General Motors Corp. Chief Executive Fritz Henderson (pictured left) said Tuesday some elements of a labor agreement between the United Auto Workers and Chrysler LLC could benefit GM as it tries to stave off bankruptcy. Henderson told reporters he was ready to resume bargaining with the union. The concessions sought by GM are likely to follow along the lines of those reached with Chrysler last week. "As I look at the Chrysler deal, certain things within that Chrysler deal definitely can help us," Henderson said. The Chrysler labor deal calls for the UAW to take a 55 percent stake in a new Chrysler in exchange for $6 billion of the $10.6 billion the company must pay into a union-run trust that will take over retiree health care expenses starting next year. The union's stake in GM is expected to be just under 40 percent. The UAW, in a letter to U.S. senators on Tuesday, said it objected to GM's most recent restructuring plan that calls for closing 16 manufacturing facilities and cutting 21,000 jobs because it would shift manufacturing to Mexico, South Korea, Japan and China. "GM should not be taking taxpayers' money simply to finance the outsourcing of jobs to other countries," wrote UAW legislative director Alan Reuther. Henderson said he would try to find common ground with the UAW at the bargaining table. – AP
Dominant Social Theme: It will all work out. It always does.
Free-Market Analysis: Sure, and it did for Amtrak, too – just not for investors. We were trying to figure out where GM and Chrysler were headed when we came upon an article recently by free-market financier Peter Schiff in which he stated that the outcome of the government's interference with two of Detroit's big three was going to create companies similar to Amtrak. We thought that was a great comparison as soon as we read it.
We can see the model emerging now. President Barack Obama himself has said that with two wars to fight (make that three, up-coming?) he has no wish to run Detroit as well. We take his words with the proverbial grain of salt but we also agree that the way this thing has been set up, it won't seem as if the US federal government is in charge, even if it is. That's the model.
The culture in America is still pretty-much free-market so the takeovers have got to mimic free-market configurations. For this reason, the car companies, just like Amtrak, will be shoved back onto their feet and will report to shareholders just as normal companies do. Heck, they may even maintain stock exchange listings. But they will be nationalized effectively in that like Amtrak they will never again earn a profit and will be run for the benefit of labor union sinecures as a primary motivation, even if no one will admit it.
Of course there is a lot of pushback to this sort of model these days, what with the libertarian fever sweeping through the ranks of even the most diehard, conservative American republicans. So maybe this model will eventually fade away as the Obama administration inevitably self-destructs (and it is doing so far more efficiently than we ever imagined it would.) But if Obama is able to pull off what he's started to do, the United States is going to go from an inefficient muddle of socialist and free-market structures to a much more rationalized – and worse – configuration.
The new Obama-style marketplace is going to feature what naturalists call BROOD PARASITISM. A typical example of brood parasitism occurs when a bird such as the European Common Cuckoo lays its egg in another bird's nest. Almost as soon as the bird hatches it begins to grow rapidly and soon evicts the chicks from their rightful places, usually by shoving them out. Presumably, the parents keep feeding the imposter – thus we see the description "bird brain" was invented for a reason.
We think this is a good description of the paradigm that the Obama administration is using to jam through the industrial changes he wants to make. He's already on record as saying that his administration wants to create health care ventures supported by the government that will compete with "private" health care companies. Of course, the brood parasitic (BP) companies (nestled within the industry) will have the resources of government at their disposal. Yes, soon the administration might be able to point to their supposedly superior service and organization as proof positive that public enterprises work best in such critical areas as health care because they drain away the profit motive and substitute the motive of public service.
We can see this model being put in place for health care (government supported companies masquerading as market-based ones) and we think it is an applicable model throughout America's troubled industrial base. We can see it being applied to the insurance industries, certainly to Wall Street, to the banking industry and of course, as already mentioned, to the health care and automobile industry.
We don't know how far Obama will get with his corporate brood parasitism, but the very concept only increases our admiration for the cleverness of those around and behind him (and for him, too, of course). It is a brilliant methodology. Obama et. al. bring down the captains of industry for a chat; glasses of water are provided along with a stern talking-to. Threats are issued (with deniability of course). Obama then maneuvers the main players of the industry into a situation where they must work with the federal government – and having been threatened, many will comply.
Once he has their cooperation, the arm-twisting continues. He will load the biggest companies up with cash, make strategic alliances for them and generally assure stakeholders that bankruptcy is a last resort and ought to be limited and quick. It will all be done while the administration maintains vociferously that it has no ulterior designs on the industries and no intention to control them. Of course, bankruptcy is always an option, but even within the framework of a bankruptcy, the administration hopes to retain the control it has fought hard to obtain.
In fact, the federal government can maintain control in numerous ways, through seeding the board of directors with its own picks, via continued funding and various understandings with senior management on the direction of the company and by making sure that the largest companies are considerably influenced and owned by their unions. All of these elements are present in both the GM and Chrysler workouts — and were to a degree in the AIG workout.
In fact, the reason for the recent high-profile corporate firings are not to show Middle America that Obama is "doing something" in our opinion, but to indicate quite clearly to the management of America's top companies that they better do as they are told. It is a carrot-and-stick procedure, but one that the administration is busy perfecting and using over and over. It is difficult to believe, by the way, that Obama is "winging" it at this point. There is a plodding methodology to all this, a ponderous pattern, that smacks of long and deliberate planning.
Back to Amtrak. Amtrak hasn't earned a profit since its inception in the early 1970s. In fact, the private rail lines out of which Amtrak is built were doing just fine until the federal government decided to tax them to death and then used the proceeds to build a national highway system. We see some of the same mentality at work today.
The American feds are taking advantage of a bad economic time to make fundamental shifts in the way business relates to government. The future for industries that acquire BP status is fairly grim and consists of continued subsidies, poor quality products and management constrained as to vision and innovation by political concerns. For investors, such companies will not fulfill Obama's grand promises.