Felix Salmon

Mark Perry is convinced that the recent uptick in vehicle miles is a good sign, economically speaking; Calculated Risk is not as convinced. Both, however, are working on the assumption that vehicle miles are an excellent proxy for economic activity as a whole, and that the more they rise, the better the economy is doing.

Perry’s chart, in particular, would seem to back that up:

The way in which vehicle miles fell steadily over the course of the recession is startling. But look at CR’s chart:

And suddenly recessions don’t seem as big of a deal: vehicle miles simply tend to rise over time, except for during oil spikes.

It’s worth remembering here that the recession started in December 2007, while oil prices were still rising; they didn’t reach their all-time (nominal) high until July 2008. Given that gas prices lag oil prices, a large part of the fall in miles can probably simply be attributed to high gas prices, rather than to the recession — especially since, as Nate Silver notes, “the cost of gas twelve months ago has historically been a much better predictor of driving behavior than the cost of gas today.”

More generally, vehicle miles are a cost of economic activity, and to the extent that they can be minimized through various kinds of efficiency gains, they should be. Things which are good for a vibrant economy — mass transit systems, telecommuting, e-commerce, walkable neighborhoods — tend to mitigate against driving, while — to take the extreme counterexample — I’d guess that people who have been foreclosed upon tend to spend a lot more time in their cars.

My feeling is that what we’re seeing in the latest driving numbers is no more than the fact that gas prices were low a year ago. I do hold out some hope that we’re decreasing our national reliance on autos, if only a little bit; it would be sad if any economic recovery had to be associated with a concomitant rise in driving. As America moves back into the cities from the crumbling suburbs, is that really too much to hope?

(HT: AR)

Andrew Ross Sorkin loves private equity.

Sorkin finally get around to responding to Malcolm Gladwell today, and he’s unimpressed. Here’s how he frames the question:

Can financiers ever do anything beyond financial engineering?

With General Motors planning an initial public offering for Thursday that values the once-left-for-dead company at more than $50 billion, the answer to that question is more than theoretical.

How did G.M. become one of the greatest turnaround stories, at the moment at least, in history?

You can guess where Sorkin ends up. While Gladwell gives a lot of credit for GM’s current health to Rick Wagoner, Sorkin dismisses Wagoner as the CEO under whom GM went bankrupt. Instead, he says, “the GM turnaround is ultimately an act of financial engineering”—the financial engineering that Steve Rattner takes lots of credit for in his book, and which Sorkin is happy to ratify as one of the greatest turnarounds in history.

The financial engineering at GM was difficult and impressive. But in principle it’s neither difficult nor praiseworthy to take an insolvent company, put it through bankruptcy, and let it emerge under the ownership of its former creditors and people who provided DIP funding.

Bankruptcy, in theory and in practice, is essentially just a change of ownership. It’s not easy, and it carries non-negligible costs; Rattner did a good job of minimizing those costs and therefore maximizing the value of the post-bankruptcy GM. But you don’t need PE honchos to orchestrate a bankruptcy filing and rid a company of its liabilities. And the main thing that Rattner did with GM was to lubricate the process with something over $50 billion in US taxpayer money, most of which went to pay off GM’s creditors, and much of which is unlikely to ever be repaid.

Rattner deserves praise for what he did. But so does Wagoner, and so do all the workers who have worked and who continue to work to actually make the cars that GM sells. The financial engineering might have been a necessary part of the turnaround process. But it wasn’t remotely sufficient.

I’m a fan of Steve Rattner’s book about the auto bailout, Overhaul, and I’m also a fan of Malcom Gladwell’s very tough review of it.

There are lots of reasons to read the book: it’s a surprisingly candid and open account of life in the early days of Obama’s White House, and Rattner is happy going public with a lot of information that the White House officials in question simply assumed was tacitly off the record. He’s also happy being very rude about lots of people who rubbed him the wrong way, from Sheila Bair to former GM CFO Ray Young.

Gladwell’s main problem with the book is Rattner’s view of former GM CEO Rick Wagoner. That view is pretty simple: Wagoner had overseen the decline of GM to the point at which the only choices were bankruptcy, bailout, or both. He therefore had to go. Gladwell, by contrast, is much more charitable: he sees Wagoner as a man who fundamentally transformed GM into a competitive powerhouse, and who, in doing so, did a certain amount of unfortunate collateral damage to GM’s balance sheet.

Gladwell’s view understates the financial nightmare that was GM pre-bailout: at one point its book value was negative to the tune of $98 per share. Wagoner caused billions of dollars in unnecessary bankruptcy costs by refusing to consider or prepare for any kind of bankruptcy at all, despite the fact that his quarterly SEC statements had been showing that GM was insolvent since 2006.

On the other hand, Rattner is comically out-of-touch when it comes to running companies: finance is all that he cares about, and it’s a very narrow view of what corporate finance can and should be, too. Let’s see if you can detect a pattern here.

On Ron Bloom: “Unlike most aspiring labor activists, he went to Harvard Business School”

On Rick Wagoner: “By most accounts, he had been a golden boy at GM. After graduating from Duke University and Harvard Business School, he’d begun as an analyst”

On Harry Wilson: “Harry had been the first in his family to earn a college degree, from Harvard, and he’d gone on to earn an MBA at Harvard Business School.”

On Sadiq Malik: “a skinny, intense Pakistani American who had graduated near the top of his class at Dartmouth, taken a Harvard MBA, and worked at the Blackstone Group”

On Bob Lutz: “Harry had admired Lutz ever since hearing him speak at Harvard Business School”

On Rob Fraser: “resumed his position at his private equity firm and then matriculated at Harvard Business School”

No other institution gets this kind of obeisance in the book: Harvard gets 17 citations in an Amazon search, while Princeton and Yale get precisely one between them. And it seems that what Rattner loves about HBS — and his own Team Auto taskforce more generally — is the way that everything can be reduced to clever questions about capital structure, and decisions can then be made in an incredibly dispassionate and pseudoacademic way. For instance, the bailout of Chrysler was a very close-run thing, and the company could easily have been left to die. Here’s how it was saved:

Larry pressed us to attach probabilities to our recommendations and countered with odds of his own… he confessed that as we gave our answers, he was discounting our probabilities based on what he thought we would say… Plainly, Larry was loving this debate…

Larry called for a show of hands. His question was precise: “If you assume that the probability is 50 percent or greater that Chrysler would survive for five years, would you save it?”

This says volumes about Larry Summers: how he acts, how he thinks, how he operates politically. And it’s clear from this book that it was Summers, rather than Rattner, who ultimately made the decisions which would then be presented to the president for sign-off. (Geithner was nominally involved too, but let Summers take the wheel when it came to Team Auto.)

The fact is that neither Rattner nor Summers nor just about anybody else in Team Auto knew anything much about Detroit, about car manufacturing, or about running industrial companies. They did know that GM’s treasury was a shambolic organization which could require weeks to find out how much money it had — so they judged the treasury operation, because they were good at doing that, and then they damned the whole company by association.

There’s another fact, too, though — which is that Team Auto did wonders for the future health and sustainability of GM by forcing it into bankruptcy and extinguishing large chunks of its actual and contingent liabilities. Gladwell is far too grudging here:

Team Auto was engaged in an act of financial engineering: it used the power of the bankruptcy process to rid G.M. of some of the liabilities that had been holding it back. This was cleverly and swiftly done. It was badly needed. But, at the end of the day, cleaning up a balance sheet is cleaning up a balance sheet.

In fact, it’s not remotely as easy as that, and the restructuring needed some very inventive bankruptcy lawyers, some extremely hard-nosed negotiators, the jettisoning of a lot of conventional wisdom about the abilities of automakers to withstand bankruptcy — and, of course, many billions of taxpayer dollars.

That Rattner’s team managed not one but two insanely complex bankruptcies in a hitherto unimaginably short timeframe is a real and noteworthy achievement of the Obama administration. Rattner is right about that. But Gladwell’s got a good point too. This kind of biz-school restructuring is easy to show off about. What’s hard is making millions of cars which are so good that the picky US consumer will buy them rather than the incredibly well-made competition — and making a profit by doing so. Eliminating GM’s monstrous debt burden by sending it through bankruptcy was a necessary step in getting there. But it’s not at heart what managing a company like GM is or should be about.

Google’s driverless car is one of those technologies which makes me feel old, in a bad way: I would dearly love to have been able to grow up with this technology. And I can’t wait for it to arrive: I’m not a very good driver, and I’m sure that taking a Google car would be much safer for both me and for other road users.

It could also cause a radical change in the economics of cars, making it much less attractive to buy them, and much more attractive to buy into something much closer to the NetJets model. Doron Levin has a keen insight:

Cars that don’t need drivers also may not need private owners – since they could be summoned remotely and returned once their journey is complete. Why take on a lease if you can purchase a subscription to a car instead? Car owners who never want to spend a saturday under the hood or in the waiting room of a mechanic’s shop again might quickly adapt to a car subscription model.

My guess is that in the first instance, at least, driverless cars are still going to require a driver sitting behind the wheel, much as airplanes on autopilot still require a pilot at the controls. So sending a driverless car back to its depot at night will be non-trivial. But eventually we’ll get there, and you’ll be able to rent a truck when you need a truck, or a zippy sportscar when you’re so inclined, or a big family wagon only when you need it.

One of the big problems with cars right now is that families buy the biggest car they’re ever likely to need. The family car might just be used to drive a single person to work and back most of the time, but because it might used for a family camping holiday once every year or two, the family ends up buying something huge, and the expense of that work commute rises substantially as a result.

Similarly, one of the big reasons why people are wary of electric cars is that every so often they want to take long car journeys which can’t be managed on a single charge. Up until now, the only solution to that problem is either to have a second, gasoline-based, car, or else to have a nationwide network of recharging stations which in any case are likely to take far too long to recharge the battery.

Car subscriptions would be a much better solution. You use an electric car most of the time, and then when you need something with greater range, you just swap it out for one of those instead.

So bring on the self-driving car! It could be exactly what we need to get most of us driving electric.

Quite aside from the costs of rescuing GM itself, the U.S. government spent a whopping $17.2 billion bailing out GM’s subprime lender, GMAC. It’s never going to get repaid in full: at the moment estimates of total losses on that deal are running at about the $6 billion mark.

So the government knows full well how dangerous and costly it can be for GM to own a subprime lender. What’s more, the government currently controls GM, holding an equity stake of about 61% of the company.

So what on earth is GM doing spending $3.5 billion on buying a subprime lender? It’s not enough to simply bail them out, it seems: the government is now using taxpayer money to buy out AmeriCredit’s shareholders at a 24% premium to Wednesday’s closing price.

I do appreciate that GM needs to be able to sell cars to people with bad credit. But there’s no indication that GM is a good owner of subprime lenders — quite the opposite. AmeriCredit is already working with thousands of GM dealers, and the two could easily start rolling out GM-branded products across GM’s dealer network even without an acquisition.

I’m suspicious at the speed with which GM is moving back into the world of financial services: I’m not sure it bodes well for the company, which really should be sticking to building cars, keeping its credit operations outsourced.

If GM wants to build a strategic relationship with AmeriCredit, that’s fine, and anybody who’s bullish on GM would be more than welcome to buy AmeriCredit shares at the same time. But I see no great upside — and lots of danger — in bundling the two. And in any case the last person who should spend $3.5 billion on a subprime lender is anybody at the Treasury.

Jim Surowiecki didn’t even scratch the surface when it comes to the power of auto dealers in general and Big Three auto dealers in particular. They’re grossly inefficient, as this chart from Monday’s SIGTARP report on them shows.

Despite this, their political clout is enormous. When Treasury insisted on closing many dealerships as part of its restructuring of GM and Chrysler, the auto dealers went straight to Congress and managed to get more than half the 1,100 closed dealerships reinstated.

Treasury, failing to learn its lesson, then insisted that auto dealers wouldn’t get a carve-out from consumer financial protection laws. It failed there, too.

And now the auto dealers have managed to slam Treasury one more time, via the SIGTARP report, which the Washington Post describes as “mostly a rehash of familiar dealer complaints about the supposedly unfair process by which the companies selected dealerships for closure”.

In this case, however, I think that Treasury’s argument is weak. Herb Allison, the Treasury official in charge of such things, just says that closing some dealerships was obviously better than closing all the dealerships, which would have been the outcome if GM and Chrysler had been liquidated. Well, yes. But as the report responds, “this is a false dilemma with no factual support”. Keeping more dealerships alive would not have killed the entire restructuring.

A stronger argument, I think, is that the combination of Ron Bloom and Steven Ratner went in guns blazing with a strategy of getting as much pain as possible out of the way as quickly as possible — not only with respect to the dealers, but even more with respect to the bondholders as well. If you’re going to declare bankruptcy, get as much benefit as possible out of it and make it quick. And that’s exactly what they did.

So yes, with hindsight, it might have been possible to cause less pain. But the task facing Bloom and Ratner wasn’t to do the perfect restructuring, it was to get something done at all. And Ratner, in particular, has a big ego and is unlikely to have taken the dealers’ complaints seriously: I absolutely believe that he ignored them and felt quite proud of the fact that he was taking advantage of bankruptcy law to get a lot of them out of the way.

As such, the SIGTARP report — which was authored I think mainly by Kurt Hyde rather than Neil Barofsky — is worth listening to, rather than simply railing against in Treasury’s knee-jerk fashion.

A more realistic response from Treasury would be simply that the deal was rushed by necessity and that no one had the luxury of time to make sure that everything was optimal; what’s more, the dealers, once they knew that a deal was on, had everything to gain by being obstructive and could not easily be trusted in what they said: they were fighting for their very livelihoods, and would say anything to keep them.

Still, that’s no reason to ignore them completely and the Auto Task Force would have done well to task one of its own members with crunching the dealers’ numbers in good faith. I think that Ratner sometimes forgot that he was working for the nation as a whole and that every extra unemployed former auto dealer was an outcome best avoided if possible. Or maybe it wasn’t yet clear just how bad the national unemployment situation would get. I do think that he failed to give the dealers a fair shake; I understand why that would be the case; and I think that it behooves Treasury to learn from its errors, once in a while.

Back in 2006, I started writing about Zipcar insurance. Zipcar — which is going public in an offering worth as much as $75 million — has a history of being more than a little disingenuous about the degree to which its drivers are insured. I spoke to them in February 2007, and they promised to change the language on their website; instead, in May 2007, they decided to start leaving sock-puppet comments on my blog, rather than actually do what they’d promised. Eventually, in October, they merged with Flexcar, which had much better insurance policies, and as part of the merger they adopted Flexcar’s insurance plan. (They had to, or face mass defections by Flexcar’s corporate client base.)

Today, they still tout their “comprehensive insurance” (the image at right is from this page). But when push comes to shove, it seems they’re still interested in putting liability onto their members when there’s an accident, like the time when Zipcar member Dale Douglas rear-ended Leslie Minto. Minto took Zipcar to court, but Zipcar won, saying that it was not liable “for harm to persons or property that results or arises out of the use, operation, or possession of [their vehicles] during the period of the rental or lease”. As a result, Douglas has to personally pay Minto’s damages.*

In the short term, this is probably good for prospective shareholders in Zipcar, which don’t need to worry about large potential legal exposure. The bigger picture, however, is that Zipcar might not have put its insurance worries behind it. Anecdotally, I still speak to a lot of people who say that they won’t use Zipcar because they’re worried about the insurance situation. And if Zipcar starts to get a reputation for sticking its customers with damages after telling them that they had comprehensive insurance, that’s not going to be good for its business.

*Update: Zipcar’s general counsel, Maria Stahl, has now responded, via email:

Our insurance program covers our members for third party liability up to $300,000 per occurrence.  Accordingly, Mr. Douglas was in fact covered for this accident up to $300,000.  Your posting stated that “As a result, Douglas has to personally pay Minto’s damages.”  That simply is not true.  If Ms. Minto’s damages had been in excess of $300,000, Mr. Douglas may have been held liable, exactly as he would be had he been driving his own car and damages resulting from an accident had exceeded his own policy limits.

Ms. Minto had brought suit against Mr. Douglas as the driver of the vehicle and against Zipcar.  The court’s decision dismissed Zipcar from the lawsuit.  Zipcar’s dismissal from the action does not in any way affect Mr. Douglas’ coverage under the policy we maintain for members.

Good on the AP for FOIAing the details of how cash-for-clunkers played out:

The single most common swap — which occurred more than 8,200 times — involved Ford F-150 pickup owners who took advantage of a government rebate to trade their old trucks for new Ford F-150s. The fuel economy for the new trucks ranged from 15 mpg to 17 mpg based on engine size and other factors, an improvement of just 1 mpg to 3 mpg over the clunkers.

It gets worse:

In at least 145 cases the government reported consumers traded old vehicles that got better than or the same mileage as the new vehicle they purchased. A driver in Negaunee, Mich., traded a 1987 Suburban that got 18 mpg for $3,500 toward a new Silverado pickup that got only 15 mpg. An Indianapolis driver traded a 1985 Mercedes 190 that got 27 mpg for $3,500 toward a new Volkswagen Rabbit that got only 24 mpg.

In at least 15 deals in nine states, owners of large pickups cashed in old trucks for between $3,500 and $4,500 toward new Hummer H3 SUVs that got only 16 mpg.

I think this is safely the worst policy implemented to date by the Obama administration: it has almost nothing in the way of redeeming features. Let’s hope it was some kind of weird aberration.

(HT Hiskes, via)

Steven Rattner’s first-hand account of the automaker bailout is self-serving (of course), but still very much worth reading. He’s very much the office-bound technocrat: “we recognized the importance of a trip to Detroit,” he writes at one point, “so in March, several of us made the journey”. Well, yes, that would probably make sense.

At the same time, this financier understands clearly and intuitively that in bankruptcy proceedings, seniority of creditors doesn’t matter:

The lenders were particularly aggrieved that the UAW’s health-care trust, which ranked below the secured creditors, was slated to exchange an $8 billion existing claim for $4.6 billion in notes and 55% of the equity in the reorganized company. While arguably close to a 50% haircut, it was a higher-percentage recovery than we were offering the banks.

The lenders felt that this represented an ideological decision by the Obama administration to tilt in favor of labor and against capital. That was simply not the case. At no time during our months of work did the White House ever ask us to favor or punish any stakeholder.

Many other unsecured creditors — notably, suppliers and consumers holding warranties — actually received 100¢ on the dollar. The fact was, Chrysler had to have workers, suppliers, and customers to succeed and therefore needed to give them more than called for by their rank in the capital structure…

The outcome of the Chrysler restructuring had virtually nothing to do with the heavy hand of government and everything to do with the fact that Treasury was the reluctant investor of last resort.

Every stakeholder did better under our plan than they would have in the alternative: a liquidation, in which the lenders would have gotten far less than the $2 billion they wound up with.

Rattner’s job was to create a viable company, not to maximize recovery for bondholders. If those creditors wanted to put their own new money into Chrysler, and run it themselves, they were more than welcome to. But even the government came very close to simply letting Chrysler fail, until it worked out the magnitude of the knock-on effects on jobs at dealers and suppliers. No one else would put a penny in, and the fact that TARP money was found for the automakers meant that hundreds of thousands of jobs, and billions of dollars, were saved. The creditors really were lucky to get what they got.

Vehicle emissions are a major public health issue. We already know that the best thing you can do if you want to bring your crime rate down is to switch to unleaded gasoline and then wait for 20 years. Now we’re learning that if you want to improve the health of babies (and healthy babies become much more productive members of society when they grow up), simply installing an EZ-Pass tollbooth has a large and significant positive effect: the resulting improvements in congestion and emissions more than make up for any excess emissions from cars crawling through the toll plaza itself.

The negative externalities from driving, then, are significantly greater than the ones that the likes of Charles Komanoff calculates — and those are $160 per trip, in Manhattan. If we want to become a happier, healthier, more prosperous nation, then we have to wean ourselves off our car addiction. It won’t be fast, and it won’t be easy. But it’s profoundly necessary.

(Via Wessel)

Update: The E-Z Pass study can be found here; the link in the WSJ blog is broken. Thanks to Charles Kenny for the pointer.

These tables come from a study organized by the National Highway Traffic Safety Administration, and they’re sobering: they show that hybrid electric vehicles (HEVs) are in some times twice as likely to be involved in pedestrian and bicyclist crashes as their internal combustion engine (ICE) counterparts.

The first table shows 1.2% of hybrids being involved in low-speed crashes with pedestrians, twice the rate of old-fashioned cars; the second table shows 0.6% of hybrids crashing with bicyclists, again twice the rate of noisier cars.

The reason, of course, is that the hybrids are so quiet: bikers and pedestrians use car noises to help them work out which cars are moving and which aren’t. That’s why hybrid manufacturers are now talking about adding vroomtones. Sounds like a good idea!

(HT: Voiland, via Weisenthal)

From the WSJ:

Last month, Bill Wamsley, a commercial real estate broker in Mill Valley, Calif., hoped to replace his wife’s Lexus sedan with a 2009 Cadillac CTS.

From information Mr. Wamsley collected online he determined a CTS lease would run around $580 a month when all costs were factored in. After some shopping, he found he could lease a Mercedes C300, with roughly the same retail price, for about $450 a month.

General Motors spent so many years as a leasing company with an automaker attached that it must feel weird to see the tables turned like this.

$580 a month is $6,960 a year, or 19% of the $36,560 base price for the Mercedes. $450 a month, by contrast, is $5,400 a year, or 15.5% of the $34,650 base price for the C300 Luxury. The difference, of over $1,500 a year, is significant enough that GM is now faced with an invidious dilemma: either risk blowing up their loan book, or else reduce their prices so much that they’ll never make any money making cars.

A team of seven Spiegel staffers has produced a spectacular account of the big M&A story you’re probably vaguely aware of and find far too complicated to understand — the attempted sale of GM’s European car division, Opel. There’s lots of great stuff here, such as the games of phone tag being played out at the highest levels of the German and US governments (including Angela Merkel, Tim Geithner, and even Hillary Clinton and Dmitry Medvedev); and the spectacular own-goals being scored by the German government (like appointing board members to the German-American trust overseeing the sale of Opel who disagreed fundamentally with the government’s own plans for the carmaker).

Then there’s the even more spectacular own-goal made by at least one bidder, RHJI:

The plan offered by private equity investor RHJI would have been less expensive. It only requires government assistance to the tune of €3.8 billion.

However the fact that Magna was chosen in the end was a consequence of more than just political lobbying. It was also a result of a lack of tact on the part of RHJI representatives at a meeting in the Chancellery.

When Merkel asked Magna CEO Siegfried Wolf why he wanted to take over Opel, he said he believed in the company, in the future of the automobile market, and the value of the Opel brand. Merkel liked that.

Then she asked RHJI CEO Leonard Fischer why he was interested in Opel. The former investment banker answered very matter-of-factly that it was because the German government was assuming the risk. Merkel liked that less.

At this point, the chances of a deal being done before the German elections on September 27 seem to be negligible. After that, the political will behind bailing out Opel might well dissipate, to no particular sadness in Detroit, where important GM board members are asking why Opel need be sold at all. The most likely scenario could well be, now, that no deal will be done at all, and all the high-level politicking will be ultimately for naught.

(Via Hasselback)

Last year, I put together an interactive feature for Portfolio.com entitled “Watch Out Below”; it listed nine vulnerable “tall poppies” who were liable to be cut down to size over the coming year. There were three CEOs on the list: Shelly Adelson, Ken Lewis, and Wendelin Wiedeking. Maybe it’s to his credit that Wiedeking managed to hang on longer than the other two. But now he’s been fired, while the other two still have their jobs, even if their reputations are in tatters.

The weird thing is that although Wiedeking’s now gone, the jury’s still out on what he achieved. After all, the tiny sports-car company he transformed over the past 16 years is now being bought for €8 billion on sales of about €6 billion a year. As a hedge-fund manager — which is what he most resembled of late — Wiedeking came spectacularly unstuck, thanks to a liquidity crunch he couldn’t get out of. But the brand he leaves behind him is a strong one, and even with €10 billion in debt it still has significant equity value.

Wiedeking was a classic product of the boom years, and the saga of VW and Porsche will make for many gripping books. There’s no doubt that today’s a low day for him. But I suspect that history will be much less harsh on Wiedeking than it will be on, say, Lewis.

Dealbook is making a big deal out of the fact that Chrysler Financial has repaid its TARP loan. But read down to the bottom of the press release, and you find this:

Funds used to make the repayment of TARP were obtained through the completion of a AAA-rated automotive asset-backed securitization (ABS) through the Term Asset-Backed Securities Loan Facility (TALF).

So, yay, the government got its TARP money back. Because some other arm of the government (the Fed) was willing to lend the same amount of money even cheaper, through TALF. This is an improvement how?