Looming Bailout Is the Death of the Big Three

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Back in the early days of this decade when executive malfeasance was the scandal du jour, there was a rush among many CEOs to support Sarbanes-Oxley, a bill that would allegedly make them more honest. Sarbox on its own would have and did spook the markets, but unspoken of at the time was the oily eagerness among top CEOs to endorse a law’s passage that would to some degree treat them like criminals.

To some, the way in which executives prostrated themselves before Congress was the biggest scandal of all. More soothing to an investor would have been mass protest on the part of company chiefs offended that their integrity was being questioned by a political class famous for lacking anything of the kind. We’ll never know, but it’s fair to wonder if part of the reason stocks sold off before and after Sarbox’s passage had to do with investors wondering if CEOs were in fact corrupt; their lack of protest a suspicious signal.

Fast forward six years, and something similar with regard to the U.S. carmakers has revealed itself. Desperate for federal money to save that which investors have left for dead, the CEOs of the Big Three have with the exception of resigning, proven willing to compromise on anything and everything to secure more welfare from Congress. Unfortunately, those compromises explain why the looming bailout will not work.

Doubtless playing to television cameras and to “wavering” politicians empowered by the money of others, Messrs. Mulally, Nardelli and Wagoner professed their supposedly “altruistic” desire to cap their compensation at $1/yr. The “seen” there is the commitment of all three to improving the fortunes of these gasping monuments to past business success, but the “unseen” or unspoken is what the compromise says about all three. Put simply, they’re making the implicit point that their value as CEOs is slim to none.

The above is surely unfortunate when we consider each company's future, because the basic truth is that quality CEOs are priceless. And when they succeed, their nominally enormous pay works out to a small fraction of the total wealth they create. If Mulally, Nardelli and Wagoner truly felt they had the skills necessary to right these sinking ships, they would have properly asked for handsome pay packages that included a great deal of equity upside should they succeed.

That they’re willing to work for nothing shows they don’t honestly believe they can fix what is broken. Based on their childish compensation requests alone, it’s a certainty that the money handed them will be wasted.

Sadly, their personal compromises weren’t just limited to pay. Embarrassed for having arrived at last month’s congressional hearings in their respective company jets, they left them behind for their latest D.C. foray; Ford CEO Alan Mulally driving to Washington in a hybrid.

Considering private jets, Warren Buffett has named his “The Indefensible”, and other corporate chiefs seek to keep their luxury travel accommodations out of the public eye. Their faux "man of the people" preening is absurd. Buffett has created staggering wealth for shareholders over the years, and to the extent that private travel keeps him of sound mind, The Indefensible should be re-named “The Very Necessary”. In much the same way, as a shareholder of Microsoft and Amazon, this writer would be furious if airport security and connections at hub cities kept Steve Ballmer and Jeff Bezos from concentrating on growing the two companies they oversee.

Returning to Messrs. Mulally, Nardelli and Wagoner, that a little bad press would scare them into cars or commercial travel shows yet again how little they believe in their turnaround strategies. Good CEOs with good plans would ignore the catcalls from reporters and populist politicians given their certain belief that their time is truly valuable. That the Big Three chiefs would so willingly give in to a childish form of peer pressure is more evidence that they’re not worth even one dollar of taxpayer charity.

But even if the above compromises hadn’t been made, the one made with regard to the imposition of an “auto czar” insures that the bailout will be a stupendous failure. According to the Wall Street Journal, the “czar” appointed by President Bush "would act as a kind of trustee with authority to bring together labor, management, creditors and parts suppliers to negotiate a restructuring plan. He or she also would be able to review any transaction or contract valued at more than $25 million.”

As we learned so clearly while watching the implosion of the communist bloc countries nearly twenty years ago, the whole reason companies and economies grow is precisely because there’s no government bureaucrat overseeing the myriad decisions that lead to the production of anything, let alone a car. The former Soviet Union had all sorts of product czars, and the result was horrendously bad products of insufficient supply. As Hedrick Smith noted in his essential book, The Russians, Soviet citizens waited in line for every consumer item, and were regularly unsatisfied assuming they were able to purchase anything at all. Thanks to a policy crack-up in Washington, we’ll now get to see the failure of Soviet-style planning up close.

But when it came time to “save” the Big Three this week, the inevitable happened even though the terms are still being “negotiated.” When you combine a chastened Republican minority bereft of market principles with a Democratic majority eager to pay off its union support, some sort of bailout was always as sure as the Detroit Lions having another losing season.

The Lions will seemingly always lose, and U.S. carmakers will never be allowed to die. But make no mistake about either because while new management could someday make the Lions great, the Big Three are as good as dead no matter the dollar amounts handed to them. The terms of the coming bailout insure as much.

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