Smug Bastard Cabal

Absolute Disgrace

If someone ever told me that I would consider the President of the United States a national disgrace, I would have told them that they were kidding me. That no presidential administration could be that bad. Well, yes they can:

"These are complicated companies," one CEO said. Offered another: "We’re competing for talent on an international market."

But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. "Be careful how you make those statements, gentlemen. The public isn’t buying that." "My administration," the president added, "is the only thing between you and the pitchforks."

This is the sort of language one hears from a third rate racketeer or tin pot dictator. Not the leader of the free world. I'll leave for further discussion the extent to which the administration astroturfed these pitchforks to deflect from the growing resentment against the political class.

On General Motors (Or Should We Now Call It Twentieth Century Motors?)

While I have some disagreements with his reasoning on arriving at this conclusion, the bottom line of this Holman Jenkins piece from today's Journal is about right. There's no way the Obama administration ever lets GM see a bankruptcy judge, except as a pretext for outright nationalization.

Like that of any insolvency, any turnaround of General Motors is going to necessarily focus on how the company can operate as a profitable enterprise. By most accounts there are two constituencies that make this implausible: GM's workers and GM's bondholders. GM's bondholders already recognize they aren't going to be made whole. At this point the creditors' committee is holding out for about 33 cents on the dollar. GM's unions say they've already given more than enough back, thank you very much, and they're not going to give any more. The threat of bankruptcy is supposed to make them feel more pressure to lower their expectations and make concessions. Given that GM bonds are trading below 33 cents on the dollar right now, there's some reason to believe that bondholders will likely succumb to this pressure. The problem is, even nuking the bondholders entirely will not enable GM to survive. The company has a negative EBITDA (earnings before interest taxes depreciation and amortization). EBITDA is commonly used as a ballpark estimate of operating cash flow (actual cash flow from operations is often a worse estimate because interest payments are deducted from the top line number). What this means is that, before the bondholders see a dime, GM is loosing money. Moreover, there's really not a whole lot of evidence that that's going to change, unless you believe that the "green" technology being suggested by the administration for GM and that GM has a substantial lag behind Toyota and Honda on is going to just completely magically save the day. And I'm not a believer in magic. That, in turn, means that, unless GM achieves deep and drastic operational cuts, the company will still be on a greased pole to insolvency.

And the deep and drastic cuts that we're talking about here are the kind of things that workers and unions detest. We're talking about massive job cuts, givebacks in compensation packages, and radically revised work rules. So, that leaves the ball in the unions' court. And it's here that I think people claiming that the administration will let GM go bankrupt are kidding themselves. Really, there's little if any reason to believe that the prospect of nationalization is more offensive to the administration than the consequences of the changes that GM needs. By announced philosophy (anyone remember "patriot corporations") and by example of their interaction with the financial community, free markets are not exactly a intellectual cause for them. Moreover, such a move would be incredibly bad politics on their behalf. It would outrage the unions, one of the administrations core constituencies. It would throw open Michigan as a swing state. One also has to ignore the actual meat of the Obama administration's policies on this matter to believe that a bankruptcy is likely. His staffing of Edward Montgomery for the role of "Auto Recovery Director" (actually "Director of Recovery for Auto Communities and Workers") fits the nationalization scenario far more closely than the bankruptcy scenario. I won't speak to Dr. Montgomery as a person. However, there is a disconnect between his background and any mission to turn around the industry. He is neither an industry expert, a turnaround specialist, an expert on industrial organization, or an efficiency specialist. Instead, he's a labor economist and specialist on social spending. Essentially, the guy's qualifications suggest a background qualified to run a jobs program rather than turn around a business.

So, to take the bankruptcy threat seriously, one has to believe both that Mr. Obama would undermine his own political interests on behalf of a cause he's shown no actual predilection for and, perhaps not so implausibly, that his staffing choices were not only unusual but downright strange. Now, all of this may be the case. And I'm sure there are a lot of people who actually believe this. But, they probably also fell for "hope and change".