Chrysler declares bankruptcy

Chrysler has declared bankruptcy. Not unexpected, but kind of a bummer. Megan McArdle takes a look at it; she thinks the unions won a Pyrrhic victory, sort of. She thinks that they got a better deal than the hedge funds, which will work out for the unions in the short term, but not in the long term, as it will make it very difficult for Chrysler to raise capital. The logic is that if you have a lot of money to invest, but you run the risk of losing your money to unions, then you don't have much incentive to invest your money, unless you get a really high rate of interest. Good point. I'm not sure how much I agree with it, but I think she has something there.

Dan Neil is not terribly optimistic. He doesn't see a lot of synchronicity between Chrysler, which makes a lot of money - or did make a lot of money - selling big trucks, and Fiat, which makes small, fuel-efficient cars. The one bright spot might be California's greenhouse gas regulations, which would benefit Fiat and, therefore, Chrysler.

Ironically, California's pending waiver request to the U.S. Environmental Protection Agency that would allow the state to regulate greenhouse-gas auto emissions would actually play in the new company's favor.

The state's request would in effect raise fuel efficiency for new cars by 30% by 2016. A dozen other states and the District of Columbia have said they would hew to the new California standards.

If California succeeds in imposing its own auto emissions/fuel economy rules, the Chrysler-Fiat alliance would be well positioned to quickly deliver smaller, more fuel-efficient vehicles to market.

After years of fighting California's clean-air rules, Chrysler may in the end depend on them for its survival.

I have a cousin who does PR for Chrysler in the western United States. He has an interesting job these days.

My thots are that if Chrysler does survive this, it will be in diminished form. One long-standing problem that Chrysler has had is that of finding and retaining top talent. I don't know any of this in detail, and I don't have any facts to back this up - it's pure speculation on my part. There are, I'm sure, lots of great people at Chrysler, like my cousin. But there are far more people at Chrysler who are, I suspect, merely good at their jobs, or maybe even not that good. Anyone who is essential to a car company and who is very good at their job - engineers, car designers, manufacturing experts - has a strong incentive to work for another car company. Traditionally, that would have meant Ford or GM. In the last twenty or thirty years in this country, it has also meant the Japanese companies. If you have skills that are not industry-specific, you have even less incentive to work for Chrysler. If you're a crackerjack software designer, and your options are working for Google or Chrysler, you're going to work for Google. If you have a Harvard MBA in finance, chances are somewhere between slim and none that you are going to choose Chrysler over, say, JPMorgan. The same could very well be true to a lesser extent in dealerships around the country.

Speaking of whom, the LA Times interviewed some Chrysler dealers around LA. These guys are masters of spin, but I am not encouraged by some of their comments. Some of them actually seemed to suggest that bankruptcy was a good thing, because it ends the speculation.

"It's all for the better to get the mysteries and question marks behind us."

I've got news for you, dude: the mysteries and question marks are not behind you. They are in front of you. One question has been answered: will Chrysler declare bankruptcy? Answer: yes. Two far more important questions have not been answered: one, can Chrysler make enough cars that Americans want to buy? and two, will Chrysler emerge from bankruptcy as a stable, flourishing company? Those questions have not been answered, and the first one in particular is going to take a long time to answer. Chrysler did not get into this situation overnight. It will take a long time for Chrysler to convince lots of the American people that it's a good idea to buy a Chrysler. This is particularly unhelpful:

"We've all been zigging and zagging these last few months, but now we're talking about facts," Gray said. "Everybody has a bounce in their step now. It's a good day to be a Chrysler dealer."

No, it's not. Chrysler has a huge, some would say impossible, task ahead of it. It's not just about negotiating between the UAW and hedge funds. It's not about negotiating the minefields in Washington, DC.

It's about regaining the faith of customers. The Big Three having been losing mindshare for at least a couple of decades. Chrysler has made some interesting cars lately - the PT Cruiser, the Viper, the Crossfire. But it has to make beautifully ordinary cars. It has to make cars that fit the average American like a great pair of jeans - utterly comfortable. It has to make them really, really well. And dealers have to provide world-class service on a constant basis and as if their jobs depend on it - because they do.

The one thing the UAW can do to help the process is stop whining. The whole "Buy American" argument is, at this point, an albatross. The idea that Americans should buy American cars puts the interests of the American car worker ahead of the interests of the American car consumer. I should buy a car because a guy in Flint made it? Great, is that guy going to read my blog, just because I'm an American? If I make a movie, is he going to watch it just because I'm an American? No, he's not. He's going to read my blog or watch my movie because he finds my blog interesting or my movie funny. You want me to buy a car because I should be proud to be an American? Fine, then make a car that makes me proud of American cars.

UAW workers get a great deal. They work hard, but they also have the "30 and out" thing going - they can retire after 30 years. Imagine this: a guy starts working for GM in 1930 at the age of 20, and retires at 50 in 1960. He could be alive and well, 49 years later, at the age of 99. He has been retired for almost half his life. Most Americans do not get anywhere nearly that good of a deal from their employers, and they feel no special affinity for people who do. And don't get me started on the jobs bank.

I would like to see Chrysler succeed, but my hope is fading. Many people - several hundred thousand - would suffer if Chrysler went under. But many more people - many, many more people, like tens of millions - wouldn't miss it.

Investment bankers and educational reform

Some good commentary from Megan McArdle on why we shouldn't hate investment bankers. She also throws in some good advice to investment bankers: don't whine. You are not entitled to being paid millions of dollars a year. And it's not just the people on Wall Street who have to come to terms with reality.

The real problem with investment bankers goes deeper, and is the problem of the entire upper middle class: we have come to believe that complying with the rules produces excellent results as by some natural law. In school, if you do your work, teacher gives you an A. It comes to seem like a sort of a natural law: if you have a good education and work hard, the universe is supposed to reward you. After school, the upper middle class gravitates towards careers with very well defined advancement hierarchies: medicine, law, finance, consulting, where this subtle belief is constantly reinforced

.

I am very familiar with this problem. I graduated from Swarthmore with a degree in philosophy, and was expecting to be able to just get a job. I have a degree in a very intellectually sophisticated and demanding subject from one of the best schools in the country. Shouldn't I just be able to snap my fingers and presto! get a well-paying, intellectually engaging, emotionally satisfying job? Shouldn't I be able to just send my resume out to a bunch of places and then wait for the job offers to roll in?

Uh, no. I grew up spoiled. Not by my parents, who were very fair and moderate, but by my situation. I'm a heterosexual white male in contemporary America. I took for granted that I would have the nice house and great vacations and all the consumer goods I could want and all that, because that's normal.

Uh, no. It's not normal. It's the product of hard work. Part of my mistake was thinking that education is the key to success. Because that's what we're told: work hard in high school so you can go to a good college, and then you're set. That's the most important thing in being successful: going to a good college.

For many people, maybe it is. And it doesn't hurt. But I think we have confused cause and effect. Many successful people have gone to good schools, so that must be the key to being successful, right? Except that those people got into those schools for the same reason that they were successful. They were smart, competent, hard-working and creative in high school, they were smart, competent, hard-working and creative in college, and then they were smart, competent, hard-working and creative in the real world.

But going to a good school does not guarantee that you will be successful. It just makes it a little easier to get started on being successful. That's it. I have known flaky people with degrees from Harvard and Stanford.

This is something that we as a society have not yet come to terms with. For previous generations, higher education was something that was available to very few people. So people with college degrees were a scarce resource. That made them valuable.

That is no longer the case. Higher education is now much more widely available, so the value of a college degree is now less, as a function of greater availability.

I fell into the trap of thinking that my college education made me special, because I was thinking of it in the terms that had been defined by previous generations. This is not surprising, because the people running the college when I was there were the people from those previous generations. For the people on the Board of Managers when I was in college, Swarthmore was a very special place, because it gave them an education like no one else in their generation had.

So I thot the same would be true for me. I was getting an education that made me unique and special. Except that it didn't. Almost everybody in my high school graduating class went to college and got at least a Bachelor's degree. The one who didn't end up with a BA actually has the coolest job of almost anyone I know - he's a brewmaster at a brewpub, and is doing much better professionally than I am. And he has no student loan debt.

Not everyone in my high school class went on to an elite liberal arts college, but even the ones who went to state schools did really well. Three of my friends went to the University of Michigan. All three have Ph.d.'s (one from Harvard), and all three are successfully pursuing careers in academia.

Megan's friends in investment banking are discovering something that many of us in Generation X have discovered: your college education does not guarantee that you will be successful. All it does is guarantee that you will be able to go to reunions every five or ten years.

Quote of the day

From Megan McArdle, writing about Ben Bernanke's latest effort to save the economy:

[W]hile in theory, theory is the same as practice, in practice, they differ.

Oddly enough, I agree with her both in theory and in practice.

Those AIG bonuses

So AIG paid some bonuses while they were taking billions of dollars in government money to avoid bankruptcy. Wow.

Like about a gazillion other people, I am pissed off about this, but not too pissed off; in the grand scheme of things, this doesn't surprise me that much or bother me much more. $165 million is not that much money compared to what we're spending to keep AIG afloat, and I think I am just not that surprised any more at the sheer stupidity and greed of people on Wall Street. I'm saving my anger.

What I am surprised at is the stupidity of whoever wrote these contracts. I can understand incentives in a contract: make X amount of money, and we will pay you Y bonus. I have no problem with that. But apparently these people wrote contracts that promised payment of bonuses even when they clearly DID NOT make X amount of money. They must have written contracts that did not take into account the fundamental ability of the company to actually pay the money promised by the contract.

AIG does not have $165 million to kick around. We have lent them tens of billions of dollars. They will make the argument that if they don't pay people, they'll leave. Fine. Let them leave. Then hire someone else and give them incentives to clean up the mess. Right now there are lots of unemployed investment bankers out there. I have no problem incentivizing people to clean up a mess. I have real problems with paying people for failure.

One ancillary question running through this debate has been: can we get the money back? How about taxing the bastards? Megan McArdle asked Laurence Tribe about the technicalities involved in that. I don't think it would be a good idea to target these people particularly. I think Obama is going to wait until the argument swings to whether or not we should raise the capital gains tax, or the top tax rate on the wealthy. He's going to have a fair amount of ammunition. The Republicans argue that the private sector is a better steward of money than the government. Right now, that is just laughable.

You have two cows . . .

John Carney at ClusterStock (great name for a blog) uses the two cows model to explain why AIG went kerflooey. The best line is that, after you get started playing financial games with your cattle, "A third of the country goes vegetarian." Ha!

These are some of the classic versions of using "You have two cows. . . " to explain different economic models, This is from Iceland, and is an attempt to use some dark humor to deal with the current crisis there. The Icelandic version is rather complicated.

Here are a couple of examples of other models:

COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.

AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyse why the cow has dropped dead.

A FRENCH CORPORATION
You have two cows.
You go on strike, organise a riot, and block the roads, because you want three cows.

AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.

There are 21 total models. I'm just glad someone can find some humor in this mess.

(hat tip: Megan McArdle)

A special kind of blanket

For the past couple of months, when I ride the bus to work, I've been seeing these ads (we have TVs on some of the buses) for something called the Snuggie, a blanket with arms. It's taking off. The commercial is rather strongly on the cheesy side, but considering I see it on my bus, that's about the level that I expect. Megan McArdle loves hers. But some people are not amused. I tried to post the video here, but the embed code didn't work. So you have to go the collegehumor.com to watch this video. But it's worth it.

(hat tip, once again, to Andrew Sullivan)

Depression or recession?

Are we in a depression, or in a recession? I'm starting to get depressed just thinking about it. Tyler Cowen lists eight reason why he thinks it's a depression. Megan McArdle, in whose blog I found the link to Cowen, adds that she thinks we might be in a depression because "we don't understand how to get in or out of it."

I'm not enough of an economist to make the judgment. This is certainly the worst recession I've ever lived through.

One thing that strikes me that is different about this is that we are seeing massive increases in efficiency and productivity because of the Internet, but we are not seeing increases in wealth because of those increases. It's ridiculously easy to find news, or music, or just about any kind of entertainment, but most of it is free, or pays its content creators differently than old media does. NYTimes.com is vastly more efficient at making the content of the NY Times available to a worldwide audience, but it's not making as much money for the NY Times as the paper edition.

That will eventually be corrected. At some point the business models will adjust. They are already starting to. But there remains a great deal of pain that we have to go through first. And there is almost nothing that the government can do about that.

There is nothing unusual, of course, about changes in technology precipitating changes in business models that lead to wrenching change in an economy. But it's happening very quickly, and across the world.

Again, I'm not an economist, so I don't know how to crunch the numbers for that. But it strikes as something unique about this economy

Megan McArdle has customer service issues at Sears

Megan McArdle has been having a lot of trouble getting Sears to fix her washer. She spends a fair number of pixels ranting. I can sympathize, as I think just about any American - or, indeed, any resident of a modern society - can. How bad was it?

Obviously, they have lost a customer in me. Though I have reluctantly agreed that if my car breaks down in a remote northern town where Sears is the only repair vendor, they can fix it, they'll be holding ice festivals in Beelzebub's back garden before I will voluntarily purchase so much as a $1.59 box of nails from them.

I'm going to take a stab at a economic/historic explanation.

Let's go back 50 years, to 1958. Let's take a look at the technology in the average American home, the kind that requires a repairman. That would include a car, washing machine, dryer, dishwasher, TV, radio, record player, vacuum cleaner, heater, plumbing, toaster, stove, oven, refrigerator, blender, maybe AC, possibly a typewriter. Most of those are mechanical, just a couple are electronic. I think we can assume that all of them break down more regularly than they do today, just because we are better at making things than we used to be. I think we can also assume that all of them were more expensive - in constant dollars - than they are today. So disposing of them was not an option for most people. So they needed regular repair. Which means a good market for repairmen (I'm assuming there weren't a lot of repairwomen).

Now let's think about who would have been repairing this stuff. Being a repairman requires a certain amount of mechanical aptitude, halfway decent interpersonal skills, and a certain degree of professionalism. In 1958, there would have been a certain pool of men with those skills, who would have held those jobs. Assuming that those jobs paid reasonably well, because of the demand, we can assume that there was competition for them. So the people with solid mechanical skills, but better-than-average people skills and a strong sense of professionalism would have had an advantage, and could make more money.

But if you combine those same abilities, i.e. mechanical aptitude, good people skills, and a sense of professionalism, with a college degree, you can make even more money. In 1958, a repairman who was 40 would have been born in 1918, and probably would not have had much opportunity to go to college. Today, someone with those skills and a degree could be an X-ray technician, a computer programmer, product designer, or even a rocket scientist. So the available pool of labor for repairmen is much, much smaller. Which means that the emphasis on hiring people will be on finding people with mechanical aptitude, and a company will be lucky if they get a solid professional with a strong sense of customer service.

I have some personal experience with this, specifically at Sears, although my experience is the exact opposite of Megan's. I have a brother-in-law with excellent technical skills and great people skills who is a consummate professional. He worked at Sears once, at the headquarters, doing something with their Website. He left fairly quickly. Of course, he can do that because he has a master's degree in computer science from Harvard.

There is one solution that we, as a society, use. We import people who could make good repair people. I once hired a guy to help me move some furniture. I only hired him to help me move something - that was it. But he turned out to be a furniture installer, and he assembled a desk that I needed put together. He was from Guatemala. He was great. Saved me hours.

Of course, there are limits to this solution as well. My brother-in-law, the technogeek (who is the go-to guy in the family for fixing computer problems), is from Mexico.

Maybe some day someone will realize that people like Megan McArdle will pay very well for someone who can fix her washer on time. And maybe some day someone will realize that there are millions of people like Megan McArdle. Hundreds of millions.

Bailing out the Big Three

The topic of the week is whether or not the federal government should bail out the Big Three American car companies. If it doesn't, there are a number of foreign car companies poised to step in. Megan McArdle tries really hard not to be a heartless libertarian. Turning whimsical (complete with Tom Lehrer videos!), she proposes bailing out journalism, of which group she is one. She also proposes an analogy with the film industry (she's from upstate New York, home of Eastman Kodak). The problem with this analogy is that film was rendered irrelevant by a new technology - digital cameras - that didn't use film. Nothing is going to be replacing cars any time soon.

Thomas Friedman takes a few blasts, not only at the management of the Big Three, but at the entire Michigan Congressional delegation, for their mistakes. Then he admits that he's terrified of what would happen if GM actually declared bankruptcy. As are most people.

I have a complicated view of this. As a Democrat, I would normally be defending the union, but I've heard enough to know that the UAW made sure that they were taken care of really well when times were good, and unwinding that legacy has been, and will be, a big part of the problem.

But can you blame the union for making sure they got theirs? They got what they could out of their negotiating partners. They demanded, and got, great pay and benefits because that's what the companies could afford to pay them. There's a reason some Detroiters refer to as GM "Generous Mother." Friedman grudgingly admits that something is going to have to be done, but demands conditions. Which I think the Big Three are going to have to agree to. The UAW is not quite as agreeable, as they feel that they have been paying the price for a long time. They're right. The Big Three have been downsizing for years.

In a sense, that's a good thing. A lot of the hardest work has already been done.
That's one of the reasons I support a bailout (with conditions). The Big Three have already offered a chunk of people buyouts. They've already written massive losses. They've done some of the necessary restructuring - GM killed Oldsmobile a few years ago. Ford sold Jaguar. Chrysler killed off Plymouth. The current recession will force the closure of some unnecessary dealerships. There will be a great deal of pain. There already has been a great deal of pain.

Politically, I can't believe the Republicans are opposing this. I understand that most of them opposed the Wall Street bailout as well, but it ain't going to play well in Peoria to write a check for $700 billion to white guys in suits, but deny a fraction of that amount to blue collar workers in the Midwest. Obama did very well in the Rust Belt this year. If the Republicans really oppose this bailout, they can pretty much write off Michigan and her neighbors for a long time.

I'm not a fan of nostalgia in politics, but this is, in some respects, deeply personal for me. My family history is deeply intertwined with that of the American car industry, going way, way back. On my mother's side, one of my great-grandfathers was the construction foreman on Henry Ford's mansion. My paternal grandfather only finished eighth grade, but went to trade school at Ford, became an engineer, and eventually ran his own tool and die shop. His roommate in the 20's was a man named Walter Reuther, who was president of the UAW for 24 years, and one of the most important labor leaders of the 20th century. My grandfather hated unions, but he always told us that Walter Reuther was the most honest man he had ever known (and one of the cheapest - Walter didn't like paying for gas, so they would double-date, and my grandfather would always drive).

Someone in my extended family has worked either directly for one of the Big Three, or for a supplier, for decades. My father got his undergraduate degree in mechanical engineering from General Motors Institute (now Kettering University). I have a cousin who currently does PR for Chrysler. I have an uncle who tried to change GM from the inside for many years. So I'm not a fan of nostalgia in politics, but I can't help but be nostalgic about the American car industry.

Economically, it would be a catastrophe of the first order to let the Big Three go under. I hope and pray that no one demands that they declare Chapter 11, because that could very easily lead to Chapter 7. Ron Gettelfinger, president of the UAW, explained the problem this morning on NPR: would you buy a car from a bankrupt car company? Many people wouldn't, so Chapter 11 could very easily be the beginning of a death spiral. The people affected wouldn't just be the workers and their families - the ancillary effects would be felt by their suppliers, and many other companies who serve the populations of Michigan, Ohio, Indiana, etc.

Apart from the hardheaded economics, I think the most important reason to save the Big Three (or Big Two, if GM takes over Chrysler) is one that I have to admit borders on nostalgia: to let the Big Three go under would be an admission of failure on the part of this country as a whole. We have already seen many industries leave for other shores, and each loss has a certain poignancy, but nothing compares to the importance of the car industry, on many levels. Sure, we've all had "Kodak moments" shot on Kodak film, but I don't notice a much of a difference when it's captured by a CCD instead of 35mm (motion picture film excepted, for all my DP friends).

In purely romantic terms, there is a sizable piece of American history carried in the icons known as the Corvette, the Mustang, and the Jeep, among others.

I'm not advocating spending billions of dollars on preserving sheet metal memories. I'm a romantic, but I don't like using nostalgia to save doomed projects.

What I am advocating spending billions of dollars on preserving is the incredible insfrastructure - physical, corporate, industrial, cultural, intellectual, and even artistic - that the Big Three represent. Unwinding the Big Three would cost billions, just for dealing with car dealerships. The psychic cost would be staggering. But I'm not advocating a $25 billion Xanax.

Millions of people have put incalculable amounts of blood sweat and tears into the Big Three. There is still an incredible amount of brainpower and willpower in those companies. I'm not sure whether or not current management is up to the task of saving these companies. I'm perfectly willing to see the boards all tossed. In fact, I have a suggestion for someone who should be on the GM board: Dan Neil, the car critic for the LA Times. As a critic, he has intimate knowledge of pretty much the entire range of the automotive market. He's the only automotive critic to win the Pulitzer Prize for criticism. He knows the issues backwards and forwards, and he can explain them extraordinarily well, and usually with a fair amount of humor. He could rally the troops inside GM, and set for them the standards they know they are capable of meeting.

I don't know who else I would nominate for any of these boards, besides my uncle, Len Allgaier. I spent many a Thanksgiving listening to him explain to me what exactly was wrong with GM. He's been retired for a few years, and I'm not sure how my Aunt Gwenne would feel about it, but I think he would jump at the chance.

There are many people like my Uncle Len. There are many people who have lots of ideas about how to fix the Big Three. And there are lots of people who are running the Big Three who have been ignoring those voices of dissent for years. There is a lot of deadwood in Detroit. There are a lot of people who are terrified of change, or in denial, or who still cling to that idiotic idea that Americans should buy American cars. I believe that Americans should buy American cars when Americans make great cars for Americans. But I also happen to believe that that is still possible.

Actually, I'm pretty sure my Aunt Gwenne, the daughter of a man who lived with Walter Reuther and started his own tool and die shop, would love to see her husband go back to work fixing GM. It would be the fulfillment of a dream; the culmination of a lifetime of work. It would give him something to fight for, something to believe in.

There are many people like my Uncle Len, and many people like my Aunt Gwenne, people who love solving big, huge, impossible problems. Problems like putting a man on the moon, or putting a black man in the Oval Office a very short time after the civil rights movement flourished.
This is why I believe we should try to save the American car industry. Not because we should. But because we can.

Understanding derivatives

Megan McArdle pointed me to a great site, Derivative Dribble, that explains, in as simple terms as possible, how derivatives work. I don't quite get all of it, but I now have a slightly better idea of how they work. I am also reminded of why I don't have an MBA and why I never went into investment banking.

Megan on the crisis

Megan McArdle, economics blogger at The Atlantic, has a good explanation for the financial crisis. It's not completely comprehensive, but it's a fairly thorough examination of the bad mental habits so many people developed. She's not a fan of either political party, so she calls both out for their failures. Her basic conclusion is that mass delusion reined.

I'm with Megan on this one

Megan McArdle, one of the bloggers at The Atlantic, has a post with this title:

Happy, happy, joy, joy

Why is she so excited?

At long last, I can start covering policy again. There was no point in covering candidate policy while the main race was between Hillary Clinton and Barack Obama; other than foreign policy, there's really very little daylight between them.

I'm still a little addicted to the horse race, but I am also very much looking forward to thinking more about policy. Big relief.