Sunday, November 30, 2008

TOO BIG TO FAIL

Too big to fail. How many times have you heard this lately? Lehman Brothers, A.I.G. Insurance, and now the auto makers specifically General Motors. Lehman represented all the banking business in the country. AIG represented all the insurance. Of course the auto makers represent millions of our workers. We have been told that all the surrounding support companies will go down if the auto makers fail. They are all just too big to fail.

My aim in this essay is to ask the question, too big to fail or just too big? I think it is a fair question. Have we as a country come to rely too much on a few businesses to support this economy? I don’t fault the businesses for growing. I fault some of the decisions during that growth, but that is another essay. No, this is about our putting too many eggs in too few baskets.

Here are a few other examples of what I’m talking about. We are now hearing that gasoline tax receipts are at such a low that highway improvement projects will have to be curtailed. What did the powers that be think was going to happen when gasoline hit $4.00 a gallon? There has been a natural cutting back in the use of gasoline. We will either have to find other sources of funding these projects or reduce our expectations for a time.

When the auto makers were going strong, they probably felt that they were invincible. They negotiated contracts with the UAW that put themselves and their unions in real jeopardy. Now those chickens have come home to roost. In previous writings I have commented on how the auto makers have borrowed the future buyers out of the market and now have fewer and fewer potential customers. They and their unions are going to have to reduce their expectations for a while.

How about the banks? They have shelved good judgment in favor of huge short term profits and they now are seeing the only possible result of that lapse in judgment, delinquencies and foreclosures. What else could they have been thinking? Is it in the best interest for we the people to now take on their potential losses so that they can continue with their excesses?

Consider the plight of BWM Inc. This is not to be confused with BMW Inc. That would of course be Bavarian Motor Works. No, I’m talking about Buggy Whip Makers Inc. Imagine if you will the buggy whip makers going before Congress and begging for a bailout. Further imagine that such a bailout had been granted. We would now have warehouses filled to the rafters with buggy whips. The horseless carriage eliminated the need for buggy whips. Those makers of buggy whips had to figure out another business strategy to stay alive or they perished. Keeping them alive served no purpose to the country as a whole. I wonder how the buggy whip makers would have traveled to Washington to ask for the bailout. Oh how the mind wanders.

During prohibition several beer makers resorted to soft drinks to stay alive. They probably knew down deep that their problem was temporary and they just needed a strategy to keep going until America came to its senses.

I remember many years ago when I was given my first management assignment. My supervisor told me that management was the process of making decisions. If you make more right than you do wrong you will be successful. Nothing has changed in business.

So what are we to think of these latest events? Sadly in my view we have no choice but to continue to bailout the businesses in question. But, and this is a huge but, with restrictions. Restrictions in executive compensation, restrictions in executive retreats, restrictions in executive travel, and finally restrictions in union contract negotiation. It can no longer be business as usual. Those agencies whose job it is to audit banks must get serious about their jobs. Boards of Directors in companies must hold their executives feet to the fire. Unions must get real in their demands. They gain nothing for their members if their demands put companies in jeopardy. Finally Members of Congress must take a long look at their allegiances. Their only special interest is the American people. It is past time for them to start acting like it.

We as a country are not too big to fail, but we might get too big for our britches so we have to get smarter. We the people have to expect better from those we employ to guard the hen house.

Ron Scarbro November 28, 2008

2 comments:

Erik S. Olson said...

While I share your concern for the many workers at jeopardy, and am aware of the potential consequences of "allowing" companies like General Motors to fail; what really frightens me is the specter of having such companies propped up by the government.

Especially when you add in the provisions of restrictions on executive pay, union negotiations, etc. I see no good can possibly come of it.

At best, we'll end up turning an acute pain into a lingering illness. An infection that saps the strength, but doesn't kill. Better to let it die a quick death.

Companies, like all other human constructs, have natural life-spans. It seems that GM has reached it's dotage and should be allowed to drift away on its ice-flow of obsolescence. We'll be doing no one any favors (long-term) by propping it up on tax-payer funded life-support.

Companies that create and deliver market value don't need this kind of moly-coddling. Strong companies are those that can compete, adapt, and shift with the ever-changing markets. As we've so clearly seen; neither GM nor Ford has any ability to do so. Let them become "Nostalgia" brands like De Soto, and Cord. I for one, won't miss them much.

Interfering with the market will only slow down the necessary corrections and encourage the government to stick its nose in further places it has no business sniffing around.

Ron Scarbro said...

Thank you Erik for your comment. I don't think we as a country have the luxury of allowing these huge companies to fail. Also to loan them vast sums of money without restriction would be foolhardy. I don't want the government involved with business either but I am a realist. The cost of our failure to grant the bailout would be far greater than letting them die. I go back to my posted comment that we have put too many eggs into too few baskets. After we have shored them up, and prevented our own economic failure, then we can insure their compliance as well as the unions. They have proven that they are incapable of success without oversight. All of this is distasteful but I fear completely necessary. A big problem is of course that most of the Congress is owned by the unions. It will be interesting to see what happens next. Stay tuned.
Ron