Politics, et Cetera

A publication from The Political Forum, LLC

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Tuesday, April 8, 2014

They Said It:

Great economic dislocations bring out the corporatist, which is why we now have a government board overseeing General Motors, and the Treasury Department has issued the first car warranty program in its history.  It’s why some banks were pressured to accept bailout money they didn’t need and have been pressured not to return it to get out from under federal micromanagement.  And it’s why the federal stimulus package contains such chestnuts as money to build out our broadband infrastructure, which comes with all sorts of strings attached by the Federal Communications Commission, because we somehow can’t rely on our phone, cable or internet companies to provide customers with the bandwidth they demand in networks that will suit our economy.

Corporatism is especially attractive to politicians, public intellectuals who serve as policy makers, and Nobel Laureates because it is ultimately a world managed by the few, the elect, through the state.  If we are told enough times that nothing, even technological innovation, is possible anymore without significant contributions and directions from the state, maybe we’ll eventually come to believe it, although the inventors of the printing press, the steam engine, the light bulb, the telephone, and internal combustion engine and other game-changing technologies might wonder how they accomplished what they did without government.

Corporatism is not about regulating capitalism better as markets evolve.  It is several steps beyond.  It is instead about those who believe in “the beauty of pushing a button to solve problems,” as the economist Paul Krugman recently described his attraction to the social sciences.  Some people worry about what happens when the regulators take charge of our economy.  But the real concern is what happens when the button pushers take charge, for the button pushers are the corporatists.

Stephen Malanga, “Obama and the Reawakening of Corporatism,” RealClearMarkets, April 8, 2009. 

 

CHENEY VS. OBAMA; MARKETS VS. THE STATE.

The story of the week is clearly the hub bub caused by Mozilla’s defenestration of its longtime employee, creative genius, and recently appointed CEO, Brendan Eich for having made a political donation six years ago in support of traditional marriage.  Never mind that Senator Barack Obama had campaigned on the same side of the same issue six years ago.  The liberal-left, senior management team at Mozilla cannot be in the same room with a man who has the temerity to believe that the legal definition of a multi-thousand-year-old institution should not be changed by judicial fiat or without careful and due democratic consideration.  And that is that, as they say.

Of course, we already wrote this story a few short weeks ago in an article entitled “What’s the Matter with the GOP?”  We concluded, presciently though not especially insightfully, that the battle over same-sex marriage will be most notable not for the eventual acceptance of the  practice, but for the effect that it will have along the road on freedom of expression and especially freedom of religious expression in this country.  In short, Eich’s dismissal was hardly a surprise to us.  The culture wars are not over.  They have merely moved on to a different and likely more divisive battleground.

All of which means that while the rest of the country fusses and fumes over the Eich story and over the intricacies of Washington spin with respect to health care, free speech, and campaign finance reform, we are going to move on to another subject this week, namely the subject of Dick Cheney.

Interestingly, our present concern with Dick Cheney has nothing whatsoever to do with terrorism or the now-defunct war on it.  It has nothing to do with the types of issues that made Cheney the most hated man in Washington while he was Vice President.  In fact, it has nothing to do with his service as the nation’s second-in-command.  Moreover, it has nothing to do with his service as the Secretary of Defense, as the White House Chief of Staff, or even as a Congressman.  Rather, we have been thinking a great deal of late about Dick Cheney the businessman, Dick Cheney the erstwhile CEO of Halliburton.

As you may or may not recall, in 1995 Halliburton named Richard B. Cheney, the former Secretary of Defense and the former chairman of the Council on Foreign Relations, as its Chairman of the Board and Chief Executive Officer.  Cheney served in this position for the next five years, until he resigned on July 20, 2000 to join George W. Bush as the Vice Presidential candidate on the Republican presidential ticket.

The “highlight” of Cheney’s tenure as CEO was Halliburton’s acquisition of Dresser Industries, a Dallas-based energy and natural resources company, along with Dresser’s construction and engineering subsidiary, M.W. Kellogg.  After the merger, Kellogg was merged with Halliburton’s own construction subsidiary, Brown and Root, to create Kellogg, Brown & Root – KBR – the construction and contracting company that would go on to become the largest and most controversial military contractor in the Middle East, building and maintaining several military bases, prisons, and other facilities.

Of course, given the company’s connection to the then-Vice President of the United States, many Bush administration opponents questioned the probity of the various Halliburton/KBR deals.  Since then, many others – including current presumed GOP presidential frontrunner Rand Paul – have argued that Cheney planned the war in Iraq largely to benefit Halliburton.

Now, most sane people think that the conspiracy-minded Left and the libertarian/Paulist Right are . . . well . . . crazy and that Halliburton/KBR received its war-on-terror-era federal contracts lawfully, which is to say that the war itself was a legitimate, if poorly planned undertaking, and that KBR won its contracts because it was the only company capable of doing what the U.S. military needed done.

In any case, what concerns us today is not the role that Halliburton and its subsidiaries would go on to play after Cheney had made the aforementioned acquisition of Dresser, but what they had done before the merger.

You see, Dresser Industries was, for all intents and purposes, Halliburton’s cross-town rival.  The companies were competitive, but they were not cutthroat.  Indeed, Cheney and his Dresser counterpart, William Bradford, hunted quail together on at least one occasion.  At one point in his career, Prescott Bush served as a director for Dresser.  Prescott’s son, President George H.W. Bush, Cheney’s first boss named George Bush, worked at Dresser in various capacities in the late 1940s and early ‘50s.

Additionally, and more to the point, Dresser had a subsidiary called the Harbison-Walker Refractories Company, which manufactured industrial products, like bricks and pipe coatings.  Dresser spun off Harbison in 1992, with the two companies agreeing to split Harbison’s asbestos liabilities, which were, at the time, considered manageable.

As it turned out, of course, Harbison’s asbestos liabilities were not all that manageable, and when Halliburton acquired Dresser, it acquired a hornets’ nest, namely Dresser’s half of the Harbison liabilities.  Ironically, the acquisition was considered an enormous triumph at the time.  The celebrity CEO and Dresser’s Bradford had discussed the deal several times personally, sealed it on the aforementioned quail-hunting outing, and . . . yes . . . nearly destroyed Halliburton in the process.

Not that any of this should surprise anyone.  Over the course of the last two decades, asbestos tort litigation has destroyed dozens of companies, many of which, like Halliburton, had almost nothing to do with the production or distribution of the product.  When Cheney bought Dresser, he increased Halliburton’s exposure several-fold, perhaps even a hundred-fold.  Halliburton’s original exposure was limited to a couple of thousand cases.  In the wake of the Dressers acquisition, however, that number jumped up to over 400,000 cases.  And all of this despite the fact that Halliburton was Dresser’s competitor when Dresser owned Harbison and despite the fact Dresser itself remained in the Halliburton fold for only a very brief time.

Asbestos litigation was a monster, which pit real victims against not-so-real victims, and made a great many tort lawyers very rich.  And as the inimitable Megan McCardle noted just last week, the fact that deaths were involved and that there were deep pockets to be fleeced meant that liability was spread far and wide.  To wit:

Imagine, if you would, that by buying and holding the share of a firm for 10 minutes, you thereby subjected yourself to seizure of all your goods to satisfy potential lawsuit judgments – even if those judgments involved behavior that involved no legal liability at the time of the acts.

Not possible?  That’s basically what happened with asbestos liability.  Firms that had had no legal liability under the doctrines of the times in which the asbestos was sold or used suddenly found themselves driven into bankruptcy by massive settlements.  Moreover, after the first wave of lawsuits exhausted the funds available to pay asbestos claims, plaintiffs’ lawyers started pushing to expand the number of pockets that could be dipped into.

A company that had never manufactured asbestos could be sued and have to spend hundreds of millions of dollars on lawsuits and settlements because it had once bought a company with an insulation division that had formerly manufactured asbestos – even though it had immediately sold off that division in the process of completing the merger.  Insurers could be forced to pay out for the whole of a company’s liability if they had sold a company insurance for even a year between the time a company started making or using asbestos and the time that the plaintiff discovered the harm.  And “harm” wasn’t limited to getting sick; you could sue for the emotional distress of worrying that you might get sick.

In the years following Halliburton’s unfortunate Cheney-led acquisition of Dresser, companies such as Bethlehem Steel, Owens Corning, Babcock and Wilcox, and W.R. Grace went bankrupt because of asbestos liabilities.  By the early part of last decade, such disparate political entities as Supreme Court Justice Ruth Bader Ginsburg and the editorial board of the Wall Street Journal were virtually begging for Congress to create a federal asbestos-liability regime designed to compensate victims while at the same time saving the energy, contracting, and insulation industries from economic catastrophe.

Now, as you may remember, during one of our previous incarnations at a big shot brokerage house, one half of The Political Forum spent a little time studying asbestos and asbestos litigation reform efforts.  Indeed, that individual headed our old firm’s coverage of the subject of reform legislation.  All of which is to say that we know why the proposed legislative solution never happened, just as we know what the failure to reform the asbestos litigation process says about some more contemporary matters in Washington.

The story begins with the Democratic Party, which was at the time a wholly owned subsidiary of the trial lawyers association and was specifically instructed by said association not to kill the goose that was laying many billion golden eggs.  Peter Angelos, for example, the owner of the Baltimore Orioles, made his initial fortune in the asbestos game and then proceeded to donate millions of dollars from that fortune to Democratic candidates and causes, making him one the Democratic Party’s most prolific donors over the last two decades.  Needless to say, neither Angelos nor his compatriots in the plaintiffs’ bar wanted a legislative solution to the asbestos disaster.

Additionally, and perhaps more to the point, asbestos litigation reform stalled in Congress because no one wanted to be seen as bailing out Cheney or his former employer, the dreaded Halliburton.  As we noted at the time, any asbestos settlement would have been seen as a sop to Cheney and a lifeline to the struggling Halliburton.  As long as Dick Cheney was part of the administration pushing for asbestos litigation reform, the Democrats in Congress would do their damnedest to ensure that said reform never happened.  And it never did.

In late 2004, Halliburton essentially bought its way out of the asbestos nightmare, agreeing to a settlement tied to the bankruptcy proceedings of its KBR subsidiary.  Dresser ended up costing Halliburton $7.7 billion up front and over $5 billion in asbestos claims, including the $4+billion bankruptcy settlement.

All things considered, then, the politician-celebrity-CEO was a disaster for Halliburton and its shareholders, no matter how much money the company made in Iraq or what the political detractors claimed.

We mention all of this today not because we think that you or anyone else should care a great deal about what Halliburton is or is not doing right now or because we want especially to comment on Dick Cheney’s business acumen, or lack thereof, as the case may be.  No, we bring it up because we think that the Halliburton experience provides a useful gauge against which to measure the fortunes of other companies who are affiliated with products that have caused the deaths of a number of their users.

Halliburton, obviously, was burned and burned badly.  And these burns were suffered in large part because of its deep pockets, the short-sightedness of its management, and the fact that various political players were – in as nice an interpretation as we can muster – excessively cautious about providing anything that might even appear to be preferential treatment to a company closely tied to the second-most powerful man in the world.

And that brings us to Mary Barra, the Chief Executive Officer of General Motors, who was in Washington last week testifying before the Senate Consumer Protection, Product Safety, and Insurance subcommittee about her company’s faulty ignition switches, which have been responsible for some 13 deaths and some six million recalled cars.  As it turns out, GM has known about these faulty switches for years, but until recently saw no reason to do anything about them.  To paraphrase the anti-war Left:  GM lied and consumers died – or something like that.

What’s interesting, though, is if you compare GM to Halliburton you get a skewed picture.  And NOT just because of the disparities between the two companies, their tort losses, and the public’s reaction to their respective liabilities.  No, the real distortion relates to the fact that GM and Halliburton are not actually analogous entities.

As we documented above, Halliburton simply made the mistake of purchasing a company with pre-existing liabilities; it’s only crime was failing to do its due diligence before buying its competitor.  And that means that for there to be any analogy here, GM would have to be parallel to Dresser Industries or perhaps even Harbison-Walker Refractories.  And Halliburton, in turn would be analogous to the UNITED STATES GOVERNMENT, the entity that bailed out GM, took over its ownership, and spent tens of billions of taxpayer dollars to ensure that normal bankruptcy rules would not be applicable.  In this story, then – a story of deception, death, and corporate liability – Mary Barra is not the Dick Cheney character.  Barack Obama is.

The tale of General Motors, of its deception, and of its liability with respect to that deception is complicated.  No one knows for sure how it will play out.  No one knows all of the facts.  No one knows who knew what and when.  And most important, this last question – who knew what and when – undoubtedly applies to some people in the federal government as well.  But for now, no one knows who.

Despite all of this uncertainty, there are a few things that we DO know for sure.  And those things are damning enough.

We know, for example, that the “13 dead” is probably just the tip of the proverbial iceberg.  The New York Times reported on March 13, for example, that defective ignition switches may be part of a much larger problem with a much higher death toll.  The Times put it this way:

As lawmakers press General Motors and regulators over their decade-long failure to correct a defective ignition switch, a new review of federal crash data shows that 303 people died after the air bags failed to deploy on two of the models that were recalled last month.

The review of the air bag failures from 2003 to 2012, by the Friedman Research Corporation, adds to the mounting reports of problems that went unheeded before General Motors announced last month that it was recalling more than 1.6 million cars worldwide because of the defective switch.  G.M. has linked 12 deaths to the faulty switch in the two models analyzed, the 2005-7 Chevrolet Cobalts and 2003-7 Saturn Ions, as well as four other models . . . .

The G.M. ignition problem is connected to air bags because, to deploy, they require electrical power provided by the engine.  The power is needed for a complex electronic system of sensors and a computer that consider factors ranging from how rapidly a vehicle is decelerating to how close the occupant is seated to the air bag, said David Zuby, the chief research officer for the Insurance Institute for Highway Safety, which is financed by insurance companies and conducts about 80 crash tests a year.

Then, the computer determines whether to deploy the air bag with full force or at a lower level.  The goal is a balancing act to protect the occupant from the impact of the crash, while keeping the air bag itself from causing an injury.

The Center for Auto Safety’s letter said that the 303 victims were in the front seat, where air bags are situated, and had died in nonrear-impact crashes of Cobalts and Ions, in which the air bags did not deploy.  That is about 26 percent of a total 1,148 fatalities — including those of back-seat occupants — that involved the same models.

We also know that, for a variety of reasons, part of the responsibility for at least some these deaths can and should be laid at the feet of the federal government.  One of the more obvious of these reasons is the fact that the National Highway Traffic Safety Administration knew about the faulty switches on GM vehicles perhaps as long as a decade ago, but did nothing about it.  As the Detroit News reported last week:

A senior NHTSA investigator in September 2007 asked his superiors to open a formal investigation into Cobalt cars for stalling after reports of four fatal crashes but his superiors opted against it.  [Acting NHTSA Administrator David] Friedman said the Cobalt only had a slightly elevated risk.  In early 2008, one of the special crash reports was completed that showed a link between the key position and the failure of the air bag to deploy.

Friedman said there are not complete records of why NHTSA didn’t open an investigation into the Cobalt in 2007 — something that has changed.

Another reason that the government shares some culpability here is the fact that the cars GM was making – those with the faulty ignition switches/air bags – were cars that GM never would have made, or at least never would have made in the United States, had it not been for federal regulations, specifically the much ballyhooed CAFE (Corporate Average Fuel Economy) standards.

GM, like all American auto makers, makes money on the one thing it does well, namely trucks.  But trucks are big and they get relatively poor gas mileage.  And so to make up for that, GM is compelled by CAFE to balance out its fleet by doing something it does poorly, namely make small cars, i.e., the cars that had the faulty ignition switches.  Worse still, GM could probably have made those small cars more cost effectively, thus not having to skimp on safety, if the federal government had allowed it to offshore some production costs.  But then, that would have hurt the unions.  And what good is saving GM if it can go on to make cars without supporting the UAW?  Last week, the Wall Street Journal put it this way:

For years prior to GM’s 2009 bankruptcy, our columnist Holman Jenkins and various Journal contributors warned that Detroit’s business of making small cars wasn’t sustainable given the high costs of union labor, pension and medical benefits plus fuel-economy standards mandated by the government.  GM, Chrysler and Ford could make money selling trucks and SUVs because Americans wanted them (and because light trucks enjoy tariff protection).  But the Big Three struggled to stay profitable making the low-emission small cars desired by politicians.

Toyota maintained a labor cost advantage (including health care) of roughly $2,000 per vehicle over Detroit.  If the Big Three got creative they could find a way to offset this advantage when selling a $30,000 truck but not a small car in the $10,000-$20,000 range.

Federal regulations essentially prevented Detroit from building the small cars more cheaply offshore.  That’s because the auto makers still had to meet stringent fuel-efficiency averages for all the cars they produced domestically.  So in order to keep building the big vehicles they could make profitably, they had to churn out lots of fuel-efficient vehicles and somehow make them cheap enough to compete with cars produced by non-union workers.

Is this why GM didn’t make much earlier what seems like a relatively inexpensive fix?  Ms. Barra suggested as much this week.  “In the past,” she said, “we had more of a cost culture, and now we have a customer culture that focuses on safety and quality.”

Finally, there is perhaps the largest reason why the government might share some of the blame for the deaths caused by GM’s faulty products.  This reason, while speculative and circumstantial, is still significant and worthy of considerably greater attention than it has been given thus far.  You see, while the federal government owned a portion of GM, and after it knew about GM’s faulty ignition switches, faulty airbags, and related deaths, it still nonetheless peddled GM as an enormous success story, a huge victory for interventionist government.  And it did so even as it pursued GM’s competitors with fanatical vigor.  Does that mean that the government covered for GM?  Does it mean that the government ignored the evidence in front of it in order not to disturb the phoenix-back-from-ashes narrative it had created?  Obviously, we can’t say for certain.  But the evidence certainly appears damning.  David Harsanyi tells the tale as follows:

In February 2010, the Obama administration’s transportation secretary, Ray LaHood, told America, without a shred of evidence, that Toyota automobiles were dangerous to drive.  LaHood offered the remarks in front of the House subcommittee that was investigating reports of unintended-acceleration crashes.  “My advice is, if anybody owns one of these vehicles, stop driving it,” he said, sending the company’s stock into a nose dive.

Even at the time, LaHood’s comments were reckless at best.  Assailing the competition reeks of political opportunism and cronyism.  It also illustrates one of the unavoidable predicaments of the state’s owning a corporation in a competitive marketplace.  And when we put LaHood’s comment into perspective today, it’s actually a lot worse.  The Obama administration not only had the power and ideological motive to damage the largely nonunionized competition but also was busy propping up a company that was causing preventable deaths. . . .

Toyota, after recalling millions of cars and changing parts and floor mats even before LaHood’s outburst – and after years of being hounded by the administration – recently agreed to pay a steep fine for its role in the acceleration flap.  This, despite the fact that in 2012, Department of Transportation engineers determined that no mechanical failure was present that would cause applying the brakes to initiate acceleration.  The DOT conducted tests that determined that the brakes could maintain a stationary car or bring one to a full stop even with the engine racing.  It looked at 58 vehicles that were supposedly involved in unintended acceleration and found no evidence of brake failure or throttle malfunction.

Attorney General Eric Holder kept at it, though, and Toyota finally agreed to a $1.2 billion settlement (it has about $60 billion in reserves) to make it go away.  Though it looks as if the company doesn’t think the fight is worthwhile, for all I know, it’s guilty.  I’m certain, though, that General Motors is.  It announced this week that it was recalling over a million vehicles that had sudden loss of electric power steering.  This, after recalling nearly 3 million vehicles for ignition switch problems that the company had known about since 2001 and are now linked to 13 deaths.

GM has apologized.  But does anyone believe that the Obama administration took as hard a look at GM as it did Toyota?

You take all of this, add in the fact that Barack Obama ran for reelection in 2012 on the slogan, “GM is alive and bin Laden is dead,” sprinkle in the knowledge that both GM’s 2010 post-bailout IPO and the federal government’s sale of its final stake in GM took place at rather convenient moments in the ignition-switch investigation, and it appears that you have the making a real, full-blown scandal, one that not only implicates GM and its corporate culture, but the federal government as well, and indeed the corporatist structure that has come to dominate American politics over the last five decades.  Or at least you should have a full-blown scandal implicating the government.

Somehow, though, we doubt that the government side of this deal will get all of the scrutiny it richly deserves.  In fact, in one of the most predictable outcomes of such a debacle, Democrats have already begun insisting that this is not a scandal of government collusion and complicity, but a scandal of austerity and anti-regulatory fervor.  The NHTSA would have caught GM’s problems, if only it had had the resources to so.  But it didn’t.  And it didn’t because the stingy Republicans denied them the money they needed . . . and . . . well . . . you know the rest of the story.

Several years ago, when Bill Clinton’s various Secretaries of Commerce were running around the world with private companies in tow, trying to sell the companies’ wares to the Chinese and the Indonesians and anyone else who had the money to buy, we warned that the net effect of all of this would be death, destruction, and the ruin of transparent capital markets.

How, we asked, could anyone possibly know whether to invest in Boeing or Airbus, when the ultimate determining factor in each company’s success would prove not to be its value and productivity, but rather the types of inducements its home government was willing to offer potential customers?  How could anyone possibly know where to put his money when the success of an enterprise was controlled not by market forces but by clandestine government deals?  How, in short, could global markets survive when government controlled information crucial to market success but disseminated it on its own timeline and to its own benefit?

Interestingly, Chris Cox, the former Congressman and the former Chairman of the SEC, wondered the exact same thing and warned of his fears in precisely the context of the TARP bailouts, which as we all know, included the money for the bailout of General Motors.  In a December 2008 address to Congress, Cox declared:

[T]he most obvious problem with breaking down the arm’s length relationship between government, as the regulator, and business, as the regulated, is that it threatens to undermine our enforcement and regulatory regime.  When the government becomes both referee and player, the game changes rather dramatically for every other participant.  Rules that might be rigorously applied to private sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules.

It is clear, we think, that Cox proved prophetic, particularly with respect to General Motors.  And the differences between GM and Halliburton, particularly with the treatment they received at the government’s hands, are as obvious as they are damning.

In the early 2000s, when Halliburton was not owned by the government but had merely once been run by a powerful government official, the opposition party, the media, and the regulatory state did everything in their power to hold the company and its erstwhile executive culpable for even the slightest connection to tort liability.  In the end, the company ended up settling with regulators by ponying up more than $4 billion to compensate victims of a product to which it was only tangentially connected.

By contrast, in the current environment, General Motors, a company “rescued” by the government, which then became the its principal stakeholder, was treated far more delicately.  Whereas Halliburton was punished for its failure of due diligence, Barack Obama’s federal government stakes its innocence on the same, claiming that its bailout task force didn’t know and couldn’t possibly have known about GM’s faulty ignition switches in 2009, despite the fact that the NHTSA had stymied an attempt to investigate those same switches a full two years earlier.

Whereas Halliburton had to set up a liability compensation fund as a condition of KBR’s bankruptcy, General Motors actually received indemnity from liability and from the possibility of having to pay compensation as a condition of its bankruptcy, which, of course, was engineered by the Obama administration.

Whereas Halliburton shall forever be remembered by the political mainstream as a perpetrator of great evils, the Obama administration will forever be remembered as the brave and bold group of men and women who saved an American institution.

Both Halliburton and General Motors provide examples of what can happen to a company when a politician is put in charge.  But only one of the two provides an example of what can happen – to free markets and the rule of law – when that politician happens to have the full force of the federal bureaucracy and a compliant media backing his efforts.

The comparisons between the Cheney-Halliburton mess and the Obama-General Motors mess are many.  But the contrasts are greater still – and far more important, because they are both harbingers of an increasingly confused future.

Copyright 2014. The Political Forum. 8563 Senedo Road, Mt. Jackson, Virginia 22842, tel. 402-261-3175, fax 402-261-3175. All rights reserved. Information contained herein is based on data obtained from recognized services, issuer reports or communications, or other sources believed to be reliable. However, such information has not been verified by us, and we do not make any representations as to its accuracy or completeness, and we are not responsible for typographical errors. Any statements nonfactual in nature constitute only current opinions which are subject to change without notice.