Feeding The Kitty

Poor management is like feeding chili to your pet cat. No matter how novel the idea seems to be at the onset, there is an overwhelming chance that it will not end well. And it will take a long time to find all the places where the catastrophic results need to be cleaned up.

Such is the case we find ourselves in today with the Detroit automakers, the union leadership that emboldened workers by imperiling the companies they worked for and the investment bankers on Wall Street. Each of these parties made some remarkably poor management decisions based on their own short term interests.

Wall Street lost all historical perspective and began gambling instead of investing. They went double down on a real estate bubble attempting to cash in on the high yields of high risk, forgetting the disastrous results of hitting on 19 during the tech revolution just a decade ago. The Detroit automakers signed contracts assuring their non-competitiveness against global competitors in order to avoid work stoppages and tried to make up for the additional labor cost by marketing boring, cookie cutter, plastic laden cars that were neither attractive nor worth the price. The unions took every opportunity to advance their standing amongst the rank and file by focusing their attention on what they could squeeze out of the manufacturers, forgetting that it is ultimately the car buying public that decides the value of their member’s labor and that the consumer is not obliged to act within the confines of any union contract.

All three of these entities forgot the simple principle that if you want to be successful in the long term you have to think and act in the long term. They are now looking to abate the consequences of their short sightedness by appealing to the only board of directors left in the country with worse financial management skills than they themselves have.

While the credit crisis we are now enduring is far too complex to pin on just one suspect, the shortsighted actions of the extraordinarily poor financial managers in the U.S. Congress certainly contributed greatly to its sudden impact and far-reaching scope. Through Fannie May and Freddie Mac the Congress infected credit markets with a new government backed welfare program, insisting that unqualified home buyers be given mortgages with little or no possibility of repayment. They furthered the sense of entitlement by insinuating that the happiness of home ownership was a right rather than the pursuit of that happiness through prudent financial management.

Regardless of how novel the idea was at the onset there was an overwhelming chance that it would not end well. Wall Street suffered unprecedented declines by not picking up their chips and analyzing risk a little farther down the road than the next few quarters. The prevailing thought was that the home loans would be secure as the home values continued to appreciate. Few considered the impact that an ever growing number of foreclosed homes would have on home prices, driving the overall market down, creating an abundance of upside down mortgages and releasing a chili filled cat into the bond market.

The government’s plan to free up the credit markets by injecting $700 billion has so far proven to be less than successful at doing anything other than deflecting attention from who fed the cat.

Giving taxpayer guaranteed loans to automakers that have no plan in place to pay them back doesn’t make any more sense than the mortgages did. Unlike Congress, companies must make money in order to pay off debt. Increasing their debt load does nothing to increase their earning ability. The reason the Big Three cannot give an accurate accounting of their true financial state is that they do not know everywhere the cat has been.

Once the process has started there is very little that can be done other than to minimize the damage, clean up the mess and move on, hopefully a little wiser. Congress is cooking up a new batch of chili and feeding it to three cats with a bigger spoon.

And for the taxpayers, who are ultimately responsible for cleaning up the mess, this does not look like it will end well.