Belmont Club

Ship of fools

Professor of finance David Yermack at the WSJ recalls when Michael Moore thought it was cool to diss the CEO General Motors. As always, Moore missed the point.

Before Michael Moore became famous for documentaries like “Fahrenheit 9/11” and “Sicko,” his first big success came in 1989 with “Roger and Me.” In that film, Mr. Moore followed General Motors chairman and chief executive Roger Smith with a camera crew, asking him why the company was closing plants and producing low-quality vehicles. Mr. Smith looked flustered and inartfully avoided Mr. Moore’s camera crew while it lingered outside his country club or GM’s executive offices.

“Roger and Me” was entertaining, but it missed the real story about Roger Smith, who turned out to be a forward-thinking genius. Mr. Smith made big investments in information technology and satellite communications, acquiring Electronic Data Systems in 1984 for $2.5 billion and Hughes Aircraft in 1985 for $5.2 billion. … Mr. Smith understood all too well that GM shouldn’t continue investing in its failing automobile business. That was 25 years ago. Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.

But Yermack misses the most interesting implication of his story. The Smith anecdote suggests that even the CEO of General Motors felt fundamentally unable to change the business model of his company around. When the captain of the ship, by all accounts a competent seaman thinks it is better to shimmy down the sternpost into a lifeboat rather than wrestle at the wheel of the Titanic of the auto industry, what exactly makes him bid it sayonara? Yermack doesn’t exactly say.

But he does say the iceberg is in full view. Looming. Mountainous. Fatal. And he does see the Titanic of the auto industry patiently changing course to ensure it is on a direct collision course with it. It’s not the iceberg which is in GM’s way. They would run it down if they had to chase it into the tropics.

In 1993, the legendary economist Michael Jensen gave his presidential address to the American Finance Association. Mr. Jensen’s presentation included a ranking of which U.S. companies had made the most money-losing investments during the decade of the 1980s. The top two companies on his list were General Motors and Ford, which between them had destroyed $110 billion in capital between 1980 and 1990, according to Mr. Jensen’s calculations. …

He wanted his students to understand that when a company makes money-losing investments, the cost falls upon all of society. Investment capital represents our limited stock of national savings, and when companies spend it badly, our future well-being is compromised. Mr. Jensen made his presentation more than 15 years ago, and even then it seemed obvious that the right strategy for GM would be to exit the car business, because many other companies made better vehicles at lower cost.

The problem with Professor Jensen then and Professor Yermack now was that they were in the wrong academic program. The issue wasn’t financial. It wasn’t even economic. It is political. Politics has a put “our limited stock of national savings” on a collision course with the abyss in pursuit of “affordable housing” and saving the industrial backbone of the nation.

“Iceberg! Iceberg!”

“Damn the torpedoes! Full speed ahead! I have not yet begun to fight! Turkey trots to water! Tora-tora-tora!”