LEADING PROFESSIONAL FIRMS DURING DOWNTURNS

Leadership is never more critical than when a firm hits a major downturn in its business. There was a lengthy article in Sunday's NY Times on the large global law firm, White & Case. It is a scenario that is playing out across the globe at many law firms and other professional firms.

The Leaders of these firms must now act like crisis managers. This is very difficult for the leaders to do. They generally have spent a couple of decades at the firm. They have strong views of the firm's strengths and weaknesses that may prevent them from taking the right steps. They also have strong relationships and beliefs regarding the partners and staff that may prevent them from taking the necessary steps. Furthermore, the firm's accounting systems may produce information that clouds the true profitability of each department and of each partner.

It is actually critical at this stage for these Leaders to retain the services of an outside troubled company expert to objectively and critically analyze the operations. Professional firms grow on the assumption that they will continue to grow and be profitable. Sometimes the revenue recognition and expense allocation is not a true reflection of profit and loss of a service line or an office. And sometimes there are sacred cows that insiders don't question.

Several years ago, I worked with a global professional services firm that was being sold. The London Office of the firm was entertaining offers from other firms. One week the London Office was in our deal, the next week it was out of the deal. And so it went for several weeks. Finally during one of the weeks that the London Office was out of the deal, I finally analyzed the true profitability of the London Office. It didn't make a profit. In fact, as far as I could tell, it had never made a profit.

I met with the global leader and said, "why do we want the London Office? It has never been profitable." The global leader replied, "We are a global firm, we must have a London Office!"
To which I replied, "Thank God we only have one London Office, if we had more we would be out of business!!"

The global leader finally let the London Office go to another deal. Only an objective party could make a recommendation to let the London Office of a global firm go away if it wasn't profitable.

Now when a professional firm is in a significant downturn, the Leaders should hire a professional restructuring advisor. But like the shoe cobbler whose kids have no shoes, it is almost impossible for a professional services firm to hire a professional restructuring advisor. How ironic.

Cheers, Mike

THE 5 C's OF LEADERSHIP- CHARACTER & INTEGRITY

The 5th of the 5 C's of Leadership is Character & Integrity.

First and most importantly, this is a yes or no issue. You either are a person of character and act with integrity or not. Sometimes I hear people try to make this a question of degrees. Well, they usually act in an appropriate manner but not always. Stop. Can you trust them to do the right thing and can you believe what they tell you? Yes or No?

Now, let's get into more specifics. In our book we have a story, trust is like a bank account. In essence, you have to make deposits in the trust bank so there is something there when you go to make a withdrawal and say to someone "trust me" they will. You also need to have the courage to speak up when you see something you believe is wrong. A leader is not a coward.

Mike wrote a post about a leader being able to say three simple words. The three words are "I was wrong". If the leader is someone with character they will be able to say those three words. My father would use the expression that someone was a "stand up kind of guy". This was the highest compliment he could give anyone. By the way, in this context, the word guy is gender neutral, or so I choose to believe.

Given that there is truth to the concept of the shadow of the leader, I believe that the leader's character will eventually shape the culture of the organization. The culture within an organization is critical and must be maintained. It will erode over time if proper care is not taken and if leaders with different values are brought into the organization.

Finally, we have previously posted about laughter being serious business. We have also posted on authenticity and the need to be yourself. Leadership development is not about becoming someone else. It is about becoming the best version of you that you can become. Be yourself. Be honest. Be a person of integrity and strong character. Be someone others want to be around. Lighten up and enjoy it. Leadership is fun! You can make a difference. Make it a positive difference.

Until Next Time,
Gail

CHRYSLER APPEAL HEARING TODAY

Zerohedge is covering the Indiana pension appeals of the Chrysler sale today at 2pm. If you are interested, read this Zerohedge piece and follow the Zerohedge blog for updates.

I agree with Zerohedge that questioning the use of TARP funds to help the auto industry is a non-starter in the current environment. ZH states that the pensions should have presented their own objective liquidation analysis. I think a competing liquidation analysis should have been presented before the Bankruptcy Court ruled on the sale.

But I wonder, what will the Court of Appeals say about the objection based on the assertion that the FIAT sale is in effect a plan of reorganization without going through the plan process? This objection make carry more weight than one might think. It is also perhaps a better issue to bring in front of an appeals court than a competing liquidation analysis. We shall see.

Cheers, Mike

THE 5 C's OF LEADERSHIP- CREATION OF LEADERS & TEAMS

The Creation of Leaders & Teams is the 4th of the 5 C's of Leadership.

Let's start with the creation of leaders and then move to the creation of teams. In my opinion, one of the key roles of a leader is the development of their people. A great leader creates other leaders. So now let's identify some of the ways in which you can develop leaders:

• Recognize the responsibility and make sure you allocate time and resources to development
• Provide practice opportunities for people in internal meetings and on task forces, etc
• Share your thought process so your team knows how you make decisions and get to the answer. Talking out loud as you think was helpful to me in this area
• Delegate, don't abdicate- you not only have the responsibility for getting the work done, but you have a responsibility to check-in and see if they need help
• Give feedback often and honestly - someone can not change or fix something if they are not aware of it. I know we are all busy but this can be in the elevator as you are leaving a meeting- assuming no one else is there.(I did a few posts specifically on feedback)
• Set the bar high, tell people what the bar is, and be fair in evaluating people against the bar
• Spend time with your stars and good soldiers. Often, we spend so much time dealing with poor performers that we short change the stars (most often) and the good soldiers of time that could be spent on their development. Check your calendar from time to time to make sure you are spending time with the stars and the good soldiers. Don't be someone that only tells a star, "you are doing a great job, keep it up"
• As a matter of fact, fire now or pay later, one of the stories in our book is about dealing with the problem performers sooner rather than later, which frees up your time for the better performers

Now, let's talk about developing teams. In most companies, the term leadership team is an oxymoron. It really is just a group of people that happen to report to the same person. There is no effort to create an environment or invest in really creating a team. A team should be given a clear team goal and time frame to achieve the goal. Then tell them the position or role that each member of the team is playing and what are the individual team member goals. They also need to be given opportunities to work as a team so they build trust and confidence in one another. A high performing team can accomplish great things, while a really bad team undermines and attacks one another. In most cases, they are polite and cordial in a group meeting but do not feel any responsibility or loyalty for or to one another and never work as a team but as individuals.

When people know you really care about their development and are willing to invest your own time as well as company resources to them, they will perform better and have increased loyalty to you and the organization. Seeing someone succeed beyond what even they thought possible is not only good business but is very personally rewarding.

Think of the Return on Investment if you are a great leader and you create other great leaders. Very high!!

Until Next Time,

Gail

APPEALS COURT TO HEAR CHRYSLER SALE OBJECTION

As a non-lawyer, I am interested to see the outcome of the Indiana pensions appeal regarding the Bankruptcy Court's approval of the Chrysler/FIAT sale. (See WSJ artictle). The Bankruptcy judge was able to overrule the objections to the sale because it was in the best interest of the estate for the sale to go through. Remember, a bankruptcy court is a court of equity, not a court of law. This gives the Bankruptcy Court a fair amount of leeway. The Appeals Court of the Second District however, is a court of law. I wonder if this will be a meaningful distinction when the Appeals Court hears the oral arguments on Friday.

If the Court temporarily stays the sale to FIAT, FIAT may have the opportunity to walk away. Of course, given the deal that FIAT has received from the US Treasury, why would it ever walk away? As Yogi said, 'It isn't over til it is over.'

Cheers, Mike

IS THE TREASURY DEMANDING ENOUGH CUTS FROM GM?

I read a short piece from Zerohedge that shows a summary cash flow projection for GM that projects it will lose $20 billion of cash over the next nine weeks. There is no detail and no way to test the projection as presented. So for our purposes let's assume it is directionally correct. Here are a few observations and questions. (Thanks to bankruptcylitigationblog for the picture)

You can only lose $20 billion in nine weeks if you have $20 billion to lose. As simple as this sounds, read it again. If the Treasury only gives GM $10 billion for the next nine weeks, it would only lose $10 billion. GM is clearly not cutting enough.

Look in all the press for the treatment the unsecured creditors are getting. You know, all those vendors, suppliers and other unsecured creditors. You don't see it, do you? The silence on the topic can only mean that all these creditors are being paid in full in the ordinary course of business. Can you say, 'thank you U.S. taxpayers?'

Are expenses being cut deep enough and quick enough? Obviously not. The Treasury has already put in $20 billion before the filing. The projection shows another $20 billion in the next nine weeks. That leaves only $10 billion in a rumored $50 billion of Treasury support. I have no other facts, but if the $20 billion in nine weeks is true, another $10 billion is unlikey to provide enough time for GM to turn cash flow positive.

Various stakeholders are getting too much on the backs of the taxpayers. This will become more clear as time passes. Unfortunately, the cash will already be out the door.

Cheers, Mike

THE 5 C's OF LEADERSHIP- COMMUNICATION & COLLABORATION

Communication & collaboration is the 3rd of the 5 C's of Leadership.

Communication is a key element of strong leadership and must be:

• Candid
• Authentic
• Empathetic
• Two way
• Always about the listener/receiver, not about the speaker

Communication is the way in which a leader shares their ideas in order to align the team and motivate followers. But it is also the way in which the leader learns what is going on in the organization which is why it must be a two way communication process. Many leaders do not realize that people do not feel free to challenge them or bring up bold new ideas. It is the leader's responsibility to create an atmosphere in which people know they can and should speak up and share their thoughts. This can only happen if the leader is genuinely interested in their ideas. If the leader is a person that is interested in learning and in other people, this will come naturally. The leader also needs to strive to get diverse points of view so the issues can be fully vetted before decisions are made. Good leaders talk straight and honest with people. Mike and I spend time in our workshops discussing authenticity. We all need to be ourselves. Leadership development is not about becoming someone else but rather about becoming the best version of you that you can become.

But most importantly, communication is about the audience. It is easy to fall in the trap of communicating what you want to say in a manner that means something to you as the leader. More importantly, the leader needs to stand back and ask themselves, what is the current mindset of this audience? What do they care about? What are they worried about? Once you honestly assess the current mindset of the audience, you then need to ask yourself where do you want them to be when you are finished with this communication. At this point, and only, this point, can you address what needs to be communicated and how to get them there. Always remember, it is not about you, it is about them.

Collaboration is another key element. This can be collaboration with the audience, your clients, other stakeholders, other groups in your organization. No group or individual is an island. We get things done well only with and through others.

Leaders need to persuade people to change, to see the possibilities, to work hard to achieve a goal and to achieve what they may have thought was not possible. Therefore communication and collaboration skills are one of the critical 5 C's of Leadership.

Until Next Time,
Gail

THE 5 C's OF LEADERSHIP- COMPETENCE AND COMMON SENSE

Competence and Common Sense is the 2nd of the 5 C's of Leadership. The key points within Competence and Common Sense are as follows:

• Leadership is not related to a position or title
• Always think, speak and act as a leader
• Technical and leadership skills are important
• Identifying, mitigating and monitoring risks as well as opportunities is the leader's job
• Leverage the strengths of your team- you are not perfect
• Common sense- it will not fail you

Leadership is not about your position of title. Anyone can be a leader (or not). Next time you pass a school yard with young kids playing outside, stop for a few minutes and watch. You will see that some of the children have emerged as leaders among their peers. They have no position, title or golden parachute but they are leading. The way to tell is that other kids are following. Leaders have followers. If you want to know if you are a leader, turn around once in awhile and see if anyone is volunteering to be your follower. Leaders emerge during a situation. They take action; they make suggestions; they stand up for what they believe; and they are convincing and persuasive.

Always think, speak and act as a leader. You can not turn it on and off. When you are a team or committee member but not the team leader, you should still think, speak and act as a leader. This does not mean taking control. Good leaders are good team members because they are also good followers. A good follower does not mean blind faith and obedience. Bring all your skills to the table. Make suggestions, challenge ideas, remember the greater good. If your official team leader is a good leader they want you to bring everything you have to the table. It will work if you are respectful of others, which is a leadership skill, and support the decision once it is made. So the ALWAYS in this point is critical. It really means always think, speak and act as a leader. Mike frequently reminds me that people speak as they think. Pay attention to the way someone speaks. Do they speak in a clear and concise manner? If so, their thinking is probably also orderly. In a casual conversation, not when they are "on" do they speak like a leader? If not, they are probably a faux leader that happens to have the title and position.

Technical and leadership skills are important. We all spend countless hours making sure we have the technical skills to do our jobs. It applies to all jobs- law, accounting, engineering, human resources, marketing, fire fighting, police work, sales, secretarial or technology. It is also true for our industry knowledge. But most do not spend an equal amount of time and effort developing and enhancing our leadership skills. You need competence in both technical and leadership skills yet most companies spend time and money developing an employee's technical skills throughout their career but spend much less time and money on their leadership skills. Most companies refer to these as soft skills. I would submit that we are learning during this global economic crisis just how hard it is when you do not have real and top quality leadership skills. It also seems to me that most companies wait too late in a person's career to begin developing their leadership skills.

Identifying, mitigating and monitor risks and opportunities is a leader's responsibility. We have covered in other posts the need to identify your three biggest risks and then develop a mitigation plan and a monitoring system. You can do this at any place within your organization. It can be for the company overall or for a small team. The ideal is where it is done at the top and then cascaded down throughout the organization but leaders do what they can instead of waiting for someone else. You can start with any group. Mitigate does not eliminate which is why you need to be diligent in monitoring. Now what about opportunities? Do you have a means of systemically searching for opportunities? Most of us do not. We may be great at seizing it when it presents itself but that may be too late to capitalize on it. To identify, capitalize and monitor opportunities, you have to be looking outside the company. If your organization is too insular you will miss many opportunities. Your clients and customers are the best source of data. But also watch general market trends and ask yourself what could this mean for us in the future.

Leverage the strengths of your team. None of us is perfect. Are you honest with yourself on your strengths and weaknesses? Have you surrounded yourself with people that compliment your skills and shore up your weaknesses? Have you made sure that your team has the permission to challenge and question you? Have you unleashed their talent and creativity? One time in particular I remember being totally buried at work. The result was that I was not getting out as often to meet with the people in my group or our clients. I was usually very diligent in traveling to see everyone. My team was on a conference call with me and raised the issue. My answer was that I just did not have the time. One of them asked what was eating up all my time. I explained and he and another team member offered to take over some additional administrative responsibilities from me. They did point out that it was not my greatest strength and that they were better than me at those tasks. It worked out great and I was back on the road the next week.

Common sense should always be applied and it will never fail you. There are not guidelines for every situation and sometimes there are guidelines but they are dumb. When all else fails, use common sense. When you can not reach your boss and need to make a decision, ask yourself what makes sense and then do it. Do not fall into the trap of doing something that makes no sense but your conclusion is that "it" says to do it. If common sense was used more often, we would all be better off. Now, this is another reason you need to be careful who you hire and retain. Hire and retain people with good common sense so you will be comfortable with them using their judgement on what makes sense.

While the 5 C's are interdependent, I hope you have enjoyed reading today about Competence and Common Sense. Stay tuned as we continue the 5 C's next week. As always, feel free to comment, make additions or disagree. Discussion and debate is a good thing.

Until Next Time,
Gail

ALLAN MULALLY - A CHEERLEADING LEADER

Nice piece on Alan Mulally, the CEO of Ford. Mulally came from Boeing to Ford a few years ago and took the helm of a struggling company. He immediately started making material moves to ensure the viability of Ford. At the time, some of those moves were questioned. They are not being questioned now.

He sold brands such as Jaguar, he borrowed billions when they were available and pledged collateral, he reduced the number of dealers in the network and he moved aggressively to build hybrid vehicles.

Furthermore, Mulally is a relentless cheerleading CEO. By all reports, he is very enthusiastic and positive. He is constantly smiling and exhorting all Ford's stakeholders to work together toward success. People are infused with his attitude when they spend time with him. Such an attitude is priceless in a turnaround situation. People need to be given credible hope that their efforts will bear fruit in the end. No one wants to follow a downbeat "woe is me" leader.

Courtesy of my friend Dave, Churchill said, "A relentless leader is the greatest weapon in war." So when things get tough, put together a bold plan to turn things around and be relentlessly positive. In the beginning, a positive attitude may be all you have.

Cheers, Mike

THE 5 C's OF LEADERSHIP- COMPELLING VISION

The first of the 5 C's of Leadership is Compelling Vision. The best leaders create a bold vision that excites and inspires people. Then, they provide the tools to support the team's needs. Finally, and most importantly, they let go and unleash the talent and creativity in the organization!

Before the leader can inspire others, they need to be passionate about the vision and direction of the organization. Your passion and drive will be contagious and once you inspire people, their energy will be amazing. It takes courage to unleash the talent but great things can happen when you do let go. Now this brings up another issue which is that the 5 C's are interrelated. You need to make sure you have the talent and have invested in their development.

In order to create a compelling vision, you need to state where you are going and why would people want to go there. People crave clarity of direction and want purpose to their work. Give them something worth working for and comfort that they will be rewarded for their efforts and people will achieve great results.

Let's use planning a group vacation as an example. If you are planning a group vacation the first two things you need to decide is where are we going and when. After that, there is much to be done in planning your itinerary, where you will stay, what you will do, where you will visit, how you will get there, what is your budget, etc. But none of that can take place until the where and when questions are answered. Using the vacation example, the leader must tell the team where they are going and when. State the vision and when you expect to get there. This gives some parameters so everyone is on the same page. Now, you might create the vision as part of a team exercise but the leader needs to make the final decision and state it clearly. This also avoids wasting efforts on things that are not consistent with the vision. If the trip is to go to Paris in the springtime, you do not want a team working on how to get to the Alps in the winter.

But the other part of this is making it compelling. Why Paris? Why in May? What will I get to do when we get there? This all needs to be stated from the view of the team, not the leader. Put yourself in their shoes. Answer the what's in it for them question. The leader needs to state the vision in ways that create mental images that arouse their expectations and mobilize the team.

After the vision is clearly stated in a compelling fashion, the team needs to be given lots of freedom on how to achieve the goals. This will continue to fuel the energy to achieve the goal. The environment needs to be one that not only permits creativity and imagination but fosters it and helps it flourish.

Although the leader does need to step back and unleash the talent of the organization, they can not abdicate the role of leader. They still need to continue to provide the resources needed to achieve the goal; reallocate resources as time goes on; and monitor the direction of the plan to make sure that the team is not starting to go off course. It is also the leader's job to reassess at key points in case a course correction is needed. The leader should remove roadblocks for the team to achieve its goals. The team also need refueling from the leader. Over time, the challenges in achieving the vision will drain the team's energy. The leader is the refueling post. You need to sense when they need a boost of energy and how to give it to the team. But they will need refueling. Celebrating milestones along the way is key and also reminds the team of the road map and final destination. The leader also needs to be thinking about the next step in the vision after the team achieves the goal. This ensures that you are always striving for a better future. Finally, the leader will need to make many decisions along the way. A team's energy can be drained very quickly by a leader that delays decisions and does not take action.

In summary,

• Vision- what and when
• Compelling- why should I want to work hard to get there
• Unleash the talent and get out of their way
  
• Leader's passion and commitment
• Provide resources/remove roadblocks
• Create and sustain energy
• Take action

Until Next Time,
Gail

GMAC, WHAT IS THE TREASURY DOING HERE?

According to this report by Reuters, it could take a long time for the Treasury to recoup its advances to GMAC, maybe more than 15 years. The Treasury has already advance $12 billion to GMAC and according to the stress tests, GMAC needs several billion more.

Now that the initial TARP funds have provided a base to the steady the financial system, I would like to see future TARP advances to done in light of an acceptable repayment plan. Most lenders evaluate how their loans will be repaid before the loans are made. It is probably at a point in the cycle where future advances should be based on the likelihood of repayment. I know GMAC is the preferred lender to GM and Chrysler dealers and buyers, but couldn't JP Morgan, Bank of America and Wells Fargo have stepped into this role?

Stayed tuned, the financial press will likely start to pay attention to this issue.

Cheers, Mike

THE 5 C's OF LEADERSHIP

Hello everyone and sorry I missed you last week. I received a few emails (not many) from people asking when I was going to do my next post. Nice to know some of you missed me.

Today, I am going to start a series on the 5 C's of Leadership. Each day, I will discuss one of the C's. Please comment on the series. Let me know if something is missing or you disagree on something or want to add an emphasis. Your comments are not only welcome, they are needed.

As you know, Mike and I write, speak and teach on Leadership. Until now, we have not utilized an overall organizing framework. We have now created the 5 C's as our overall framework within which we can and will include all our thoughts on leadership. Since the framework is new we welcome all your insights.

Today, I will list the 5 C's and then each day discuss one of the C's. The 5 C's of Leadership are as follows:

1) Compelling Vision- why people would want to follow you
2) Competence and Common Sense- the actions and processes
3) Communication and Collaboration- the message, the medium and the timing
4) Creating Leaders and Teams- the responsibility to develop people
5) Character and Integrity- why people should believe and trust you

Until Next Time.
Gail

LEADERS MUST LEAD BY EXAMPLE

True leaders lead by example. This is critical to establishing a culture that people will happily follow. Leaders are well-advised to follow the same rules and policies as everyone else. This will go a long way on enforcing compliance by everyone else.

The proper way for a leader to do this is to be authentic. The leader must demonstrate integrity and embody the values of the company. A leader must be supportive of the people following and must take responsibility for his/her actions. If a leader is faking it, soon everyone will know and the culture will erode.

Many of us have worked for a 'leader' who believes that the rules are actually for everyone else. When that happens, we feel like second class citizens and we are less inclined to follow the rules and more inclined to feel some bitterness to the 'leader'. If the leader is above the rules, the rules will cease to have meaning after time. The employees will soon be there for the sole reason of making money and that is never a particularly positive experience.

Cheers, Mike

SO, HOW DOES THE TREASURY GET REPAID BY GM?

The press has covered the UAW agreement with GM. The press has covered the GM bondholders non-agreement with GM. The press has covered the billions that the Treasury has advanced to GM. But where has the press covered how the Treasury will recover its billions from GM?

CNBC reports that Treasury advanced another $4 billion to GM last week to bring the total to $19.4 billion. Further it reports that GM projects the total will be up to $27 billion before year-end. So now, how does the Treasury get the money back?

First a couple of table setting items. Usually the lenders of last resort receive sufficient collateral and interest and fees to extend loans prior to a bankruptcy filing. I haven't seen a word on the terms and conditions of the Treasury's advances. Further, it is unusual for a company contemplating a bankruptcy filing to borrow large amounts to pay unsecured trade creditors a couple of weeks before the possible filing in absence of a like deal with its various stakeholders. Finally, post-filing advances from the Treasury should be treated as DIP lender advances and should be repaid upon exit from bankruptcy.

So the bondholders are complaining that the UAW with $20 billion of unsecured claims is receiving $10 billion of debt and 35% of the equity for the remaining $10 billion claim while they receive only 10% of the equity for their $27 billion unsecured claim. Obviously that makes no sense on its face. (See Ben Stein's article). Further, reading between the lines, unsecured trade creditors are being paid in full in the ordinary course of business. The Treasury may be receiving 55% of the equity for its total claim of $20 to $27 billion so far. It remains to seen if the Treasury will receive debt for any of its claim. And remember, the Treasury claim should really be senior to all unsecured creditors as lender of last resort.

In summary, the Treasury, which should be senior to the UAW in part or in whole may receive 1% of equity for every $375 - $500 million of its claim (55% for $20-27 billion). The bondholders may receive 1% of equity for every $2.7 billion of its claim (10% for $27 billion). The UAW has agreed to receive 1% of equity for every $285 million (35% for $10 billion) and a 100% recovery in debt for its remaining $10 billion claim. The UAW is receiving a multiple of what the Treasury is receiving and the UAW should be junior to the Treasury is some material respect. And, of course the UAW is receiving a recovery much greater than the bondholders who are pari passu.

So, why is the Treasury receiving much less than the UAW when it should be receiving more? And are all the unsecured trade creditors being treated better than the Treasury? And what is the value of the equity the Treasury is receiving? It seems the Treasury should be receiving 50% of its claim in debt and not the UAW. Perhaps we will hear soon how the Treasury recovers its advances.

Cheers, Mike

THE BOOK SIGNING

A special thanks to all the people who attended our book signing at Barnes & Noble last night. There was much laughter and general hilarity. The B & N manager had to move us slightly since the crowds were getting out of control. Fortunately there was a solid police presence to handle the crowds waiting to get into the store.

We also set a record at the store for "Meet & Greet" sales. We doubled the previous record! Gail's arm was starting to fade from all the signings but she was able to rise to the challenge when the second wave arrived.

The crowd for the 8:30 talk was borderline unruly. Next time we will be sure to have a Breathalyzer test handy. Finally, Joanne has not been reading our blog because she is not in it. So Joanne, now you are in it.

Cheers, Mike

XEROX'S ANNE MULCAHY RETIRING

Anne Mulcahy exhibited excellent leadership during her tenure as the CEO of Xerox. She took over the helm as Xerox was reeling from an accounting scandal and the departures of the former CEO and CFO. Furthermore, Xerox was shut out of the commercial paper market which required the company to draw down on its $7 billion loan facility. Anne found herself in charge of a company with lagging products, $14 billion of debt, an unsettled management team and fierce competition.

Anne did a fabulous job of refocusing the company to promote color copying and document preparation and to build a value-add service operation. While keeping people focused on transforming the company to compete effectively in the market, she dealt with the financial restructuring in a way to ensure Xerox's financial viability for the foreseeable future.

A key takeaway from her efforts for leaders everywhere is, get your people entirely focused on producing operating results and transforming the business so that there is no time to worry about problems that are outside of their control. This takes the leadership ability to get people fired up on the direction of the company is taking and motivated to produce results for which they will be rewarded.

Cheers, Mike

WELCH DISAGREES WITH OBAMA'S HANDLING OF CHRYSLER

Jack Welch apparently doesn't approve of the Obama administration's handling of the Chrysler matter according to Bloomberg. Jack Welch wants to know why the unions were favored over the lenders. Good luck Jack. The unions voted for Obama and the lenders borrowed TARP funds from the Treasury. Anything else said would be redundant.

But, in case that doesn't do it for you Jack, check this out. The State of Indiana pension funds objected to the Treasury sponsored plan to sell Chrysler in a quick Section 363 sale. Not to be outdone in speed, the Chrysler bankruptcy judge ruled against the pensions funds in less than 24 hours according to Zerohedge. Really? This is going through no matter what anyone says about anything. But thanks for stopping by.

Cheers, Mike

LEHMAN SAYS BARCLAYS GOT WINDFALL, WILL THIS IMPACT CHRYSLER??

According to the WSJ, Lehman now says that Barclay's got a windfall when it purchased Lehman's investment banking operations five days after Lehman filed for bankruptcy. At the time, Judge James Peck approved the quick sale of the investment banking operations because of concern of the group holding together. Now, the creditors are questioning the price that was paid because Barclay's has commented on how much the Lehman investment banking operations have added to its earnings.

This raises the question of how this may impact Chrysler's rapid fire sales process. Some have referred to Judge Peck's quick Lehman sales process as precedent for Judge Gonzales quick Chrysler sales process. Well, now if the Lehman sale is being questioned for being too quick, will this embolden those creditors who believe the Chrysler sales process is too quick?

We shall see. We shall see.

Cheers, Mike

TRUMP ON THE ART OF VALUATION PER WSJ

There is a very entertaining article in the WSJ this morning. Trump is suing an author and his publisher for defamation due to a 2005 book which said he was only worth $250 million. There are excerpts from Trump's deposition regarding how he values his empire. It is really a good read.

The opposing counsel tries to get Trump to admit contradictions between his testimony and actual contracts. Trump however, has an answer for every question. While it is entertaining, I suspect that Trump will do very well when it comes time to testify. The fact is that valuation is much more art than science notwithstanding a well-accepted body of knowledge on the topic. And Trump is really good at the art side.

Furthermore, Trump, a graduate of Wharton, is more technically smart than some may think. I am looking forward to the reporting on this case. I can envision The Donald weaving valuations concepts and his subjective views to easily prove that he was worth more than $250 million at the time even if he can't prove he was worth 20 times that.

It reminds of the time that I was questioned on a distressed company valuation by a Harvard Business School student. I looked up at him in a class of 100 and said, "you must have worked at an investment bank for the past few years." He indicated that he had. So, I replied, "So, you must think that using methodologies like discounted cash flows, comparable sales, public and company multiples produce the actual value of something. Well, they don't. Something is only worth what someone will pay for it, especially in distressed situations." In this case, I am siding with Trump to demonstrate he was worth well more than $250 million. Should be a fun ride.

Cheers, Mike

GOVERNMENT TO WEIGH IN ON HARTMAX BANKRUPTCY?

Where will it stop? Hartmax, maker and retailer of men's suits, filed for bankruptcy in January. Wells Fargo had already lent $114 million to Hartmax at the time of the filing. It has lent $2o million more since the bankruptcy filing. Wells is now refusing to lend more to Hartmax since there is no tangible prospect for repayment. They believe they are throwing good money after bad.

Well, now members of Congress are considering pressuring Wells to continue to support Hartmax, according to Bloomberg, since Wells was a recipient of TARP funds. This is a dangerous road to go down. One has to presume that Wells is behaving as a rational lender in this case. Wells is likely evaluating how to maximize values of Hartmax because it will be paid first from any value that can be realized. If Wells has decided that it should no longer support Hartmax with more loans it is because Wells has determined risks attendant to more loans is not supported by the likely reward.

It is totally inappropriate for members of Congress to weigh in based on the fact that Wells received TARP funds. This is especially true with this week's revelations that Paulson forced TARP funds on the banks.

Cheers, Mike

THE YELLOWSTONE CLUB

A couple of months ago, I wrote about the craziness in the Yellowstone Club bankruptcy. I suggested that readers follow it because it promised to be entertaining. Well the bankruptcy is coming to a head. Today began the hearing to sell the club to either an entity of one of the members or to Tim Blixseth and Credit Suisse which loaned $375 million to the former owners Tim Blixseth and his wife, (they are now divorced, she got the club, the club filed for bankruptcy, she filed for divorce and he is now trying to buy the club back).

Greg LeMond sued the club two years ago for $38 million. He won the suit and was paid around $25 million. He has sued for the remaining $13 million. Now the club has sued to get the $25 million back as a fraudulent conveyance. I hope he didn't lose the money in the market, he may have to give it back.

Then with all this in the backdrop, the bankruptcy judge, citing "naked greed", effectively invalidated Credit Suisse's first liens on the club. The judge was so incensed over how Credit Suisse went about making the loan, he equitable subordinated Credit Suisse. This means that Credit Suisse no longer has the recovery rights of a secured lender. Instead it has the recovery rights of an equity holder. This is a very drastic remedy and extremely rare in my experience. It is even rarer in this case because usually equitable subordination is reserved for lenders that exert undue influence on running the operations of the company. I am not sure the logic hold. But there you have it.

Perhaps the judge sensed this. He indicated he reviewed the case law and decided it acted appropriately. Furthermore, he gave Credit Suisse back certain rights so that he effectively just put the unsecured creditors (mostly locals) ahead of Credit Suisse. This enables Credit Suisse to still "credit bid" its secured debt to buy the club with Blixseth. I know, 'what is credit bid?' This is where a bank or banks with a first lien go to the auction and instead of bidding cash, they bid the value of their loans which must be repaid first.

Once again, this is a fun matter to follow. Perhaps the strategy is to have all the craziness so that the movie rights will be able to boost the ultimate recoveries. At this rate, it is moving towards a Will Ferrell movie.

Cheers, Mike

IS CHRYSLER CUTTING ENOUGH DEALERS?

Chrysler notified 789 dealers today that the company will ask the bankruptcy court to allow it to reject the dealers' franchise agreements. Unfortunately for those dealers, they will have no recourse to argue otherwise with the bankruptcy court. The only real argument will be about the terms and conditions of the closures. Dealers who have been loyal to Chrysler for years really have no where to look. We should expect the majority of these dealers to file for bankruptcy themselves in the near future.

The question I have is did Chrysler cut enough dealers? The 789 dealers represents approximately 25% of Chrysler's dealers. Interestingly, 50% of Chrysler's dealers are responsible for 90% of its sales. Given the fixed and variable costs attendant to supporting a dealer and the need for radical change, I wonder why Chrysler didn't cut 40-50% of its dealers to implement radical change. In my experience, bankrupt companies with retail locations never enough locations on the first round. Hope springs eternal that the revenues of the open locations will rebound.

Cheers, Mike

ARE THERE ANY LEADERS IN CONGRESS?

It is amazing how many fake leaders show up during any crisis. The economic crisis is no different. The problem is that during a crisis is just when you most need great leaders not fake leaders. There is an article in the WSJ Lawmakers Press AIG's Liddy. After reading the article I was struck by the lack of real leadership in Congress. It seems instead of leadership, we are getting TV drama. This could have been an episode of Celebrity Apprentice instead of a congressional hearing.

Now don't get me wrong, I am no AIG fan either but some things are absurd. The lawmakers asked to see the AIG business plan referred to as Project Destiny. As lenders and owners of 80% of the company that seems like a fair and reasonable request. But not if the plan will be splashed in the newspapers and on TV, which is what these lawmakers would do with it.

AIG's Liddy needs to show leadership and respond to a small committee that he reports to on an on going basis. But the committee also needs to show leadership. I do not need to see or hear everything they do. What congress should do is tell the American people how they are overseeing AIG and then be held accountable for how well they do that job. Instead they want to play out every action in front of the press as a way to pretend that they are leading but not have any real accountability.

Hey, did I say lawmakers? Maybe that is the problem, we have lawmakers pretending to be business people. Let us hope that real leaders emerge some day soon.

US TO SET BANK COMPENSATION POLICIES???

According to a report in the WSJ, the Obama Administration is considering getting involved in setting bank compensation policies. For example, loan officers should be paid based not only on the quantity of the loans made but also on the quality of the loans. Seriously, is this any different than the issues with most commission salespeople in most industries? Are they selling high margin products? Are they selling to customers with good credit? Are they giving away too much to get the sale? Is this the role of government? Of course not.

I have written it before, the issue is not the compensation policies. The issue is the leadership of the companies. The leadership must set compensation policies that drive the behavior and performance that they desire. The leadership must then identify the risks associated with its compensation policy and evaluate and monitor those risks. This is the responsibility of leadership not the government.

The government is quick to try to fix corporate issues based on the current financial crisis. Maybe it should fix its own house first. Artificially low interest rates for the five years leading into this crisis served to reduce the price of risk. Risky investments saw falling and low interest rates. These rates inflated the investment bubble across all asset classes. Compensation policies were part of the issue but not the largest part.

Cheers, Mike

HOW TO LEAD IN A CRISIS

There is an article in the WSJ archives How To Lead In a Crisis that is worth reading. Mike and I teach a two day class at Villanova's Executive MBA program on this subject that is much more in depth but this article is well done.

There are a few key things I would add to the seven lessons listed. Communications. There is no such thing as over communicating during a crisis. Get the right team. You not only need expertise you do not have but you need people that are not as emotionally involved. There is also Mike's all time favorite comment, "work the process". There is so much you do not control in a crisis and you can not guarantee the outcome. What you can control is the process that you follow.

But the most important is for you as the leader is not to over react. Yes, you have to walk through the fear but do so after you have taken a deep breath. Walking through the fear is very different that acting on fear. Leaders stay focused on the better future ahead.
Until Next Time,
Gail

LEADERS - MAKING DECISIONS, PRESERVING OPTIONALITY

When making decisions, leaders often consider a path that leaves them options in case the decision needs to be changed or modified based on the results. It is called preserving optionality. Here is an example of how it used.

A number of years ago, my former partner and I decided it was time to promote three of our senior people to the partner level. As usual, we came at the situation from different places. My partner wanted them to be income partners with no vote on material firm matters and I thought they should be equity partners and participate in making the decisions required to run the firm.

We each made our arguments for our positions. My former partner asserted that our management and ownership process was very efficient and easy and that adding three more people to the mix would be very disruptive and not add value. I made the case for the other side of the argument. We then reached the point where we had to pick one or the other. We did this remarkably well by each of us saying how strongly we felt on the issue.

In this case, my former partner felt very strongly on his point of view. I decided to support his position because it gave us optionality. We could make the new partners income partners and decide later whether to make them equity partners. If we followed my method, we had no optionality. Once they were equity partners, there was no taking it away from them.

After a relatively short time period, it was clear to me that we had made the right decision for the time being. In fact, after one meeting, I laughed and said to my former partner, "Well, it is a good thing we didn't do this my way. That would have been a mistake."

Optionality, it is always good to make decisions that preserve optionality if the price for it is not too high.

Cheers, Mike

TREASURY CALLING THE SHOTS WITH GM BONDHOLDERS

The CEO of GM, Fritz Henderson, spoke this morning at press conference, and said that GM is likely to find itself in a chapter 11 proceeding even though there is still a slim chance of staying out. One of the questions out there is "will the US Government follow the same 'we are providing the financing so we are calling all the shots' play as it did in Chrysler?"

The US Government decided what answer it wanted in Chyrsler and as the lender of last resort forced that answer on Chrysler. It is likely to do the same with GM. Afterall, GM is unlikely to be able to obtain financing from any other source. And after all, if you are the only lender willing to finance GM then you get to call the shots.

The Treasury is jamming a recovery of 10% of the equity on GM's bondholders. And, it is probably not negotiable. The GM bondholders have $27 billion of unsecured debt. The UAW has claims of $20 billion for its VEBA accounts (workers health benefits). The Treasury is reported to have agreed to let the UAW get 55% of the equity and $10 billion of debt. In summary, GM bondholders get 10% of the equity for $27 billion of claims and the UAW's VEBA gets 55% of the equity for $10 billion of its claims and $10 billion of debt. This is not even close to similiar treatment for claims that rank the same in a bankruptcy which would usually provide that these claims get generally the same treatment.

So, what's going on? Here is a take on it. First, as one government official said, 'we need autoworkers to build cars, we don't need bondholders.' Bear this in mind as you follow this matter over the next few weeks. Second, the government has already lent billions to GM. It will have a large claim in the bankruptcy that it looks like it is forgiving. Said another way, the Government is giving whatever recovery to which it is entitled to the UAW. Third, the Treasury will be lending billions more to GM in a bankruptcy (or an out-of-court restructuring) that should be paid in full before other creditors are paid. Instead, it looks like the Treasury is going to give some of its recovery on its future financing to the UAW. Fourth, the Treasury may be saying, 'All the funding we are putting in is more than the value of GM, therefore, we effectively own it. And, if we own GM, we will decide who gets what."

This is just a view. I am sure shortly after the GM bondholder fight with the Treasury is over, we will hear from the participants, anonymously no doubt.

Cheers, Mike

POSITIVE CHANGE REQUIRES LEARNING

I received the article Going Dutch subtitled How an American living in Holland learned to love the European welfare state from a friend that is currently living in Holland. The article is a good read and explores some of the socialism versus capitalism issues. It is timely for Americans discussing universal health care.

However, there is a broader reason that I am posting this article. To me, when we come out of this global recession, we will all need to re-evaluate the way we did things before the economy crashed. Governments and companies around the world will need to change. But change for change sake is not the goal. The goal is improvement.

To achieve that goal of positive change, we will all need to learn from others and adapt good ideas for our businesses. Using this article as an example, it is not helpful to just say you are for or against socialism or capitalism. You have to learn what those words mean and most importantly is there a middle ground?

My mother always taught me that extremes were usually bad and it was in finding balance that we usually found the right answer. Since yesterday was Mothers' Day, it seems fitting for me to acknowledge this insight as one of many smart things my mother taught me.

Thanks Mom for everything especially for inspiring me.
Until Next Time,
Gail

THREE LITTLE WORDS FOR LEADERS

Bloomberg posted a piece from HarvardBusiness.org which asserts that all leaders need to be able to say three little words from time to time, 'I was wrong'. For most leaders, it is as hard to say these three words as it was for the Fonz 30 years ago. Some leaders can rationalize almost anything and see saying these three little words as a sign of weakness.

I actually think the ability to say the three little words is a sign of strength. It shows that leaders are comfortable being themselves and that they know they are not infallible. Furthermore, leaders who never admit being wrong will find themselves with an increasing cynical group of followers. They will be followers only because they need the job, not because of loyalty to the leader.

So, what do you think? Should a leader be able to say the three little words?

Cheers, Mike

MADOFF TRUSTEE SUING MERKIN

The Deal of the NYTimes reports on Irving Picard's (Madoof SIPC trustee) lawsuit filed against Ezra Merkin. Merkin (pictured to the right from Bloomberg) ran three hedge funds and allegedly turned at least $1 billion of his investors' money to Madoff to invest. There are some reports that Merkin turned all of his investors' money over to Madoff. For this, Merkin allegedly earned over $400 million in fees.

Irving Picard is suing Merkin to get him to return over $500 million withdrawn over the last five years. Picard says that Merkin either knew or should have known that the Madoff scheme was not on the up and up.

I always like when someone says, 'he either knew or should have known'. The other person, in this case Merkin, is boxed in a corner. What does he say? 'I didn't know and I shouldn't have known?' Merkin alledgedy had all his investors' money with Bernie. He should have been all over Madoffs books and records. Picard sets forth over 500 trades on Merkin's funds' statements that showed stock transactions at prices that were outside the range the stocks actually traded at on those days. That doesn't look good for Merkin.

He collected over $400 million of fees from his investors. He probably didn't tell them, 'don't expect much because I don't know much about investing.' He probably has sales information touting his investment expertise and there will probably be investors willing to testify as such.

Furthermore, until earlier this year, he was the chairman of GMAC! It is going to be hard for him to plead that he wasn't up to the task, very hard.

Cheers, Mike

WHERE ARE THE REGULATORY LEADERS?

Before we get into the leadership question, we should step back and revisit the mission of regulators. Let's at least address the SEC and the Federal Reserve. According to their websites, the mission are as follows:

SECURITIES AND EXCHANGE COMMISSION:
The mission is to protect investors; maintain fair, orderly , efficient markets; and facilitate capital formation necessary to sustain economic growth.

FEDERAL RESERVE:
The central bank of the US provides the nation with a safe, flexible & stable monetary and financial system.

I think it is safe to say that both regulators and many others in countries all over the world failed to achieve their mission resulting in this global financial disaster. No need to beat this drum any more. The question is where do we go from here to correct the problems.
Leaders have a responsibility to look forward, to be able to prioritize and allocate resources, and to stay laser focused. Leaders have many demands on their time and attention. One of the important skills for a leader to possess is to properly set priorities and then stay focused to resolve the issues.

There are three articles in today's WSJ to read:
SEC Squanders a Shot at Overhaul
SEC Policing Some New Beats
Bank Stress Tests

I do not see the regulators stating their priorities and then staying focused to resolve the issues. Now don't get me wrong, many regulatory reactions are really political window dressing that often cost much more than they are worth. Think Sarbannes Oxley. But clearly we need some changes. The current bank stress tests are a good start. Even if you disagree with the process of the metrics, it is a start. But isn't that what we thought the Federal Reserve was doing all along? What are the capital requirements that have existed for many years if not to make sure the banks were adequately capitalized? What have they learned in the stress test process that should be included in the ongoing capital requirements?

Oh, and let's not forget AIG. Has anyone heard any news about the insurance regulators looking at any required improvements? The only thing I am hearing from the National Association of Insurance Commissioners (NAIC) is about testimony about national health care. Why not? They did such an outstanding job with AIG let's give them more responsibility.

Leadership. We are in desperate need of leadership everywhere in the world. Regulatory bodies are no exception. I do not want them to restrict growth as the global economy needs help not more problems but we need reform and follow through. The balance in setting the rules and the focus on follow through is critical. That takes strong leadership skills. So far, I see no leadership. Let us all hope leaders emerge.
Until next time,
Gail

BANKS ARE REBOUNDING?

It is interesting to watch the bank stocks rebound and soar in some cases. Here are a few points to keep in mind. First, the banks are experiencing increasing bad loan losses as evidenced by this Bloomberg piece on Barclays. This is further supported by numerous discussions I have had with major players in the troubled company industry who say that the level of distressed companies is increasing not decreasing.

Second, at some point bank earnings are dependant on leverage. For the foreseeable future leverage will be greatly reduced from just 18 months ago. This means that large banks will be hard pressed to achieve the earnings of just a short time ago.

Third, expect to see goodwill write-offs at banks that have acquired other institutions in the past three years as a result of impairment of asset values.

Just a few points to keep in mind.

Cheers, Mike

A VIEW OF THE PRESENT FINANCIAL SITUATION

Zerohedge.blogspot.com posted a very thoughtful and thought provoking letter by Elliot Associates on the current state of the US economy and where it is going. Take a few minutes and check it out. If nothing else, you won't lose knowledge.

Cheers, Mike

FIAT'S MARCHIONNE WILL BE CHALLENGED WITH CHRYSLER AND OPEL

It will be a tall order for FIAT's CEO Sergio Marchionne to mold FIAT, Chrysler and Opel into a viable entity. In the world of financially-troubled companies, the merger of broken companies is often fills the pipeline of future work for restructuring professionals.

Coincidentally, I have followed Marchionne's moves for the past five years as a result of living in London when he took over FIAT. I thought it was great that a non-auto executive was brought in to run FIAT. I liked the way he out maneuvered GM to force GM to pay $2 billion in 2004 to FIAT to buy its way out of owning FIAT. (How ironic that 5 years later FIAT is saving (?) Chrysler.) I followed his innovative moves to enter into various joint ventures with companies around the globe. He flattened FIAT's organization and he drove new car development to quicker turnaround times. He improved the quality, performance and curbside appeal of FIAT's and Alfa Romeo's auto lines.

But now, he must take Chrysler, which is broken and operating far from break-even, Opel, which is also broken and being abandoned by GM and FIAT, which in case you look, is also operating at a loss. He will have to do this during the worst period in the auto industry in 70 years.

He will have to merge different companies, different cultures, different manufacturing processes, different information systems, different capital structures, different operating policies across different countries with different governments weighing in on how their country is being treated. And he has to do all of this with a finite amount of financial resources and limited management and leadership resources.

This will be extremely interesting to watch from a leadership standpoint. I recommend following the saga through the Financial Times. I hope Marchionne succeeds because he dares to be different. One way or the other, Sergio will be smoking more cigarettes, downing more espresso.

Cheers, Mike

IDENTIFY, MITIGATE AND MONITOR RISKS

Mike and I always bring up risk mitigation in our leadership workshops. While you can not plan for all potential future problems, you can identify the three biggest risks to your company, division, group or team and plan accordingly. It is a powerful process. Even the discussion of identifying the risks is helpful.

Today in the WSJ there is an article about companies making plans for work disruption due to the swine flu. If you read the article, you can see how a more general process could be applied. What if the question was not about the swine flu but about anything that stopped your employees from arriving at the office or the plant? How would you get work done?

Here is the article Companies Develop Strategies For Flu Interruptions. As you read it, think through the risks in your organization. Have you developed mitigation plans? Do you have a monitoring mechanism? How would you communicate and with whom when the crisis occurred?
Until Next Time,
Gail

DETROIT, THAT'S LEADERSHIP?

Joe, one of our followers, sent me this link regarding a councilman from Detroit who abandoned his house because his mortgage is more than the current value of the house. One of his constituents asked the obvious question, 'why should she follow someone like this?'

Leaders need to be responsible and accountable for their decisions regardless of the consequences. When leaders behave as if it is all about them, followers can become disheartened and lose faith. It is at these times other leaders must step forward. Many people don't want to lead, especially at work. They just want to do their jobs, make money and go home. If you want to lead, look for the opportunity to lead and take it. If you really want to lead, you will do better than you think.

And remember, people are always looking to follow a true leader.

Cheers, Mike

FINANCIAL OVERSIGHT-COMPENSATION DRIVES BEHAVIOR

President Obama is rightfully committed to strengthening oversight of the financial industry. One of the methods that should be employed is based on the compensation scheme of each company that is being regulated.

It is universally recognized that compensation drives behavior. Any effective oversight must, among other things, focus on what the compensation scheme incentivizes top management and other senior employees to do. Once the behavior is identified, the risks must be identified and evaluated. These risks then must be monitored on an on-going basis.

For simple examples, if an employee is paid hourly, a major risk is that the employee will record hours that were not worked. If an employee has a very low base compensation and is eligible for a large performance based bonus, that employee may take outsized risks to boost the bonus. And if an employee's compensation is based on sales, but not subsequent collections, then the employee may take higher risks on the collection side to make more sales.

Every compensation system can be gamed. No one compensation system is inherently that much better than another. The key is to understand the behavior that is driven by the compensation system. Then evaluate and monitor the risks that have been identified.

Cheers, Mike

CHRYLER'S PROPOSED SALE

According to this report by Bloomberg, Chrysler will submit a motion to sell many of its assets to a new entity controlled by the UAW, the Treasury and FIAT. Rather than speculate on what the terms and conditions will be, take note of what the Treasury is doing to force the quick sale.

The Treasury is providing up to $8 billion of DIP financing to Chrysler. Reading between the lines, it appears that the Treasury has made a sale to an entity that has an alliance with FIAT is a requirement of its loan to Chrysler. The Treasury also appears to be requiring the sale to occur within 60 days. I wonder if the financing proposal gives the Treasury the option to pull the plug on the financing if the sale isn't completed in this time frame.

There should be some fireworks in Federal bankruptcy court. Corinne Ball of Jones Day, is Chrysler's lead bankruptcy attorney. She is a formidable force and quite capable of accomplishing the company's and the Treasury's objectives. Rest assured, the courtroom will be standing room only.

Cheers, Mike

THE CAPITAL STRUCTURE MATTERS

One of our followers, Dan, sent me this article by Mike Milken. Milken makes a compelling case why the capital structure of a company is critical to its viability.

I am a little perplexed that anyone would seriously take the other side of the argument. Mike, did the late Nobel laureate Merton Miller really believe that managing the capital structure was not the responsibility of corporate leaders? ( I call him 'Mike' since I was in a small four-person meeting with him a few years ago. But that, is yet another story.)

For the past 25 years, I have used a definition of viability. The definition is as follows: The company must have good management, the profit structure must be sound, the industry dynamics must be favorable toward the company, the company must be adaptable to economic conditions, and finally, the capital structure must be sufficient to allow the company to take advantage of opportunities and to withstand competitive pressures and inevitable downturns.

Take a look at the companies that are surviving or thriving today in the face of lower sales and enormous headwinds. They all have solid capital structures. This is not by mistake. This is a product of good leadership.

I also like how Mike uses the word leadership instead of management. Pretty telling, isn't it?

Cheers, Mike

CHRYSLER DEBT HOLDERS and CREDIT DEFAULT SWAPS

Expect to hear more in the next few weeks that some of the holdouts in Chrysler's bank group were also holding Credit Default Swaps that may make them at least whole on their debt holdings. One side of the argument will be that these vultures precluded Chrysler from doing an out-of-court restructuring so that they could collect on their credit default swaps and make themselves whole or even a profit.

The other side of the argument will be that the Government should have been aware of this in its negotiations and provided a deal that would have made such debtholders' shortfall less than the proposed deal.

Perhaps even more intriguing will be the identities of the issuers of the related credit default swaps. Can you say, AIG? Maybe even Lehman? Certain TARP beneficiaries? If you start to identify where the Government stands in all this, it gets a little crazy.

Let's see, the Government owns a piece of or has significant loans to:

1.Chrysler received billions from the Government before filing for bankruptcy.
2.The PBGC is on the hook for a certain amount of the UAW pensions.
3. Medicare takes a hit if the retiree health benefits are eliminated.
4. Government lent billions to Chrysler's debt arrangers and majority holders, Goldman Sachs, Citibank, Morgan Stanley and JPMorgan Chase.
5. The Government effectively owns AIG which probably stands behind Chrysler credit default swaps.
6. The Government has a program to assist auto suppliers through loans.
7. More involvement that I am sure exists, that I am not aware of.

Maybe if the Government gave the debtholder group more in Chrysler, it would have lost less from AIG covering the credit default exposure to the same lenders? It does make you wonder. Confused yet?

Cheers, Mike

FLOYD NORRIS ON CHRYSLER, REALLY?

I don't know Floyd Norris who writes on business and economics for the NY Times. I usually read his work and find it worthwhile. However, his entry today on the "bondholders of Chrysler" may not be his best work.

First of all, and this is somewhat significant, Chrysler doesn't have bondholders. The term bondholders generally refers to holders of unsecured debt in the form of bonds issued by a company such as Chrysler. And generally, bondholders, such as those at GM, would have the same rank and priority in a bankruptcy as the unsecured claims of the UAW's pensions and retiree benefits.

Chrysler has secured debt lent to it by a group of banks. Chrysler pledged certain of its assets to these lenders as collateral. So these bank debt holders (not bondholders) rank ahead of the UAW's pension and retiree health claims to the extent of the value of their collateral. The portion of their debt not covered by the value of the collateral then ranks at the same level of as the UAW claims. So by definition and simple math, the bank debt holders should recover more not less than the UAW.

Floyd also jumped on the "speculators" bandwagon. The facts, he points out, include that all these holdouts bought the loans at a discount. Damn speculators. I didn't know it was against the law or immoral to buy debt at a discount. I didn't know if you bought debt at a discount your legal rights didn't count. Who knew? Further, some of these speculators bought the debt directly from some of the arrangers of the debt, such as Goldman Sachs. It is kind of how the capital markets work. Damn speculators.

Floyd said, "no one thought a hedge fund investment was risk-free". I say, "no one expected that the government would not give their investments the rights provided in their legal contracts and then force them to turn their investment into an involuntary charitable contribution." But hey, that's just me and my readership is slightly less in number than Floyd's.

At least he admits that "it is disquieting that ... the Government is making these decisions." It is even more disquieting when the Government is going against the established laws and rules. If the Government wants to be charitable (with the taxpayers money) to the retirees, maybe it should have just put the money directly into the affected plans rather than continue to fund the losing operations of Chrysler. How many more billions will Chrysler lose before it can get to break even? Who knows? I don't have enough facts on the operations of Chrysler or its proposed arrangement with FIAT to have an educated view on the future viability of Chrysler. I hope it works. We will see.

Cheers, Mike

GOVERNMENT SEES QUICK CHRYSLER BANKRUPTCY

According to this CNBC article, the Government is seeing a quick, 30-60 day bankruptcy. I think that is unlikely. First of all, as I suggested a month ago on this blog, Chrysler will file in Manhattan, not Detroit. This lays the groundwork for a quicker bankruptcy. However, the bench in Manhattan is very experienced with large matters. While they have the experience to act quickly and in the bankrupt estate's best interest, they also are likely to uphold the rights and priorities of the various stakeholders. This is part of the reason why the holdout debt holders believe they will fare better in a bankruptcy than the out-of-court deal proposed by the Treasury.

The Treasury believes that will be a quick sale of the assets and Chrysler's operations will emerge from bankruptcy. First of all, there won't actually be a sale of the assets to an unrelated third party. The stock of the post-bankruptcy Chrysler will be split up between creditors (the US Government being a creditor) and FIAT.

The stock can't actually be split amongst the parties unless pursuant to a confirmed plan of reorganization (POR). FIAT really can't be guaranteed of its share of the equity until a POR is developed, negotiated, voted upon and confirmed by the bankruptcy court which must deal with many issues that the Treasury was hoping to sweep away and with good reason.

There will be objections and litigation skirmishes regarding:

(1) the value of the banks' collateral securing $6.9 billion of loans
(2) collateral values of other secured creditors such as mortgage lenders
(3) the priority of the US Government's pre-petition multi-billion dollar loans
(4) which dealers to keep and which dealers to close and the payments to such dealers
(5) the classification and priority of various UAW and retiree claims
(6) the classification and priority of the claims for unpaid taxes due various municipalities, counties, states and the IRS
(7) the treatment of so-called "critical vendors" (this will be a free-for-all)
(8) the contribution required from Daimler-Benz
(9) potential issues against majority owner funds controlled by Cerberus
(10) treatment of suppliers and vendors not deemed "critical"
(11) a key employee retention program that will be proposed within days
(12) the treatment of the Government's post-petition loans
(13) the assumption or rejection of virtually every outstanding contract
(14) A laundry list of other issues that will come to light shortly

So, 30 to 60 days? Not likely. Not likely at all.

Cheers, Mike

QUESTIONS ABOUT THE CHRYSLER BANKRUPTCY?

If any of you have questions regarding Chrysler's bankruptcy over the next few months, please post them here in the 'comments' section or email us at ExcuseMeLeaders@gmail.com.

We will treat all questions as anonomous. We will answer all questions and post the best ones here on the blog.

Cheers, Mike

THE TREASURY IS NOT FOLLOWING THE RULES OF CHAPTER 11

In order for a successful out-of-court reorganization to be completed generally, the treatment of each of the stakeholders must follow the rules of a chapter 11 bankruptcy. If it doesn't follow those rules, the disadvantaged parties will force the company into bankruptcy to get better treatment.

This is what is happening this morning in Chrysler. The Treasury's proposal is treating the banks worse than a bankruptcy court would treat their loans. This goes against the rules of the game that have been in place since at least 1979 when the Bankruptcy Code was enacted. This is nicely set forth in this WSJ article that covers the decision on hedge fund holding Chrysler debt is facing. The call for 'shared sacrifice' is a little disingenuous because it doesn't fully credit that one class of creditors is senior to other classes.

I have posted before that there is a real danger to a precedent of not following the rules of the current Bankruptcy Code. The rights of lenders are factored into the loans banks make to borrowers. Ad hoc changes to those rights will result in some chaos and confusion in future lending.

The Treasury can accomplish its goals without igniting such chaos by following the rules. They work.

Cheers, Mike

WSJ LEADERSHIP LESSONS

The Wall Street Journal put together some interesting videos and text on leadership lessons. If you are interested in Leadership at all, give it a look.

Cheers, Mike

CHRYSLER AND ITS HOLDOUT BANKS

As Chrysler's reorganization negotiations speed toward tomorrow's deadline for a deal, certain parties in its bank group are holding out. The four agent lenders have agreed to terms based on their negotiations with Chrysler. However, there are 40 other banks, hedge funds and other debt holders that must agree to the terms or Chrysler will be forced to pay them off in full or, file for bankruptcy to force the holdouts to comply with the agreement.

Remember these banks are secured lenders. They have collateral and therefore rank ahead of all pre-filing creditors in a bankruptcy to the extent of the value of their collateral. There first may be a court hearing to value to banks collateral. This is always a sticky issue and very subjective. The banks have $6.9 billion of loans to Chrysler. Let's say simply that the court determines that the banks' collateral is worth $2 billion. This means that the banks' secured claim would be $2 billion and the banks would have an unsecured claim of $4.9 billion.

The banks' secured claim of $2 billion would have to be satisfied with cash or debt satisfactory to the banks as a class. This means that unlike an out-of-court restructuring which requires a 100% of the banks to agree, in a bankruptcy only a simple majority of the number of lenders holding at least two-thirds of the amount of the loans are required to approve the treatment.

Currently the NY Times reports the four bank agents alone hold over two-thirds of the amount, so it is a matter of getting a majority of the number. Some smaller debt holders may believe that the value of the banks' collateral is more than $2 billion and will therefore not vote for a lesser treatment. Or they may be playing the "hold-up value card." They are hoping that their claim can get better treatment because the amount is small and the cost of a bankruptcy is large. They may quietly get away with it. At least that is what they hope.

Even as you read, there is a lot of arm twisting going on and Ron Bloom, head of the Auto Task Force is invoking the name of President Obama more than once. Stay tuned.

Cheers, Mike