Wednesday, December 17, 2008

Cars, Kabul and Banks

NY Times

December 14, 2008


If there is anything I’ve learned as a reporter, it’s that when you get away from “the thing itself” — the core truth about a situation — you get into trouble. Barack Obama will have to make three mammoth decisions after he takes the oath of office — on cars, Kabul and banks — and we have to hope that he bases those decisions on the things themselves, the core truths about each. Because many people will be trying to throw fairy dust in his eyes.

The first issue will be whether to bail out Detroit. What is the core truth about Detroit? Auto executives will tell you that it’s the credit crisis, health care, retirement costs and unions. Sure, those are real. But the core truth is that for way too long Detroit made too many cars that too many people did not want to buy. As even General Motors conceded in its apology ad last week: “At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster.” Walk through any college campus today. You don’t see a lot of Buicks.

Over the years, Detroit bosses kept repeating: “We have to make the cars people want.” That’s why they’re in trouble. Their job is to make the cars people don’t know they want but will buy like crazy when they see them. I would have been happy with my Sony Walkman had Apple not invented the iPod. Now I can’t live without my iPod. I didn’t know I wanted it, but Apple did. Same with my Toyota hybrid.

The auto consultant John Casesa once noted that Detroit’s management has gone from visionaries to operators to caretakers. I would say that they have now gone from caretakers to undertakers. If they are ready to bring in some visionaries and totally restructure — inside or outside of bankruptcy — so they can make money selling cars that people will want to buy, then I say help them. I’d hate to see the Detroit auto industry go under. But if all we are doing is prolonging auto undertakers, then we have to let nature take its course.

After Detroit, Mr. Obama will be asked to bail out Afghanistan. Watch out. The tide has turned against us there because too many Afghans don’t want to buy our politics, or, more precisely, the politics of our ally, the corrupt government of President Hamid Karzai. That is “the thing itself.”

The main reason our Iraq bailout — a k a “the surge” — has had a positive effect is because Iraqis voted with their own guns and their own lives, taking on both Al Qaeda and pro-Iranian Shiite militants. Iraq has avoided bankruptcy for the moment — a total meltdown — because enough Iraqis wanted what we were selling: freedom from extremists. That is the thing itself, and right now I’m not seeing enough of that thing in Afghanistan. Beware of a Kabul bailout.

But maybe the most flagrant area where we continue to avoid looking at “the thing itself” is with our banks. What we are dealing with there is the effect of a credit bubble that began in the late-1980s with the advent of global securitization — the chopping up and bundling into bonds of everything from home mortgages to student loans to airplane leases, and then selling them around the world.

When you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up, you have a nuclear financial explosion. The deflating of this credit bubble is so wealth-destroying that even the most prudent banks have been ravaged by it.

What to do? The smartest people I know in banking are praying that Obama’s Treasury Department will tackle “the thing itself.” That is, do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.

Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier. Some experts believe we still need to close 1,000 banks.

This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me. The “thing itself” here is that banks still don’t want to lend because they still don’t know the true value of their own balance sheets, let alone anyone else’s.

The market has to clear. We can do it painfully and quickly, as we did with the dot-coms, or we can be Japan and drag it out.

So whether it's cars, Kabul or banks, we have to stop wishing for the worlds we want and start dealing with the things themselves. If Obama does, his first year will be excruciatingly painful, but he could have three years after that to be creative. If he doesn’t, I fear that cars, Kabul and banks will dog his whole presidency.

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