Thursday, September 30, 2010

Paul Ingrassia Review's Rattner's "Overhaul"

My one-time squash partner and friend, former Wall Street Journal executive Paul Ingrassia wrote a review of Obama auto czar Steve Rattner's recently-published book, "Overhaul." As a Pulitzer Prize-winning author for his own auto-related book, Ingrassia was the natural choice of the Journal to comment on Rattner's alleged tell-all tale of the administration's intervention into GM's and Chyrsler's travails in 2009.

As I write this, I am picturing Paul sitting in front of me discussing his review, because, due to my past personal association with him, I don't want to find myself writing anything that, were I to run into him on the street this week (he lives in the next town), I wouldn't be at a loss to explain or defend.

That written, my overall reaction to Paul's review is that it reveals what I think is his latent liberal political bent. As a seasoned and highly successful journalist, Paul never made a practice of advertising a specific partisan bias, but I think it's fair to say that he certainly conveyed, at best, a sceptical acceptance of conservative fiscal and social policies.

Thus, he lauds the administration's decision to eschew conventional bankruptcy for GM. For me, the salient passages of his piece are these,

"Mr. Rattner recruited a 15-member task force whose members had private-equity backgrounds, not auto- industry experience. That turned out to be an advantage, because Team Auto, as the group called itself, wasn't constrained by Detroit's hidebound thinking. The conventional wisdom argued against the auto companies' declaring bankruptcy or the government's taking equity (if temporarily). 

President Obama is pictured as cool and decisive, especially when dealing with his divided staffers on whether to save Chrysler. There was no such debate about GM, which was deemed too big to fail.

But to his credit, Mr. Rattner also shows unexpected candor. He reveals that White House staffers vetoed GM's desire to move its headquarters from downtown Detroit to the suburbs, despite President Obama's insistence that the government wouldn't call the shots at the company.

Given the chance to do it again, Mr. Rattner writes, he would have reformed the fixed-pension systems at GM and Chrysler, which he says might come back to haunt both companies. He also expresses concern that the United Auto Workers union hasn't changed enough to be a partner instead of a problem for Detroit.

Mr. Rattner acknowledges that the bailout remains unpopular, though he believes that the government will recover most of the $82 billion spent—in part by selling its stock in what he calls "Shiny New GM." The money, he says, averted "a major economic calamity in the industrial Midwest and helped keep the national economy from spiraling from deep recession to outright depression." It's a self-serving statement, but credible. Team Auto did a fine job, and Mr. Rattner has written a good book about its efforts. Whether GM and Chrysler make the most of their second chance is yet to be determined and will be fodder for future books."

It's surprising to me that Paul would refer to a traditional Chapter 11 filing and court-supervised bankruptcy for GM as being against "conventional wisdom," I rather think such a filing was the conventional wisdom, and the entirely right thing. Except that it would be a non-government-tainted bankruptcy, in which the UAW wasn't paid back for political favors at the expense of bondholders with legitimate rights.

Curiously, Paul is completely silent on this point in his review. Instead, he seems to have swallowed Rattner's argument that only by employing non-auto task force members was his 'Team Auto' able to devise the correct and best solution to GM's woes.

That's just nonsense. That Rattner and his Team were involved at all shows how what should have been a straightforward, unbiased, court-adjudicated reorganization of GM's operations became political theatre and an opportunity to dispense political largesse while appearing to be concerned with larger economic issues.

Many, myself included, feel that the only larger economic effect of the poisoned GM bankruptcy was the nearly-complete erosion of investors' faith in the rule of law in the US.

At least Paul highlights what Rattner revealed, which is that his Team and the government exercised far more control over GM, despite promises to the contrary, than they admitted in public at the time. Or now.

I'm puzzled that Paul didn't chide Rattner for only musing that reforming the outdated defined-benefit pensions of GM's employees was necessary to truly reorganize GM for any future success. You'd have to have had your head in sand somewhere for the past 20 years to believe otherwise. Every major US industry involving capital goods, beginning with steel, then airlines, and, now, autos, has seen its defined-benefit pensions gutted by economic reality. For anyone to think that any auto company will long survive with this sort of retirement scheme is ludicrous.

Finally, I was, again, not surprised that Paul wrote so approvingly that "Team Auto did a fine job."

Team Auto did a job that should never have been attempted. I've contended in prior posts, here and here, there was a simple and clear path to cleaning up GM's problems. In one of those posts, I wrote,

"Who are you, or any government official, to say that the alleged new 7,500 jobs at GM are better than letting capital markets create jobs?

Maybe if GM were allowed to go through a normal bankruptcy, and another firm had bought and reorganized various divisions of the old GM, all that borrowed Canadian and US money may have stayed in the private sector and funded other, better jobs with new firms.

My brilliant boss at Chase, SVP Gerry Weiss, used to remind us that the real value of informed resource allocation across the bank's many businesses was realized by transferring money and employee counts from the least-efficient, money-losing units, to more efficient, more profitable and, typically, much faster-growing units. The major delta in the bank's performance would result from this move of resources from extremes. From extremely bad uses to extremely good uses.

It is just this process that is frustrated by crony capitalism such as we've witnessed in the GM bailout. Instead of the resources wasted at GM being freed up to be used elsewhere in the economy, they were allowed to remain in place, then more capital added, from taxpayers, as a free equity injection. Free to GM, but very costly to taxpayers and the economy in general."

Paul himself admitted to being biased for the big auto companies in a prior Journal book review. I therefore expected him to pretty much back whatever the administration had to do to "save" GM. It's in his blood, and I really think it's such a deeply-rooted, emotional facet of Paul as a former beat auto sector reporter that he literally cannot change how he feels and, therefore, thinks about the GM situation.

As such, he would never quarrel with someone whose job was to manage the government's dominant role in preserving GM, rather than taking a broader, longer range economic viewpoint. Paul seems to simply assume that the many claims of complete US economic depression resulting from a GM court-supervised Chapter 11 reorganization were true on their face, without any evidence of that contention. As friends with experience in Chapter 11 proceedings have assured me, filing for and undergoing reorganization, and actually dissolving a company, are two completely different events. The former allows for continued operation of business while closures, sales and such are consummated.

Plenty of other old, famous US corporate names from the past have vanished over the years- TWA, RCA, Continental Bank, and American Motors, to name just a few. Death and dismemberment of outdated businesses is one of the inherent strengths of the US economic system.

That means reliance on relatively-free, of government interference, for one, markets in both good and finance, to make the best choices on the uses of resources and their values.

Not reliance on a handful of bureaucrats picked by politicians in Washington.

Thus, not only does Rattner's book obviously come from a heavily vested-interest perspective but, unfortunately, so, too, does Paul Ingrassia's review of that book.

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