Rants

A friend send me the following story recently, explaining the financial crisis in a way that everyone can understand.

John is the proprietor of a bar in Surfers Paradise. In order to increase sales, he decides to allow his loyal customers, most of whom are unemployed alcoholics, to drink now but pay later. He keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of unemployed alcoholics flood into John’s bar.

Taking advantage of his customers’ freedom from immediate payment constraints, John significantly increases his prices for wine and beer, the most popular drinks. His sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases John’s borrowing limit.  He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items because Lehman Bros recommended them as a good investment.

One day, although the prices are still climbing, a risk manager of the bank, (subsequently of course fired due to his negativity), decides that the time has come to demand payment of the debts incurred by the drinkers at John’s bar. But of course they cannot pay back the debts. John cannot fulfil his loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 88 %. The suppliers of John’s bar, having granted her generous payment due dates, and having invested in the securities, are faced with a new situation. His wine supplier claims bankruptcy, his beer supplier is taken over by a competitor.

The bank is saved by the Federal Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this massive rescue are obtained by levying a new tax on all the non-drinkers. With the extra tax moneys, the banks will be able to maintain their disgusting system of greed, egocentrism and bonusses that eventually caused the financial crisis.

I couldn’t help adding the italic part to the story after the news came out about AIG and ING passing tax-payers’ money to their top-executives that should be kept liable for the financial crisis and perhaps should even be jailed.

With me, many people feel outraged with regards to these scandalous bonuses, which should immediately be eliminated and returned. Though politicians and high-ranked officers claim that this is impossible due to earlier agreements and contracts, I really doubt this and wonder if this isn’t just a political lie. If it is really not possible to prevent these bonuses from being payed, I would like to urge political leaders to implement new legislation that taxes these bonusses away and to get them back where they belong.

The bosses of the three biggest US carmakers, Ford, GM and Chrysler, have asked Congress for a $25bn bail-out. They told a Senate hearing that without the rescue package, their firms risked collapse, and warned of broader risks to the US economy. Ford’s CEO Mulally has committed to reducing his own salary to $1/year IF Ford receives the requested $9 billion line of credit.

The CEO’s claim that the credit crisis should be blamed for these companies having a hard time. But is that really true? Could it be that the American car companies have been badly run for decades? It seems that they have been emphasizing marketing over products. Yes, it’s difficult for anyone to compete with Toyota, but the relative success of three Japanese companies, two Korean companies, three German companies and even Renault demonstrates that Detroit’s problems are entirely self-inflicted.

Paul Ingrassia, former Detroit bureau chief of the Wall Street Journal, has an authoritative discussion of these self-inflicted problems this morning, entitled “How Detroit Drove Into a Ditch.” One excerpt:

In all this lies a tale of hubris, missed opportunities, disastrous decisions and flawed leadership of almost biblical proportions. In fact, for the last 30 years Detroit has gone astray, repented, gone astray and repented again in a cycle not unlike the Israelites in the Book of Exodus.

What it comes down to is that US car companies couldn’t produce the cars that customers want for a price that customers want to buy them for. Not only during the credit crisis, but even many years before. Foreign car makers have been able to fill that gap, even with cars produced in the US, under the same US labour laws that apply to the big three. Note that this lack of sight for what the customer wants has been covered up for a long time with what Wendelin Wiedeking (CEO of Porsche) described as “ruinous discounts and hugely subsidised leasing rates“.

So why shouldn’t the US government chip in to save the US car industry:

1. The US car industry doesn’t only consist of GM, Crysler and Ford alone. Paying their bills would be unfair to the other manufacturers that have setup production facilities in the US. In fact, these three Detroit-based companies combined no longer control the lion’s share of the American automotive market. Foreign-owned manufacturers account for over 50 percent of all new vehicle sales within the U.S. For better or worse, they constitute the core of the American automobile industry.
2. Using tax money to protect Ford, GM and Chrysler from their own incompetence will not benefit the U.S. car industry, or even these three companies. A federal bailout for Ford, GM and Chrysler would simply prolong the automakers’ – and their workers’ – agony. Ford, GM and Chrysler will have to shed jobs anyway. Bailout or no bailout.

In my opinion the better options are:

• Get the management of these companies to return a seriously large part of their undeserved bonusses of the last few years, maybe even decade. They are the only ones that can be blamed for mismanagement. Even though they might have so-called “deserved” their bonusses by making short-term goals, obviously they missed out on the really important long-term goals. And do note that their total earning are ~20 mln per CEO!
• Remove the management of these companies. They have shown their incompetence for decades and it it time to clear up the mess they have left. Perhaps have a couple of hedge funds to take majority control and maybe even have foreign or Japanese talent, to replace the management.
• Evaluate the constituent brands within the 3 companies, reconstitute the healthy brands as independent car companies and get rid of the unhealthy ones.

And if the US government, for one reason or another, still decides to grant the detroit car makers this loan, the US government should maken sure that it gets a large stake in these companies. And once it has this stake make the above still happen.

There will be pain. Lots and lots of pain. But sometimes the more painful the mistake, the more important the lesson. This is one of those times. Detroit can not be saved from the reality that they’ve studiously, callously, stubbornly ignored. Nor should they be.

Powered by non-sequitur.com

Previously, I have been a supporter of a fresh wind through the US politics, and though Obama would be able to accomplish that. But things seem to have changed.

Barack Obama has named Joe Biden as the Democratic vice presidential candidate. CNET offers an interesting article reviewing Biden