GM's CEO takes the fall - UPDATED UPDATES

GM's CEO, Richard Wagoner, has abruptly resigned at the request of the Obama Administration as a condition of new federal funding. While the recent moves by the Administration toward tighter control of private industry are of great concern, at least this resignation will force some restructuring of the company (along with Chrysler). Of perhaps greater concern, however, is the continued flood of tax dollars to prop up failing industries. The sad truth is that the American auto industry (particularly as centered in Detroit) started failing long before the current recession, and should have restructured themselves years ago. Ford is the closest thing Detroit has to a success story, and that is not saying much.

The newest requests from GM and Chrysler total $21.6 billion, and even before meeting the requirement to present a restructuring plan to Congress, the Obama Administration appears to have promised a new bailout (although a figure has not been named). There is no indication on how far Congress and the Administration are prepared to go with the bailouts, what the final total will be, what the vetting process is, or if there is any kind of a plan whatsoever in place to ensure that the companies will be successful in the end. It all seems a little like fiddling while Rome burns.

UPDATE 1:
President Obama stated today that a short bankruptcy/restructuring period may be necessary for GM and Chrysler, and is giving them a 30-day extension on the original deadline to present a recovery plan. Additional federal funding is the carrot in all of this. Chrysler is also expected to complete a merger with Fiat within that time-frame. The shotgun wedding is being negotiated, in part, by the Administration, with pot-sweetener of $8-$10-billion likely. GM shares dropped like a rock (22.9%) in response to the firing of Wagoner and today's announcement.

UPDATE 2:
One has to wonder if Wagoner is being punished for funneling more GM pac-money to the GOP instead of the DNC. If they had been more like Sores, would he have survived?

Bailout kings

As Pres-Elect Obama looks at a $500B - (by some estimates) $1trillion rescue package, it's important to look at the fundamental differences between idea of an economic stimulus and a 'bailout.' Obama's plan calls for a massive government jobs creation program (2.5 million on government-funded and regulated infrastructure, green-technologies, and other jobs), a large tax credit program, and a rescue of mortgage-holders going down the river. While Obama wouldn't specify numbers in today's news conference (he says he wants his new economic team to propose to him first), one thing is certain. A stimulus of this size would create a massive deficit and long-term debt, far beyond what we're looking at already. Obama acknowledged this fact in his news conference, but made not commitments as to how this debt would be dealt with, other than the shop-worn promise to look at the budget line-by-line. I don't think he's going to find $2 trillion (an estimate of all of the stimulus & rescue packages combined) to cut from the budget, so several generations are going to be footing this bill. He seems to have moderated his position on eliminating the Bush tax cuts somewhat, hinting that they may be allowed to expire on schedule rather than be eliminated.

Obama was asked about what he thought of the Citigroup bailout and proposed rescue of Detroit, and managed to dance mightily around these questions as well. In case you haven't turned on the news in the last couple of nights, Citigroup lost over half its stock value in less than a week after investors decided they were probably exaggerating the stability of their positions. The government promised to guaranteed a $306-billion loan package, which made Wall-Street happy, but may or may not be of long-term benefit. Sec. Paulson seemed uncertain of why this bailout will work in the long-run, and gave the same basic explanation provided with the AIG rescue - too big to fail. Probably true, but it's a bit disconcerting when there seems to be no clear plan for execution and success. Obama seems to think that as long as it looks like it could be successful, it's worth trying.

When Obama was asked about the Detroit bailout, he took the Nancy Pelosi line of 'we can't let them fail, but they need a good plan.' The Guardian had an interesting look at this on Sunday, comparing the successful rescue of Chrysler in the 1980s with the failed rescue of the UK's Leyland auto company which involved a government takeover. Two important facts jumped out of that article: in the case of Chrysler, Lee Iacocco was an expert who had already cleaned house and made an intensive restructuring plan before coming to Congress for the loan; the Leyland takeover involved major, intensive government-management of all aspects of the company, dooming it to failure. Neither Congress nor the federal government have good track records of managing much of anything. They need to leave that to the experts in individual fields, and deal with basic governance. My problem with the current proposed rescue is that Congress just promised the big-three a $25B loan in September, and rather than justifying how it will be used and how they'll restructure, the auto-industry is turning right around, hat in hand to ask for more. The auto industry has demonstrated failed planning and structure for years now, and shows no sign of turning that around.

There are certainly economists of all stripes right now recommending a further economic stimulus, but there's a big difference between a stimulus and a bailout. A bailout rescues someone or something, maybe with strings attached, but with no real means of ensuring operational change. A stimulus provides incentives to change, maybe with shot of cash, but leaves it to the market, or the individual, to correct mistakes. A stimulus doesn't make the assumption that government can and should be the major employer, manager and baby-sitter of record. That's just what the packages on the table will do - seems like a bailout to me.