Friday, December 5, 2008

Auto Industry Bailout - Supplement III

As my readers know, in my previous recent posts on this subject, I have very mixed feelings about the appropriateness of a federal bailout, but believe that a highly conditional loan based bailout is inevitable, given the clear support of the majority of members in Congress, the Bush Administration, and Obama's transition team. From a pragmatic perspective, I think it's a reasonable option under present circumstances. I want to make several more points that I think are called for at this point.

1. The three U. S. auto companies (GM, Ford, and Chrysler) don't deserve a bailout of any kind, certainly not the management team, the board of directors, or the stockholders. One can argue that the non-management employees deserve some government help. The industry's problems are not really their fault. It's a question of whether bankruptcies or properly structured loan packages best serve the interests of the country and the needs of our national economy, given our worsening recession and fast increasing unemployment numbers.

2. In my view Chrysler should preferably be required to be rescued by its controlling shareholder, Cerberus Capital Management, or to be acquired by Ford or GM, given its much smaller size and more urgent and serious problems. That would eliminate the need to look at CEO Nardelli's request for a $7 billion loan by the end of the month and probably another request next spring. It would also provide an opportunity to remove excess overhead expenses from the industry.

3. Our senior government spokespersons supporting a conditional bailout should remind the public and their critics in government that what's being considered is not a grant or an equity infusion, but a loan and/or line of credit with interest that is expected to be repaid within several years.

4. In event that Chrysler is not initially rescued by Cerberus or acquired by Ford or GM, Cerberus should be required to inject new cash equity of at least $1 billion into Chrysler, reducing the company's need to no more than $6 billion, and should find acceptable private sector guarantors for any loan by the government for the remainder. This might convince Cerberus that a sale to Ford or GM might be preferable.

5. I was not impressed with CEO Wagoner's statement in presenting his plan to Congress that GM may trim its lineup of cars and trucks from 60 models to 40. I would think a much smaller number of models, say 20 or 25, would be much more sensible in terms of improving manufacturing efficiencies and minimizing overhead.

6. Government bailout financing should be collateralized by acceptable assets to at least 50% of the credit commitments made to reduce the risk. Interest rates and commitment fees should be similar to what a major bank would charge for similar risk. The loans and lines of credit should be senior obligations repayable before any other loans or bonded indebtedness. The financing should also be subject to a formal credit agreement like any bank would require.

Tuesday, December 2, 2008

Afghanistan War Strategy

I am pleased that President-Elect Obama has recently confirmed he still is committed to withdrawing U. S. troops from Iraq on a responsible basis within 16 months from taking office next month, a plan and timetable that has been approved by the Iraqi government. However, I have very mixed feelings about his plan to support a substantial increase in our current troop strength in Afghanistan, especially considering our serious economic recession, our huge federal budget deficit, and great funding needs here at home.

As a reminder, our war there began in October 2001 as the military operation called "Operation Enduring Freedom," launched by the U. S. and the U. K. in response to the September 11, 2001 Al Qaeda attacks on our country. The stated purpose of the invasion was to capture Osama bin Laden, destroy Al Qaeda, and remove the Islamic radical Taliban regime which had provided support and safe harbor to Al Qaeda. In 2002 a second operation, under a coalition called the International Security Assistance Force (ISAF), was initiated to stabilize the country. NATO took control of ISAF in 2003. While the U. S. and our coalition allies, particularly the U. K., were successful in removing the Taliban regime, we have not yet after seven years succeeded, as far as we know, in killing or capturing bin Laden or destroying Al Qaeda, though, fortunately, a number of their senior commanders have been eliminated.

There are three other highly troubling factors. The current government, led by President Hamid Karzai since an election in 2004, is fragile with limited political or military control outside the capital, Kabul. Secondly, despite major initiatives to stop it, the country has experienced record-high illegal production of poppies from which heroin is made, and trading the heroin is a multi-billion dollar business which is providing major funding for the Taliban and local warlords whose loyalty to the government is also generally fragile. Thirdly, the Taliban insurgents seem to have recently regained some of their political and military strength, in part as a result of some dissatisfaction with Karzai's government and the poppy eradication initiatives that have damaged economic livelihoods of many of the 32.7 million population.

The ISAF coalition currently has a total of 50,700 troops in Afghanistan, of which 20,600 or 41% are from the U. S. The U. K. has the second largest contingent with 8,330 troops. Third is Germany with 3,310 troops. Several other countries, mostly European plus Canada, have a smaller representation. Including National Guard units, the U. S. had a total of 48,250 troops there as of October 2008. Afghanistan itself has approximately 76,000 active military personnel, most of whom are in their National Army and the remainder in their fairly small air force.

I have mixed feelings about the plans to add something like 10,000 more U. S. troops for a number of mostly obvious reasons. While I would be very happy to see a stable, democratic Afghanistan, free of Taliban and Al Qaeda insurgents, I'm not at all sure that this is plan is consistent with our original mission and that we should be committing large additional resources to what in effect is to a large extent essentially nation-building. We are already doing the bulk of the "heavy lifting" in terms of troops committed and casualties, with 555 killed out of a total of 1,016 suffered by the total coalition since 2001. U. S. costs are currently running at approximately $2.4 billion monthly and no doubt will increase substantially with the additional troops. While it would be very desirable to eliminate their impact and influence, I think it's a real stretch to think that the Taliban are a meaningful threat to our national security.

What would be my advice to President-Elect Obama? It must start with a careful review by his national security team and General Petraeus of our mission and current strategic priorities in the country. This review and its conclusions should also incorporate a realistic cost/benefit analysis from the U. S. perspective. Our main focus should be killing or capturing bin Laden and his senior deputies, destroying Al Qaeda, and training Afghan forces. We should place a high priority on minimizing the exposure of our troops to dangerous operations to the extent possible and consistent with our updated mission and priorities. We should continue to put due pressure on Pakistan to support our mission by clamping down on insurgent recruiting and training camps, as well as more closely monitoring their border with Afghanistan for Al Qaeda and Taliban fighter movements.

Importantly, we should also use renewed, better planned diplomatic initiatives with other Asian countries for military and financial resources to more fairly share the burden of fighting terrorism and stabilizing Afghanistan. I'm thinking especially of China, India, Russia, Indonesia, Saudi Arabia, the Emirates, and even Iran, all of whom should have a national security and strategic interest similar to ours in the region, though we clearly have noteworthy political differences on other important issues. This should be a major priority for Hillary Clinton as our new Secretary of State, supported by President Obama's national security team.

Monday, December 1, 2008

Auto Industry Bailout - Supplement II

The CEO's of GM, Ford and Chrysler will apparently fly back again to Washington, D. C. tomorrow to reconvene with key members of Congress and the Administration to present their new business plans and presumably a more compelling case for their urgent requests and supporting information for a large federal bailout. Although they likely will encounter significant skepticism from many in the Congress, most probably a conditional bailout at some level will ultimately be approved, given general encouragement from both the Bush Administration and Obama and his transition team. No doubt the substantial political contributions from the UAW and other labor unions made to Obama's election campaign and the Democratic National Committee will be a contributing factor in the outcome.

Nevertheless, I'm hopeful that the influence on the UAW and other labor unions will be limited, given some of the major reasons why our auto manufacturers have performed and competed so poorly, especially in recent years. One of those major reasons has, of course, been the great difference in labor costs between the UAW staffed auto companies, GM, Ford and Chrysler, and the non-union labor of the foreign owned auto companies' plants in the U. S. In a very convincing editorial opinion in today's respected Wall Street Journal under the title "America's Other Auto Industry," it indicated the gap in hourly average costs, was as much as $29 or 40%, largely due to the cost of job benefits separate from take-home wages. That's a substantial disadvantage for the American companies.

Another related reason for the poor performance has been the UAW's insistence in labor negotiations that certain model cars must be made in the U. S. rather than in foreign facilities with lower labor costs which would enable the Detroit Three to be more successful.

Certainly these factors must be taken fully into account in the bailout discussions, requiring very material concessions by the UAW in order both for the CEO's business plans to be found credible and a realistic and sustainable rescue and bailout to be approved.