Saturday, November 22, 2008

Mitt Romney Advises: “Let Detroit Go Bankrupt”

Governor Mitt Romney offers some interesting advice regarding the Big Three in his November 18, 2008 New York Times Op-Ed “Let Detroit Go Bankrupt” summarized as follows:

“If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car…But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries…

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.”

Governor Romney is correct.

In a July post on my blog I opined that running out of cash may be the trigger that puts them into bankruptcy, but it will be a blessing in disguise. My reasoning is that the Big Three’s hourly labor costs are reportedly $20 to $30 higher than their USA based Japanese competitors. In my experience as a Turnaround CEO, this will not be reduced in a voluntary agreement with their union. If it is not corrected, they will continue to decline and probably will not survive.

Chapter 11 Bankruptcy protection does not mean the end. The companies will continue to operate. While it will be a severe shock to the USA, it is not liquidation. It will allow modification of the factors contributing to losing money - including the high cost labor contracts.

Click here to review my July 28, 2008 post: “Bankruptcy – The Fate of General Motors, Ford and Chrysler?”

Monday, November 10, 2008

2nd Follow-up to the Analysis of the Financial Crisis

Mr. Komal Sri-Kumar analyzed the Financial Crisis on October 31. It is his fourth webcast since October 3. Mr. Sri-Kumar is TCW Group’s Chief Global Strategist.

It is a meaningful, worthwhile analysis.

A summary of Mr. Sri-Kumar's views and forecasts:

1. The 4th quarter of 2008 will be the worst quarter with a 4% drop in GDP.

2. Is relatively optimistic in expecting the USA recession to end in the middle of 2009 because: “…the economy and stock market went down very fast…for the same reason the upturn will be equally rapid”.

The significant decline in consumer sentiment suggests a deep consumer recession. Does not see a depression risk. Expects unemployment to hit 8% or higher.

3. Federal Reserve should not have cut the interest rate by 50 basis points. It gave little stimulus to the economy. It was not the reason for the stock market increase. The stock market surged because the TED risk spreads have come down. The principal negative issue is the “liquidity trap” in that lenders are not willing to lend.

He suggests that direct to consumer stimulus is more important than interest rate reductions.

Does not see an inflation risk – including copper and oil. But he advises that the Federal Reserve will need to increase the interest rate in six months to avoid inflation.

Federal Reserve has ignored older people who largely rely on interest income for living expenses. An important factor to the economy.

4. As this webcast was prior to the Presidential election, he commented on both candidates and said the new President will not have much flexibility. Senator McCain cannot reduce taxes because of the sizeable budget deficit. President-elect Obama will not be able to increase taxes – particularly dividend and capital gains tax rates – because of the negative impact on economic growth.

5. Forecasts a $1 trillion budget deficit in 2009 which at 7% of GDP he views as manageable.

6. Continues to be bullish on equities. Is negative on Europe’s prospects. Expects equities to yield 9%-10% over the next 3 to 5 years. Forecasted 3% GDP growth and 2% inflation. Considers leverage dead.

7. Surge in the dollar has ended.

8. “What worries him most?” Policy maker errors. Not the economy. Not consumers. In September 2007 he predicted a recession. Federal Reserve and Treasury policy makers ignored the signs. “…will need to depend too much on policy makers”.

Click on this link for access Mr. Sri-Kumar’s October 31, 2008 webcast, approximate duration 60 minutes, expires January 31, 2009:

On October 15, 2008 a panel of economists at New York University gave a decidedly bleaker analysis of the financial crisis compared to the analyses Mr. Sri-Kumar has given.

Click on this link for a summary and access to NYU’s October 15 webcast: