Tag Archives: Auto Bailout

Holidays 2009: Distressed Asset Investment Letter

Dear Friends:

With year-end traditionally being a time to slow down and reflect, this post is intended to be a review of the past year, and a prognosis of sorts for what the transactional deal marketplace may show us in 2010.

However, slowing down and reflecting on this year only gives me that post-roller coaster sickness feeling. This was one of the most challenging years in business for most of us. Although it ended up being a positive year from a business standpoint, it required a wholesale reinvention of what we do, as most of our business models were affected by many polar opposite, sometimes unintended and varied influences that converged in a dizzying array of confusion. It was humorous to read that many prognosticators declared that the end of the recession was near, or even that the recession was behind us, because, contrary to the statistical reports showing declines in unemployment figures and upticks in consumer confidence, in reality the fundamental problems that grounded the economy in 2007 are not significantly different from those prevalent now. Other than runaway bank profits and the gilded age of Wall Street bonuses, our world is now as it has been for the past 2 years. We have made forward progress, but what the economic landscape has in store for us in 2010 will prove to be a mixing pot of small explosions that together will concoct a distressed asset stew full of nutritional values that we may only be able to sample if we have the coupons. Well, friends, we are the manufacturer of those coupons.

Let me try and catch you up on all that has happened in this busy year! Continue reading

Let them fail, Let them fail, let them fail

let-it-snow1

Sometimes there’s a good reason to throw something out rather than to try and fix it over and over.  In following the discussions on the automakers bailout, I  realize that there are severe consequences that will stem from a collapse of the auto industry in Detroit, but there comes a time when the current system cannot continue to be repaired, and should be left to its own devices.  If that means that GM and Chrysler will fail, they should be allowed to fail.  Perhaps what comes out of that meat grinder would be an improved system.  GM sells a lot of cars, not as many as they have in decades past, but about as many as profitable Toyota.  GM, however, cannot make money with its current business plan, as the collective bargaining agreements to which it is beholden as well as the legacy costs which it has incurred are weighing it down.  Chrysler has already received a bailout, and now that they are back asking for another one, let’s review what have they done since being bailed out.  They manufactured the Jeep and convinced Daimler AG to bail, uh, buy them out.  Daimler, makers of some of the world’s best engineered cars, got indigestion and threw them up like some bad figgy pudding.  Now they want round three!  I like the Jeep, but there needs to be more — nothing less than a wholesale restructuring of the way in which the Big Three do business.  Short-term bridge loans are really not going to achieve that result.  The Big Three’s game-plan has been to ask Congress for a handout and some help in squeezing their unions to cut wages.  To get the money, the Big Three are promising to produce greener vehicles.  Unfortunately, even Congress couldn’t get the unions to accept pay decreases.  In refusing to agree to these cuts, the unions have underscored the point that the Big Three can’t survive with their current collective bargaining agreements, and when you lump in their legacy costs, such as pension plans, I don’t see how short-terms loans are going to help them.  Perhaps then, it is time for the Big Three to fail, and have these union agreements and pension plans restructured through the bankruptcy process.  Bankruptcy filings by GM and/or Chrysler will be enormous, messy and costly as, in the current credit environment, finding the debtor-in-possession financing to fund a Chapter 11 restructuring will be arduous.  These filings will also be detrimental to the economy, as massive amounts of jobs will be lost, and consumers may not be inclined to purchase products  that require parts, service support, and warranties from bankrupt companies.  Still, these companies can’t continue to do business as they are currently structured, and auto workers are going to have to change their line of work.  The Wall Street Journal makes a good point in noting that the Big Three can’t pay their creditors in greener emissions standards, and the federal aid being requested is just a $34 billion “bridge loan to nowhere”.  Nevertheless, as they are asking for this bailout, the Big Three are engaged in high-stakes, high cost litigation with several states, including California and others that have followed California’s strict environmental standards, in a multi-million dollar attempt to avoid producing these fuel-efficient cars they are promising Congress they will build.   

We need to get real! 

The past few months have seen the enactment of TARP, the so-called $700 billion bailout plan, which has assisted companies like AIG and Citibank, and there’s now speculation that bailout money is going to pay bonuses.  Some banks that received bailout money are stating that bonuses will be down by 30%, if not 50%.  Really!  How about no bonuses at all. 

As much as I enjoy debating these issues, this may very well be a holly jolly time to just let them all fail.  I think the pieces we’ll pick up can be rebuilt into a better whole.