Building boring nationalized companies
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
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.