Did General Motor's Financial Controls Fail, So That A Synthetic, Made-Up, Business Utilizing Minority Status Became 80 Million Dollars Richer?

Implications: Did General Motors' purchasing relax its standards for oversight and for credit allocation for FUCI Metals, because FUCI was set up as a minority business enterprise? Or, was GM in on it from the beginning, but lost control of it?

Analysis:

In the 1990s General Motors purchasing was managed by a very smart executive who had risen through the ranks, Harold Kutner. Mr. Kutner was unique in OEM American automotive in that he was acutely aware of the danger associated with the OEM automotive industry's short term approach to raw material sourcing. He knew that a rise in commodity prices (which, in fact occurred, and has evolved into what is now called a commodity price supercycle) could reck havoc on the costs of metals and energy, and he, correctly, suspected that such an event was looming on the horizon with the end of communism and the dramatic growth of the Asian economies.

He therefore organized, within the company's purchasing group, commodity management teams reporting directly to one of the  executive directors, all of whom reported directly to him. The commodity metals purchasing management group, and all of the others, were charged with managing the risk of price volatility of the commodities the direct purchasing of which, as commodities, they also oversaw.

Kutner was able to accomplish this unique innovation, at least in the OEM American automotive industry, because of his relationship with the then rapidly rising Rick Wagoner, who had come out of GM's finance staff to be the heir apparent to the then Chairman and CEO, John Smith, who had been brought in from the outside; he, Smith, had previously been Chairman of Procter & Gamble, to stop the carnage wrought by years of mismanagement. This close relationship with the CEO, apparent, allowed Kutner the freedom to tell the finance staff to keep out of what his teams were doing in hedging metals and fuel and stick solely to currency management through hedging.

One of the first successes of Kutner's commodity metals management group in the late 1990s was a series of trades through which GM got the right to buy a large quantity of aluminum at a very good price. To realize the gain GM was obligated to take physical delivery of a large quantity of aluminum.

GM was not a member of any trading exchange, so the aluminum was left in LME warehouses; it belonged, however, to GM.

Kutner decided that since GM owned the aluminum at below market prices it, the excess of supply over near term need of the aluminum, should be sold off to realize the gain and the profits from that sale would go directly to GM's bottom line.

The commodity specialist who bought, sold, and traded aluminum-and magnesium-at that time, 1999, was Dan Bealko, a dour 440 pound man with a kingsized ego to match his girth, who, his coworkers felt, believed that he wasn't getting the recognition he deserved.

Bealko apparently decided to kill two birds with one stone. Rather than have GM join a trading exchange such as the LME, the NYMEX, or the COMEX, which would make its trades transparent, he suggested that GM seek out a trading company, which was already a member of an exchange, and work with that company to trade off or sell the metal. This would enable the fact that it was GM that was actually selling the metal to be masked and avoid having the sale of so much aluminum depress the market and lower the price that could be obtained. The sale, if recognized as by GM, might also have sent a false signal to the market that GM was backing off on the use of aluminum; this could have raised GM's price of magnesium or even steel.

Bealko had apparently been approached by an existing small Chicago based metal trader, FUCI metals, which seems to have proposed that it would sell control of itself to a Chicago area sports figure named Demetrius A. Brown, an African American, and thus meet the basic qualification of a minority business enterprise. Another commodity trader in Bealko's group, a GM employee who had successfully found several minority trading companies who were already then doing business with GM, was asked by the group's and Bealko's manager, who reported directly to the Executive Director for Metals, who, himself, reported to Kutner, to look at FUCI Metals as a potential minority supplier to GM.

Bealko's colleague reviewed the information on FUCI and reported that the company was too thinly capitalized and Mr. Brown was too inexperienced to be a GM vendor in such complex transactions as he thought would be necessary. Bealko was noted by his coworkers to be angered by this review, and asked that his colleague not be allowed to interfere, nor to work with FUCI, in any way, and ridiculed his advice while pointing out that he, Bealko, would be there to 'mentor' the minority company to prevent mistakes.

Kutner, or a subordinate, over-ruled the hesitant commodity trader and gave Bealko his blessing to go ahead.

GM's exuberance for minority content and its, GM's, notoriously inept financial controls now opened the way for a huge loss for the company.   

Somehow over the next 18 months or so no one noticed that a company, FUCI, with a maximum credit line of 2 million dollars was being allowed to 'borrow' aluminum from GM and sell it, or sell options to buy it, in amounts of many times its credit line. Moreover no one seems to have noticed that GM was not being paid, at first, on time, and then, not at all for the metal so borrowed and sold or for options that timed out without being exercised thus resulting in a direct gain, which should have been remitted to GM, but apparent never was.

Dan Bealko was not authorized to extend credit or nonstandard terms, yet, it seems not have been noticed that that he was doing exactly that.

As part of a 'strategy' to keep Bealko was allowing FUCI to execute documents telling its customers that the aluminum in the LME warehouse belonged to FUCI. This subterfuge allowed FUCI to collateralize options deals with its customers, such as ALCOA, which never knew that FUCI did not have the capital or the metal to collateralize its options or sales. ALCOA, was dealing with an agent rather than a principal.

It will probably turn out at the trial that Bealko's defense will be that he thought he was gaming the market on behalf of GM, and with his upper management's knowledge, and making it look as if FUCI owned the metal was just part of the strategy.

The problem was that FUCI's customers paid FUCI, an agent, instead of GM, the principal, in the transaction, under the false assumption that they were dealing with the principal. It is not even remotely possible that customers would have paid up to 80 million dollars to gain options to buy or direct possession of aluminum, which was not the seller's property and which the seller did not have authorization to sell. Alcoa has sued FUCI and Brown separately for nondelivery after payment was made.

The trial in this matter will greatly embarrass GM, because I think Bealko's defense will be that he was just doing what he was told to do in the best  way he knew how to do it, i.e., by setting up, monitoring, and actually walking a minority 'front' through the complex transactions of options trading. Naturally, if it turns out that bribes were involved then there is no defense for taking them, but that is an everyday occurrence when people handle large amounts of other people's money.

I think it is extremely unlikely that there was anyone in GM purchasing management or on its finance staff who didn't know that FUCI Metals was unqualified to handle these transactions, because it was undercapitalized. I do not believe for a minute that anyone in GM's Department of Minority Supplier Development then headed by Mr. John Haines did not recognize FUCI Metals as a mentored, GM created, front set up for the sole purpose of creating minority content dollars while serving the useful purpose of masking market transactions in aluminum, which had they been known to originate from GM would have  lessened their profitability.

Apparent FUCI as a minority company also had dealings with the Ford Motor Company; it will be interesting to see if any 'Chinese' firewalls were breached in those transactions allowing Ford to profit, or if GM, by its agent, Bealko, possibly knowingly caused Ford to operate on false information to its detriment.

Uncaring politicians in Washington turned the liability for implementing the development of minority suppliers over to the private sector at the very beginning of the modern civil rights era, but these legislative hypocrites made sure that they would get the glory if anything worked out. The OEM American automotive industry tried to jump start minority business enterprise, but after about 15 years, by the mid 1980s they realized that you could not simply legislate education, experience, and proven skills in business administration into existence, so the great unspoken conspiracy of mentoring and of fronts  was created.
 
One of the key 'legacy' costs that has brought the OEM American automotive industry to its knees has been the creation of money wasting minority fronts, which have not only absorbed billions of dollars of capital, while enriching a tiny number of 'players,' but have also driven many automotive suppliers out of business through subsidized competition.

The former Big Three adopted the strategy of forcing their suppliers to mentor minority suppliers in the mid-1980s. This enabled GM, Ford, and Chrysler to get minority content by simply moving the requirement for it 'off the books' to become a requirement for doing business with them.

Unfortunately for GM a scheme like the FUCI Metals deal to sell off an asset under the radar backfired on them when they involved in it a supplier who should have had a lockbox from the first day, but couldn't, because that would have been disrespectful.

So now we have the light of day falling on issues which GM, and its competitors, were hoping would fade away and from memory.

GM and Ford would rather that questions about the success or profitability of minority business enterprise in the American OEM automotive industry were not asked. 

Let's see what the defense attorneys for Mr. Brown and Mr. Bealko bring up in their defense that may shed light on mentoring and fronts.

Are Jesse Jackson and Al Sharpton going to testify for Brown? I heard that he has claimed that they will.