Archive | February, 2011

GM Bailout Costs Taxpayers $7B

Executive Overview:

  • Bailing out GM has cost taxpayers $7B in realized loss and $19B in unrealized loss
  • GM is a zombie company that should have been allowed to die and rise again
  • Winners: GM’s employees and pensioners, vote-buying politicians
  • Losers: taxpayers, GM’s future

Full Post:

When GM was bailed out during the financial crisis, first by Bush, and then by Obama, I was disgusted.  GM is a company that is fatally structured and needed to die in order to be reborn again in a form that would allow it to succeed.  As sorry as I feel for the employees of GM who would have lost their jobs, and the pensioners who would have lost all or part of their hard-earned retirements, a bankruptcy needed to happen.  The debt and long-term obligations aren’t sustainable – then or now.  GM can’t be competitive with these fatal anchors around its neck.   Without restructuring this ship will eventually sink.

All of this got lost in the haze of  the GM IPO.   President Obama made it sound like a victory for taxpayers, and I’m betting a lot of people believe the spin.   I knew the GM bailout would be costly, I just didn’t know how much.  One of the smartest economists I know, Jim Anderson from Silicon Valley Bank,  did a great post on exactly how much: $7B in real loss and $19B in unrealized loss.

Let’s face it – the bail out was nothing short of buying votes (by both parties).   The bailout was bad for GM as a business and bad for taxpayers.  The winners were GM employees and pensioners, and the politicians who bought votes with taxpayer money.  (Note: the $7B hard loss equates to $33,493 for each of GMs 209,000 employees).

GM is a zombie company now – hamstrung by the UAW, pensioners, debt and partial government ownership.  It won’t be able to make the hard decisions necessary for long-term success because it has too many constituents.   It will never be competitive in today’s competitive automotive industry until it sheds its fatal overhead.  Letting GM go into bankruptcy would have been excruciatingly painful for GM’s employees and pensioners, but it would have given the company a chance to survive and employ generations of future automakers.  What will happen now is a slow death by strangulation, and very likely a series of government bailouts to soften the landing of the pensioners and employees who will most certainly get hosed.

The solution is simple but painful: let the zombie die the next time it becomes insolvent, deal with the political pain, and hope the company can rise again by regaining some of its once great innovative mojo.

There is only one industry I think the government should ever consider bailing out – banks.  I will discuss this in a future post.

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Vail is Fun!

Right after Jigsaw got bought I got a call from a private equity firm out of Chicago called GTCR.  I had never heard of them but took the meeting on instinct.  I have found it is a bad idea to blow off money guys as you never know when you’re going to need funding.

Phil Canfield, the Managing Director of GTCR, and one of his partners Mark Anderson came by to see me at the Jigsaw offices.  I could see right away that they were good guys.  Phil asked me to tell him my “story”, and when he found out that I used to be owner/operator of a ski area (Lookout Pass), he got all excited.  He told me he had a little place in Vail and has a gathering of CEOs there every winter.  He invited me to go.  Of course, I accepted on the spot.

I started getting emails from Phil’s assistant a couple of months before the trip and it looked like there were going to be about eight people going.  There weren’t any hotel instructions and I started getting nervous.  Specifically, I’m at a point in my life where spooning a fellow CEO in a beer-stained double bed just isn’t my thing.  About a week before the trip I chatted with a VC friend and told him about the trip.  He told me GTCR is a serious, serious player in the private equity space.  He even knew the initials of the four guys who make up GTCR.  This calmed my fears about the accommodations and off to Vail I went.

So, I show up at Phil’s “little” ski house.  This wasn’t just the nicest ski house I’ve ever been in.  It might have been the nicest house I’ve ever been in.  It was HUGE, literally right on the slopes, and was absolutely cool in every possible way.  My favorite was the “Ready Room”.  This room was for getting all your gear on before having to walk a whole twenty feet out to the slopes.  The room had a bench full of ski stations – each with its own built in boot warmers.  Yes, I said “built in boot warmers”.  If this doesn’t impress you then I got nothin’ else.

We had a fantastic two days of skiing.  Phil hired two private instructors to give us our own personal tour of Vail and we cranked out at least 25K of vert a day.  It was sick and wrong in every possible way.  The only real inconvenience was that it was cold.  I’m talking minus eight when we first got out on the slopes at 8:30 in the morning.  Luckily it warmed up – especially when Phil had us drop into his private lunch club at mid-mountain for what was certainly the schmanciest ski meal I’ve ever eaten.

Speaking of food, Phil had a personal chef named Michelle cook us all our meals at his house.  The food, wine and service were outstanding.  Michelle is engaged to be married and her fiance is one lucky (and soon to be fat) dude.  That woman can cook.  Phil would sneak down to his wine cellar on regular occasions and bring back a bottle even more spectacular than the last.  Phil got concerned when I informed him that I would be moving in permanently.

Phil gave us a complete tour of the house on the last day.  Most impressive was the “server room” that ran the house.  He has more rackspace and computing power running that house than we had for the entire Jigsaw operation during our first three years in business.  This is what happens when a gadget geek makes too much money.

But seriously, Phil and his two partners who also went on the trip (Mark Anderson and Craig Bondy), were fantastic hosts.  And I’m not just saying this because they took me skiing.  Maybe it has something to do with being from the Midwest, but these guys were just plain old good- time, low-key, funny-ass dudes.  I also have a feeling they’re pretty good businessmen and great partners to CEOs.  The other CEOs were also really great guys but I can’t mention their names because they’re all under indictment (kidding).

I thoroughly enjoyed myself and send a big shout-out and thank you to the boys at GTCR.  They rule.

Note: I also published this as a page in my Travel section.

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