Auto Bailouts Revisited and a Change of Heart

On January 2, William Holstein had an op-ed piece in the New York Times titled “GM’s Secret Success.” The piece made the argument that Rick Wagoner had overseen a major transformation at General Motors, and that the company was poised to reestablish itself. Holstein made the point that Wagoner should not be the scapegoat for 50 years of mismanagement. It was a terse but well-written argument to take a closer look at what had been accomplished and not react precipitously. It prompted me to pick up Holstein’s book, “Why GM Matters: Inside the race to transform an American icon.”

I have to say that, in spelling out the history of GM with a concentration on Wagoner’s roles in the more recent history, Holstein makes a very cogent case for why the “small” sum of $37 Billion compared to what has gone and will continue to go to the financial institutions, would be a very good investment on the part of the US government. He does see Chrysler ultimately being absorbed by another auto company, but makes a very strong case for GM. The case is based on a fairly detailed analysis of the changes that have been wrought at GM in terms of cost, design and new technologies. I was impressed. While Holstein wasn’t explicit on this point, one could imply from what he wrote, that the technological changes of which GM is in the midst, could be the foundation for a big piece of the type of innovation and growth that came out of the auto industry after WWII.

This is a bit of a stretch, but one could envision the manufacturing changes, on-board information systems driven by OnStar and the move toward electric and other drive trains as being a significant element in job creation, clean energy and energy independence, with ripple effects on other manufacturing efforts in the US and elsewhere. This could be a significant part of the revitalization of American industry based on technology and a willingness to change.

If Wagoner and his team actually can make it through this financial crisis, complete the restructuring of this behemoth of a company and become an example of what can be done in American industry, it would be a great success story in what will be a difficult period. No doubt, the equity value of the company could go lower or disappear in the near term, but this strikes me as a better bet than what one sees going on thus far with the stimulus package and the financial industry bail-outs

We all have a tendency to look for instant success. Listen to the pundits talk about the markets’ negative reactions to the various efforts thus far to right this ship, as if a different specific action on the part of Congress, the Fed and the Administration would have produced a different response in the markets. Changing a company of the size of GM takes enormous effort and time. I accept what Holstein has written, and I take back my view that a bankruptcy before money goes in would be a better course. I would urge all to at least read Holstein’s op-ed piece. might get you there. The book is also worth reading, and I hope that Congressional and Administration staff members are reading it and informing their bosses. Chapter 11, alone, about the development and promise of the OnStar system could actually make one want to go out and buy a General Motors car. I think I will wait until the mileage gets better as well—but that’s coming.

I was going to have this entry in the blog be about the sad story of the US electric transit systems and GM’ and Standard Oil’s sad roles in their demise. I still may write that at some point, but Holstein’s writings make a strong case for not punishing the GM and the UAW of today for past sins. There seems to be a strong element of that at work, maybe combined with a number of Southern congressmen who see the demise of Detroit benefiting the non-US auto manufacturers in their specific states. They may not recall the subsidies provided to those entities to locate their plants in their territories, as they decry the loan requests of two of the Big Three.

This entry was posted in Automobile Industry, United States by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

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