Should bankruptcy be the price of bailing out GM?

The Wall Street Journal ran an opinion piece this morning on bailing out GM (and potentially Ford and Chrysler/Cerberus as well) that suggests the price that each company should pay in order to get more government money: The board and senior management should be fired, shareholders should lose their remaining equity, and a Government-appointed receiver should take over. The receiver should tear up contracts with labor, suppliers and dealers, shut plants as needed, and do whatever is necessary in order to return the company to profitability.

That's the definition of Chapter 11 Bankruptcy. So, what the writer is saying is that the price of bailing out GM should be bankruptcy. That argument makes sense, but I question whether a receiver can clean up the mess at GM and turn it back into a viable competitor post-bankruptcy. Let's remember that Cerberus Capital brought in a management "dream team" to turn Chrysler around, and now they're desperately trying to sell the company, in whole or in part. Given the current economy, a move into Chapter 11 reorganization is likely to slide into Chapter 7 liquidation, which would be catastrophic for the U.S. economy.

Even without driving GM into Chapter 7, a receivership could cause other unintended consequences. For example, the Big Three manufacturers won an agreement to turn over responsibility for retiree health benefits to the United Auto Workers, starting in 2010. That will save GM $3 billion a year. However, if the trustee eliminates GM's contributions to the UAW's Voluntary Employee Beneficiary Association fund, the fund will no longer be able to support GM's retirees without taking benefits away from Ford's and Chrysler's retirees. Further, GM's costs will decrease, which will put the company in a much better competitive position vs. Ford and Chrysler. That could drive Ford and Cerberus/Chrysler into bankruptcy. We could end up with three car manufacturers in bankruptcy, not just one.

I think that the best solution is one that nurses GM through this recession, keeping the company going until consumer demand picks up, but with major operational concessions on the part of GM's management and the UAW. The company must replace its Board of Directors. GM needs its own Louis Gerstner, and a new team of senior managers who haven't been innundated with GM's groupthink. GM has got to become the world's best manufacturer of automobiles, not just the biggest, but they won't get there with either the management team or Board of Directors currently in place.

The words that GM executives dare not speak

What words? The first one is "Chrysler." In GM's earnings announcement today, the company said that it has decided not to pursue merger talks with an unspecified company at this time, and instead will focus on internal growth. In an interview with Rick Wagoner, GM's CEO, Phil LeBeau of CNBC asked him if the press release was referring to Chrysler, and Wagoner replied that he couldn't say.

The second word is "bankruptcy." LeBeau asked Wagoner if bankruptcy is a possibility, and Wagoner refused to use the word. It feels a little like the old Soviet Union or pre-Capitalist China, where certain words were banned, or their meanings were twisted beyond recognition. It doesn't reflect well on GM's management when they're frightened by words or afraid to acknowledge the truth. If the company truly wants help from the Federal Government, its management has to demonstrate that it won't waste the money, and they've got to start by speaking plainly and truthfully to the Government, press, investors and their employees.

How long with the lessons of our credit bubble last?

U.S. public radio's Marketplace ran a story today about how the sales of luxury goods are struggling, even with consumers that still have the money to buy them. It's become "unseemly" to buy more than you need, even if it means shopping at Target rather than Bloomingdale's or Nordstrom. The big question is whether this is a temporary shift that will reverse when the current recession ends, or whether this is a generational change that will persist for decades. My gut feeling is that it's the latter, but the only evidence that I can offer is what happened during and after the Great Depression.

Financial hardship causes long memories, and the deeper and more prolonged the hardship, the more entrenched the memories become. My parents both lived through the Depression. In the 1960s and 1970s they refused to do business with Mellon Bank, even though it was the largest bank in Western Pennsylvania, because Mellon had foreclosed on so many homes in the Depression and threw so many families out in the street. They paid cash for everything, financed their retail business out of their own pockets and didn't use trade credit.

Fast forward to this decade and the last. Credit was cheap and widely available, and using debt to leverage, or multiply, the amount of cash that an individual or business had was seen as smart. It worked for a while. It got many people who couldn't otherwise afford homes into homes. It convinced supposed "Masters of the Universe" on Wall Street to take on unbelievable risks. But now, the credit bubble has imploded, just as the Japanese asset value bubble imploded in 1990. Japan still hasn't fully recovered from its "bubble economy". How long will it take the U.S. economy to recover?

I think that it wll take long enough that the lessons of dependence on credit will be burned into a generation of consumers and business owners. Consumers will scale back their purchases to focus on items that they need and can afford. Businesses will again focus on cash flow and profitability, rather than growth and leverage. The quality of earnings, rather than their absolute size or growth, will become the most important factor. Personal savings will eventually swing upward as consumers work off their debt burdens.

I'm going through my own version of a credit bubble implosion, one that, frankly, I may not survive. If I do, I will be as changed as my parents were. I am not the man I was a few years or even a few months ago, but yet my lessons pale next to those of families who, through no fault of their own, have lost their homes and have no place to go. There is no longer any such thing as "good credit." Credit is a necessary evil in some cases, but it is an evil, and it should be avoided.

More pain in autos for October

Autoblog's October "By the Numbers" survey is out, and the auto industry in the U.S. slid deeper into recession last month, with all makers except Audi and Mini showing year-over-year losses. GM was the biggest loser, down 45% from October 2007, and every GM brand except Saab was down at least 40%; HUMMER was down more than 60%, and Cadillac, GMC and Saturn were down over 50%. In September, GM was one of the better performers, due to its "Employee Pricing for Everyone" program, but it was discontinued at the end of that month. In addition, GMAC withdrew financing for all but the very best credit risks, which left GM's dealers with far fewer options for customer financing.

Of the major companies, Chrysler was down almost 35%, Ford fell over 30%, Nissan was down 33%, Honda was down over 25% and Toyota was down 23% (even with its annoying "Saved by Zero" ad campaign.) Only BMW was able to stay nearly even with last year, with a 5% year-over-year decline, and that was largely due to a big increase in production capacity and sales for Mini. In total, industry sales dropped 32.3% to approximately 821,000 vehicles (vs. 1.2 million in October 2007,) the lowest monthly count since February 1993, and adjusted for population growth, the worst monthly total since World War II.

Video business news done better

I recently wrote about the problem that most of CNBC's anchors have with understanding that businesses are collections of people making and selling things, not pieces of paper to be bought and sold on Wall Street. Like a lot of people, I get ideas at 2 a.m., and last night, I wrote one down. Here's the elevator pitch:

The idea is a video news service that focuses on the needs of businesspeople, not investors. There would be multiple channels, with each channel focused on a single industry. Some of the potential channels include:

• Automobile
• Health Care
• Retail (possibly multiple channels)
• Agriculture
• Banking
• Insurance

Editors in a central location would assign and screen stories produced by a combination of full-time field editors and stringers (part-time and contract reporters.) Trade publications and newspapers that already cover these industries could participate by contributing stories; in return, they would share in ad revenues and have the right to republish the stories on their websites. Whenever viewers tune in, they would see the latest news report (continuously refreshed) and have access to longer, in-depth reports on a variety of industry-related subjects.

There would be a dual revenue model: Subscription fees (the service would be business, not consumer, oriented) and advertising.

Most importantly, the service would be available exclusively by phone, not PC. That means that mobile service providers, such as Verizon, AT&T, Sprint and T-Mobile would share in the subscription revenues and participate in marketing.

So, who should do this? Possibly CNBC (NBC Universal has all of the pieces to make it happen,) but they probably won't. Fox or Bloomberg would be better candidates, but in both cases, it would require a radical rethinking of their businesses, shifting from investors to business operators. One or more of the major trade publishers, such as Crain, Reed Business, Nielsen or United Business Media, could make it happen. The New York Times or Dow Jones are also possibilities. The point is that there are no technical limitations making this idea impossible, or even terribly difficult to implement.

Read Tom Friedman's column

Before you vote for any candidate in the U.S. Presidential election, read Tom Friedman's column in today's New York Times. Whether you're a liberal, centrist or conservative, it's the best advice I've read in a long time.

You can check out any time you like, but you can never come back

My job search continues, and I've got some prospects outside Northern California, where I currently live. I haven't lived outside of California for 25 years, so I'm just becoming familiar with the real cost of living differences between this state and most of the country. (I've always known that there are big differences, I just never had to deal with them.) Depending on where I'd move, the differences can be enormous: Using CNNMoney.com's Cost of Living calculator, I'd have the same standard of living on a $72,000 salary in Chicago that I'd have on a $100,000 salary in San Jose, CA. In Denver, $68,000 would go as far as $100,000 in San Jose; in Austin, TX, a little over $61,000 would go as far as $100,000 in San Jose. About the only place in the country where I'd have to make more money to maintain the same standard of living is the New York City area.

That's great; my money will go a lot further, almost no matter where I go. But let's flip the situation around, and say that at some point in the future, I want to return to Silicon Valley. I'd have to make as much as 64% more to maintain the same standard of living. It's almost unheard of to get a 64% raise by changing jobs; in fact, many Silicon Valley start-ups actually pay less, and make it up with stock options. That's why the only people who can afford to move to California are recent college graduates already living on low incomes, immigrants that live incredibly frugally, and people who are already wealthy. In just about every other case, your standard of living will drop dramatically when you move to California. So, once you're gone, you're gone.