Day: November 12, 2008

We could buy Honda or Toyota instead

Honda has 6 cars that get more than 30 MPG: Accord Coupe, Accord Sedan, Civic Coupe, Civic Sedan, Civic Hybrid and Fit. Toyota also has 7: Yaris, Corolla, Matrix, Camry, Camry Solara, Camry Hybrid and Prius. Notice that only 3 of those 13 are hybrids, the rest are gas engines.

GM has 3: Pontiac G5, Saturn Aura Hybrid and Chevy Malibu Hybrid. Ford also has 3: Focus Sedan, Focus Coupe and Escape Hybrid. Notice that half of these are hybrids.

GM and Ford couldn’t anticipate the demand for fuel-efficient cars while Toyota and Honda did. This is 30 years after the original gas crisis in the US when American car companies first needed bailouts from the government. After three decades, it never dawned on GM and Ford that Americans would want fuel-efficient cars again.

If only short-sighted management was the only problem. GM and Ford can’t make gas engines that are fuel-efficient but Honda and Toyota can. Why? Because Honda and Toyota have smarter engineers than GM and Ford.

Under normal circumstances, companies that have a bad management team or a bad engineering team go out of business. Both these companies have both problems. These are companies that should not be propped-up at tax-payers’ expense.

The price tag (stock market capitalization) for Honda Motors is $38 billion and for Toyota it’s $100 billion. The American tax-payers could buy them. That’d make them American car companies. Instead, the government is going to waste $25 billion on two dinosaurs. And that $25 billion is just to start — surely they’ll both be back asking for more money and the government, afraid to let the first $25 billion be thrown away, will throw more money away.

Granted, the price for both companies would be a bit higher if the US was going to buy them, but they’d still be cheaper than they will be in 5 years when the auto industry is healthier. And Ford and GM, if they’re still alive, will still be struggling to compete with Honda and Toyota.

Paulson's grasping at straws

Paulson doesn’t know what to do, but he finally realized that “buying bad loans is a bad idea”:

bq. Mr. Paulson said the $700 billion would not be used to buy up troubled mortgage-related securities, as the rescue effort was originally conceived, but will instead be used in a broader campaign to bolster the financial markets and, in turn, make loans more accessible for creditworthy borrowers seeking car loans, student loans and other kinds of borrowing.

We don’t even know how much he’s spent on buying bad loans yet, i.e., wasted money by his own admission, since the bailout is not transparent. This is why government bailouts are a bad idea… one guy with little incentive trying to solve a problem that thousands of people with big incentives couldn’t solve is unlikely to work.

He talked about the executive management compensation:

bq. “Poorly designed management compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization,” the agencies said, adding that they expect banking institutions “to regularly review their management compensation policies.”

In other words, paying high salaries to executives can encourage them to do things that harm their organizations. This is news? The more you pay someone, the more likely they’re going to think short-term rather than long-term. You put the carrot just out of reach so they keep working to get it, you don’t let them gorge on carrots so they have no incentive to work.