GLOBAL RISK DIALOGUE

At the turn of the 20th century, both Vanderbilt and Rockefeller bailed Wall Street out – but the depression still happened…

Any company that buys a struggling company the first thing the executives do? Assess what is working and what is not, assess what will retain value and what won’t…

Foreign car sales now surpass 50% of total car sales – o-b-v-i-o-u-s-l-y the U.S. consumer sees value in the foreign cars. Meanwhile UAW and others see value in the h-i-s-t-o-r-y of the Big 3 US car makers and have offered little in change for the future…

There is a REASON there is a history – it is what was, not what is now…

Bankruptcy of any or all 3 of the US car makers will only be delayed by a bailout – particularly if the global economy does not improve shortly…

The pain we will feel now by allowing them to declare bankruptcy will be nothing compared to the pain we will feel in the future with ANY ONE of the Big 3 collapsing in the future… At that time, not only will there be a loss of jobs falling like dominoes through out the country – you can count on the loss of any consumer faith left in the US car makers altogether…

At that point, EVERY U.S. car will become worthless or totally cheap on the market – and every foreign car maker will be able to ask what ever they wish for their cars…

I assume that you mean committing public funds to a bailout or rescue. In general, no. But “in general” rarely applies in real life.

If a company is failing as result of bad management or an obsolete business model, it is very hard to justify trying to save it even with new investor money. The case for saving such a company, or industry, must be completely pragmatic, not ideological.

A pragmatic business case for saving a failing company or industry would have to include a realistic analysis of the greater harm – the harm that comes from rewarding bad management and not letting the market work its magic, vs the harm that comes from the ripple effect on the entire economy.

The decision should be based on truly understanding the total societal exposure (risk times impact) that results from either choice, and the practical possibilities of containing that exposure.

“Practical possibilities” include the ability to leverage the strengths of current (or in the wings) management while neutralizing their weaknesses. They would also include levelling the playing field, such as countering subsidies or other unfair advantages given to foreign, or even other domestic competitors.

What, for example, would be the risk that GM, Ford or Chrysler would be able to emerge from Chapter 11? Historically, only small percentage of firms come out of Chapter 11 as stronger, potentially successful organizations.

What would be the impact? Here the airline analogy does not work. If I buy a ticket from a bankrupt airline, all I care about is whether or not I can get where I am going over the course of a few hours. I am not buying a long-term business relationship.

If I buy a new car, I need assurance that the manufacturer will honor its warranty for several years. Even if I buy a certified used car, I am depending on the warranty. A bankrupt car company cannot assure me that I will have the long-term business relationship I need.

The impact spreads far beyond the immediate health of the car company. By driving me away as a car company’s customer, bankruptcy will fatally damage the businesses that depend on THEIR relationship with the car company.

When I evaluate all the arguments for and against rescuing a failing company or industry, I have to ask if it is too far gone to be saved, with or without its current management. Next, I have to ask how much of the company’s or industry’s current problems result from issues beyond their control that others do NOT face. Finally, I have to ask what would be the net benefit of making a public investment in the company or industry vs letting it die.