. You can only fail when you stop trying.

Growing up my father pounded the “don’t work, don’t eat” motto into my head. It has kept me going through some very tough times. Because I know I don’t have it in me to grovel enough to get the government handouts. I don’t and won’t tell a sad enough story. We have choices in life, and the government has become the great enabler of our addiction and has learned to play on our fears and sympathies. This is how our officials are elected, and why we struggle to solve problems like social security and Medicare. We are no longer willing to make the true sacrifices necessary to solve the problems. Until we fix our psychology we will always be victims and you will continue to see more GM stories. The social drama we see playing out is an example for most of our individual lives as well. We must have faith not fear and focus on what we want to accomplish and then never give up.

Trouble with GM

We all know the troubles the US automakers are having with the press. The LA Times sensational story General Motors moves to shed 1,100 dealers on May 16th was indicative of the problems within GM and with our press. GM’s woes are familiar to everyone by now. Billions in tax dollars spent to resurrect a mature company in a mature industry is generally not a good way to turn things around. Don’t get me wrong, the team at GM is industrious and committed to what they do. They also are encumbered and inhibited by the internal give and take that is indicative of all large organizations. We see this especially in the government, but it is visible in all large organizations. The bureaucracy takes over and has a life of its own. Executives cannot rise into positions of power without negotiating the bureaucracy and thus are shaped by it. GM Europe and GM North America have long been in an adversarial relationship and no one on the board or the executive team was willing or able to take on the challenges to bring the two organizations into alignment. Now that move is unnecessary as GM Europe will be spun off. The move to shed 1,100 dealers is too little too late. By not taking smaller but braver moves 5-10 years ago, the executives are taking the only options left open to them. In a maturing market, they did not start consolidating domestic dealers, and expanding overseas activities, but stayed the course right into bankruptcy. There are many books and business examples that the group could have leveraged, one of the most popular is If it Ain't Broke...Break It!: And Other Unconventional Wisdom for a Changing Business World all talk about how to initiate change and the need for reinvention within organizations. GM got comfortable and the people inside thought things would never change. Chrysler was the same except worse.

The lesson that we need to take from GM is the one Microsoft’s Bill Gates learned early on. All it takes is one new idea and if they aren’t the ones taking advantage of it then they will be out of business, and so will 1,100 dealerships. In order to avoid the same fate as GM, companies must listen to the dissenting opinions within the group. Though politically incorrect and sometimes annoying, they are also the group that brings the ideas and are willing to communicate through the clutter of platitudes and obscure language. Pay attention to the person who says we need to change how we do business, or “this doesn’t make sense”. Even if it is a training issue, the underlying cause could be an opportunity. The world admitted 4 billion additional players to the market in the last 15 years. India’s Tata now owns Jaguar and they are not encumbered by anti-trust legislation or regulatory reporting to anywhere the same degree as US companies. We have to be better, quicker, more adaptable, and much less comfortable, unless we want to be GM, a company of great people, wanting to do the right things, but not willing or maybe not able to look at the consequences of their actions.

The New Labor Market (What’s the deal?)

Americans are beginning to realize that the relationship between those who need work done and those who can do the work is changing. Notice there was no employer/employee relationship established here. The days of someone working for 30 years disappeared 20 years ago. In a study for the department of labor done in 1999, Susan Houseman correctly identified the “contingent worker”, as a trend in the market. 10 years later we are only now seeing this trend on a mass scale. Independent contractors hired to do a specific task for as long as the contractee is willing to pay. While the department of labor will force companies to classify these individuals as employees, the result is the “employee” will only have a position either until that duty can be performed by cheaper labor (off-shore) or until the business changes.

During the .com boom legislation under the Clinton administration allowed and encouraged investment in India, China, and other countries to support the technology boom here in the US. When people realized that many of these ideas, while great, were not necessarily the economic boom that they thought they were, the money dried up, but the trained talent pool did not. From an investment standpoint and for Walmart shoppers everywhere, why would you pay $40 dollars an hour for an accountant, programmer, automotive assembly line worker, or any other group when you can pay $5-10 dollars per hour and hire twice the number to achieve the same productivity? Pay less in benefits and have a larger workforce available and be able to work 24 hour a day. This becomes a very simple equation. The truth is Americans need to get serious about changing our labor laws to facilitate contract labor and enable those who will be changing jobs every 3-5 years a much more flexible framework in which to operate. This affects everything from the 401k to healthcare. Universal Healthcare as proposed will be an excessive burden to all concerned and still not address the primary issue of how individuals can tap into a privately managed healthcare industry while freeing them and employers from having to bear the burden of insurance. We have an insurance problem not a healthcare problem.

These are but a few of the issues that I will begin talking about in the next few entries.

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.

Accountability

We have heard over and over the term accountability, and that we need to hold those accountable. What does that mean? Webster’s thesaurus defines accountable as follows: “being the one who must meet an obligation or suffer the consequences for failing to do so, “the owner was held accountable for his dog’s biting of the child.” http://www.merriam-webster.com/thesaurus/accountable . Simply, one must suffer the consequences of one’s decisions and actions. Willful negligence is an action that has been used to buffer legislators and executives for decades. Where is the AIG executive team and why are they not falling under a class action lawsuit along with the board of directors who allowed the behavior? Sarbanes Oxley was a first step to try and bring any form of responsibility to corporate America. However, since the congress has never experienced fiscal or personal responsibility, they really didn’t understand how to write the legislation necessary.

In general, there is a lack of specifics throughout corporate America as well as in our government. Being accountable is not just getting all of the negative things thrown at you either. Sometimes you are not the guy for the job, and that should not be held against you. Being accountable also means taking responsibility for stepping aside when someone or something more adapted to the environment is presented. The hard part, for those who are accountable, is we often get our lives and identity imbedded into whatever we are responsible for or accountable to. Let’s be specific. For accountability to be usefully we must be able to specifically answer the “w” questions:

· Who is accountable?
· What are they accountable for? Specifically.
· When are they accountable for the actions and decisions?
· How long are they accountable for those actions and decisions?
· Where can we address problems and to whom?
· Why is it this person and not someone else?

Accountability is an individual thing, and if a group is going to be responsible, then every member of the group must be held accountable for the actions of all of its members. That is why Arthur Andersen is no longer in business. A 100 year-old company was dissolved within 30 days based on the actions of a few members. Accountability is a lonely and scary place. It means that we are judged by the content of our character and actions, not by the color of our skin, eyes or any other arbitrary criteria. This means living with the consequences of actions and decisions without a safety net. This is why leaders are those who will take on the hard jobs, make the tough decisions tempered with the understanding that part of the learning process is to make mistakes. As a culture we have problems with this attitude and the Japanese are really tough with it, just ask those samurai who failed in their assignments. There should be balance. People will make mistakes. They must in order to learn. Part of that learning process is to experience the consequences of your actions. The pain involved is a teacher. That being said, the fact that someone made a mistake should not be held against them, what should be recognized is if they learned and what they did learn from those actions.

Now what does this to do with the state we are in now? We should not be bailing out the banks. There is no company too large that we cannot survive its demise. As a company goes under, much like Bears Stern investments, there are those who will procure pieces of the company and let those that should be dissolved dissolve. This will engender the class action lawsuits and the rest to aid in the dissolution. The things that would help legislatively would be to strip some of the protection from the board and CEO’s from shareholders. Shareholders must also feel the pain of losing their investments and not forcing board changes. As a group, we have been negligent in exercising our rights to change the board of directors. I know that the Yahoo board is probably not happy at turning Microsoft down during the last round. Unless they can completely change direction, the company that truly created portals and web capabilities will be a thing of the past. If we can live without Yahoo, we can live without AIG, or Citigroup. Those people who were employed by those companies are now free to explore alternative opportunities. They may start their own companies that fill the need and void left by the large company’s demise, and become rich in the process. If we cannot change and adapt we will die and the next culture will take over.

The government bureaucracy has demonstrated consistent mediocrity in decision making. The disasters of the Katrina rescue and the subsequent rebuilding fund management. How were the billions of dollars spent? For an interesting exercise, try and find out how much was actually donated, spent and used for hurricane Katrina recovery. Then try and find out how much Homeland Security spends. We have taxation without representation and that should be a concern for everyone. The same goes for CEOs. How to you tie compensation to performance? How do you establish compensation that is fair and based upon achievable goals? How do we, as shareholders, hold the board accountable? These groups are so large and hidden behind rules, infrastructure and legislation that it is impossible to hold individuals accountable.
For instance, how does an organization hold people accountable when things breakdown? Why in 1909 during the earthquake in San Francisco did individuals get into cars and have soup kitchens and take in strangers to help while we had National Guard units turning those trying to walk out of New Orleans back into the flooded city? Why do we not ask the relevant questions of a mayor who shut down bus service the day before the hurricane hit, and the governor who turned down repeated proposals from the Army corps of engineers to fix the levy system due to lack of federal funding? With billions in federal aid, why are the levies still not fixed? Who is accountable? The answer is no one. We, as a people, generously gave but did not use our heads to ensure that the money was spent well.

Accountability and responsibility are the cornerstones of any functioning society. Oppressors and tyrants manipulate the press and people by focusing and refocusing people’s attention on grand issues that can never be addressed as they are too broad and no one can be held to task for fixing or addressing the problem. If you do not think this happens here in America, look at any news broadcast and ask yourself, who could realistically be responsible and accountable for the topic at hand? The bailout is a prime example. How much “pork” is built in? Who is going to be responsible for reporting on the billions? Will we care six months from now, when it is no longer in the news, or will it simply disappear into the nebulous rhetoric that is spewed by the left and right of the podium? Accountability takes thought, careful and judicious application tempered with understanding and the courage to actually stand-up and be accountable.