Albert A. Koch, who led the AlixPartners team that helped restructure General Motors and now runs “old G.M.,” argues that pragmatism, not philosophical purity, will drive recovery in the bankruptcy and distressed market space.
Just over a year ago President George W. Bush said, "I have abandoned free market principles to save the free market system." His words and actions as General Motors and the rest of the economy careened toward an abyss embraced a realistic, pragmatic approach that is essential to recovery.
Government involvement — or if you prefer, "meddling" — often stirs up philosophical debate. But from where I sit, as one of the guys who helped G.M. live to fight another day, it is clear that pragmatism is still very much the order of the day.
In the interest of full disclosure, I don't like the government getting involved in the private business sector. But in this case, the government saved the domestic, and possibly the worldwide, auto industry. And that's not hyperbole.
Had G.M. and Chrysler gone down, I'm convinced that the global auto industry's highly interdependent supply chain would have crashed as well, halting production lines for virtually all automakers for months or even years. The economic and social cost would have been catastrophic "“ and that's not counting the potential domino effect on many other industries.
Faced with an epic crisis, I'm glad the government realized it had no choice and acted. Clearly, its involvement has changed the rules of the game. And while it may seem like we're playing on a field where someone forgot to paint in the yard markers and sidelines, it is critical to remember that the score is still being kept "” and that the winners are the organizations that build (or at least salvage) value for investors.
At this moment in time, the free market principles that form the foundation of our national economy may not apply as they did before, but now is the time to put ideology aside and focus on putting points on the board.
Point one: You need good players to win.
The Treasury Department’s appointments to its auto task force pointed the way to success: it was staffed with great people who were determined to bring order out of chaos. By the same token, experienced and knowledgeable players on both sides of the management-labor divide were also willing to put their philosophical differences aside to save the auto industry.
In the face of the public's current "urge to purge," it is important to remember that leadership expertise and institutional knowledge are as vital to success as the need to jettison an ossified corporate culture or outmoded work rules.
As shown by calls for salary and bonus caps in the financial industry, government intervention can make key employee retention problematic. Successfully addressing this issue remains a prerequisite to achieving strategic objectives and creating value.
Point two: Be realistic.
The current environment is populist and debtor-friendly. Debt holders "“ bankers, hedge funds and other "speculators" "“ are being painted as the bad guys. This situation is unlikely to change anytime soon, and there is no denying that bankruptcy and restructuring, which were never easy to begin with, are tougher and more complicated now in part because of changes to the federal bankruptcy code in 2005.
Today:
The time to reject or accept leases has been compressed. The debtor's period of exclusivity has been limited. Key employee retention plans (KERPs) are all but gone. Hedge funds have often replaced banks at the table. Distressed-debt investors are bigger players."¨
Given the public's view of debt holders on the one hand and the industry's complexity on the other, it is critical to take a page from the distressed asset community's playbook and focus on finding practical solutions in order to drive a positive outcome.
Point three: Fix the process; then guide the change.
With regards to bankruptcy and restructuring, failure to realize positive outcomes invites further government intervention. If the distressed asset industry "“ or any industry for that matter "“ cannot effectively deal with the current, chaotic environment, the government will ramp up its intervention. Frankly, I don't think the government wants to be in the private sector, but increased involvement is inevitable if the private sector can't make their businesses work.
As time passes and the economy recovers, new rules for navigating bankruptcy and distressed asset situations will emerge. They will reflect the experience of the current crisis and be shaped by the people who were able to turn dross into gold during the most turbulent economic period in decades.
But, in the meantime, it is important to keep a sharp eye on well-defined, obtainable objectives. At old G.M. our task is clear: As part of the auto industry workout, we have to dispose of 16 auto plants and several office buildings with a combined square footage about the same size as the principality of Monaco; continue ongoing environmental remediation and prepare for a court-approved trust to take over remediation at end of the bankruptcy; and move toward an approved plan of reorganization, hopefully by mid-2010, with the goal of turning over all of the 10 percent of "new G.M." we own to G.M.'s unsecured creditors.
Doing all that in a still very challenging economic climate is the task at hand. Concerning ourselves with the policies and philosophies that brought us here will wait for another day.
Al Koch is vice chairman of AlixPartners, a corporate consulting and turnaround firm, and the chief executive of the Motors Liquidation Company.
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E-mail This Print Share Close Linkedin Digg Facebook Mixx My Space new_york_times:http://dealbook.blogs.nytimes.com/2009/12/18/another-view-forget-ideology-lets-fix-the-economy/ Permalink Airlines/Autos, Another View, Legal, Restructuring/Bankruptcy, Albert A. Koch, AlixPartners, General Motors, Motors Liquidation Company Related Posts From DealBook Trustee Objects to Fees for G.M. AdvisersAt G.M., He’s in Charge of Selling What RemainsFor G.M. Chief, Little Time and a Full PlateG.M. to Seek Bankruptcy and a New StartG.M. Bankruptcy Would Need Army of Advisers Previous post G.M. to Close Saab After Sales Talks Fail Next post Mack Won't Take a Bonus for 2009 6 Comments 1. December 18, 2009 11:22 am LinkThere is more than enough current evidence as well as the historical example of British Leyland, Amtrack etc. to show that Obama’s auto bailout will be an expensive failure despite the undoubted technical expertise brought by Mr. Koch and other expensive experts involved in the debacle.
Fundmentally the closed shop UAW agreements at GM, Chrysler and Ford prevent these companies from obtaining any reasonable quality or cost control on the shop floor. The UAW 3 are doomed to failure.
The only question left is how many additional $100s of billions of taxpayer dollars these companies will consume over the next couple of decades until their historical customer base finally dies off.
— dave 2. December 18, 2009 2:17 pm LinkEither we pay the political price to live within our means or we go bust.
— MARK KLEIN, M.D. 3. December 18, 2009 6:23 pm LinkKoch is wrong, pragmatism and expediency will not fix the economy. Adherence to basic fundamental principles of sound money and principles of freedom especially the honoring of voluntary contracts and property rights….in short a total disengagement of the government from the economic sphere of the nation. The involvement of the US federal gov in the credit and housing markets with the federal reserve and Fannie and freddie is what brought us to this mess. The lack of a sound hard money gold standard allows the gov to spend beyond its means. Only adherence to the libertarian ideology of Jefferson, John Locke etc will lift the US out the socialist keynesian fantasy we’ve been living in.
— Liberty Mike 4. December 21, 2009 11:21 am LinkHow can you fix a contradiction that practices political discrimination? The crisis story talks of bundled securities which included instruments such as balloon mortgages with reset clauses making them impossible to service and critical to the overall health of the security. So you hear of Intel being investigated by Justice were bundles are mentioned which leads us right into Microsoft. As for our credit economy well by law they are allowed to reset interest rates whenever they feel the need. Or so it seems. If you try and create distance you learn that without credit you may have to skip a meal and forget about health insurance. So how can you fix an economy that has been politicized? An economy where in order to avoid systemic risk meltdown its alright to bail out a banker at the expense of stable amortization. All because someone may have seen, tried to swap a long term position into liquidity the domino effect an insecure risk prone loan could have with regards to actuating an insurance clause. So if the banks and the government are controlling the flow of capital and Homeland security is scrutinizing individual conduct instead of organizational conduct"¦..What is there to fix? Remember the Boston tea party was not a tax revolt but a petition for representation in the manner that monies where being allocated.
— Noway 5. December 21, 2009 11:41 am Link“As time passes and the economy recovers, new rules for navigating bankruptcy and distressed asset situations will emerge” -not. The paucity of comments on this vital subject even before the newly-printed greenbacks are dry, speaks loudly as to why policymakers should not have followed Mr. Koch’s advice as they have over this last year. It’s probably already too late to implement the kind of long-term systemic changes in regulatory and other policy areas that are required for real fiscal stability. Once the crisis appears over for today, the political will is gone like a bad debt.
— Richard Atwood 6. December 22, 2009 1:35 pm LinkThose who argue for the demise of the Federal Reserve need to bone up on the lessons of American economic history. Prior to the Great Depression America suffered numerous “Panics” (the word “depression” was used for the first time in the 1930’s because it sounded less fearfull). A very severe panic occured in 1907 that would have been even worse if JP Morgan had not led an effort with other bankers to pledge their own personal fortunes to preserve liquidity. And Morgan had to do this once before during the Panic of 1893. The U.S. was unique in the western world for not having a central bank. And keep in mind that we were on the gold standard then and the dollar was supposedly sound.
If any blame for this current crisis can be cast in the direction of the Fed it should be directed at the former chairman whose monetary policy borrowed much from a fourth rate novelist.
— David D Add your comments...Your Name Required
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