Broken Business Models: Sears & Kmart

The NY Post’s article and others seem surprised that Sears Holdings may not be able to continue as a going concern. Clearly sale of its Craftsman brand was a signal that Sears was in serious financial straits.

The acquisition of Sears and Kmart was completed ten years ago. But twenty years ago, before e-commerce became a major competitor, it was painfully obvious that Sears and Kmart were in serious trouble. Vendors selling to both companies at that time were questioning whether they could survive against Wal-Mart.

Could it be accurate that Wal-Mart’s physical distribution and information technology systems are so efficient that Wal-Mart receives cash for its products prior to having to pay its vendors for the purchases? All? Some? If true, tough to compete against.

Sears’ and Kmart’s business models were unmistakably broken starting in the 1990s. It is virtually impossible to repair a business model once it is broken. At minimum it would have required major capital investments in information technology and restructuring of their physical distribution operation with its high overhead and slow inventory replenishment. Would there have been a positive return on investment?

Mr. Edward Lampert was certainly considered a successful investor when he acquired Sears and Kmart. Possibly he was optimistic that he could repair both companies. Perhaps taking over as chief executive officer was a mistake as he apparently had never worked as CEO of a large retail company.

To be qualified to be CEO of a retail, manufacturing or service company – particularly one as large as Sears and Kmart - one needs to have started their career in the bowels of a company – at the bottom. Mr. JackWelch is an example of a successful CEO who started at the bottom.

Working ones way up from the bowels gives experience with all the functions (departments) of a business. How do these functions work together. Why is cross-functional communication so critically important - while simple in concept it is difficult to practice. How to submerge oneself into the lower organization levels to find out the priority problems and solutions without being a distraction. CEOs who started at the bottom are more calmly self-confident and make better decisions when they get to the top position.

Regardless of any mistakes that have been made Sears and Kmart seem to fit the axiom: “not every business can be turned around” – particularly if their business model is broken.

My Leadership Excellence magazine article “Seven lessons from a turnaround CEO”

Leadership Excellence magazine published my article: "Mastering Leadership - Seven lessons from a turnaround CEO"

By Robert F. Amter

There are many theories about what it takes to be an effective Chief Executive Officer.  Most are based on observation and research.  They lack the hands-on, in the trenches experience of what it really takes to lead a company – especially one that is experiencing bad times.

When I enter a company that is severely distressed and losing money I find that the previous CEO whom is usually a decent, hard working executive, has failed because he or she simply did not know how to be a leader.

Having worked 22 years as a turnaround CEO, I’ve learned seven key practices that have worked for me in restructuring distressed companies.

1. Understand the True Meaning of CEO

Naturally born leaders are very rare.  It takes hard work to learn how to lead effectively.  You must be a serious, passionate, and accessible student, to develop into a capable CEO.

Focusing on the true definition of the Chief Executive Officer is central to illustrating the basis for sound leadership.  Common dictionary descriptions may be simplistic, but they accurately define the position:

Chief: The person with the most authority, who ultimately controls or commands all the others.

Executive:  A person having administrative or supervisory authority in an organization with the power to put plans into effect. To execute.

Officer:  One who holds an office of trust, authority, or command.

Yes, the Chief is the highest in rank; however, the ability to execute is key. Anyone can write a plan, but few can execute it - implement it. Having a team carry out a focused plan is vital.  To guide all to remain disciplined in the executing a strategy can be difficult.  Providing clear-cut direction only grows more problematic, while facing competing forces, considerable distractions, and intense challenges.

The word Officer is also significant. A person appointed to this elevated position is held in trust with genuine fiduciary accountability. They are entrusted with the management of the property, with the power to act on behalf of the owners. Fiduciary is a solemn responsibility – take it seriously.

2. Learn To Whisper 

A CEO’s primary focus is people.  A CEO gets the job done by working through others.  People greatly appreciate a CEO who can command authority without condescension.  Moreover, there is no room for hubris.

Some leaders believe a tormenting style can motivate, but the mistreatment of people eventually leads to loss for all.  At no time should a CEO bully employees.  If an officer yells at an employee, the news will spread and reduce the CEO’s effectiveness.  Even high-ranking officers, will become timid, wary, fearful, and suspicious.  Many will wonder if they will be next to receive ugly treatment.  Trust is lost, eroding confidence and efficiency.

When I joined General Electric, this training precept was passed on to me:  “When you become a CEO remember that people are your most important resource.  Successful leaders motivate.  They do not intimidate.  They whisper to get results and remain calm.  They are viewed as having high integrity and being distinctly competent.  Leadership is learned.  Respect is earned.”

3. Interact With Employees at All Levels

Whether newly appointed or a 10-year veteran, a CEO only knows 10 percent of what is actually going on in the company – particularly the key issues and problems.  To be successful, CEOs must submerge themselves into all levels to learn the status of the company’s vital issues – to get the facts. 

Effective Chief Executive Officers are not office bound, nor isolated from employees. They are seen walking the halls, the floors of the manufacturing plants and distribution facilities.  People are curious about you.  I’ve had employees touch me and remark in an excited voice “I’ve never touched a CEO”. That’s a humbling experience.  Remember how much influence you can have on people.

When walking around, be approachable.  Today, many company dress codes are business casual. If there is a formal dress code, do not wear a suit coat – be more informal. Interact with people. Stop to answer questions and ask what the employee is working on. Do not be aloof. You are the ultimate boss and people will be nervous around you. Display a likeable personality, a sense of humor – don’t be judged a stiff. Do not answer requests for improvements in work rules, bonuses or wages by saying “I’ll check and get back to you.” Be decisive and say no – if the ultimate answer is no – but explain why the answer is no.

4. Demand Excellence

It is perfectly acceptable for a CEO to demand excellent performance.  Expectations for above average results can motivate a team.  Intense encouragement for quality will inspire all to work harder. 

This winning style can grow capabilities.  People will stretch and can reach higher performance. Success foments self-confidence.  It builds a gung ho team – the enthusiastic and dedicated attitude of working together.

Always use a constructive tone.  Never intimidate anyone with bullying.  Again, instead of raising your voice, remember to whisper in a productive manner.

5. Consider Failure

Managers often require that rigorous, in-depth and detailed analyses be completed prior to implementing priorities, initiatives and capital investments. Management wants to know what positive incremental profitability and free cash flow will result from executing the project or making an acquisition.  But the analysis should also analyze the impact on the company if the initiative fails. What will the effect of the capital expenditure be on the capital structure and the cash flow?  If it’s a new product introduction, what will the reaction be in the channel segment, with customers and competitors?  If an acquisition, are we ready to handle integrating the new operation into existing operations?  Does management have the time for an acquisition, or will they be overwhelmed with other priorities?  What are the short and long-term consequences on the businesses that may result by an overwhelmed management? 

Once a management team decides on its priorities, a project tends to get a life of its own, to not be killed once work has started on it.  Still you need to periodically judge its viability. 

6. Foster Communication

Well-run companies have candid cross-functional communication.  It is essential for the new CEO to maintain open exchanges of information.  Meetings should include everyone involved with the initiative, issue, or problem including those from the third and fourth tiers of the company.  For example, do not invite only the VP of sales and his team, while investigating a problem with sales.  Include marketing, manufacturing, supply chain, product and accounting in the meeting, since each of these functions affect sales.

Cross-functional communication is almost always lacking in distressed companies, because it takes the direction, energy, and patience of management to maintain it. Silo management with top-down decision making is easier but always results in a failing business.  Mistakes are easily hidden and multiply when information isn’t shared.  When internal functions do not discuss vital issues, a business becomes uncoordinated and produces negative surprises.

I encourage leaders to meet face-to-face.  Avoid depending on email, telephones or video conferencing. Judging performance and initiatives is best evaluated first hand, in the same room with the people orchestrating the endeavor.  Seeing body language, facial expressions, and sensing a person’s passion, provides signals often missed when using various technologies.

7. Empower The Team

Ownership of the strategic plan to fix or run a company must be held by the people on all the levels who contribute to creating the plan and are crucial to its being implemented.  It cannot be only the CEO’s action plan.  It will never get implemented.  Do not legislate the strategies and tactics.  Do not dominate the process.  Persuade your subordinates and remember to listen to their input.

While it’s important to have consensus and ownership of decisions by the officers and managers, in the end the CEO is the final decision maker.  Don’t abdicate the role or decide based on since we all agree.  If, as CEO you do not agree, don’t approve a group decision.  You may decide on an alternative solution and not implement the consensus solution. 

As the CEO, you have fiduciary responsibilities.  Take them seriously.

Being a CEO is a position of great power, but not an easy one.  If you follow the steps, you and the company you lead will thrive.

The Jaguar and Land Rover Turnaround

I was pleased to read the New York Times recent article “Tata Motors Finds Success in Jaguar LandRover”.

The article describes the turnaround of the troubled England based manufacturer of Jaguars and Land Rovers by Tata Motors an automobile manufacturer headquartered in India.

Tata purchased the company from Ford Motor Company in 2008.

The sad aspect of this story is that an Indian automobile manufacturer could fix and turnaround this complex operation but the venerable Ford Motor Company could not.

Surprisingly, this may be an indication of some weakness in Ford's management ability.

Allegedly foreign manufacturing operations in developing countries are not capable of matching the management abilities of USA companies.

Can Ford's failure in this regard, be applied to studying the weakness in the USA's overall manufacturing capability?

The question remains, “Can Manufacturing Return to the USA?”

General Motors versus Toyota – who will win?

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General Motors just reported a 41% reduction in its second quarter Net Income to $1.5 billion with a $1.8 billion decrease in Sales.

The main source of the GM decline was its European operations. Its future results are questionable as USA sales forecast predicts declines. Both of which are understandable in this difficult economic environment.

But, Toyota reported a huge increase for the same time period. Its Net Income was $3.17 billion on robust sales growth – profit was 111% greater than GM’s. Its sales forecast expects substantial increases.

Can GM be successful up against Toyota and other Asian manufacturers?

Toyota’s USA based operations have lower product costs compared to GM because their hourly factory labor wages are lower – further compounded by lower health care and retirement costs. Toyota has a leaner salaried organization and thus lower overhead costs. These significant issues were not dealt with during GM’s bankruptcy.

GM is not the best cost producer in its industry and, as a result, will decline. Its profit margins and free cash flow will be squeezed resulting in less capital available to develop new products and productive manufacturing systems and equipment.

Will this bring GM to its knees again?

Most likely.

Click on the following links to read my earlier posts with greater details of GM’s issues:

General Motors - Industry Leader? 

GM & Chrysler Bankruptcies

UPDATES:  

On August 15^th Forbes published a thorough analysis of General Motor’s declining performance entitled GeneralMotors Is Headed For Bankruptcy – Again -  a worthwhile read.

A September 10^th Reuters’ article, Insight: GM Volt: the ugly math of low sales, high costs,  details General Motors costly failure with the Chevrolet Volt – a loss of $49,000 on each car. Couple this failure with the Chevy Malibu being rated dead last versus five competitive vehicles in Car and Driver magazine’s comparison tests raises two questions: Is GM well managed? Can it succeed?

These product failures signal the absence of coordination and cross-functional communication among GM’s operating functions. In particular, for these two product failures, are product engineering, marketing, manufacturing engineering and cost accounting working in sync?

In my experience there is an absence of open and candid communication through all levels of distressed, troubled companies. Cross-functional communication is always missing. Consequently mistakes mount, problems fester.

Cross-functional communication requires that the CEO uses it and demonstrates that it is an integral part of the company’s culture. Absent that it is difficult for functional officers and mangers to use it – the negative politics of some human beings results in certain people being unwilling to participate in this style of management. Need a fully competent and self-confident CEO - highly knowledgable of what goes on in the bowels of a manufacturing company.

If its faults are not corrected, the prediction that GM will reenter bankruptcy may come true.

October 31 and November 5. Toyota’s net income tripled and market share increased while General Motor’s net income declined12%.
 

General Motors – Has It Lost Its Credibility?

The news is full of criticism of General Motors’ announcement that it has repaid the money it owes the United States government for bailing GM out with TARP money (Troubled Asset Relief Program).

General Motors' April 2010 announcement: “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse.”

The facts:

General Motors' April 2010 repayment totaled $6.7 billion.

The United States government gave General Motors $49.5 billion in 2009 to finance its bankruptcy. Thus only 14% of the total aid GM received from the government has been repaid. Not a full repayment.

Further complicating the issue comes from Mr. Neil Barofsky, the Inspector General overseeing the troubled asset program, when he testified before the Senate Finance Committee on April 20, 2010 that G.M. was using taxpayer money to make the loan repayment – not General Motors’ earnings.

Apparently the $6.7 billion came from the $13.4 billion of the United States government’s TARP money that had been put in a General Motor’s escrow account when GM was in bankruptcy. Thus the company is using US government money--to pay back the US government loan.

Further complicating the issue is the General Accountability Office’s December 2009 report that: "The Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially more than they have in the past."

Also coloring GM’s financial condition is that:

● It has applied to the Department of Energy for a $10 billion loan to retool its plants.
● In 2009 it was unprofitable with deficit gross profits and operating losses.
● In the first months of 2010 its market share declined.

Is all of this true? If it is, the real issue is General Motors' loss of trust and credibility. Will consumers figure out that General Motor’s announcement is not true? That it was a misleading public relations ploy? If consumers do not trust a manufacturer, will they stop purchasing its product? For this short-term gain, will GM lose in the long run?

Sources:
New York Times.
Power Line.
Reason Foundation.

Lenders Change their Treatment of Troubled Loans

An interesting recent Reuters article, titled 'Lenders More Willing To Own Bankrupt Firms', documents a fairly significant change in the distressed and bankrupt marketplace. Lenders, it reports, are no longer selling their delinquent and troubled loans. They are not selling the loans at steep discounts. They are converting loans to equity ownership and managing the companies themselves.

Reportedly lenders are “kicking the proverbial can down the street" by granting waivers. They are no longer forcing companies to default, or marking loans to market. This is quite unusual, as compared to prior practice.

Will this continue? Once the economy improves, will lenders focus on lending money? Or will lenders continue to be owners and manage the operating companies? Or will they return to selling troubled loans?

Ford Motor Company Reports Profit – Positives and Negatives

The Positives:

“…the only major U.S. automaker to avoid bankruptcy, posted third-quarter net income of $997 million and its first operating profit since early 2008…”.

“…finished the third quarter with $23.8 billion in automotive cash, up from $21 billion at the end of the second quarter.”

“…U.S. market share increased to 15.8 percent for the first nine months, compared with 14.8 percent from a year earlier…”.

Certainly, registering a third-quarter 2009 positive profit with a market share gain are excellent and solid signals. Unfortunately it overlooks Ford’s negatives, which give pause and concern for the future.

The Negatives:

“…workers have overwhelmingly rejected contract changes that would have allowed the automaker to cut labor costs.” “Ford sought the deal to bring its labor costs in line with Detroit rivals Chrysler Group LLC and General Motors Co….”.

Bringing Ford's hourly labor costs in line with General Motor's and Chrysler's should not be the priority. The priority is to become cost competitive with USA based Japanese automotive manufacturers. Ford's, GM's and Chrysler's hourly base wage rates and benefit costs are reportedly $20 to $30 per hour higher than Japanese competitors. Doubtful these costs were reduced in the GM and Chrysler bankruptcies. This remains a huge problem.

“…workers felt they were being asked to sacrifice more than the company's executives. Ford CEO Alan Mulally made $17.7 million last year…”.

There is some justification in the Unionized Employees position on this issue. Hourly employees are well aware that officers of a major company have significantly higher incomes. This is not an issue in healthy economic times. But in poor economic periods, if Management is perceived as not sacrificing with all on board, then a disconnect is created, and polarization with contract rejection occurs.

A helpful signal for Unionized employees, to convey Management is being serious about reducing overhead costs, is if Ford has cut back on some Executive perks. Does Ford still have an executive dining room, replete with waitresses, multi-course menus, and silver finger bowls?

“He (Alan Mulally, CEO) hasn’t presided over an annual profit at Ford, which has posted three straight full-year losses totaling $30 billion.”

Other questions exist. For example, did the quarterly profit rely heavily on favorable product mix and pricing? Will these same conditions be available in future fiscal years?

The list of negatives should not detract from the solid job Mr. Mulally and his team has done in beginning Ford's turn around. The challenges are enormous, and Mr. Mulally has clearly moved it in the right direction.

Bankruptcy and the Financial Crisis

On June 30, 2009 New York University held an excellent seminar on “Bankruptcy and the Financial Crisis".

The link to view NYU's webcast of the seminar is included below.

The subjects discussed included:

1. Federal government policy on large financial institutions and managing too-big-to-fail firms.

2. Creditor’s rights particularly reconciling Chapter 11 filings with section 363 of the federal bankruptcy code. Has anything changed in the distressed trading markets based on the handling of the Chrysler and General Motors bankruptcies?

3. Will a large bank fail? Actions the federal government will take if there are failures. Is capitalism affected and sacrificed to expediency?

4. Bankruptcy trends and risks – increase in distressed businesses.

The “Creditor’s Rights” panel:

• Moderator: Thomas Cooley, Dean, NYU Stern School of Business
• Barry Adler, Professor, NYU School of Law
• Edward Altman, Professor, NYU Stern School of Business
• Gerald Rosenfeld, Deputy Chairman, Rothschild North America

The keynote speaker: Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City:

1. Mr. Hoenig rejected the notion that some firms are too-big-to-fail. He laid out a three-step plan to address troubled, large institutions and the need to avoid ad-hoc approaches.

2. He suggested that large firms be held accountable including replacing management.

The “What if a Large Bank is Failing?” panel:

• Moderator: Matthew Richardson, Professor, NYU Stern School of Business
• William Ackman, Pershing Square Capital Management LP
• Edward Altman, Professor, NYU Stern School of Business
• Micheal Krimminger, Special Advisor, Federal Deposit Insurance Corporation
• Nouriel Roubini, Professor, NYU Stern School of Business
• Myron Scholes, Chairman, Platinum Grove Asset Management

Click here to access the webcast link to NYU’s seminar.

The GM & Chrysler Bankruptcies

“The General Motors Corp. Chapter 11 bankruptcy marks the humbling of an American icon that once dominated the global car industry and sets up a high-stakes gamble for USA taxpayers.”

Reportedly both General Motors and Chrysler will exit from Chapter 11 Bankruptcy Court in 60 to 90 days. This sounds like wishful thinking and may involve some public relations imagery. To “correctly” restructure a significantly less complex and smaller manufacturing company, would require at least one year. The rush may produce more problems for all involved.

Regardless, one of GM’s and Chrysler’s most significant problems is that hourly labor costs are reportedly $20 to $30 per hour higher than their USA based Japanese competitors. It doesn’t appear that this most fundamental weakness has been addressed in a serious manner.

Most of the Japanese competitors have non-union hourly labor in their USA manufacturing operations. As such, their labor costs will not significantly increase over time. In addition, for the past few years, the Japanese Automakers have made higher capital investments to improve productivity. The cash strapped Big Three have not been able to match its competition.

Recent GM and Chrysler plant closings and operational restructurings have reduced their overall costs by billions of dollars, as well as their hourly headcounts by the thousands. However, the overall impact is misleading. The hourly cost for direct labor employees has not been reduced. And will continue to prove to be a vivid Achilles’ heel for the legendary USA manufacturers.

While the total of manufactured GM and Chrysler automobiles have declined significantly, the actual cost of each automobile continues to be higher than its Japanese competition. The Automakers will continue to prove unable to compete with this inherit weakness. Besides overt Labor commitments, another higher cost factor to consider is unabsorbed manufacturing overhead, since production is lower in existing plants. This is not a healthy sign.

However, the most important factor remains, has the UAW agreed to reduce the total cost for hourly direct labor employees?

Regretfully, there is no evidence of a reduction in hourly labor rates...

It is doubtful any labor cost concession will be meaningful if this is true:
"The fear at the UAW was that ownership in GM could eventually be worth very little.”

Thus, as it stands, GM and Chrysler will continue to lose money and will probably be forced to return to bankruptcy protection. We will have to wait to see what structure the FIAT buyout of Chrysler will produce. But, if there is a next time for GM in bankruptcy, it may have to execute liquidation under the Chapter 7 bankruptcy code. That is, if the US Government, which now owns 70% of the company, will allow it.

In addition, salaried headcounts appear too high. While this can be dealt with outside of the bankruptcy process, GM and Chrysler should analyze their salaried organizations and adopt Toyota’s performance target of 10% improvements in salaried productivity every year.

Regardless, neither company should exit from bankruptcy protection until the operations are restructured to allow a competitive, best cost manufacturing operation to emerge. We shall see, both GM and Chrysler face enormous challenges for survival.

Have two of the Big Three suffered such a loss in reputation over the years, their brands are too damaged beyond repair for today’s marketplace?

No, quality management can turn anything around with the right strategy, capital, cost structure, and culture. But it requires the tools needed to compete. Anything is possible.

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?”

Follow-up to Analysis of the Financial Crisis

Two weeks ago, I posted about Mr. Komal Sri-Kumar’s near calming treatise of the financial crisis provided on October 3rd. He is TCW Group’s Chief Global Strategist.

Mr. Sri-Kumar expects a 6 to 9 month Recession, with the stock market starting it's recovery in April 2009. He is rather bullish on equities, and does not believe we are heading into a Depression. Bearish on oil and bullish on the dollar: Oil $75, Euro $1.25, Gold $700.

However, last week I attended New York University’s financial crisis seminar. This Panel’s views and forecasts were decidedly bleaker than Mr. Sri-Kumar’s.

NYU Panelists:

• Dennis Berman, Deputy Bureau Chief, Wall Street Journal’s Money & Investing
• Mark Patterson, Chairman, MatlinPatterson Global Advisors LLC
• Nouriel Roubini, Professor of Economics, NYU Stern School of Business
• Lawrence White, Deputy Chairman & Professor of Economics, NYU Stern School of Business
• Moderator: Thomas Cooley, Dean, NYU Stern School of Business

The NYU Panel’s views:

1. Predicted that the worse is yet ahead.

2. The recession would last 18 to 24 months. The question is whether the recession will be V, U or L shaped. While the word “depression” was not used, the Panel described the economic recession as one of the worst since the Great Depression years.

3. Equities will decline further from current levels and will not have a meaningful recovery for perhaps two years.

4. Housing prices expected to decline further. Housing prices will not recover quickly and will reduce the net worth of consumers to such an extent that it will affect spending.

5. Expect consumer loan defaults and hedge fund failures to add to the financial crisis.

6. The bond default rate is currently at 3%. Its historical average is 4%. The Panel expects it to rise to 10% or higher with the possibility it could reach 25%. The covenant light and toggle loans will delay defaults and bankruptcies.

7. China’s funding the USA trade deficit will become problematic and may require higher interest rates and perhaps a political “quid pro quo” such as Taiwan.

Mr. Sri-Kumar and the NYU Panel are in agreement that:

1.The Financial Rescue Plan was not developed and implemented effectively. The solutions have come late to a problem that was obvious in 2007. The handling of the Crisis by officials world-wide undermined their credibility and the predictability of the Crisis which has exasperated it.

2. “Inter-bank lending” is a key variable.

Click here to access the NYU Panel’s webcast link. Seminar held October 15, 2008. Duration: 97 minutes.

Click on this link for a summary and to access Mr. Sri-Kumar’ October 3, 2008 teleconference call.

Analysis of the Financial Crisis

Mr. Komal Sri-Kumar, TCW Group’s Chief Global Strategist, gives a thorough, almost calming, treatise of the financial crisis in his October 3rd teleconference call.

It is worthy of review.

A summary of Mr. Sri-Kumar's content and conclusions:

Believes the two major reasons crisis came about:
1. Low interest rates in force for a longer time than necessary which encouraged borrowing regardless of qualifications or the ability to repay the loan.
2. Ineffective regulation.

Not heading into a depression. Disinflation is major threat, not inflation.

His expectations include being bearish on oil and bullish on the dollar: oil $75, Euro $1.25, Gold $700. USA recession starts 4th quarter 2008, 1st quarter 2009 and ends March April 2009 with the stock market starting its recovery. Recession will be worldwide. Bullish on USA equities. The $700 billion rescue plan may result in a profit for the Federal government.

Europe will continue to decline and will decline much steeper than other areas. Particularly affected will be the United Kingdom since 20% of its economy relies on the financial sector versus the USA’s 5%.

China’s GDP growth will be reduced perhaps to 7%-8% in 2009 compared to 2008's expected 11% with the complication that China has stopped trying to curb inflation and is striving for growth.

His presentation explores: When will this crisis end? Are foreign investments safer than investing in the United States? What areas of the world offer attractive investment opportunities now? The origins of the ongoing financial crisis. An explanation of what the rescue plan is intended to achieve.

The recording of Mr. Sri- Kumar's Conference Call is available for free to the public domain.

For the Digital Playback call:
Primary Playback Number: (888) 843-8996
International Playback Number: (630) 652-3044
Passcode: 22866500
Call available: October 3, 2008 - November 3, 2008
Broadcast on October 3, 2008 – duration 45 minutes.

Click here to get a copy of the PDF of his presentation.
(* It is not necessary to register on the web site to listen to the conference call, just call the 888#).

Bankruptcy - The Fate of General Motors, Ford and Chrysler?

General Motors, Ford and Chrysler may have to enter into Bankruptcy to reduce their hourly cost of labor. Running out of cash may be the trigger that puts one or all of them into bankruptcy, but it will be a blessing in disguise.

One of their most significant problems is that their hourly labor costs are reportedly $20 to $30 per hour higher than their Japanese competitors. Some of the differential will be reduced with the UAW’s assumption of retiree health care with VEBA -- Voluntary Employee Beneficiary Association – beginning in 2010. This could reduce employee health insurance costs by one-third but will only produce a relatively small reduction in hourly labor costs. This won’t be enough - including consideration of the two-tier wage structure.

Most of the Japanese competitors have non-union hourly labor in their USA manufacturing operations. As such, their labor costs will not significantly increase over time. In fact, they will probably decrease because of higher capital investments with more effective productivity improvements.

By comparison, GM, Ford and Chrysler are at a distinct disadvantage. They are strapped for cash which severely limits their ability to invest capital for operating improvements. Recent plant closings and operational restructuring have reduced their overall costs by billions of dollars, as well as their hourly headcounts by the thousands. However, the overall impact is somewhat misleading. The hourly cost for direct labor employees has not been reduced. While the number of automobiles manufactured by the Big Three have declined in dramatic fashion, the actual cost of each automobile continues to be higher than its Japanese competition.

Will they be able to negotiate “voluntary” hourly labor cost reductions with the UAW?

One negative example from my turnaround experiences:

I was CEO of a legally insolvent, severely distressed manufacturing company. We asked the local union members to accept minor “voluntary” changes in the union labor contract. Specifically, we needed a delay in the contracted 3% increase in the base wage rate and an increase in the co-pay percentage for health insurance. These proposals were rejected by the local union leaders, although we had the International’s support for the changes. The local labor leaders proved indifferent to the company’s condition and were hostile to essential requests needed for the restructuring required to help save the company.

Admittedly this distressed company was not the size of GM, Ford or Chrysler. However experience suggests the UAW will not “voluntarily” agree to the significant reductions needed in hourly labor costs. (Which may require cuts as large as $10 per hour or more). Thus, the Big Three will be forced to attempt to terminate the labor agreement in Bankruptcy Court. If they fail to do so, they will continue to decline. And their future will offer even more desperate operating and financial conditions.