The Nationalization of Big Business
Good grief, what has happened to America’s capitalistic, free enterprise system? As a red-blooded American, native Michigander, and alumnus of Kettering University, I am more than a little shocked, disappointed, and angry at what I see as a major blow to free enterprise, and more importantly, to democracy. Here’s why:
Following is a condensation of a couple of articles that came to my attention today. These are excerpts from an article by Monica Langley and Neal E. Boudette in the WSJ’s Morning Brief, and an article by Dr. Jeffrey Feldman in the Huffington Post.
WASHINGTON — Inside a windowless, ornate room Thursday (3/26) just across from the Oval Office, President Barack Obama and a group of senior economic advisers began the job of remaking the American automobile industry.
The first order of business: Oust General Motors Corp. Chief Executive Rick Wagoner.
Steven Rattner, a former investment banker who is heading the administration’s auto restructuring; chief economic adviser Lawrence Summers; and Treasury Secretary Timothy Geithner were among those gathered around the polished wood table of the Roosevelt Room in the White House’s West Wing. They were there to decide under what conditions the government would continue to prop up once-powerful Detroit car companies GM and Chrysler LLC. At Thursday’s meeting, once the Obama administration concluded the pair were running out of money, their effective dismantling began.
The White House meeting at which Mr. Wagoner’s fate was decided came five days before a March 31 deadline when the administration was set to rule on the viability of the companies.
The auto team (headed by Steve Rattner) prepared briefs for Mr. Obama on his options, as well as viability reports on both companies. The car team wanted an executive who could accelerate the changes it (the administration) desired. Mr. Wagoner didn’t have any support within the group. “This is Obama, and symbols of change are important,” said one person familiar with the situation.
A much harder decision was what to do with Chrysler. A conclusion that the company wasn’t viable could lead to 40,000 workers losing their jobs. To combat that threat, the government is negotiating with Chrysler and Italian car maker Fiat SpA for an agreement that Fiat will continue to make cars in the U.S. if it buys Chrysler, according to an official of the Obama administration.
After the Thursday meeting at the White House, Mr. Rattner asked Mr. Wagoner and Mr. Henderson to come see him the next day. Mr. Rattner broke the news to Mr. Wagoner at his office at the Treasury, according to an administration official. Afterward, Mr. Rattner met with Mr. Henderson, and told him he would take over as GM’s CEO.
Once word started to trickle out that a White House decision on the auto makers’ fate was imminent, GM officials and some Michigan lawmakers began making calls. Michigan’s Democratic governor, Jennifer Granholm, called the White House to ask for a meeting with Mr. Obama. Told she’d need to come in by Friday, which wasn’t possible, she had a personal phone call with the president and urged him to consider the communities that could suffer.
Mr. Wagoner told GM’s board Friday evening that he was asked to step down and informed directors the administration wanted a majority of them to resign, according to two GM officials. Several volunteered to quit over the weekend. Other GM officials speculated that they would also be asked to resign.
On Sunday, …Mr. Obama made one call himself to some of the Michigan delegation, including U.S. Sen. Carl Levin and his brother, Rep. Sander Levin, and Michigan Sen. Debbie Stabenow. He told them that he planned to put some administration staff into the Detroit companies, according to one person familiar with the situation.
Sen. Corker, a Republican from Tennessee, said he told Mr. Rattner on Monday that he was alarmed that the administration would dictate what kind of vehicles would be constructed. “Deciding what vehicles and plants will survive is setting industrial policy,” the senator said.
For the complete article, click here.
Let me see if I have this correct-
- The administration does not give money to the auto industry-Congress does. (Unless the Treasury dept. is diverting funds Congress provided previously.)
- The President has formed a small group of people (the auto team) who are dictating how the American auto industry will be run.
- The head of the administration’s new auto team is Steve Rattner, a former Investment Banker.
- Steve Rattner personally fired Mr. Wagoner and personally appointed Mr. Henderson as the new President of GM.
- The administration is dictating what cars the auto industry will build, and what plants will survive.
- The strong-arm tactics by President Obama and his auto team run roughshod over the Articles of Incorporation and By-laws of GM, rending corporate law meaningless. (Nationalization?)
- The President told some of the Michigan delegation he was going to “put some administration staff” into the Detroit companies.
- The auto team is doing the negotiation between Chrysler and Fiat.
There also seemed to be a few people missing from the Thursday meeting–like:
- Where was the Board of Directors?
- Where was the Michigan delegation?
- Where were the shareholders (the government is only one shareholder)?
- Where were the “car guys?”
- Where were the “union guys?”
- Where were the Congressional leaders?
- Lastly, where is the fairness, executed by the administration, between the auto industry and the banking industry?
What does Michigan think of all this? Here is what Dr. Jeffrey Feldman had to say in his article in the Huffington Post today:
Fear and anger are rising in Michigan: Fear that things are about to get much, much worse than they already are; anger that the federal government is strong arming the Mitten State just a short while after opening up America’s coffers to Wall Street with no strings attached. New York gets what it wants, when it wants it from Washington, Michigan gets slapped in the face. The fat cats on Wall Street caused this problem, they sank the economy, and they got paid off…Executives in Detroit get tarred and feathered and escorted to the door.
For the complete article, click here.
Now, I am not saying that all these things shouldn’t happen to, or within the American auto industry; nor that they wouldn’t happen anyway, but I am shocked, and disappointed, at the way events are being dictated to the auto industry by the President, and his select few, who are taking over the entire industry. That is not how capitalism works. That is not how democracy works.
Confusion in Lending
I think it is safe to say that anytime the government gets involved in anything to do with business–confusion reigns supreme. The President made it clear in one of his recent addresses (review here) that he wanted banks to start lending, especially to small businesses.
However, yesterday, I read a column from the Associated Press that covered Congressional hearings on the conflict and confusion being experienced by banks. Here are some summarized excerpts from the article:
Regulators at a House hearing Wednesday heard complaints from small business owners, and others, who haven’t missed any payments, but are getting their credit lines deeply cut or yanked away… “There is actually a growing anger from these people,” said Rep Spencer Bachus of Alabama”… “The reduction or denial of credit to credit-worthy customers is occurring every day across America in about every town,” he said.
“The current bank regulatory climate is causing many community banks to unnecessarily restrict their lending activities,” said Michael Menzies, Chairman of the Independent Community Bankers or America. “Actions of bank field examiners are often unnecessarily putting constraints on community bank lending,” he said.
“Banks have to lend money to make money,” Timothy Long, senior deputy comptroller in the Office of the Comptroller of the Currency, told the hearing…Scott Polakoff, acting director of the Office of Thrift Supervision, said “…there is an element of truth in the bankers complaints [that examiners have been ordered to ‘crack down'].”
Bank examiners work for the Federal Deposit Insurance Corporation and the Treasury Department. Don’t tell me this is another boondoggle by Tim Geithner!
Will the political drama never end, so businesses can all get back to work and bring our economy back on track?
Finally–Shareholders Take Action
The investment group, Finger Interests Number One, Ltd., owns a small block of Bank of America stock, and has charged, in a regulatory filing, that the board of directors of Bank of America ignored shareholder interests when they approved the purchase of Merrill Lynch & Co.
Now, three board members; Ken Lewis, CEO; O. Temple Sloan, lead director; and Jackie Ward, director, are up for reelection, and the investment group is asking shareholders to vote these incumbents out and bring in new blood. The election of board members will take place at the Bank of America annual meeting in late April.
It is about time shareholders discarded their complacency and started fulfilling their obligations as “owners” of companies–especially those “owners” of failing companies. Makes one wonder what role shareholders played in the current crisis on Wall Street. I wonder how many shareholders actually spoke out during the nomination for board members–or even voted for that matter.
Have you looked closely at your portfolio lately?
Venture Capital–The Reality
Mainstream media, in its search for bad news, seems intent on trying to lead readers into thinking that Venture Capital today is all but non-existent…and that any entrepreneur who is looking for VC money is on a fool’s errand. However, let’s look at the reality of Venture Capital investments.
Obviously, there are fewer IPOs during the present turmoil and condition of the stock market, but this simply means that Later Stage companies will have to wait a while longer before cashing in on their big “payday.”
The good news is for startups. Investment in Seed Stage companies increased substantially in 2008, with a 19 percent jump from the prior year. There was also about the same investment in Early Stage companies during 2008 as there was in 2007.
Money invested in Clean Technology grew more than 50 percent in 2008, and investments in Internet-specific companies remained at about the same level as 2007. VC investments in the categories of Energy, Media and Entertainment, and IT Services grew during 2008, while several other categories remained about the same level as 2007.
It is true that; overall, the total amount of VC money invested was down about 8% in 2008–due largely to a decline in Later Stage and Expansion investments. This is likely due to everyone waiting out the stock market before they crank up the IPO machine again. Total number of deals in 2008 was only down about 4%.
So, with the President arranging for more capital to become available to loan to small businesses, Congress pumping up the economy, and Venture Capitalists continuing to invest at close to their normal rate, there should be no reason for entrepreneurs to put off starting a business, or growing a business. Put aside the fear and get on with it!
Good News for Small Business
It looks like action is finally being taken to unfreeze credit to small businesses. In a business roundtable at the White House, President Obama outlined actions to help small business, and get credit flowing again. As the President pointed out, this is just a first step in getting small business back up to speed, so they can begin hiring again.
Here is a CNN edited clip of President Obama’s speech to the business gathering.
(email subscribers–view on the blog)
This is what small business people have been waiting to hear. It is definitely a start to get small businesses back on track. There is still much to do about healthcare and taxes as they relate to small business, but it is encouraging to see the government taking steps to improve the current situation.
U.S. Falling Behind in Innovation–Part II
In Part I of this series (shown below this post), I presented the general findings of the
nonprofit, nonpartisan, public think tank, Information Technology and Innovation Foundation (ITIF), regarding Innovation in the U.S. vs. 40 other leading nations/regions of the world. The ITIF report is based on scientific findings–not opinions–and shows that not only has the U.S. dropped to the number 6 innovator in the world, but also its rate of change (improvement) is dead last.
In the same report, the ITIF also presents those things the U.S., or any nation/region, can do to improve competitiveness and innovation. I have capsulized their suggestions as follows:
- Provide incentives for companies to innovate. Incentives should be in the form of robust R&D tax incentives; accelerated depreciation on new equipment; workforce development tax credits; corporate tax structures that make the U.S. more competitive world-wide; and other incentives that encourage businesses to spend more on innovation.
- Encourage high-skilled immigration. The broader the scope of thinking–the better the likelihood of new ideas and innovation. The U.S. is currently sending high-skilled immigrants home, and that is counter productive in the long-term.
- Promote a digital economy. The U.S. is successful in offering new digital devices and services, primarily to the younger generations, but they haven’t been able to make a mobile phone service that doesn’t consistently drop calls. There are thousands of square miles in the U.S. that have no mobile phone service, and thousands more that have only sporadic service. Also, there are more areas in the U.S. without broadband service, than there are with it. Europe and Scandinavia do not seem to have these problems. [A few years ago, I used a mobile phone near the Arctic Circle in Northern Sweden. Today, mobile phones are totally unreliable in my suburban house in the U.S.]
- Support institutions that are critical to innovation. Not just universities that perform research, but also the kinds of institutions and training-centers that foster commercialization of their research. In addition, there should be more support for local economic development, entrepreneurship development, and workforce training.
- Remove regulations and government policies that retard innovation. Small businesses produce 13 times more patents than large patenting firms, yet spend four and a half times as much per employee in compliance of environmental regulations, and 67 percent more per employee on tax compliance than big businesses do. In the U.S., not only does small business receive very little government support, but it also appears that the government is working against small business through overly stringent regulations of small business.
Well, there you are. That’s what the ITIF believes needs to happen to stop America’s slide into oblivion as a leading innovator in the new knowledge-based innovation economy of the world.
I believe all the above items are well and good–and should be done–but they seem to only address the symptoms. The above are things our government can heavily influence, but I believe the reason for America’s demise as the innovation leader goes much deeper.
Commentators to Part I suggested that the root problem is perhaps a cultural and socioeconomic problem. I believe they are right, and I will soon post, as Part III of this series, my views and concerns on the reasons for diminishing innovation in the U.S., along with what I think needs to be done to improve the situation.
I would also like to hear from everyone out there who has a suggestion on how they think we can bring innovation back to the forefront of the U.S.
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