Uncle Sam Now Hiring: CEO - Must be experienced, ambitous, and a potential government lap dog.

2009-03-30T11:23:00.000-07:00

You would have to have been hiding under a rock to not get caught up in the public unrest resulting from the auto industry's "bailout" request last November. Americans everywhere were shocked and dismayed to hear of GM, Chrysler, and Ford executives traveling to Washington D.C. on corporate jets in pursuit of badly needed cash to fund their financial obligations. This plea to Congress was rightfully rejected by citing poor management, poor operational effectiveness, and grossly outdated labor contracts. To me, it was a win for government in leaving the free market system alone. Then came a plea to the White House, and in his final betrayal of core conservative values George W. Bush decided on a multi-billion dollar cash infusion for GM and Chrysler.
To no ones surprise, GM is still not solvent, has burned through its cash, and is back on the brink of bankruptcy. The response to this has been a White House issued ultimatum for Rick Wagoner to step down as CEO, or GM would not receive any additional bailout money.
The fundamental problem with this is that we have a case where a business is no longer able to act in response to market forces. A strong argument could be made for government intervention, as technically the tax payer has invested in GM. This then leads to the fundamental question, "Should the government have given any money to GM, and if so, should it continue to do so"?
Let's examine a similar situation in the last few years that may shed some light on this. Montgomery Ward began as a catalog retailer in 1872. They introduced a groundbreaking new methodology in selling consumer goods through untapped mediums. Through the decades the company expanded and built brick and mortar locations. They became a retail powerhouse in the days preceding Best Buy, Walmart, and Target. Then, the landscape began to change. Consumers started moving into less densely populated areas, technology began to emerge at unprecedented levels, and consumers began wanting more from their shopping experience. Montgomery Wards ignored these signals and didn't change their operating model at all. As a result, K-Mart and Walmart quickly moved in and responded to the changing needs of these consumers. Seemingly out of nowhere a 100 year old retail dynasty was brought to its knees! And do you know what happened?
NOTHING!
The company simply failed.
Well what about the workers that lost their jobs?! They are working at Walmart. What about the consumers that has service plans through Montgomery Wards?! Insurance companies honored their contracts. What about the consumer?! They are saving money and getting a better experience!
What if the government has bailed them out? My guess is that they would have still been unable to change and would have eventually filed bankruptcy plunging even more tax dollars into a deep abyss. In addition, the ugly precedent would have been set for retailers telling them that if you mismanage your business, fail to have vision necessary to survive, and don't maintain liquidity it's ok! Uncle Sam is here!
You may argue that GM is very different from Montgomery Ward, and that may be partially true. After all, the White House has crammed the importance of the auto industry down our throats since last November. But, what if we did just let GM fail without giving them more of our money? What if we let the market decided who stays and goes?
GM would file bankruptcy destroying public confidence in the company. This wouldn't matter because their stock is only trading at about $3.50 indicating a holistic abandonment in public confidence. Then, a court would step in under bankruptcy laws and overhaul the company. The executive team would be ousted and disgustingly ridiculous labor contracts would be reworked. Best case scenario, the company would actually have a chance to reemerge with a healthy balance sheet.
But what if they don't?
Then the same thing will happen that's always happened in our market system. It will self correct! Competing firms will pick up the production that GM forgoes and those competing firms will employ the same resources that GM employed. It will undoubtedly take some time for this to occur, but everyone will be better off in the end.
When did we start giving our federal government the power to take our dollars and bail out companies that they deem as "to big to fail"? In a free market system the biggest incentives for a company to operate effectively are the ability to generate a profit and to avoid bankruptcy. We are stripping this motivator out of corporate America and each one of us is being stuck with the bill. Let GM go.

WolfPAC

Uncle Sam Now Hiring: CEO - Must be experienced, ambitous, and a potential government lap dog.