Detroit 1 Detroit 0

How decisions of winners and losers cost Detroit,  the Motor City its victory while the Motor Industry scored.

 This story could have been longer and more detailed, but Detroit has no time for this, so the short and more pointed story is in order.

 Introduction

 Why do I care what happens to Detroit Michigan?  Why don’t I., like so many others, just let Detroit go, let the free market settle the issues it’s facing?  There are a number of reasons for this, namely reasons that everyone, even those like me who don’t even live in Detroit can relate to.

 It was May 1980 and entering the Detroit Bank Building I went up a dozen floors and began my banking career as a commercial credit analyst at Detroit Bank & Trust.  Many call the past few years the Great Recession, but several months after joining the bank, the prime interest rate hit 21 ¼ %, inflation was nearly 12% and unemployment was over 10% – the proverbial trifecta of economic disasters.

 For a couple of years we did everything to keep companies afloat, many of them family owned tool and die and production shops and other providers serving the Big Three.  Some couldn’t make it, those that did were bruised and beaten, but came through stronger.  The sense that we all survived this time gave all of us, bankers, borrowers, customers, even politicians a sense of victory and this feeling has never left me.

 After working with many smaller businesses, I was shifted to major accounts and assigned to the Chrysler account.  I was assigned after the bailout (the first one) was approved, but still in the middle of its implementation. There were many tense moments during that time with Chrysler just it was at American Motors and its partner Renault.

 I learned a lot from the way the Chrysler deal was done and how it could have been done in the present day – but that is for another story.  The basic premise of how Chrysler was handled and what it did for Detroit is still applicable today in the present circumstances. 

 I lived in Detroit for three years before being transferred to Western Michigan, but did, and now do live in Toledo, a city that has similar characteristics.

 I also remember Detroit Axle, Highland Park, Mound Rd., Detroit Assembly – all plants and the Chrysler corporate headquarters that hummed with action while I lived in Detroit and that are now gone.  Sometime harkening back to the “good old days” is worthwhile.

 Detroit can be saved and should be – not torn apart or sold off, but turned around.

 Too Big to Fail, or too small to save?

 I find it curious that Washington has not had the foresight or will-power to use the too big to fail model for Detroit.  Not only is the too big to fail not applied, but the “damaging ripple effect” of a Detroit failure used in the financial crisis bailout could cause a major crisis is also not used.  So seems to be the thinking.

 Now I am not into government bailouts as an answer for problems whether they be caused by mismanagement or market.  I do believe government assistance, strategically and rarely used, can actually create greater value and either higher rates of return or a faster recovery.  What it boils down to is risk, short term and long term, who takes it on and at what levels.

 Back to Washington though.  If we compare the reasoning for the bailouts of the financial and automotive industries some distinct patterns begin to emerge that define the model used and the resulting future template for its future use.

 The financial industry including commercial banks, investment banks and the credit rating agencies were bailed out of their stupidity, ineptness and/or greed.  The reasoning that was used was “the sky is falling” mentality meaning if nothing was done, America would collapse or at least fall into a great depression.  Nearly a trillion dollars were set aside to bail out the financial markets. 

 The results:  the banks and related parties are recording huge profits, paying out executive bonuses and improving daily, with seemingly no consequences for prior behavior – at least not significant consequences.  The results for the customers caught up in these shenanigans?  Lots of foreclosures, broken home, lost wealth, businesses gone and added years of personal work to recover retirement funds.

 Was the financial bailout successful?  From a banker perspective, yes.  From a customer perspective, spotty.  From an American perspective – time will tell, history is still writing the results.  One view might be: would a short term deep depression be better than the 7+ year Great Recession (as it is known) and its lingering effects?  We will never know.

 The auto industry bailout was needed, according to Washington, since without it, the reasoning was that America would collapse.  The impact of GM and Chrysler going under could affect 800,000 to 1 million people; at least those were the estimates.  Of course, we will never know if these estimates were accurate.  The United States loaned or invested $60-80 billion in the industry to save the jobs and related entities (suppliers, municipalities, financing entities etc.)

 The results:  GM and Chrysler are profitable again, although Chrysler is now an Italian company.  It looks like jobs were saved and new ones created.  The industry has been stabilized and appears to be regaining strength again.

 Was the automotive bailout successful?  The auto industry is making cars again and at a profit.  With all the money loaned only one U.S. company survived – Chrysler is now an Italian company.  Many bondholders and shareholders lost money, as did dealers and other vendors to name a few.  It also looks like the United States will take a loss on GM of about $20 billion.

 The most distinct and notable observation in each of these bailouts is that they did not take into consideration the needs and positions of ALL stakeholders resulting in a lack of consensus decision making, a win for all.  Instead, the decision methodology used the compromise process leading to winners and losers and in each case the losers lost big.  This placed the government in the awkward position of not making everyone satisfied (not necessary happy or getting everything they wanted) and the result was picking winners and losers – something the U.S. through its government should never do.

 Why were these two historic government bailouts noted?  Each in its right has collectively created the model, the template by which the government will decide or not decide to intercede financially and to some degree managerially, in any industry or enterprise.

 In the case of Detroit, the impact is 700,000 to millions.  This number includes the city population as well as vendors, citizens of Wayne County, the bankers, employees and retirees, the school system and its students and the millions of municipal bond holders and issuers that fear the possible negative results that could have on all municipalities in the U.S. for years to come.  The dollar amount needed for Detroit is likely $20-40 billion. 

 The analytical result?  If the template for the financial and auto industries bailouts are the measure, Detroit qualifies.  But the design used in both financial and auto bailout template is not necessarily the right one for Detroit.

 But there is even a bigger and more important issue here – not only the long term survival of Detroit, but a successful survival and growth of the city.

 Perspective

 When a financial crisis develops in any organization, or has been developing, the “blame game” begins.  Usually the crisis is so deep that instead of constructive decision making, decisions are made in desperation.  In the case of Detroit, the belief that the city is so far gone, that the situation is so desperate, that the only resolution is to take dramatic and draconian actions without regard to stakeholders.  And it is these stakeholders, at least most of them, that will need to be satisfied if Detroit is to be a success again; not a successful resolution in bankruptcy, but a success.

 Because the focus on Detroit is simply the resolution to the serious problems currently facing it, the governor of Michigan, Rick Snyder appointed an emergency manager, Kevyn Orr.  It is my understanding that Mr. Orr is an attorney and quite skilled in matters of bankruptcy.  What Detroit does not need is an attorney.  Why?  The issues facing Detroit are not legal, they are financial, and require financial and strategic financial planning to resolve them.  Appointing an emergency manager will only solve short term problems and Detroit will either remain mired in the problems it is now, and has been, facing, or likely sink further into the abyss.

 I do not know Mr. Orr personally, only his reputation as portrayed in public reports.  As mentioned, he appears to be very skilled in his profession, but his profession is not needed at this time.  The reports surfacing recently will not solve any long term problems, only result in continuing the problems that brought Detroit to its current state.  The “collateral damage” normally brought on by these decisions keep potential investors and more importantly, potential population from even considering Detroit as a place to live and work.

 From what I can gather from news reports, everyone involved so far, even the professionals are dealing with current financial conditions, but have no idea how the conditions developed.  Oh, there is plenty of speculation and likely much of this speculation may be able to be backed up, but speculation is based upon subjective data, which is data interpreted by an individual or group of individuals without examining the objective data.  And what is objective data?  Objective date is raw data, measurements of hard numbers, numbers that made up the decisions of real people and ultimately tell the story of how a company, or in this case, a city, found its way to the present.

 What is needed?

 Detroit, like any company in trouble, needs a turnaround specialist.  A turnaround specialist knows cash is king and takes action to preserve it while maintaining it customers and vendors as best it can.  Once cash is stabilized, a short term plan, intermediate plan and long term plan are developed. 

 Every stakeholder and its needs must be addressed.  The only way a plan can succeed is to make sure all stakeholders, through consensus, make decisions for the greater good of Detroit.  Compromise cannot be used as this method leaves detrimental attitudes towards the city along with finger pointing, blame and no long term plan.

 So who are the stakeholders, those that not only need to be taken care of, but part of the solution both short term and long term?  Citizens, vendors, bondholders, bankers and other financing sources, current business community, educational institutions, school systems, all taxpayers, current and retired city employees, political leaders in Detroit, the State of Michigan, Wayne County, the United States of America

 Other key observations a turnaround specialist would make:

  •  Selling assets is a last resort, not a first resort, unless the entity is asset heavy, and it does not appear Detroit is asset heavy.

 

  •  Requiring retired civic employees to bear the burden of the city’s problems is not only unethical, it is immoral.  A community needs to take care of those who worked their lives for the city and through no fault of their own, find the financial condition as it is.  This can also be said of certain employees nearing retirement that would be unable to make sufficient personal changes in their personal finances to bear such a burden.  The future is quite a different story.

 

  •  Placing the burden on the vendors will not only create long term damage to the vendors, many small businesses, but to Detroit in the long run as cost for services provided by vendors who do survive increase markedly and the pool of vendors will likely decline sharply as the long term needs of the city would not be resolved.  And who would like to relive this situation again?

 Analysis is needed

 There is very little detailed objective analysis that I have found available.  Without this data and its analysis, the “why” of what has happened is absent and decisions are made with subjective data (people putting a “spin” on data) or by only the current results.  Either way, the current and long term solutions will likely fail – depending on how one defines failure and success.

 The analytical phase also takes into consideration all the stakeholders, their current positions, their needs and what information they can provide to answer the “why” of the existing condition of the city.  This process also begins to lay the foundation for a consensus decision making by beginning the process of listening and measuring the risk of all parties.

 The analytical phase of any turnaround is so critical, it cannot be substituted.  This is why the “cash is king” mode at the beginning of any restructuring is paramount to be able to complete the analysis and make it to the actual turnaround phase.

 Conclusion

 If the bankruptcy of Detroit advances as predicted, the fundamental causes that brought the Motor City to this time and place will not be solved and likely will crop up again – some day.  The effects it will likely accelerate demise of the city in one key measure – the loss of population, especially the key age demographic 25-44, the most productive, entrepreneurial and highest purchasers of goods and services of any other demographic.  Without this demographic group, key to any successful turnaround plan and a successful Detroit, no plan will be viable.

 No one should be critical without an answer, a plan for success.  I will be posting my thoughts on such a plan on my website www.sheehanfinancial.com within the next few days.

 Why Detroit 1 Detroit 0?  The auto industry, still the pride of Detroit, was rescued and thrives.  This was the goal of the federal government.  Right now, no federal government help is in sight, the other Detroit, the city and its people just aren’t worthy or maybe just too small to save.

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