GM, Peru interest rates and 2-party communism

Random thoughts on some of the day’s main business news:

GM exits bankruptcy. CEO Fritz Henderson said

“…the new GM will be faster and more responsive to customers than the old one and it will make money and repay government loans faster than required.”

Yeah, right. Why don’t I have warm fuzzies about this? When was the last time a company majority owned by the US government and the UAW became faster and more responsive? The company even brought back Bob Lutz, one of the old rich guys who was at the helm of the ship when it went under. Sure GM dumped a bunch of liabilities, but with revolutionaries like the US government, the UAW and Bob Lutz in the driver’s seat I doubt they made a lot of structural changes to the problems that got them in trouble to begin with.

Perhaps the biggest thing I question about GM’s reorganization plan is the sale of Saturn, which essentially becomes an independent dealer network. If you’ve never heard of Chery, JAC, SsangYong or Mahindra, you may soon enough at a Saturn dealer near you. In 5 or 10 years, GM will be relegated to selling trucks, Suburbans and Corvettes, no mas.

New Chery cars at a Peruvian dealership

New Chery cars at a Peruvian dealership

In other news, Peru lowers interest rates. Interest rates are near zero practically all over the world. How’s that been working out for Japan in the last 2 decades or so? I’m with the camp that says the whole financial mess was caused by too much leverage, lending more money is not the solution.

By the way, since interest rates in the US are near zero, how much should you be paying on your credit cards? And if you’re paying 5% on your mortgage, isn’t that about 4.5% too much? Exactly where does that 4.5% go? Once again, if you believe the well-being of the big banks on Wall Street – at the taxpayers expense – is in the best interest of middle class America, I’ve got a mountain in Peru I’d love to sell you 😉

More news this simple mind doesn’t understand… Timmy Geithner says derivatives should be regulated. Creo que no. Regulation isn’t the answer. What would have been better is if the government had simply let AIG fail, this way most of the derivatives would have gone away and perhaps, just maybe, the bankers on Wall Street might have gotten a lesson in morality. Not to mention, taxpayers would have been saved some $180 billion that now went to such needy institutions as Goldman Sachs and Deutsche Bank. Let the market adjust itself, stop bailing out old rich guys in suits.

2-party communism

All this brings me to my main point, the US effectively is a 2-party communist state now. Sure you have individual freedoms, so I don’t mean to imply communism like in the old Soviet Union. But realistically, business and government have become institutionalized and joined at the hip. GM, Chrysler, untold number of banks have been deemed “too big too fail” and are without a doubt taking advantage of that status. Treasury and the Fed prefer regulation over allowing the markets to correct. Bernanke, Geithner, et al are printing up money to distribute as they see fit, practically reducing competitive advantage to where you stand in your ability to tap into government funds. In Washington and New York, decision makers move seemlessly between government and private positions. Henry Paulson was at Goldman before he came to Treasury, wanna take bets where Timmy Geithner will be in 2 years?

All this of course is bad for innovation and real value creation – ever driven an old Lada? Businesses that have become institutions of government have little incentive to make or do better things, yet they wield tremendous competitive advantage over independent companies.

I’m not too worried about any of this though. I believe you have to make your own luck, no matter what the big wigs in Washington, New York or Lima say or do. And the pendulum will eventually swing back in the opposite direction, as it always does. But for now we are “kicking the proverbial can down the road” too much, and future generations will be paying for our excesses. Better get ready to work, Brianna 🙂

GM turnaround plan

I’m worried that my brother – and many other good people – could lose their jobs in the GM bankruptcy (filing doc pdf). Now is not the time to point fingers or argue over the same stale disagreements that have existed for years, but a time to figure out how to make business better for the future.

The turnaround plans I’ve read in the media seem to consist mainly of wiping out shareholders (done), swapping debt for equity, and starting over. However, I haven’t seen much to address what I believe are structural problems at GM, such as:

  • Splitting the finance arm from manufacturing
  • Divesting the international divisions (Opel, Vauxhall, Saab)
  • The failed ideas of globalization
  • Improving labor relations (okay, they’re giving part of the company to the union to erase a debt, but what are they actually doing to improve morale & productivity of the workers, or to create a pipeline of talented engineers and skilled technicians?)

So I wrote a turnaround plan for GM, admittedly from outside looking in. Hopefully some of it will fall on the right ears in Detroit, Washington, New York or Germany. You can download my GM turnaround plan from Although I wrote the presentation with GM in mind, many of the ideas are also relevant to other struggling, 20th century businesses.

Download GM turnaround plan – Powerpointhtml

I was influenced by ideas from others, most notably Option Armageddon and Umair Haque. If I overlooked any credits in the presentation, please let me know. If you use any of the ideas in the presentation, please also be so kind as to give credit.

My presentation is certainly no silver bullet to the GM restructuring (there’s billions in bondholder obligations), so feel free to add ideas in the comments or contact me for discussion.

Ward Welvaert