Felix Salmon

Building boring nationalized companies

By Felix Salmon
November 4, 2009

I’m back, relaxed, after the longest amount of time I’ve spent off-blog in three years. Trying to get back up to speed this morning, I noticed an interesting twist in the annals of bailed-out too-big-to-fail companies: RBS is being forced to sell some core assets, like its auto-insurance operations, which give stability to its earnings. At the same time, GM has managed to unsell Opel, an equally-core asset which had been going to Canada’s Magma Magna.

I like both of these developments. There’s a big difference between a too-big-to-fail bank and a too-big-to-fail automaker: leverage. GM’s failure would have devastating repercussions in terms of midwestern unemployment, which is why the US government bailed it out. But it wouldn’t threaten the international financial architecture in the way that the failure of RBS would. So the world’s taxpayers have more interest in shrinking RBS than they do in shrinking GM.

Opel is GM’s best hope for the future, in that it’s very good at making small, fuel-efficient cars. Selling it makes much less sense than trying to import that technology into the US. If GM’s management can work out a way in which keeping Opel costs less than selling it, that’s a great result for the company.

At RBS, by contrast, it’s long past time that the financial-supermarket model is broken up. If RBS can really manage its retail banking network as well as it says it can, that should be just as much of a source of stable and predictable earnings as the auto-insurance business is. And no one’s telling RBS to sell of the disastrously-acquired ABN Amro branches, which means that the bank can evolve into becoming another strong Anglo-Dutch giant like Unilever or Shell.

If all goes according to plan, both GM and RBS will end up as large, successful, boring companies — the kind of companies that Warren Buffett has made his fortune by buying-and-holding. Both have a macroeconomic tailwind behind them right now: GM in the form of a natural rebound in car sales from their depressed 2008-9 levels, and RBS in the form of an extremely low cost of funds. If these were private companies, they might use that tailwind to make big and risky bets. But because they’re state-owned, instead they’re using it to simply get into a position where they can become established and profitable enough to let their respective governments sell down their stakes sooner rather than later. Although even after that happens, regulators will continue to keep a close eye on RBS, and the amount of risk it’s taking on.

Update: As John notes in the comments, RBS didn’t get ABN Amro’s branches. Those went to Fortis, which then also ended up nationalized.

9 comments so far | RSS Comments RSS

welcome back salmon

Posted by otto | Report as abusive

None of that really matters. So what GM might do better. They should have been allowed to fail. The argument was made many times that a failure of the then “Big Three” would be catastrophic to the economy.

But that would only have happened if the government refused to bail out its citizens. All of the car makers could have failed without hurting the economy if that 787 billion dollars had been spent on keeping citizens afloat while the markets corrected themselves via the “survival of the fittest” philosophy they touted so boldly and proudly not more than a decade or so ago.

Having that money applied to the citizens would not only have allowed families to weather the economic storm, but it also would have put money in the hands of true entrepreneurs. We might well have seen new start up car makers and other such businesses take the place of the bloated and failed ones.

It’s down right insulting and a slap in the face of every American when our leaders discuss our problems in terms of fixing the banking/business sector.

Even though we citizens are the driving force of the economy (because it’s from us that business and innovation spring), we are treated like cattle to be used and discarded. Our economic system is brutal and animalistic. How else would you explain a system that allows individuals, and indeed, whole families to fall into destitution for the sake of maintaining “profitability”?

We are not animals, and we should not be content to live as such.


You know, I remember the 70′s, and the worry (or claim) that US automakers didn’t know how to make small cars. We imported some European models then (Merkurs?). That was 30 years ago. A lot have auto designers have passed through university in that time, and I’d certainly assume that economy and efficiency trade offs have been part of the curriculum.

I don’t really buy that onshore makers need to import small and efficient cars (or designs) anymore. They just need to decide to build them.

(Note that for many of those 30 years US makers had a real resistance to building good small cars. Their “entry model” was that, and a placeholder on the lot from which they could up-sell you to a bigger car or SUV. Having the designs available from Europe didn’t change that.)


“A lot [of] auto designers have …”


Broadly agreed with the piece – but note that RBS never took on ABN’s branches: they went to Fortis, and are now owned by the Dutch government. RBS just took the i-banking business.


http://blogs.wsj.com/economics/2009/11/0 3/barney-frank-on-financial-regulation-o verhaul/ – “He supports making Harvard Law School Professor Elizabeth Warren the first director of the Consumer Financial Protection Agency.”

Posted by glory | Report as abusive

Although Magma sounds much cooler, it’s actually called Magna. Welcome back!

Posted by jg | Report as abusive

Welcome back. We’ve missed you.

Posted by Linda | Report as abusive

“If RBS can really manage its retail banking network as well as it says it can, that should be just as much of a source of stable and predictable earnings as the auto-insurance business is. ”

Well, yes, but they’ve been forced to sell 14% of their branches.

Posted by Ginger Yellow | Report as abusive

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