Breakingviews-Wall St could learn a thing or two from Detroit
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Antony Currie
NEW YORK, Jan 3 (Reuters Breakingviews) - Wall Street could learn a thing or two from Detroit about getting the business back on the road. Both needed government aid in 2008. But it is the automakers that have restructured and become decently profitable in straitened times. Motown’s chiefs can more easily justify big pay days too.
Uncle Sam attached more strings to bailing out General Motors (GM.N) and Chrysler than it did to the likes of Bank of America (BAC.N) and Citigroup (C.N). The two Motown manufacturers had to slash dealerships and brands and cut factory worker pay to the same levels as foreign rivals. Ford (F.N) took similar measures, too.
Banks also restructured by shedding assets and businesses, but not as much. And as the fifth anniversary of the bailouts approaches, most of the bulge bracket U.S. investment banks are only eking out single-digit returns on equity. That’s well below the rule-of-thumb cost of capital of 10 percent.
Detroit, meanwhile, is cranking out cash. General Motors’ pre-tax margin in North America is a healthy 8 percent or more while Ford routinely bests 10 percent – a level once reserved for the best luxury carmakers.
So what can the Motor City teach Wall Street? First, that it pays to make swift strategic decisions on product lines. Only Swiss bank UBS (UBSN.VX) has taken the real bold step of shutting down whole swaths of fixed-income trading. And that was hardly a decision taken quickly.
Second, banks have to learn that compensation needs to fit the environment. Investment bank bonuses are lower than before the crisis on an absolute basis, but still hover around 40 percent of revenue. Reducing that would give an immediate boost to ROE. Goldman Sachs’ (GS.N) would jump from 8.8 percent to 12.3 percent for the first nine months of the year if pay fell by a quarter, to about one-third of revenue.
Putting shareholders first has its own rewards, too. Ford Chief Executive Alan Mulally and Executive Chairman Bill Ford took home $43.5 million between them last year, or 0.55 percent of net income. Applying the same metric would double pay to $24 million for Goldman’s Lloyd Blankfein. JPMorgan’s (JPM.N) Jamie Dimon, meanwhile, would net around $100 million, almost five times his 2011 reward.
It’s unlikely a bank will be able to hand over that much again for a long time. But it illustrates that despite the challenges they still face, especially on Europe, Detroit’s Big Three have responded to the challenge much better than Wall Street.
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(Editing by Robert Cole and Martin Langfield)
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