All Blog Posts from Econwatch

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Channeling his inner Russian emperor, Pay Czar Kenneth Feinberg's compensation edict shook top executives at some of the nation's biggest banks. The Special Master will cut the cash component of salaries for the top 25 earners at the companies he oversees - AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, GM and GMAC.


How big a deal is this? First of all, we're talking about 175 employees, so let's not leap to "compensation is changing forever!" And Feinberg is not cutting total compensation, he's changing the composition of pay packages - less cash, more stock with longer vesting periods. In other words, the top guys will have more skin in the game.

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The government's "Cash for Clunkers" rebate program to spur sales of more fuel-efficient cars has worked extremely well, with auto sales up. Some dealers, however, are complaining that they don't have the inventory to meet demand.

Now Chrysler is dropping its offer to increase the rebate offered by the government's Car Allowance Rebate System (CARS) program, which can be as high as $4,500 depending upon the car model purchased.

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With the news of General Motors' historic bankruptcy this morning, we asked CBS Evening News business producer Guy Campanile to provide some perspective by answering the following five key questions about the storied automaker, the whole car industry and the greater economy:

1) How will GM survive all this negative publicity in terms of getting future customers to buy their cars?

GM's ability to win back consumers scared off by bankruptcy depends on the speed of the bankruptcy case. The Obama Administration would like to see a debt-free and smaller GM spin out of the courts by September.

The trick in the car business is to get rational people to spend money for an irrational thing. Remember -- all a car or truck really does is provide transportation. The auto industry makes money by convincing consumers that they require leather interiors, sunroofs, sculpted lines and a killer sound system to feel good about making those trips.

People are unwilling to lay out the $25,000 required to buy such amenities if they are dubious about the sustainability of a car company. People typically own cars for 5 years or more. That's a commitment that must be supported by confidence in the brand. GM will have no chance at convincing people to buy its brand unless it quickly gets back to the business of building profitable cars and trucks in North America.

2) What does this bankruptcy mean for the rest of the auto industry?

The American auto industry as we knew essentially ended today. The auto making behemoth that was General Motors is dead. It is now a government-owned ward of the bankruptcy courts. Chrysler is part of an international car company (FIAT).

Only Ford remains as a fully independent American automaker. How Ford takes advantage of its strong position is unclear. They could play-up the fact that they are the last survivor on the island. But they could risk alienating many consumers. Of course, the economy could get worse and Ford may find itself in the same boat as its Detroit cousins.

Ultimately we are looking at an industry that is not American, Japanese, Korean or German. The new reality is that cars are made in bits and pieces all around the world by companies that are capitalized by investors all around the world. The modern auto industry is now truly a global affair with a far more nebulous national character.

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The Obama administration appears to have reminded Chrysler about the cost of accepting government bailouts: with federal funds comes federal control.

A report this week in Advertising Age said that Chrysler wanted to spend $134 million in advertising over the nine-week duration of its bankruptcy. But Mr. Obama's auto-industry task force sliced that figure in half.

Robert Manzo, executive director of Capstone Advisory Group and a Chrysler consultant, testified at a May 4 hearing in bankruptcy court that the task force "believed that it was not feasible to not spend anything on marketing and advertising for fear of eroding the image of the brand." But, Ad Age said, the task force overruled the car maker. (Chrysler's factories will be shuttered for those nine weeks.)

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As perhaps as many as 800 Chrysler dealers across the country wait for the bad news, it may be helpful to consider these facts about the ailing automaker:

• Despite losing 400 dealers since early last year, Chrysler still has too many showrooms too close together, especially in cities. Merging them would leave nicer and better-staffed franchises which would be more profitable, at least in theory.



• The criterion being used for deciding whether a franchise will close or stay open involves whether sales goals were met (can you imagine what goals were set much less met?) Profits, if any, will be a factor too, along with the condition of their facilities and whether they have all three Chrysler brands (Chrysler, Dodge and Jeep) under one roof.



• Up to 800 of 3,200 dealers will get the bad news otherwise known as “rejecting franchise agreements.” That’s a quarter of Chrysler showrooms around the country. Thought of another way, it means that probably 50 percent of the Chrysler dealers in big urban areas will be closing. There apparently are way too many Chrysler dealers in the Northeast.



• You can see the problem more clearly when you realize that Chrysler gets 90 percent of its sales from 50 percent of its dealers, according to bankruptcy documents currently on file.

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The thing that strikes you about these car company press conferences is all the manufactured enthusiasm. Arrayed before us at an idle Ford SUV and truck plant on this occasion were the leaders of Ford, the leaders of Ford's unions and the governor of Michigan, Jennifer Granholm, who seemed so energized she was practically doing handstands. I get it that Granholm and these car salesmen want the audience of journalists to buy into their optimism about Ford, but they really take it overboard.

Yes, this plant — idle since November — will soon be retooled so it can start producing smaller, greener vehicles including an all-electric version of the Ford Focus. Yes, Ford seems better positioned than any of the Big Three to make the pivot from gargantuan Navigators and Expedtions to more economical models that get good mileage without sending a black cloud of pollution everywhere they go. So, yes, Ford deserves a pat on the back for heading in a direction many consumers appreciate. (That bit about consumer appreciation for smaller cars is evident in the many, many vehicles that Japanese and Korean automakers produce and sell in this country. Would that Ford could produce cars of similar quality.)

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Taxpayers may never get back billions of dollars lent to Chrysler, according to various reports.

Testifying in bankruptcy court on Monday, one of the top financial advisers overseeing Chrysler's restructuring said the U.S. government may never get back its loans to the company.

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A day after Chrysler agreed to file for Chapter 11 bankruptcy and form an alliance with Italian automaker Fiat, the president of the United Auto Workers mustered up some optimism for the beleaguered industry.

"This is an opportunity," Ron Gettelfinger told CBS' The Early Show Friday. "We just want to keep the American auto industry going."

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The announcement today that Chrysler is filing for bankruptcy came with something of a populist outburst from President Obama. The president sought to portray the move as an important step towards the Chrysler's eventual revival, and lauded the sacrifices made by the autoworkers' union and the majority debt holders. But he also took a swipe at hedge fund managers for what he described as their decision to hold out for a taxpayer bailout.

"I don't stand with them," Mr. Obama said. "I don't stand with those who held out when everybody else is making sacrifices."

There were strong words, but they left us wondering: What is really going on here?

To find out, we asked CBS News business Producer Guy Campanile to break down Chrysler's collapse and talk about how the fallout will impact investors.

CBSNews.com: Do we know who these investment firms and hedge funds are that the president is criticizing?

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While Chrysler may well be heading for bankruptcy, the White House is still holding out hope that the company survive.

"Our hope and expectation, and the president has said, [is that] the bankruptcy would be quick, not result in liquidation, and Chrysler would come out the other end a company ready, leaner, and able to compete," Vice President Joe Biden said on CBS' The Early Show Thursday.

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