Keep bailing . . .

Felix Salmon complains, justly I think, that the bailed out financial firms are using the funds to keep their operations going rather than restructure them:

The NYT also, however, has a pointed column from Floyd Norris, who notes the double standard being applied here: while the government is disinclined to give Detroit any help at all, it's much more well-disposed towards companies like AIG and Fannie Mae which are coming back for second helpings of bailout money, after having made clearly insufficient changes the first time around.

It strikes me that this is another problem with a potential auto bailout:  we don't have any good blueprint for what we want them to do.

The financial industry is one of the most heavily regulated industries in the country, indeed, the world, and while we don't know how to collectively get out of this crisis, we do know generally what we want the banks to look like at the end of it:  less leverage, better risk management, and probably a better compensation system that calibrates earnings to multi-year and systemic performance.  I don't want the government to run the banking system for any number of reasons.  But I do think that the government has a roughish idea of what a good bank should do.

What, by contrast, should we demand from GM in return for our largesse?  I don't think we have any legislators or regulators with the experience and flair to design new cars or oversee the marketing program, manage the dealer network or decide which lines to cut or gut rehab.  We'll have to depend on management to do this.  And the management that will be in charge is going to be, in essence, the same management that screwed things up. 

Oh, we can replace the people at the top, if we want (it would probably be a good idea, but I don't know how it would play politically).  But American business writing considerably overstates the value of a CEO.  Not that being a CEO is easy, or that they don't do valuable work; I venture to say that 100% of the commentators who think that running a major company is a matter of riding around on the corporate jet and stealing from the workers and shareholders would be surprised at how quickly the company sank under them if they were thrust into that cushy sinecure.  But while a bad CEO can ruin a good company, it is not necessarily the case that a good CEO can save a bad one. 

Big organizations are like ocean liners; they turn slowly, if at all.  Corporate culture is simply an amazingly powerful thing, almost always beyond the ability of one man (or woman) to change.  I have spoken to people at organizations that replaced two thirds of their staff in a buyout, and nonetheless found the old culture running the place rather than the new, dynamic environment they'd hoped to create.  A very small cadre of old workers can perpetuate the old culture surprisingly well, because they're united, while the new people coming in have no common culture to bring against the old guard.

Too, CEOs at failing companies are often operating under more legacy constraints than they are given credit for.  One often hears people rail against the UAW when talking about the auto industry; more rarely do you hear about the supplier network, the dealer network, and the politicians at local, state, and federal levels, all of whom exert considerable leverage over Big Three CEOs.

Congress, or some regulator, has no ability to fix the corporate culture that failed in the first place.  No matter how many executives you fire, the middle management, the engineers and marketers and purchasing agents and sales force, will stay the same.  We don't have anywhere else to recruit a whole new workforce from, even for a stripped down company.  Even if we were going to go outside the industry and get new people, how on earthy would you persuade them to move to Detroit?  Maybe you could do it by throwing money at them--but can you imagine the reaction from Congress if the new Big Three leadership proposed raising management salaries by 30%?

Indeed, a bailout will mute the one thing that sometimes does turn around dysfunctional management:  the shock value of failure.  Failure is nature's way of saying "don't do that anymore!"  We're whiting that out and replacing it with "Keep going!"

The only thing that the Federal government could even theoretically oversee fairly competently is downsizing:  choose which plants to shutter, which workers to lay off.  But avoiding mass layoffs and plant closings is precisely the reason that Congress wants to give Detroit a bailout.  And even if Congress had the political will to cut deep, in practice it would fall apart.  The decisions about plant closures and layoffs would become a political football akin to base closings in the nineties, with Congress working hard to ensure that any such decisions were made on the basis of whose senators and representatives had more power, rather than which plants are least efficient.  The Big Three have a fantastic burn rate; at current rates, a $10 billion infusion into GM would be gone in a few months unless the economy magically turns around.  Raise your hand if you think auto demand is going to improve to 17 million cars a year in the next two or three years. 

Yes, Mr Wagoner, you can sit down now.  The rest of us are skeptical.

My prediction:  we will get an auto bailout, probably as soon as Obama is sworn in, though possibly sooner.  It will not involve the kind of massive job cuts and plant closings that most analysts who do not work for GM (or the UAW) believe are necessary to make the company viable again.  Possibly the company will go into bankruptcy, burning the creditors, but any planned bankruptcy will involve shielding union contracts from a serious cramdown.  Top management will be fired, and the rest will have their salaries cut or frozen, causing the most talented workers to flee for other industries.  The company will burn through the money, and be back asking for more from Congress before Obama's first year is out.

The best case scenario for GM, and the worst case for the rest of us, is that the bailout involves the government assuming many of its legacy obligations at enormous ongoing expense.  This will help, but not erase the fact that Detroit has capacity to build at least 50% more cars than anyone is currently willing to buy.