Mar 31 2009
Sweetheart deal for banks?
I have heard many individuals criticize the Obama administration’s heavy handed approach to the GM bailout, citing the unfair treatment of Rick Wagoner, CEO of General Motors. Many state the the administration offered up a sweetheart deal for the major bank’s CEO’s, handing out bailouts with limited legal restrictions, even as most of the CEO’s in question admitted, during a congressional hearing, that they were still being paid seven figure salaries.
Anytime the government gets involved with the running of private businesses it is messy. Regardless of what the paranoids on the right might think the government does not want to be in the business of managing the private sector. Politically no administration could survive the direct responsibility of sinking a corporation, particularly such iconic names such as AIG, GM, and Bank of America.
General Motors CEO Richard Wagoner has continuously bemoaned the tight credit markets for GM’s flagging sales recently as he tirelessly campaigns for a tax payer bailout. In a way the failure of GM could be blamed on an economy brought to heel by reckless derivative plays by financial institutions. Certainly he may be right, that auto sales are suffering because of tight credit and poor consumer confidence, pulling sales down some 32% from Jan. 2008. Certainly an across the boards decline in sales will have a devastating impact on earnings and profits, jeopardizing the companies ability to function. On more than one occasion Wagoner has threatened Chapter11 presumably in an effort to persuade politicians bail them out.
I wonder what reckless behavior Wagoner would blame the failure to achieve a profit in 2004, 2005, 2006, and 2007. Many have red or heard the pundits list the extended compensation of an average auto worker at $70 which seems to me to be an obvious reason GM is failing. They are paying too much. The UAW recently disputed the oft repeated $70/hour number stating that actual extended compensation for its workers is more like $41/hour, which is still almost double the average American worker’s salary. According to a recent Media Matters article the $70/hour number includes “legacy costs” to retired employees. Unfortunately for GM legacy costs count, and hurt the bottom line.
Regarding the other beneficiaries of government bailout money it seems that the issues are different. Fannie Mae and Freddie Mac, and AIG their Chief Execs. were all canned. The Bank Executives can make an argument that their companies have been consistently profitable even when “bubble” profits are excluded, until the recent crash. Having said that, I believe they could probably find better, more talented financial minds to work for less than a million bucks a year, but the situation isn’t the same as GM.
As a quiet cheerleader for American business I hope the problems at GM can be worked out. It certainly will not be as simple as renegotiating UAW contracts. I am concerned that GM demonstrates that US automakers can only thrive in a credit fueled bubble economy, like they experience prior to their recent 5 year slump. In the end if Wagoner is the only fall guy at GM in return for billions of tax payer dollars, their lucky.
