On Volcker and GM

It’s hard to believe that we are only a week and a half away from Christmas. On the one hand we have our institutional clients who are by and large closed for the year and who are now just tinkering with the portfolios – internal transfers of securities are still in full swing but interaction with the markets has severely faded – but on the other hand there is still plenty of significant news hitting the wires and new issue flow, although slowing, is far from absent.

Like it or not, the Volcker Rule was yesterday passed by all five relevant US regulating authorities although I was mildly amused to note that Professor Volcker himself has been busy reminding all and sundry that he had no hand in the drafting of the law which bears his name.

It appears that the final version is not as fierce in many areas as the banks had feared and that more heed has been paid to maintaining market-making standards than once looked possible. However, there are plenty of other influential factors which are constraining that particular part of what should be an orderly market so we are left with a law which to some extent is shooting a corpse.

GM going forward

Meanwhile there has been plenty of newsworthy activity in what was one of my specialist sectors, the auto industry. Top of all is the appointment of Mary Barra, executive vice-president of global product development at GM as new CEO of the company. GM has come a long way since the grim days under the erstwhile Muppet in Chief, Rick Wagoner.

Apart from being a woman, the first one to head up a major car maker – if one discounts the indomitable Johanna Quandt, 16.7% shareholder in BMW and very much an invisible power within the company – Barra shines with a phenomenally strong technical background rather than one in sales or finance. Wagoner had galloped about the globe in staff roles but never got his hands dirty on the line. Barra, on the other hand, is a proper automotive engineer and has spent most of her 30 years in the company in manufacturing.

In my closer personal circle of low friends in high places, I am honoured to count the former CEOs of two car makers, one of which is Ba2 rated but still succeeded yesterday in borrowing US$700m five-year money at 4⅛% or 268bp over US Treasuries and the other a prestige name which is now sadly to be found in car maker heaven. I’m sure that both would confirm that although the objective has to be able to make persistently a product cheaper than it can be sold for, getting the darned thing to be technically competitive and to work properly is a precondition. GM’s downfall was precipitated by a predominance of form over substance, something which I doubt Mary Barra will countenance, going forward. GM Europe, beware.

Alas, and without shame, I must take my hat off to President O’Bama who stared down the opposition when it came to effectively nationalising General Motors at the depth of the global crisis. The right was screaming “Communism!” when Washington stepped in, but in doing so he saved not only the company but the hundreds of suppliers and suppliers to suppliers who would have gone to the wall, had GM been shuttered.

As Europeans and owners of Mercs and BMW’s, we laughed at the dated and sub-standard product which rolled off the production lines in Detroit and sniggered when the behemoth began to totter. But America is America; hard decisions were taken, plants closed, wages cut, benefits abolished and the GM phoenix is beginning to rise from the ashes. Meanwhile, the European car industry (and especially plant owned by the big US makers) struggles with legislation and labour protection which makes it uncompetitive when open and hugely expensive and nigh impossible to close.

Perceived wisdom in the industry is that the volume car business is a natural loss-maker and that it is only through the high value-added luxury brands that a larger group can be brought back into profit; hence the fearsome troubles at both Renault and PSA which, despite some half-hearted efforts, lack class product and access to the top end buyers. In the US, the value added is generated in the light truck divisions.

Forgetting Ms Barra’s gender, I will be watching with interest what becomes of GM under the guidance of an all-out engineer. The stock has risen over 40% this year and has doubled in 18 months. I suspect there might be more to come.