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Wall Street Journal: 'Just Say No to Detroit'

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On the very top of this weekend's WSJ, there's a Chrysler Pacific dashboard with a red slash through the steering wheel. It reads...

BAIL OUT DETROIT?

WRONG WAY,

DO NOT ENTER

Just Say No to Detroit

Given the abysmal performance by Detroit's Big Three, it would be better to send each employee a check than to waste it on a bailout, says David Yermack.

PT-AK196_NOBAIL_D_20081114170031.jpg

Before Michael Moore became famous for documentaries like "Fahrenheit 9/11" and "Sicko," his first big success came in 1989 with "Roger and Me." In that film, Mr. Moore followed General Motors chairman and chief executive Roger Smith with a camera crew, asking him why the company was closing plants and producing low-quality vehicles. Mr. Smith looked flustered and inartfully avoided Mr. Moore's camera crew while it lingered outside his country club or GM's executive offices.

"Roger and Me" was entertaining, but it missed the real story about Roger Smith, who turned out to be a forward-thinking genius. Mr. Smith made big investments in information technology and satellite communications, acquiring Electronic Data Systems in 1984 for $2.5 billion and Hughes Aircraft in 1985 for $5.2 billion. Mr. Smith's successors divested those businesses at huge profits -- EDS was taken public in 1996 for more than $27 billion, and Hughes, renamed DirecTV, went public in 2003 for more than $23 billion. (The man who sold EDS to Roger Smith at a bargain price was H. Ross Perot, who then convinced many people that the experience qualified him to be president.)

Mr. Smith understood all too well that GM shouldn't continue investing in its failing automobile business. That was 25 years ago. Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.

In 1993, the legendary economist Michael Jensen gave his presidential address to the American Finance Association. Mr. Jensen's presentation included a ranking of which U.S. companies had made the most money-losing investments during the decade of the 1980s. The top two companies on his list were General Motors and Ford, which between them had destroyed $110 billion in capital between 1980 and 1990, according to Mr. Jensen's calculations.

I was a student in Mr. Jensen's business-school class around that time, and one day he put those rankings on the board and shouted "J'accuse!" He wanted his students to understand that when a company makes money-losing investments, the cost falls upon all of society. Investment capital represents our limited stock of national savings, and when companies spend it badly, our future well-being is compromised. Mr. Jensen made his presentation more than 15 years ago, and even then it seemed obvious that the right strategy for GM would be to exit the car business, because many other companies made better vehicles at lower cost.

Roger Smith, who retired as chairman in 1990, seemed to understand that all too well, and so did Chrysler's management, which happily sold their company to Daimler Benz for $30.5 billion in 1998. That deal, one of the savviest corporate divestitures ever, ended very badly for Daimler, which essentially paid Cerberus a few billion dollars (by agreeing to retain pension liabilities) to take Chrysler off its hands in 2007.

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

The implications of this story for Washington policy makers are obvious. Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.

Two main arguments are being raised to justify a government rescue of the auto industry. First, large numbers of jobs may be at stake, perhaps as many as three million if one counts all the other firms that supply the Big Three. This greatly overstates the situation. Americans are not going to stop driving cars, and if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share, adding jobs in the process. Many suppliers will also stay in business to satisfy the residual demand for spare parts even if the Detroit manufacturers go under. If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.

Second, it is suggested that the failures of the U.S. financial industry, which have cost us something like $700 billion, justify bailouts of other sectors of the economy. This makes no sense. If the government diverts our national savings into businesses that have long track records of destroying investment capital, eventually we'll end up with an economy like France's -- or Zimbabwe's.

Other arguments are on the table as well. Some see the troubles at GM and Ford as opportunities to retool the auto industry to produce environmentally friendly cars. Given their long track records of lobbying against fuel economy standards and producing oversized gas guzzlers, this suggestion seems ridiculous, sort of like asking cigarette companies to help with cancer research.

Not many of my students today remember "Roger and Me" (many confuse the film with another picture from the same era about the cartoon character Roger Rabbit). However, Roger Smith's example casts a long shadow over the auto industry today. It's time to cut our losses and let society's scarce investment capital flow to an industry with more long-term potential to create jobs and economic value.

http://online.wsj.com/article/SB122669746125629365.html

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What an absolute jackass!

No kidding. I think that there is a long term bias against blue collar work in this nation, and no one seems to have it worse than the wall street elite.

Chris

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dont worry he'll get his when no one can afforda wallstreet journal subscription because of econimic collapse.

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It is precisely the surrender mentality of fools like this that will give us an economy "like Zimbabwe".

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I don't understand it. Wealth is created by having lots of people do lots of interesting things, from building cars to running Italian resteraunts.

Wall street types seem to think that real welth is on the trading floor, when what is swapped on the trading floor is only a symbol of real wealth.

Chris

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I don't understand it. Wealth is created by having lots of people do lots of interesting things, from building cars to running Italian resteraunts.

Wall street types seem to think that real welth is on the trading floor, when what is swapped on the trading floor is only an illusion of real wealth.

Chris

Fixed.

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Interesting this guy makes the assessment 25 years later that Roger Smith was a genius. Back 25 years ago, Roger Smith was ridiculed for what he was doing. So I suppose if I use the author's logic to this, presuming he'd consider his ideas of what to do with GM today as brilliant, then conversely in 25 years he'd be seen as an idiot.

Do I have this thinking right?

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Interesting this guy makes the assessment 25 years later that Roger Smith was a genius. Back 25 years ago, Roger Smith was ridiculed for what he was doing. So I suppose if I use the author's logic to this, presuming he'd consider his ideas of what to do with GM today as brilliant, then conversely in 25 years he'd be seen as an idiot.

Do I have this thinking right?

Spot on.

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I like this guy and his writing style. He makes some good points, but the short-term ramifications will be quite severe. Sure competitors would come in and replace GM and Ford, but the buffer period will be rough. It is true though that the financial institutions were quite healthy before the meltdown, whereas GM has been limping along for years.

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Anyone praising the actions of Roger Smith is of questionable mental capacity.

The man caused much of the mess GM has been dealing with since his tenure.

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Anyone praising the actions of Roger Smith is of questionable mental capacity.

The man caused much of the mess GM has been dealing with since his tenure.

Oddly, I agree with your assessment.

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Oddly, I agree with your assessment.

Even more oddly, I knew that you would. :AH-HA_wink:

We've discussed the "Clown Prince" of GM management before.

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Remember what I said???

Wall Street will ooze with this kind of logic in order to try and sway the government and citizens. All because Wall Street can make a buck on the back of the little man and at the hands of 300 years of history.

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Kind of flies in the face of the poll The Griffon posted, doesn't it?

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In 1993, the legendary economist Michael Jensen gave his presidential address to the American Finance Association. Mr. Jensen's presentation included a ranking of which U.S. companies had made the most money-losing investments during the decade of the 1980s. The top two companies on his list were General Motors and Ford, which between them had destroyed $110 billion in capital between 1980 and 1990, according to Mr. Jensen's calculations.

I was a student in Mr. Jensen's business-school class around that time,

Hmmm.... That says a lot.

The definition of sheep? I think so...

Two main arguments are being raised to justify a government rescue of the auto industry. First, large numbers of jobs may be at stake, perhaps as many as three million if one counts all the other firms that supply the Big Three. This greatly overstates the situation. Americans are not going to stop driving cars, and if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share,

Wonder who cut him the check?

adding jobs in the process.

But no where near the 3.5 million that would be lost... But then again, since americans (especially american business men) cannot see past their own noses, that DOESN'T MATTER.

Other arguments are on the table as well. Some see the troubles at GM and Ford as opportunities to retool the auto industry to produce environmentally friendly cars. Given their long track records of lobbying against fuel economy standards and producing oversized gas guzzlers, this suggestion seems ridiculous, sort of like asking cigarette companies to help with cancer research.

Yeah... And they did that to try and shut people like you the hell up, by MAKING A PROFIT!

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No kidding. I think that there is a long term bias against blue collar work in this nation, and no one seems to have it worse than the wall street elite.

Oh, there is... It's a stigma.

Yet these yuppies can't see the forrest for the trees. Without blue collar work and workers, their JOBS will dry up. We're beginning to see that happen. america is too heavy on the people that don't really create anything, they just shuffle the existing (like this guy and most service jobs). That leads to a decrease in spending power (what we're seeing now... Credit has finally surpassed spending power) and ultimately less jobs for the shufflers. You can't service anything if people don't have the money to spend on the services or what needs serviced.

I like this guy and his writing style. He makes some good points, but the short-term ramifications will be quite severe. Sure competitors would come in and replace GM and Ford, but the buffer period will be rough. It is true though that the financial institutions were quite healthy before the meltdown, whereas GM has been limping along for years.

I wouldn't exactly call the 90s, the truck boom, "29%" pins and billions in profit "limping along for years"

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Interesting this guy makes the assessment 25 years later that Roger Smith was a genius. Back 25 years ago, Roger Smith was ridiculed for what he was doing. So I suppose if I use the author's logic to this, presuming he'd consider his ideas of what to do with GM today as brilliant, then conversely in 25 years he'd be seen as an idiot.

Do I have this thinking right?

Yes, you do!

Chris

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Oh, there is... It's a stigma.

Yet these yuppies can't see the forrest for the trees. Without blue collar work and workers, their JOBS will dry up. We're beginning to see that happen. america is too heavy on the people that don't really create anything, they just shuffle the existing (like this guy and most service jobs). That leads to a decrease in spending power (what we're seeing now... Credit has finally surpassed spending power) and ultimately less jobs for the shufflers. You can't service anything if people don't have the money to spend on the services or what needs serviced.

Congrats, you said it about eleventy billion times better than I did...But this puzzles me. It is almost like they need to look down on blue collar workers to find their own self worth.

Chris

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Congrats, you said it about eleventy billion times better than I did...But this puzzles me. It is almost like they need to look down on blue collar workers to find their own self worth.

Chris

Perhaps because they don't really DO anything and feel inadequate about that?

A big part of being 'american' is having the independence and ingenuity to "make your own way"

Most of these yuppies on the street couldn't survive the NYC subways at night, much less be able to ever CREATE or BUILD anything with their own hands in order to "make their own way"

I think they might feel inadequate about that.

But that's just my humble opinion.

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Wow, based on all the sentiment I've been reading in the comments sections of these papers, the only thing I can say to the management and employees at GM is, "good luck - you're gonna need it". Nobody believes in GM anymore. It's truly amazing how horrible the perception of GM actually is in this country. The average person who isn't up on current events (or just doesn't happen to look around when driving) can't see that most of Toyota's current models are actually gas guzzling trucks, and that Toyota has actually followed GM down the path of building fuel inefficient vehicles for the sake of making a lot of money. Yet, they somehow are seen as being more "innovative". What's more, Toyota, Nissan and the rest of the foreign "transplants" were allowed to build factories here through gigantic tax breaks and next to nothing land, through essentially the same processes (lobbying) of strong arming Washington politicians that the Big 3 are using now. But none of these so called "intellectuals" are calling the Japanese companies on it. Never mind the fact that every dollar we send over there gets sent back to us in the form of a "loan" - which we pay back to them at interest.

Moreover, it isn't like GM doesn't build fuel efficient, competitive vehicles. Most of the current vehicles offered by them are not only fuel efficient, but are considered world class in the eyes of the automotive press.

The folklore that America only builds gas guzzling, non-competitive products needs to stop. While I think that Toyota, Nissan and the like build some really good cars, I also think that the Big 3 do as well - but you'd never know that if you didn't bother to read anything current about the industry.

Edited by gmcbob
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No kidding. I think that there is a long term bias against blue collar work in this nation, and no one seems to have it worse than the wall street elite.

Chris

can't say that enough.

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Remember what I said???

Wall Street will ooze with this kind of logic in order to try and sway the government and citizens. All because Wall Street can make a buck on the back of the little man and at the hands of 300 years of history.

wall street is partially behind this, as they want to reduce the automakers to scraps so investors can profit off the sale of the scraps.

all he says all this after this buddies got a 700B injection in funds.

that alone says all you need to know.

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Where is aatbloke when you need him? I've been screaming for 2 or 3 years now that Wall Street builds NOTHING and that a day of reckoning was coming, yet I got sniped at for 'hating' anybody with a degree. No, just accountants and lawyers, who are all a bunch of snake oil salespeople, as far as I am concerned.

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Congrats, you said it about eleventy billion times better than I did...But this puzzles me. It is almost like they need to look down on blue collar workers to find their own self worth.

Chris

I think it also is the east coast-west coast mentality that the fly over states are not worth anything so they don't care about middle America, after all Madison avenue and California infuence everything from design, fashion, entertainment, etc.

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