Japan Learns a Lesson: Firing Line By Matthew Buckley, Contributor 01/20/10 - 09:58 AM EST
Loading Comments... Add CommentStock quotes in this article: AMR , BA , GS , JALSF.PK , DAL There's great news from the land of the rising sun. After their "lost decades," the Japanese are beginning to realize that their government can only prop up bad companies for so long. Tuesday, Japan Air Lines(JALSF.PK Quote) declared bankruptcy and will now undergo a court-led reorganization. What's more -- in what should be a lesson for some U.S. executives -- the CEO fell on his sword and resigned. But this comes only after Japan's former ruling party, the Liberal Democrats, had kept the carrier on a government IV for years without requiring it to reform or restructure. The lesson is clear: The government umbilical cord is a hard one to sever. "The Liberal Democratic Party put off the problem for too long," said Seiji Maehara, the current transport minister. "Now that the government has changed, we will find an appropriate solution." The government is extending the ailing carrier $10 billion while at the same time strong-arming lenders into "forgiving" more than $8 billion in debt. And employees and retirees are eating more than $11 billion in concessions. American Airlines(AMR Quote) and Delta Air Lines(DAL Quote) recently tried to get JAL to dance and partner in the lucrative international market, but talks fall through. Both carriers have now said they'll wait until a new management team is put in place before they'll resume discussions. At last, an educated call from our own ailing fleets. (Japan Air Lines plans on keeping its orders for 35 Boeing(BA Quote) aircraft, which is good news on our side of the Pacific.) Over here, we appear to be about to enter our own zombie decade -- or decades -- following in the footsteps of Japan. Though they really got crushed while we have only taken a solid kick to the gut, the actions of the governments are similar. Our government, from the president's effective firing of CEOs to the current Treasury secretary and his AIG(AIG Quote) "this tape will self-destruct in 10 seconds" attitude, has shown that too much government involvement can be a bad thing. JAL specifically shows the danger to small investors of a company being considered "too big to fail." When the government decides to arbitrarily pull the protective put it has put in place it hurts the guy on Main Street. The Japanese media is reporting that scores of small investors were buying JAL stock in the past couple of weeks because they thought the government once again would bail out the carrier. They believed it was ... um ... "too big to fail," to use a phrase I've heard a lot over the past couple of years. We saw such arbitrary government action with now-defunct Lehman Brothers. Dick Fuld must be sitting in the corner of a room somewhere, rocking back and forth in a tight white coat and saying, "Why not me? Why not me?" We saw CIT Group roll over and turtle, and as taxpayers we ate $2.3 billion that the government generously funneled into that pit a year ago. But when we're talking trillions in deficits for as far as the eye can see, a billion here and a billion there really doesn't amount to much. Did I just write that? But the good news with the rare U.S. bankruptcy is that Goldman Sachs(GS Quote) made an estimated $1 billion on CIT going down. Firing line: When the government gets too involved in business it creates an implied put that leads investors to a false sense of security and encourages excessive risk taking, and excessive risk taking is exactly what caused the current financial crisis. Free markets, with the right amount of regulation, are smarter than politicians.