This post first appeared on Minyanville.
It's official: General Motors (GM), the world's largest car company for more than 75 years, will drag its $82 billion in assets and $173 billion in liabilities into bankruptcy court.
The long-awaited move leaves the US government as GM's majority owner. Washington is betting more than $50 billion in taxpayer money that its turnaround plan can transform GM into a slimmed-down, dynamic powerhouse in the rapidly changing global automotive industry - despite mountains of debt, labor disputes, high fuel prices, and anemic sales.
The GM bankruptcy will allow its new public-employee chieftains to more quickly downsize the bloated firm, shuttering dealers, ditching struggling brands like Hummer and Saturn, as well as rapidly renegotiating labor contracts. According to the Wall Street Journal, the protection of Chapter 11 bankruptcy will also enable the company to rid itself of nearly $80 billion in debt.
And although GM’s bankruptcy filing may speed its way through the courts, as did Chrysler's (and the company could emerge from bankruptcy as early as this week), the 2 failed automakers’ cases couldn't be more different.
First, the sheer size of GM -- with nearly 3 times the assets and a fraction of the debt Chrysler had when it filed for bankruptcy protection April 30 -- will make its proceedings infinitely more complex. Pacifying a web of creditors, dealers, labor groups, and investors will be no easy task.
In addition, when GM eventually does emerge from bankruptcy, around 60% of its equity will be owned by Uncle Sam, since more than $50 billion in government loans will be converted to equity.
By contrast, Chrysler used bankruptcy protection in part, to cement a sale of key assets to Italy’s Fiat, which will own the new Chrysler in conjunction with labor unions, while the government holds a small, less-than-10% stake. Congressional meddling into its new Detroit-based Frankenstein's monster could hold up decisions at GM, as major as which brands to scuttle to trivialities like which brand of paperclips to use.
The Obama Administration reiterated that government ownership will be transitory, predicting that GM could once again be a public company within 6 to 18 months. During that time however, competitors like Ford (F), Toyota (TM) and Hyundai can leap ahead as GM focuses on cleaning up old messes and charting a new path for the future. Analysts say, however, that a new government-enhanced GM could emerge with an unfair advantage over companies like Ford that didn’t need to be bailed out.
Finally, and perhaps more importantly, GM must regain the trust of a country whose loyalty to the brand was based not on quality craftsmanship or reliability, but on patriotism. Without a dedicated client based in the United States that buys its cars because they are superior to those manufactured by its foreign competitors, the restructuring of GM will fail in even its most modest aims.
The automobile may have been invented in the United States, but its construction was perfected elsewhere. The turning of that tide will be the ultimate test of this brave new era in American car-making.
Showing posts with label gm. Show all posts
Showing posts with label gm. Show all posts
Wednesday, June 3, 2009
Tuesday, April 14, 2009
GM: One Step Closer to Nationalization
This post first appeared on Minyanville.
The great modern American nationalization experiment is underway: General Motors (GM), once the largest automaker in the world, has become a sort of Frankenstein's monster for the US government.
Bloomberg reports the Obama Administration is stepping up pressure on management, unions and creditors to make further concessions, and is considering taking a sizable equity position in the once-proud Detroit firm. The move, which would swap out some of the outstanding $13.4 billion in government loans for stock in a new, slimmed-down, cleaned-up version of GM, is the latest in a series of steps toward outright nationalization.
Analysts say the swap would diminish the rights of creditors, to whom the company offered around 90% ownership in a recent restructuring plan - a plan rejected by government officials. Under the Obama Administration's preferred tact of temporary state ownership, employees owed pension benefits would end up faring better than bondholders.
The government aims to take an ownership interest in GM, then quickly use the cover of bankruptcy courts to hack off the 'bad' parts of the firm. With a fresh start, free of legacy obligations and under performing divisions, Washington says it would quickly divest of it's stake and let the restructuring process continue.
We've by now become almost numb to government-led bailouts of failed companies, most notably American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE). The details are almost an afterthought, as the complexity of each scenario renders casual analysis almost a waste of time. The GM situation, however, could be a blueprint for future intrusion of the federal government into private enterprise.
Secured lenders, as is the government in the case of GM, often prefer a bankruptcy filing when companies get into trouble since it can enable the quickest repayment of their loans in full. Unsecured creditors and equity owners are left holding the bag.
The Bush Administration before him and now Obama have set a precedent: Emergency, secured loans are a likely precursor to state ownership. Notably, the huge bailouts of Citigroup (C) and Bank of America (BAC) were executed through portfolio guarantees and capital injections, not secured loans to the company itself. Not yet, anyway.
Despite efforts on the part of officials to play down the government's role in running GM, or AIG, or Citigroup, or Bank of America, we have entered an economic reality where business success, rather than relying on vision, strategy and good practices, is becoming increasingly reliant on political acumen.
By adding layers of red tape and palm-greasing to our already politicized economy, we move closer and closer to an economic system directed not by the collective will of the many, but rather one controlled by an ever-shrinking group of power brokers and political puppeteers.
This, despite loud proclamations of an impending return to economic vibrancy, is not a welcome development.
The great modern American nationalization experiment is underway: General Motors (GM), once the largest automaker in the world, has become a sort of Frankenstein's monster for the US government.
Bloomberg reports the Obama Administration is stepping up pressure on management, unions and creditors to make further concessions, and is considering taking a sizable equity position in the once-proud Detroit firm. The move, which would swap out some of the outstanding $13.4 billion in government loans for stock in a new, slimmed-down, cleaned-up version of GM, is the latest in a series of steps toward outright nationalization.
Analysts say the swap would diminish the rights of creditors, to whom the company offered around 90% ownership in a recent restructuring plan - a plan rejected by government officials. Under the Obama Administration's preferred tact of temporary state ownership, employees owed pension benefits would end up faring better than bondholders.
The government aims to take an ownership interest in GM, then quickly use the cover of bankruptcy courts to hack off the 'bad' parts of the firm. With a fresh start, free of legacy obligations and under performing divisions, Washington says it would quickly divest of it's stake and let the restructuring process continue.
We've by now become almost numb to government-led bailouts of failed companies, most notably American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE). The details are almost an afterthought, as the complexity of each scenario renders casual analysis almost a waste of time. The GM situation, however, could be a blueprint for future intrusion of the federal government into private enterprise.
Secured lenders, as is the government in the case of GM, often prefer a bankruptcy filing when companies get into trouble since it can enable the quickest repayment of their loans in full. Unsecured creditors and equity owners are left holding the bag.
The Bush Administration before him and now Obama have set a precedent: Emergency, secured loans are a likely precursor to state ownership. Notably, the huge bailouts of Citigroup (C) and Bank of America (BAC) were executed through portfolio guarantees and capital injections, not secured loans to the company itself. Not yet, anyway.
Despite efforts on the part of officials to play down the government's role in running GM, or AIG, or Citigroup, or Bank of America, we have entered an economic reality where business success, rather than relying on vision, strategy and good practices, is becoming increasingly reliant on political acumen.
By adding layers of red tape and palm-greasing to our already politicized economy, we move closer and closer to an economic system directed not by the collective will of the many, but rather one controlled by an ever-shrinking group of power brokers and political puppeteers.
This, despite loud proclamations of an impending return to economic vibrancy, is not a welcome development.
Tuesday, April 7, 2009
The Great SUV Baillout?
This post first appeared on Minyanville.
The double standard continues.
There seems to be no limit to the amount of money the federal government is willing to spend to prop up our broken financial system. But when it comes to putting money in the pockets of average Americans, or support policies that will foster energy independence, Washington cries broke.
The Wall Street Journal reports that Congress is throwing weight behind a so-called "cash for clunkers" program, whereby owners of SUVs and trucks can receive a kickback for scrapping their gas-guzzlers in favor of more energy-efficient vehicles. The catch: The handout is likely to be capped at far less than the clunkers' trade-in value.
To be sure, the program is a step in the right direction. The fewer Escalades (GM) and old Suburbans clogging up our freeways and spitting out carbon dioxide, the better. Not to mention, cars aren't exactly flying off the lot at American dealships - a few new purchases wouldn't hurt the forturnes of GM, Chrysler and Ford (F).
But the initiative would be a lot more effective if it made economic sense. In an environment where making the mortgage payment, putting food on the table, and paying the bills on time are the top financial priorities, eating a few grand to save the trees is barely on the radar.
Sure, a policy that paid full trade-in value for pollution-spewing trucks wouldn't be cheap - but neither is dumping hundreds of billions of dollars into insolvent banks. And it might actually do some good. I mean, insuring more than $300 billion of Citigroup's (C) bloated balance sheet is nice - but my credit line still got cut.
There's clear lesson here: If you want to get on the government dole in a meaningful way, make sure to come as close as possible to bankrupting the entire country. Anything less just won't cut it.
Take GM, whose former CEO Rick Wagoner was fired by the Obama Administration for poor strategic decisions and a turnaround plan that wasn't up to snuff. Meanwhile, Bank of America (BAC) CEO Ken Lewis ran his firm into the ground so thoroughly that he would have taken the entire financial system down with him - had Washington not stepped in with over $200 billion in bailout money and federal guarantees.
The government doesn't seem to have a problem overpaying for toxic financial assets -- in fact, it's encouraging pension funds to do just that -- but when it comes to handing over taxpayer money to, well, taxpayers... The well suddenly runs dry.
The double standard continues.
There seems to be no limit to the amount of money the federal government is willing to spend to prop up our broken financial system. But when it comes to putting money in the pockets of average Americans, or support policies that will foster energy independence, Washington cries broke.
The Wall Street Journal reports that Congress is throwing weight behind a so-called "cash for clunkers" program, whereby owners of SUVs and trucks can receive a kickback for scrapping their gas-guzzlers in favor of more energy-efficient vehicles. The catch: The handout is likely to be capped at far less than the clunkers' trade-in value.
To be sure, the program is a step in the right direction. The fewer Escalades (GM) and old Suburbans clogging up our freeways and spitting out carbon dioxide, the better. Not to mention, cars aren't exactly flying off the lot at American dealships - a few new purchases wouldn't hurt the forturnes of GM, Chrysler and Ford (F).
But the initiative would be a lot more effective if it made economic sense. In an environment where making the mortgage payment, putting food on the table, and paying the bills on time are the top financial priorities, eating a few grand to save the trees is barely on the radar.
Sure, a policy that paid full trade-in value for pollution-spewing trucks wouldn't be cheap - but neither is dumping hundreds of billions of dollars into insolvent banks. And it might actually do some good. I mean, insuring more than $300 billion of Citigroup's (C) bloated balance sheet is nice - but my credit line still got cut.
There's clear lesson here: If you want to get on the government dole in a meaningful way, make sure to come as close as possible to bankrupting the entire country. Anything less just won't cut it.
Take GM, whose former CEO Rick Wagoner was fired by the Obama Administration for poor strategic decisions and a turnaround plan that wasn't up to snuff. Meanwhile, Bank of America (BAC) CEO Ken Lewis ran his firm into the ground so thoroughly that he would have taken the entire financial system down with him - had Washington not stepped in with over $200 billion in bailout money and federal guarantees.
The government doesn't seem to have a problem overpaying for toxic financial assets -- in fact, it's encouraging pension funds to do just that -- but when it comes to handing over taxpayer money to, well, taxpayers... The well suddenly runs dry.
Monday, March 30, 2009
GM Runs Out of Road?
This post first appeared on Minyanville.
Taking money from the US government isn't just risky; it can cost you your job.
Just ask Rick Wagoner, the now former Chief Executive Officer of General Motors (GM). After accepting billions in aid from the Treasury Department -- but failing to produce an acceptable restructuring plan -- Wagoner was forced out of the beleaguered automaker over the weekend.
The Wall Street Journal reports that, in addition to removing Wagoner, the Obama administration’s auto-industry team floated the notion that bankruptcy may be the best option for Chrysler and GM. Although the government said it doesn’t have plans to oust Chrysler CEO Robert Nardelli, it did suggest that it's growing tired of propping up the struggling company.
The shakeup at GM didn’t end with Wagoner: A large part of the board of directors was also asked to leave, and Chief Operating Officer Frederick “Fritz” Henderson was named Chief Executive. He, along with a new-and-improved board and management team, will receive a 60-day credit lifeline by which to devise a more rigorous turnaround plan.
After the AIG (AIG) bonus debacle, financial firms are scrambling to return TARP money, lest they be subject to similar scrutiny (or similar witch-hunts). Goldman Sachs (GS), JPMorgan Chase (JPM) and others have suggested they’re working on plans to repay billions in government aid.
Whether its bonuses at AIG, corporate jets at Citigroup (C), or executive-suite redecoration at Merrill Lynch (BAC), the federal government is taking a rather more active role in any company that's required federal money in order to stay afloat.
The US government now controls some of the biggest companies in the world. And if this weekend's actions are any indication, it plans to fully wield that power.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Taking money from the US government isn't just risky; it can cost you your job.
Just ask Rick Wagoner, the now former Chief Executive Officer of General Motors (GM). After accepting billions in aid from the Treasury Department -- but failing to produce an acceptable restructuring plan -- Wagoner was forced out of the beleaguered automaker over the weekend.
The Wall Street Journal reports that, in addition to removing Wagoner, the Obama administration’s auto-industry team floated the notion that bankruptcy may be the best option for Chrysler and GM. Although the government said it doesn’t have plans to oust Chrysler CEO Robert Nardelli, it did suggest that it's growing tired of propping up the struggling company.
The shakeup at GM didn’t end with Wagoner: A large part of the board of directors was also asked to leave, and Chief Operating Officer Frederick “Fritz” Henderson was named Chief Executive. He, along with a new-and-improved board and management team, will receive a 60-day credit lifeline by which to devise a more rigorous turnaround plan.
After the AIG (AIG) bonus debacle, financial firms are scrambling to return TARP money, lest they be subject to similar scrutiny (or similar witch-hunts). Goldman Sachs (GS), JPMorgan Chase (JPM) and others have suggested they’re working on plans to repay billions in government aid.
Whether its bonuses at AIG, corporate jets at Citigroup (C), or executive-suite redecoration at Merrill Lynch (BAC), the federal government is taking a rather more active role in any company that's required federal money in order to stay afloat.
The US government now controls some of the biggest companies in the world. And if this weekend's actions are any indication, it plans to fully wield that power.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Wednesday, March 18, 2009
Moody's List of Riskiest Companies Forgets to Include Moody's
This post first appeared on Minyanville.
Make-up calls belong in basketball, not finance.
In an attempt to render itself useful, Moody’s Investors Services (MCO) is issuing a list dubbed “The Bottom Rung,” cataloguing the riskiest 15% of all companies it tracks. The effort, which the company claims is an attempt to get ahead of the looming mountain of corporate defaults, has already ruffled a few feathers.
According to the Wall Street Journal, Eastman Kodak (EK), which appeared on the list, issued a harsh rebuttal last night, saying “Any speculation, however informed, suggesting that Kodak is less than financially sound is irresponsible.”
Among the list of allegedly shaky companies: Familiar names like Ford (F), General Motors (GM) and Chrysler made the cut, along with airlines AMR Corp (AMR) and US Airways (LCC). Retailers, restaurants and even a few energy firms also appeared in this corporate hall of shame, in addition to chipmaker Advanced Micro Devices (AMD) and chemical manufacturer Georgia Gulf Corp (GGC).
Moody’s, along with fellow ratings agencies Standard and Poor’s (MHP) and Fitch Ratings Services, played a major role in the recent financial market meltdown. Conflicts of interest with debt issuers, faulty models and lax internal controls all led to credit ratings that were unreliable at best, deceptive at worst.
Unfortunately for Moody’s, gone are the days when investors valued haphazard assessments of credit risk. The Bottom Rung, while generating ample work for Moody’s customer-complaints department, isn’t likely to reclaim any of the company’s lost glory.
When a firm that specializes in assessing whether borrowers will repay their debts fails to see the biggest wave of defaults in a generation, it’s safe to say that company isn’t very good at its job.
Minyanville's Jeff Macke said it best last week:
In an environment in which DC is creating and changing the laws of corporate governance on a daily basis, it’s simply lunacy to allow 3 groups complicit in the creation of the underlying problem to go on their merry ways while members of the House endlessly lambast bankers for being bankers. Take the gun away from the 5 year old; suspend the ratings authority of Moody’s, S&P and Fitch.
Thursday, February 19, 2009
Auto Bailout: Part Deux
This post first appeared on Minyanville.
In a scene reminiscent of last year’s near-collapse, General Motors (GM) and Chrysler LLC told government officials that, without more than $20 billion in additional rescue money, bankruptcy is their only option. Required to submit restructuring plans under the terms of the first federal bailout, GM and Chrysler outlined a strategy for revitalizing their firms and returning to profitability.
Twenty billion dollars, GM’s CEO Rick Waggoner argues, is a paltry sum when compared to the estimated $100 billion the firm would need to make it through a traditional bankruptcy process, according to the Wall Street Journal. Chrysler, for its part, said $24 billion would suffice to skate through bankruptcy proceedings, should Washington fail to produce the requested funds.
In addition to squeezing taxpayers for more cash, the firms announced tens of thousands of layoffs and other cost-cutting measures.
GM plans out phase out its Hummer brand as early as this year, since no buyer emerged for the production facilities that crank out the oversized gas guzzlers. Saturn could be gone by 2011, as could Pontiac, and the company is trying to sell Saab. Five factories will be shut, 47,000 jobs will be cut, and dealerships will be closed as GM tries to rein in its bloated cost structure.
Chrysler is fighting battles of its own, as Congress is becoming increasingly hostile toward the company’s majority owner, private-equity firm Cerberus Capital Management. Lawmakers want to see Cerberus pony up cash for its struggling investment before any additional taxpayer funds are put to work.
Progress has been made by GM, Chrysler as well as Ford (F) in negotiations with the powerful United Auto Works union, but there are still outstanding items that need to be resolved before any restructuring can be pushed through.
Earlier this week, President Obama announced that the so-called “car czar” would never be crowned, opting instead to task Treasury Secretary Tim Geithner and Lawrence Summers, chairman of the National Economic Council, with cleaning up Detroit’s mess.
And quite a mess it is.
With the economy in free fall and the nearly $1 trillion stimulus package now approved, allowing the automakers to fail could be a severe setback for the Obama administration. On the other hand, growing public discontent over handouts to industries that brought about their own demise makes this a prickly political issue.
Ultimately, Obama may be looking to treat the situation in Detroit as a trial run: The relatively simple task of unwinding 2 cash-starved companies will be child’s play compared to fixing the country’s ailing financial system.
The nation's biggest banks, Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC), continue to reel as losses mount, and the economic crisis deepens. And as Treasury Secretary Geithner muddles along with his bank-rescue package, officials may be biding their time and sharpening their management skills.
In a scene reminiscent of last year’s near-collapse, General Motors (GM) and Chrysler LLC told government officials that, without more than $20 billion in additional rescue money, bankruptcy is their only option. Required to submit restructuring plans under the terms of the first federal bailout, GM and Chrysler outlined a strategy for revitalizing their firms and returning to profitability.
Twenty billion dollars, GM’s CEO Rick Waggoner argues, is a paltry sum when compared to the estimated $100 billion the firm would need to make it through a traditional bankruptcy process, according to the Wall Street Journal. Chrysler, for its part, said $24 billion would suffice to skate through bankruptcy proceedings, should Washington fail to produce the requested funds.
In addition to squeezing taxpayers for more cash, the firms announced tens of thousands of layoffs and other cost-cutting measures.
GM plans out phase out its Hummer brand as early as this year, since no buyer emerged for the production facilities that crank out the oversized gas guzzlers. Saturn could be gone by 2011, as could Pontiac, and the company is trying to sell Saab. Five factories will be shut, 47,000 jobs will be cut, and dealerships will be closed as GM tries to rein in its bloated cost structure.
Chrysler is fighting battles of its own, as Congress is becoming increasingly hostile toward the company’s majority owner, private-equity firm Cerberus Capital Management. Lawmakers want to see Cerberus pony up cash for its struggling investment before any additional taxpayer funds are put to work.
Progress has been made by GM, Chrysler as well as Ford (F) in negotiations with the powerful United Auto Works union, but there are still outstanding items that need to be resolved before any restructuring can be pushed through.
Earlier this week, President Obama announced that the so-called “car czar” would never be crowned, opting instead to task Treasury Secretary Tim Geithner and Lawrence Summers, chairman of the National Economic Council, with cleaning up Detroit’s mess.
And quite a mess it is.
With the economy in free fall and the nearly $1 trillion stimulus package now approved, allowing the automakers to fail could be a severe setback for the Obama administration. On the other hand, growing public discontent over handouts to industries that brought about their own demise makes this a prickly political issue.
Ultimately, Obama may be looking to treat the situation in Detroit as a trial run: The relatively simple task of unwinding 2 cash-starved companies will be child’s play compared to fixing the country’s ailing financial system.
The nation's biggest banks, Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC), continue to reel as losses mount, and the economic crisis deepens. And as Treasury Secretary Geithner muddles along with his bank-rescue package, officials may be biding their time and sharpening their management skills.
Friday, February 13, 2009
Americans to More Debt: Talk to the Hand
This post first appeared on Minyanville.
While congressmen berating bank CEOs for their unwillingness to lend out their bailout money makes for a nice media clip, it reflects the growing disconnect between our elected officials and any semblance of reality. Not that the relationship was ever particularly close - but lawmakers are floundering for good press while the nation’s economic future slips further and further from their tenuous grasp.
Bloomberg reports American consumers are wary of taking on more debt, as expectations about eroding economic conditions are forcing people, to *gasp* make responsible decisions about their personal finances.
Bloomberg cites Midsouth Bancorp (MSL) president C.R “Rusty” Cloutier, who says that, despite aggressive marketing, town hall meetings, and $20 million in TARP money, Midsouth's customers just aren’t taking out new loans.
This is the rejection of debt Professor Depew speaks of when discussing the structural deflation we’re currently experiencing.
Credit is based on trust. And while conventionally we view this relationship as one in which the lender must trust the borrower to repay his debt -- at least to an extent that’s commensurate with the interest rate -- it does go both ways.
As lenders like Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) are increasingly being painted as corporate marauders out to rape and pillage the American public, would-be borrowers are wary of putting their financial future in the hands of these men of questionable repute. And with credit-card companies rushing to alter terms, it’s no surprise consumers are reluctant to extend themselves further.
Still, lawmakers are pushing through an economic stimulus package that depends, in part, on a willingness on the part of consumers to keep spending. Their delusion is only outmatched by their hubris - the belief that a bunch of self-interested politicos can coerce the average American into making ruinous financial decisions for the betterment of the country.
Floundering industries -- notably automakers and homebuilders -- are counting on government subsidies to encourage Americans to keep borrowing to buy their products. But what General Motors (GM), Ford (F), Centex (CTX) and KB Homes (KBH) don't understand is this: We just don't want what they're peddling. And we certainly don't want to borrow against it.
The transition from a debt-dependent, credit-drunk consumerist society won't be immediate: It's taken 18 months of financial panic for evidence of the shifting social mood to make its way into the mainstream.
But as the economic outlook continues to darken, the country becomes more disenfranchised, and the government grows ever-more addicted to sound bites and empty promises, reality will set in.
For the past 20 years, we've been blithely driving along an economic road that ends in a cliff. And that cliff is now in our rear-view mirror. We're tumbling, groping for any branch that can save us from the fall. But each one of these new government programs, bailouts and rescues simply tries to set us gently back on the road from which we only just plummeted.
We already know where that path ends, and it ain't pretty. What say we try another road?
While congressmen berating bank CEOs for their unwillingness to lend out their bailout money makes for a nice media clip, it reflects the growing disconnect between our elected officials and any semblance of reality. Not that the relationship was ever particularly close - but lawmakers are floundering for good press while the nation’s economic future slips further and further from their tenuous grasp.
Bloomberg reports American consumers are wary of taking on more debt, as expectations about eroding economic conditions are forcing people, to *gasp* make responsible decisions about their personal finances.
Bloomberg cites Midsouth Bancorp (MSL) president C.R “Rusty” Cloutier, who says that, despite aggressive marketing, town hall meetings, and $20 million in TARP money, Midsouth's customers just aren’t taking out new loans.
This is the rejection of debt Professor Depew speaks of when discussing the structural deflation we’re currently experiencing.
Credit is based on trust. And while conventionally we view this relationship as one in which the lender must trust the borrower to repay his debt -- at least to an extent that’s commensurate with the interest rate -- it does go both ways.
As lenders like Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) are increasingly being painted as corporate marauders out to rape and pillage the American public, would-be borrowers are wary of putting their financial future in the hands of these men of questionable repute. And with credit-card companies rushing to alter terms, it’s no surprise consumers are reluctant to extend themselves further.
Still, lawmakers are pushing through an economic stimulus package that depends, in part, on a willingness on the part of consumers to keep spending. Their delusion is only outmatched by their hubris - the belief that a bunch of self-interested politicos can coerce the average American into making ruinous financial decisions for the betterment of the country.
Floundering industries -- notably automakers and homebuilders -- are counting on government subsidies to encourage Americans to keep borrowing to buy their products. But what General Motors (GM), Ford (F), Centex (CTX) and KB Homes (KBH) don't understand is this: We just don't want what they're peddling. And we certainly don't want to borrow against it.
The transition from a debt-dependent, credit-drunk consumerist society won't be immediate: It's taken 18 months of financial panic for evidence of the shifting social mood to make its way into the mainstream.
But as the economic outlook continues to darken, the country becomes more disenfranchised, and the government grows ever-more addicted to sound bites and empty promises, reality will set in.
For the past 20 years, we've been blithely driving along an economic road that ends in a cliff. And that cliff is now in our rear-view mirror. We're tumbling, groping for any branch that can save us from the fall. But each one of these new government programs, bailouts and rescues simply tries to set us gently back on the road from which we only just plummeted.
We already know where that path ends, and it ain't pretty. What say we try another road?
Wednesday, February 11, 2009
Fighting Debt With... Debt?
This post first appeared on Minyanville and Cirios Real Estate.
The Senate, in passing its version of the over $800 billion economic stimulus package yesterday, threw a great deal of cash at 2 industries whose products we have far too much of already. Despite the fact that we have too many cars on the road and far more homes than we do people to buy them, lawmakers are determined to prop up both the auto-making and home-building industries.
According to Bloomberg, Ford (F), General Motors (GM) and Chrysler, the latter 2 already suckling the government teat just to stay alive, will benefit from a provision that allows consumers to deduct car-loan interest payments and local sales taxes from their income tax.
Meanwhile, Centex (CTX), DR Horton (DHI) and other homebuilders are salivating at the prospect of a $15,000 tax credit for those brave enough to buy a new home. The new, more generous tax break replaces a $7,500 credit granted last year.
In what shouldn’t come as a surprise, Brian Catalde, the president of the National Association of Homebuilders (or NAHB) is pleased that his group’s intense lobbying efforts paid off.
“We’re pretty happy with the way the Senate bill is shaping up," Catalde said. "We think it will entice a lot of those people sitting on the sidelines into the marketplace.
”NAHB members nervously await the disposition of the final bill as their balance sheets remain bloated with unsold homes priced well above prevailing market prices.
Lawmakers seem determined to dig our way out our debt problem with yet more debt. By encouraging Americans to borrow more to buy the cars and homes irresponsibly manufactured by these industries in the first place, Congress and the President alike reward the very poor financial decisions that brought our economy to its knees in the first place.
To borrow the analogy from Professor Succo's piece yesterday, Economy: Code Blue, this is akin to handing an obese person a donut, telling them to munch away as long as they stay away from pizza. It just doesn't make any sense.
Among the Senate bill's numerous differences from the House’s version passed last week -- most notably the handouts earmarked for homebuilders and automakers -- it also excises more than $20 billion in funding for new public-school construction.
Once again, lawmakers display their unparalleled financial acumen: Only more McMansions will counteract the vast oversupply of schools this country is struggling to get out from under.
The Senate, in passing its version of the over $800 billion economic stimulus package yesterday, threw a great deal of cash at 2 industries whose products we have far too much of already. Despite the fact that we have too many cars on the road and far more homes than we do people to buy them, lawmakers are determined to prop up both the auto-making and home-building industries.
According to Bloomberg, Ford (F), General Motors (GM) and Chrysler, the latter 2 already suckling the government teat just to stay alive, will benefit from a provision that allows consumers to deduct car-loan interest payments and local sales taxes from their income tax.
Meanwhile, Centex (CTX), DR Horton (DHI) and other homebuilders are salivating at the prospect of a $15,000 tax credit for those brave enough to buy a new home. The new, more generous tax break replaces a $7,500 credit granted last year.
In what shouldn’t come as a surprise, Brian Catalde, the president of the National Association of Homebuilders (or NAHB) is pleased that his group’s intense lobbying efforts paid off.
“We’re pretty happy with the way the Senate bill is shaping up," Catalde said. "We think it will entice a lot of those people sitting on the sidelines into the marketplace.
”NAHB members nervously await the disposition of the final bill as their balance sheets remain bloated with unsold homes priced well above prevailing market prices.
Lawmakers seem determined to dig our way out our debt problem with yet more debt. By encouraging Americans to borrow more to buy the cars and homes irresponsibly manufactured by these industries in the first place, Congress and the President alike reward the very poor financial decisions that brought our economy to its knees in the first place.
To borrow the analogy from Professor Succo's piece yesterday, Economy: Code Blue, this is akin to handing an obese person a donut, telling them to munch away as long as they stay away from pizza. It just doesn't make any sense.
Among the Senate bill's numerous differences from the House’s version passed last week -- most notably the handouts earmarked for homebuilders and automakers -- it also excises more than $20 billion in funding for new public-school construction.
Once again, lawmakers display their unparalleled financial acumen: Only more McMansions will counteract the vast oversupply of schools this country is struggling to get out from under.
Tuesday, February 10, 2009
Ford Joins Bailout Parade?
This post first appeared on Minyanville.
Ford (F), the only US automaker not currently being propped up by federal loans, may have to contribute $4 billion to its ailing pension fund. That's cash the carmaker dearly needs to stay afloat, given abysmal auto sales from the US to Japan and everywhere in between.
According to Bloomberg, the company reported a loss of $14.3 billion for fiscal 2008 and earler this week drew all of a $10.1 billion credit facility.
As the stock market has tumbled, Ford's pension grew deeper in the whole. Future obligations now outweigh the value of it's assets and the company may have to pony up the difference. Some fear Ford's need for government assistance is inevitable, its cash troubles showing no signs of easing.
Ford is shopping around it's Volvo unit to raise capital, and is said to be in talks with China's Geely Automobile Holdings about a potential deal.
With General Motors (GM) and Chrysler already on the government dole, and once-mighty Toyota (TM) struggling to ofload cars onto cash-strapped consumers, it's a rough time to be in the business of selling cars.
Nor is it a great time to be guaranteeing pensions. The Pension Benefit Guarantee Corp, a quasi-public entity that backs corporate pension plans in the event they fail, estimates that collectively, American pensions have a $46 billion shortfall.
About half that deficit comes from firms connected to the auto industry.
This new economic stimulus package had better work.
Ford (F), the only US automaker not currently being propped up by federal loans, may have to contribute $4 billion to its ailing pension fund. That's cash the carmaker dearly needs to stay afloat, given abysmal auto sales from the US to Japan and everywhere in between.
According to Bloomberg, the company reported a loss of $14.3 billion for fiscal 2008 and earler this week drew all of a $10.1 billion credit facility.
As the stock market has tumbled, Ford's pension grew deeper in the whole. Future obligations now outweigh the value of it's assets and the company may have to pony up the difference. Some fear Ford's need for government assistance is inevitable, its cash troubles showing no signs of easing.
Ford is shopping around it's Volvo unit to raise capital, and is said to be in talks with China's Geely Automobile Holdings about a potential deal.
With General Motors (GM) and Chrysler already on the government dole, and once-mighty Toyota (TM) struggling to ofload cars onto cash-strapped consumers, it's a rough time to be in the business of selling cars.
Nor is it a great time to be guaranteeing pensions. The Pension Benefit Guarantee Corp, a quasi-public entity that backs corporate pension plans in the event they fail, estimates that collectively, American pensions have a $46 billion shortfall.
About half that deficit comes from firms connected to the auto industry.
This new economic stimulus package had better work.
Tuesday, January 27, 2009
Central Banks Fight For Survival
This post first appeared on Minyanville.
Instead, I think of a lumberjack, tenuously perched on the tip a log floating in a river, desperately trying to out-balance his foe.
Log-rolling, a sport invented by lumberjacks driving lumber downriver to sawmills, pits 2 competitors standing atop a log as it floats along the surface. Mirroring the other’s moves, each participant’s goal is to spin the other off the log into the water.
The Federal Reserve, and indeed central banks around the world, are pitted in a battle not unreminiscent of those dueling lumberjacks. Their adversary, however, is nothing so unintimidating as a single wood-chopper - they face an unwieldy, inconceivably complex national economy. Imagine herding cats - Tyrannosaurus-sized cats roaming around in packs of thousands.
Nevertheless, scores of economists, pundits and private citizens entrust their economic well-being to these monetary masters, however poor their record may be.
A piece in this morning’s Wall Street Journal entitled “Central Banks Are Creatures of Financial Crises” chronicles the history of central banks, asserting that they owe their existence to society's excesses. Asset bubbles beget dramatic financial crises, and benevolent central banks have been forced throughout history to protect the many from the bad actions of the irresponsible few.
Ultimately, however, central banks have a destabilizing effect on markets, encouraging reckless risk-taking and manipulating interest rates for the benefit of those same privileged few.
Initially established in 1913 to be a “lender of last resort,” the Federal Reserve has seen its power and influence grow. The establishment would have us believe that the Fed carefully maintains a prudent balance between inflation and growth, which we're told creates greater prosperity for all.
What we’re left to figure out on our own, however, is this: As central banks hold interest rates artificially low under the pretext of maintaining strong economic growth, paper money is devalued, and the wealth we do manage to accumulate gradually erodes in value. This is fine - so long as we don’t accumulate any wealth. Hence the perpetuatl belief that spending in vast quantities is our patriotic duty, though we support the national economy to our own detriment.
Issuing mountainous debt -- as the Federal Reserve is currently doing to “rescue” the financial system -- cheapens the value of the very dollars we now so desperately covet. Likewise, as the Treasury doles out guarantees and loans to the likes of Citigroup (C), Bank of America (BAC), Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), General Motors (GM) and Chrysler, a host of non-elected officials were somehow given the power to take money out of the wallets of average Americans.
Main Street is now working harder for fewer dollars, and each one of those dollars is worth less than it was yesterday thanks to around the whirring sounds of central bank printing presses being run around the clock. As former presidential candidate Ron Paul is apt to ask “Is there any moral justification for deliberately devaluing the currency?”
Paul’s is not a new concern, that government issuance of massive debt isn’t any way to run a country. Thomas Jefferson wrote in 1816, "To preserve our independence, we must not let our rulers load us with perpetual debt. If we run into such debt... [we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers."
Even now, however, central banks are facing what could be their greatest test. The market, which they're perennially battling, is screaming for deflation. Assets of all types, long the beneficiary of loose monetary policy, are falling in value as Americans shun debt and hoard dollars to repay loans.
At stake is not just the economic well-being of a country, or even Main Street Americans. Central banks are fighting for their own survival.
Instead, I think of a lumberjack, tenuously perched on the tip a log floating in a river, desperately trying to out-balance his foe.
Log-rolling, a sport invented by lumberjacks driving lumber downriver to sawmills, pits 2 competitors standing atop a log as it floats along the surface. Mirroring the other’s moves, each participant’s goal is to spin the other off the log into the water.
The Federal Reserve, and indeed central banks around the world, are pitted in a battle not unreminiscent of those dueling lumberjacks. Their adversary, however, is nothing so unintimidating as a single wood-chopper - they face an unwieldy, inconceivably complex national economy. Imagine herding cats - Tyrannosaurus-sized cats roaming around in packs of thousands.
Nevertheless, scores of economists, pundits and private citizens entrust their economic well-being to these monetary masters, however poor their record may be.
A piece in this morning’s Wall Street Journal entitled “Central Banks Are Creatures of Financial Crises” chronicles the history of central banks, asserting that they owe their existence to society's excesses. Asset bubbles beget dramatic financial crises, and benevolent central banks have been forced throughout history to protect the many from the bad actions of the irresponsible few.
Ultimately, however, central banks have a destabilizing effect on markets, encouraging reckless risk-taking and manipulating interest rates for the benefit of those same privileged few.
Initially established in 1913 to be a “lender of last resort,” the Federal Reserve has seen its power and influence grow. The establishment would have us believe that the Fed carefully maintains a prudent balance between inflation and growth, which we're told creates greater prosperity for all.
What we’re left to figure out on our own, however, is this: As central banks hold interest rates artificially low under the pretext of maintaining strong economic growth, paper money is devalued, and the wealth we do manage to accumulate gradually erodes in value. This is fine - so long as we don’t accumulate any wealth. Hence the perpetuatl belief that spending in vast quantities is our patriotic duty, though we support the national economy to our own detriment.
Issuing mountainous debt -- as the Federal Reserve is currently doing to “rescue” the financial system -- cheapens the value of the very dollars we now so desperately covet. Likewise, as the Treasury doles out guarantees and loans to the likes of Citigroup (C), Bank of America (BAC), Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), General Motors (GM) and Chrysler, a host of non-elected officials were somehow given the power to take money out of the wallets of average Americans.
Main Street is now working harder for fewer dollars, and each one of those dollars is worth less than it was yesterday thanks to around the whirring sounds of central bank printing presses being run around the clock. As former presidential candidate Ron Paul is apt to ask “Is there any moral justification for deliberately devaluing the currency?”
Paul’s is not a new concern, that government issuance of massive debt isn’t any way to run a country. Thomas Jefferson wrote in 1816, "To preserve our independence, we must not let our rulers load us with perpetual debt. If we run into such debt... [we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers."
Even now, however, central banks are facing what could be their greatest test. The market, which they're perennially battling, is screaming for deflation. Assets of all types, long the beneficiary of loose monetary policy, are falling in value as Americans shun debt and hoard dollars to repay loans.
At stake is not just the economic well-being of a country, or even Main Street Americans. Central banks are fighting for their own survival.
Tuesday, January 20, 2009
Foreclosures Sting Even Best Builders
This post first appeared on Minyanville and Cirios Real Estate.
Besieged by collapsing home prices and frightened banks scrounging for cash, even the real-estate industry’s brightest stars are finding there’s no place to hide. According to the New York Times, small and mid-size homebuilders who thrived during the housing boom are seeing credit lines pulled even before they miss a payment.
Banks like JPMorgan (JPM) and GMAC, the financing arm of General Motors (GM), loaned builders hundreds of billions of dollars -- even as the housing market began to falter -- to buy up vacant land. Now that demand for new homes has plunged (and buyers in some areas can pick up previously constructed homes for less than it costs to build a new one), builders’ ability to turn a profit has been effectively eliminated.
It's estimated that over 20% of the nation's homebuilders have closed their doors, even as big builders like D.R. Horton (DHI), Lennar (LEN) and Toll Brothers (TOL) limp along, bleeding cash and fighting for survival.
Lenders, for their part, are scrambling to mitigate risk.
Collateral, the term used to describe the assets against which loans are given out, protects lenders in the event of borrower default. As the value of collateral rises, banks become better protected since their loans are now backed up by a more valuable asset. In a downturn, however, falling collateral values means risk increases with each passing day.
In response, banks may ask borrowers to send in cash to make up for the lost value of their investment. These margin calls, as they’re known, can quickly force small firms into insolvency.
Such was the case for Brown Family Communities, a well-known builder in the Phoenix area. The Times reports the firm’s lender, JPMorgan, demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked, since he was yet to miss a payment and had been a longstanding client of the bank with an impeccable record. Ultimately, Brown lost the property and closed his doors, complaining “The real estate market is gone.”
Other builders have suffered a similar fate, proving that despite extensive government-led efforts to minimize losses from investments gone awry, the fundamental tenets of capitalism remain intact.
Bad investments should yield losses, period. Savvy new buyers, able to handle the risk inherent in buying distressed properties, can make bets that have the potential to reap huge rewards. This cycle of profits and losses fuels economic expansion. By forestalling losses, intervention delays recovery.
The speculative buying of vacant desert land on the edges of the Phoenix city limits in 2005 and 2006 certainly qualifies as a poor use of borrowed money. That builders are being asked for cash to cover banks’ potential losses should be seen as nothing more than prudent lending -- something builders and other real-estate investors spent the boom years conveniently forgetting.
Besieged by collapsing home prices and frightened banks scrounging for cash, even the real-estate industry’s brightest stars are finding there’s no place to hide. According to the New York Times, small and mid-size homebuilders who thrived during the housing boom are seeing credit lines pulled even before they miss a payment.
Banks like JPMorgan (JPM) and GMAC, the financing arm of General Motors (GM), loaned builders hundreds of billions of dollars -- even as the housing market began to falter -- to buy up vacant land. Now that demand for new homes has plunged (and buyers in some areas can pick up previously constructed homes for less than it costs to build a new one), builders’ ability to turn a profit has been effectively eliminated.
It's estimated that over 20% of the nation's homebuilders have closed their doors, even as big builders like D.R. Horton (DHI), Lennar (LEN) and Toll Brothers (TOL) limp along, bleeding cash and fighting for survival.
Lenders, for their part, are scrambling to mitigate risk.
Collateral, the term used to describe the assets against which loans are given out, protects lenders in the event of borrower default. As the value of collateral rises, banks become better protected since their loans are now backed up by a more valuable asset. In a downturn, however, falling collateral values means risk increases with each passing day.
In response, banks may ask borrowers to send in cash to make up for the lost value of their investment. These margin calls, as they’re known, can quickly force small firms into insolvency.
Such was the case for Brown Family Communities, a well-known builder in the Phoenix area. The Times reports the firm’s lender, JPMorgan, demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked, since he was yet to miss a payment and had been a longstanding client of the bank with an impeccable record. Ultimately, Brown lost the property and closed his doors, complaining “The real estate market is gone.”
Other builders have suffered a similar fate, proving that despite extensive government-led efforts to minimize losses from investments gone awry, the fundamental tenets of capitalism remain intact.
Bad investments should yield losses, period. Savvy new buyers, able to handle the risk inherent in buying distressed properties, can make bets that have the potential to reap huge rewards. This cycle of profits and losses fuels economic expansion. By forestalling losses, intervention delays recovery.
The speculative buying of vacant desert land on the edges of the Phoenix city limits in 2005 and 2006 certainly qualifies as a poor use of borrowed money. That builders are being asked for cash to cover banks’ potential losses should be seen as nothing more than prudent lending -- something builders and other real-estate investors spent the boom years conveniently forgetting.
Friday, January 9, 2009
Porn Tries to Get a Rise Out of Congress
This post first appeared on Minyanville.
With Washington seeming even easier than a starlet on a casting couch, even smut peddlers are clamoring for their share of the bailout pie.
Triple-X DVD sales have gone limp, tumbling 22% since last year. Hustler magazine founder and smut icon Larry Flynt, along with Girls Gone Wild creator Joe Francis, are now petitioning Congress for $5 billion to help prop up the business of selling sex.
Myriad websites, quasi-reputable news sources and witty bloggers report the pair are arguing that theirs is an industry worthy of support. According to Francis, who recently did time for alleged child abuse and prostitution charges:
"Congress seems willing to help shore up our nation's most important businesses, (and) we feel we deserve the same consideration. In difficult economic times, Americans turn to entertainment for relief. More and more, the kind of entertainment they turn to is adult entertainment."
Lawmakers must be asking themselves why they bothered rescuing Citigroup (C), General Motors (GM) and AIG (AIG) when that money could have been so much better spent.
For a fraction of what it cost to bail out the entire financial system, Congress could focus its efforts on saving a line of work even more essential to political life. The collapse of the porn industry, in addition to eliminating the entire curriculum of certain community colleges in southern California, would wreak havoc in Washington, DC.
Congressmen and lobbyists alike would spend the weekends wandering the DC streets like lost puppies in search of a teat.
And while reports indicate Flynt and Francis have thus far been unsuccessful in their money shot, they aren't likely be deterred. Most experts expect they'll they'll be coming back to Capitol Hill.
With Washington seeming even easier than a starlet on a casting couch, even smut peddlers are clamoring for their share of the bailout pie.
Triple-X DVD sales have gone limp, tumbling 22% since last year. Hustler magazine founder and smut icon Larry Flynt, along with Girls Gone Wild creator Joe Francis, are now petitioning Congress for $5 billion to help prop up the business of selling sex.
Myriad websites, quasi-reputable news sources and witty bloggers report the pair are arguing that theirs is an industry worthy of support. According to Francis, who recently did time for alleged child abuse and prostitution charges:
"Congress seems willing to help shore up our nation's most important businesses, (and) we feel we deserve the same consideration. In difficult economic times, Americans turn to entertainment for relief. More and more, the kind of entertainment they turn to is adult entertainment."
Lawmakers must be asking themselves why they bothered rescuing Citigroup (C), General Motors (GM) and AIG (AIG) when that money could have been so much better spent.
For a fraction of what it cost to bail out the entire financial system, Congress could focus its efforts on saving a line of work even more essential to political life. The collapse of the porn industry, in addition to eliminating the entire curriculum of certain community colleges in southern California, would wreak havoc in Washington, DC.
Congressmen and lobbyists alike would spend the weekends wandering the DC streets like lost puppies in search of a teat.
And while reports indicate Flynt and Francis have thus far been unsuccessful in their money shot, they aren't likely be deterred. Most experts expect they'll they'll be coming back to Capitol Hill.
Thursday, January 8, 2009
China Shuns Treasuries
This post first appeared on Minyanville.
China, now the biggest holder of US government debt, is going on a buyer's strike.
As a flight from risky financial assets pushed Treasury yields close to nil -- and as the once-red-hot Chinese economy dried up -- China's appetite for Treasuries has waned. If the trend persists, it could lead to higher borrowing costs at a time American consumers can barely afford the mountanous debt they already have.
The New York Times reports China's government is keeping more of it's vast cash reserves at home, choosing to invest in its own infrastructure rather than plow money into an investment earning them virtually nothing. Chinese banks, once encouraged to invest money abroad and actively lend to foreign borrowers, are now being urged to keep that money within their own borders.
Lower demand for US debt would lead to lower bond prices, pushing up yields. And since the Treasury market typically sets the benchmark for private borrowing, this would translate into higher rates for mortgages, credit cards and other types of consumer debt.
It's no coincidence that as Chinese appetite for American debt dried up last year, the Federal Reserve began to aggressively buy the assets China no longer wanted. Heavily invested in Treasuries, along with mortgage-backed securities issued by Fannie Mae (FNM) and Freddie Mac (FRE), China's voracious appetite for US debt is being supplanted by that of our own government.
Few experts however, expect China to abandon Treasuries altogether. Such a drastic move would effectively destroy the US economy, which would in turn be disastrous for China, not to mention the rest of the world. Still, each time the government bails out a company like General Motors (GM), Citigroup (C) or AIG (AIG) its standing with debt holders slips.
The timing couldn't be worse for the incoming administration. Promising to keep the deficit upwards of a trillion dollars for the foreseeable future, President-Elect Obama is counting on new debt issuances to finance his aggressive stimulus plan.
Without Chinese demand, Obama will be forced to rely on the Federal Reserve to be the buyer of last resort. As the Fed prints money to buy our own debt, however, each of the precious dollars Obama is pumping into the economy is worth less and less.
If this all sounds eerily familiar, it should.
A certain financial deviant, now a household name, ran a massive Ponzi scheme by repaying early investors with the money of the most recent suckers. His actual holdings were worthless - much like debt issued by a country teetering under the weight of its own massive, bloated balance sheet.
Monday, January 5, 2009
2008: Better For Banks Than You Think
This post first appeared on Minyanville.
2008 certainly tried the nerves of American bankers - but other years were far worse.
University of Michigan economics professor Mark Perry notes that the 25 bank failures last year pale in comparison to banking crises past. Skeptical of comparisons with the Great Depression, Perry suggests first comparing the current situation to the S&L crisis of the 1980s, when almost 3000 banks were forced to close up shop.
As ugly as 2008 was, the banking system survived. And although many would argue (probably correctly) that it survived only because of unprecedented government intervention, survive it did. US banks are now set to benefit from the biggest economic stimulus package in a generation.
Stuffed with cash from the housing boom, years of low interest rates, and unnaturally high risk appetites, American banks entered the crisis with reserves to spare. In a year that saw the entire global financial system buckle, federal bailouts of AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), General Motors (GM) -- and the collapse of Bear Stearns, Lehman Brothers, Wachovia and Washington Mutual -- the fact that only a handful of banks actually folded is remarkable.
Those that did collapse, however, did so in spectacular fashion.
The FDIC seized IndyMac Bank last July, in what was the second largest bank failure in history. The southern California-based lender -- which was spun off from also-defunct Countrywide -- was heavily leveraged to so-called Alt-A mortgages. Alt-A occupies the uneviable spectrum of home loans just barely good enough not to be considered subprime.
In late September, Washington Mutual collapsed, and its more than $300 billion in assets were absorbed by JPMorgan (JPM). WaMu's failure was the biggest bust of all time.
Downey Savings, another southern California mortgage specialist, survived until November, when it finally sucumbed under the weight of its portfolio of option adjustable-rate mortgages, or Option ARMs. Along with Charlotte-based Wachovia (which was forced to sell itself to Wells Fargo (WFC) in October) Downey found that giving out loans without bothering to charge interest turned out to be a bad business model.
Despite dour headlines and predictions of widespread bank runs, most smaller community banks avoided the fae of their larger brethren and survived. Weakened by worsening economic conditions, banks across the board are tightening loan guidelines and hoarding cash just to stay afloat.
2009 isn't likely to be a banner year for the country's bankers - but if they can fare at least as well as they did in 2008, few would be likely to raise a fuss.
2008 certainly tried the nerves of American bankers - but other years were far worse.
University of Michigan economics professor Mark Perry notes that the 25 bank failures last year pale in comparison to banking crises past. Skeptical of comparisons with the Great Depression, Perry suggests first comparing the current situation to the S&L crisis of the 1980s, when almost 3000 banks were forced to close up shop.
As ugly as 2008 was, the banking system survived. And although many would argue (probably correctly) that it survived only because of unprecedented government intervention, survive it did. US banks are now set to benefit from the biggest economic stimulus package in a generation.
Stuffed with cash from the housing boom, years of low interest rates, and unnaturally high risk appetites, American banks entered the crisis with reserves to spare. In a year that saw the entire global financial system buckle, federal bailouts of AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), General Motors (GM) -- and the collapse of Bear Stearns, Lehman Brothers, Wachovia and Washington Mutual -- the fact that only a handful of banks actually folded is remarkable.
Those that did collapse, however, did so in spectacular fashion.
The FDIC seized IndyMac Bank last July, in what was the second largest bank failure in history. The southern California-based lender -- which was spun off from also-defunct Countrywide -- was heavily leveraged to so-called Alt-A mortgages. Alt-A occupies the uneviable spectrum of home loans just barely good enough not to be considered subprime.
In late September, Washington Mutual collapsed, and its more than $300 billion in assets were absorbed by JPMorgan (JPM). WaMu's failure was the biggest bust of all time.
Downey Savings, another southern California mortgage specialist, survived until November, when it finally sucumbed under the weight of its portfolio of option adjustable-rate mortgages, or Option ARMs. Along with Charlotte-based Wachovia (which was forced to sell itself to Wells Fargo (WFC) in October) Downey found that giving out loans without bothering to charge interest turned out to be a bad business model.
Despite dour headlines and predictions of widespread bank runs, most smaller community banks avoided the fae of their larger brethren and survived. Weakened by worsening economic conditions, banks across the board are tightening loan guidelines and hoarding cash just to stay afloat.
2009 isn't likely to be a banner year for the country's bankers - but if they can fare at least as well as they did in 2008, few would be likely to raise a fuss.
Treasury Bails Out GMAC
This post first appeared on Minyanville.
The US taxpayer is now in the business of making subprime car loans.
Yesterday, the Treasury department announced it bought $5 billion of preferred equity in GMAC, the finance arm of General Motors (GM). The new cash -- along with a $1 billion loan to GM -- is aimed at boosting the availability of auto loans to credit-strapped consumers.
Cerebrus Capital Management, the private equity firm that owns Chrysler, holds 51% of GMAC, while GM owns a 49% stake. Cerebrus has now double-dipped into the Treasury Department’s coffers, having been bailed out for 2 massive bets gone awry.
According to the Wall Street Journal, GMAC responded to the capital injection by lowering the minimum credit score needed for retail financing to 621, down from 700. Seeking an immediate impact from its second round of federal money, GM also announced it would offer 0% financing on certain car models through next Monday.
Taxpayer support of GMAC comes on the heels of news the Federal Reserve approved the finance company’s plans to become a chartered bank, giving it access to Federal Reserve borrowing. The Fed had originally required that GMAC raise $30 billion in capital to become a bank, which it had failed to do as of Friday. But accompanying the news of the Treasury’s investment yesterday was an announcement by GMAC that it had managed to scrounge up the requisite capital.
GMAC didn’t just have its hands in auto loans - it was a major player in the subprime mortgage boom. As big industrial companies reached for fat margins in the housing market, they got burned when the mortgage market collapsed last year. General Electric (GE), which purchased subprime lender WMC Mortgage from Apollo Management in 2004, was forced to shutter the lender in 2007 as losses overwhelmed its operations.
Ford (F), GM, GE and other industrials which Toddo often refers to as “financials in drag” are reeling from their exposure to the turmoil in the credit markets. In addition to higher borrowing costs, these firms relied heavily on their finance arms to drive revenues by offering customers loans to buy their products. Now that cheap financing is all but nonexistent, these and other firms reliant on credit-flush consumers are struggling to unload their wares.
Meanwhile, Washington is spraying money around the economy in the hopes it will land in the wallets of would-be consumers. But banks, hoarding cash to offset bad debt, are reticent to start lending again. Until they do, the billions of dollars being poured into the financial system are simply plugging existing leaks.
Thus far, it has. But there are ony so many holes the government can fill at once.
The US taxpayer is now in the business of making subprime car loans.
Yesterday, the Treasury department announced it bought $5 billion of preferred equity in GMAC, the finance arm of General Motors (GM). The new cash -- along with a $1 billion loan to GM -- is aimed at boosting the availability of auto loans to credit-strapped consumers.
Cerebrus Capital Management, the private equity firm that owns Chrysler, holds 51% of GMAC, while GM owns a 49% stake. Cerebrus has now double-dipped into the Treasury Department’s coffers, having been bailed out for 2 massive bets gone awry.
According to the Wall Street Journal, GMAC responded to the capital injection by lowering the minimum credit score needed for retail financing to 621, down from 700. Seeking an immediate impact from its second round of federal money, GM also announced it would offer 0% financing on certain car models through next Monday.
Taxpayer support of GMAC comes on the heels of news the Federal Reserve approved the finance company’s plans to become a chartered bank, giving it access to Federal Reserve borrowing. The Fed had originally required that GMAC raise $30 billion in capital to become a bank, which it had failed to do as of Friday. But accompanying the news of the Treasury’s investment yesterday was an announcement by GMAC that it had managed to scrounge up the requisite capital.
GMAC didn’t just have its hands in auto loans - it was a major player in the subprime mortgage boom. As big industrial companies reached for fat margins in the housing market, they got burned when the mortgage market collapsed last year. General Electric (GE), which purchased subprime lender WMC Mortgage from Apollo Management in 2004, was forced to shutter the lender in 2007 as losses overwhelmed its operations.
Ford (F), GM, GE and other industrials which Toddo often refers to as “financials in drag” are reeling from their exposure to the turmoil in the credit markets. In addition to higher borrowing costs, these firms relied heavily on their finance arms to drive revenues by offering customers loans to buy their products. Now that cheap financing is all but nonexistent, these and other firms reliant on credit-flush consumers are struggling to unload their wares.
Meanwhile, Washington is spraying money around the economy in the hopes it will land in the wallets of would-be consumers. But banks, hoarding cash to offset bad debt, are reticent to start lending again. Until they do, the billions of dollars being poured into the financial system are simply plugging existing leaks.
Thus far, it has. But there are ony so many holes the government can fill at once.
Friday, December 19, 2008
Bush Bails Out Detroit
This post first appeared on Minyanville.
The holidays just got a bit brighter for Detroit.
This morning, President Bush authorized up to $17.4 billion in loans to rescue General Motors (GM) and Chrysler from imminent collapse. The 2 troubled automakers had asserted they'd run out of money by year's end without government assistance.
According to Bloomberg, the bailout money, which will come from the Troubled Asset Relief Program, or TARP, will provide a 3-month window for the 2 firms to devise a restructuring plan to ensure their long-term viability. At the end of March 2009, the loans are callable if the government doesn't feel its demands have been met, forcing GM and Chrysler to immediately pay the money back.
Ford (F), which said it didn't need an emergency loan, wasn't included in the proposal.
In exchange for the cash, the government will receive warrants on non-voting stock, in addition to the right to block transactions of $100 million or more. Both companies must limit executive pay, give lawmakers access to their financial records, and are barred from issuing dividends until the debt is repaid. Debt must be slashed by two-thirds.
Detroit's powerful union lobby, the United Auto Workers, accepted concessions on retirement contributions and payouts for downtime.
Bush, in saving the US auto industry at a time when the economy can ill-afford further job losses, told CNN "I have abandoned free-market principles to save the free-market system."
Rumors swirled in recent weeks about the possibility of an "orderly bankruptcy," after Congress failed to agree on terms for a bailout. The President said this morning that allowing the carmakers to collapse, given the ongoing financial turmoil and recession, would "not be a responsible course of action."
Evaluating the relative success of the industry's turnaround plans will largely be left up to the incoming Obama administration. The Wall Street Journal reports metrics for determining the firms' financial viability are "relatively lenient." And though the agreement doesn't specifically refer to a so-called "car czar," it does say the government must put someone in charge of ensuring the terms of the bailout are being met.
After months of pleading for money, GM CEO Rick Wagoner and Chrysler boss Robert Nardelli can finally return to Detroit with their pockets bulging. Payrolls can be met, vendors paid, and the books closed in January without a visit to bankruptcy court.
However, for 2 firms that seem inordinately adept at losing money -- and lots of it -- one would be hard-pressed to find too many people surprised if, before March, Wagoner and Nardelli are back on Capitol Hill explaining why they deserve a second chance.
The holidays just got a bit brighter for Detroit.
This morning, President Bush authorized up to $17.4 billion in loans to rescue General Motors (GM) and Chrysler from imminent collapse. The 2 troubled automakers had asserted they'd run out of money by year's end without government assistance.
According to Bloomberg, the bailout money, which will come from the Troubled Asset Relief Program, or TARP, will provide a 3-month window for the 2 firms to devise a restructuring plan to ensure their long-term viability. At the end of March 2009, the loans are callable if the government doesn't feel its demands have been met, forcing GM and Chrysler to immediately pay the money back.
Ford (F), which said it didn't need an emergency loan, wasn't included in the proposal.
In exchange for the cash, the government will receive warrants on non-voting stock, in addition to the right to block transactions of $100 million or more. Both companies must limit executive pay, give lawmakers access to their financial records, and are barred from issuing dividends until the debt is repaid. Debt must be slashed by two-thirds.
Detroit's powerful union lobby, the United Auto Workers, accepted concessions on retirement contributions and payouts for downtime.
Bush, in saving the US auto industry at a time when the economy can ill-afford further job losses, told CNN "I have abandoned free-market principles to save the free-market system."
Rumors swirled in recent weeks about the possibility of an "orderly bankruptcy," after Congress failed to agree on terms for a bailout. The President said this morning that allowing the carmakers to collapse, given the ongoing financial turmoil and recession, would "not be a responsible course of action."
Evaluating the relative success of the industry's turnaround plans will largely be left up to the incoming Obama administration. The Wall Street Journal reports metrics for determining the firms' financial viability are "relatively lenient." And though the agreement doesn't specifically refer to a so-called "car czar," it does say the government must put someone in charge of ensuring the terms of the bailout are being met.
After months of pleading for money, GM CEO Rick Wagoner and Chrysler boss Robert Nardelli can finally return to Detroit with their pockets bulging. Payrolls can be met, vendors paid, and the books closed in January without a visit to bankruptcy court.
However, for 2 firms that seem inordinately adept at losing money -- and lots of it -- one would be hard-pressed to find too many people surprised if, before March, Wagoner and Nardelli are back on Capitol Hill explaining why they deserve a second chance.
Tuesday, December 16, 2008
Car Czar, Treasury Could Force Automaker Bankruptcy
This post first appeared on Minyanville.
As 2008, a year most market participants would just as soon forget, draws to a close, the endgame approaches in the fight to save Detroit.
After Senate Republicans blocked a $14 billion rescue package for General Motors (GM) and Chrysler last week, the ball landed squarely in the court of the Bush Administration. Both GM and Chrysler have warned they'll be insolvent by the end of the year without government assistance.
Bloomberg reports the Treasury Department is considering a plan giving the yet-to-be-named “car czar” or the Treasury Secretary power to force GM or Chrysler into bankruptcy if either firm can't survive on its own. Officials said the troubled automakers would be required to submit turnaround plans by March 31st, but would not release further details of the plan.
Moody's Investor Services wrote in a note that a rescue would most likely include a so-called "prepackaged bankruptcy," which would remove certain roadblocks to restructuring the companies.
In a letter urging President Bush to withhold assistance, South Carolina Governor Mark Sanford asserted that using TARP money to rescue the auto industry would open the floodgates to other troubled industries. Sanford, a Republican, said “We are at a tipping point in moving from a market-based economy to a politically-based economy.”
Meanwhile, Ford (F) supports plans to rescue its beleaguered competitors, saying any failure of a major auto maker would have ripple effects throughout the industry.
The White House promised to keep tabs on any taxpayer money it decided to dole out, saying “There will be rigorous oversight to make sure that these companies are doing what they promised to do, and we want to make sure that everyone is making the concessions that they’re going to have to commit to make.”
The Treasury Department, however, doesn’t have a stellar track record on transparency and accountability. Earlier this month, the Government Accountability Office found critical oversight, transparency and regulation problems and recommended the Treasury hire additional personnel to manage TARP. All the Treasury appears to excel at is spending money.
As dire as the situation has become, it's hard to find many that truly believe Washington will allow the automakers to fail. Whether the money comes from TARP, the Federal Reserve or some yet-to-be-announced slush fund, conventional wisdom would be in for a very rude awakening if Detroit is hung out to dry.
As 2008, a year most market participants would just as soon forget, draws to a close, the endgame approaches in the fight to save Detroit.
After Senate Republicans blocked a $14 billion rescue package for General Motors (GM) and Chrysler last week, the ball landed squarely in the court of the Bush Administration. Both GM and Chrysler have warned they'll be insolvent by the end of the year without government assistance.
Bloomberg reports the Treasury Department is considering a plan giving the yet-to-be-named “car czar” or the Treasury Secretary power to force GM or Chrysler into bankruptcy if either firm can't survive on its own. Officials said the troubled automakers would be required to submit turnaround plans by March 31st, but would not release further details of the plan.
Moody's Investor Services wrote in a note that a rescue would most likely include a so-called "prepackaged bankruptcy," which would remove certain roadblocks to restructuring the companies.
In a letter urging President Bush to withhold assistance, South Carolina Governor Mark Sanford asserted that using TARP money to rescue the auto industry would open the floodgates to other troubled industries. Sanford, a Republican, said “We are at a tipping point in moving from a market-based economy to a politically-based economy.”
Meanwhile, Ford (F) supports plans to rescue its beleaguered competitors, saying any failure of a major auto maker would have ripple effects throughout the industry.
The White House promised to keep tabs on any taxpayer money it decided to dole out, saying “There will be rigorous oversight to make sure that these companies are doing what they promised to do, and we want to make sure that everyone is making the concessions that they’re going to have to commit to make.”
The Treasury Department, however, doesn’t have a stellar track record on transparency and accountability. Earlier this month, the Government Accountability Office found critical oversight, transparency and regulation problems and recommended the Treasury hire additional personnel to manage TARP. All the Treasury appears to excel at is spending money.
As dire as the situation has become, it's hard to find many that truly believe Washington will allow the automakers to fail. Whether the money comes from TARP, the Federal Reserve or some yet-to-be-announced slush fund, conventional wisdom would be in for a very rude awakening if Detroit is hung out to dry.
Monday, December 15, 2008
White House Bails Out Auto Bailout
This post first appeared on Minyanville.
Bailouts are now being bailed out.
After the Senate failed to agree on terms for the rescue of General Motors (GM) and Chrysler, Detroit asked the Bush Administration to jump in and play savior. Over the weekend, White House officials pored over the 2 automakers' books, trying to figure out how much cash the Treasury Department would need to cough up to keep them alive.
According to the Wall Street Journal, estimates for the total amount vary from $10 billion to as much as $40 billion, but no one can seem to agree on how best to spend the money - any of it. GM, Chrysler and Ford (F) have been asking for money for months, to no avail. Ford, for it’s part, claims it doesn’t need an emergency loan - but still likes to remind lawmakers just how bad things would get if GM or Chrysler were to fail.
Since the $25 billion allocated earlier in the year for renewable energy investments appears too politically costly to touch, the money has to come from somewhere. While Congress, the United Auto Workers, and the Big 3’s top brass slog it out on Capitol Hill over the terms of a potential bailout, bean counters are scurrying around Washington scrounging up the cash. That's a tall order, since all but a paltry $15 or so billion is left of the first tranche of the $700 billion financial system bailout.
If Treasury wants to tap TARP, it needs to ask Congress to release the rest of the money. And if there were ever a day to keep the television locked on C-SPAN, this will be it. Watching irate senators and appalled members of the House rail at Treasury Department officials and their smug Federal Reserve cohorts who've been begging for more money like spoiled teenagers asking for bigger allowances would be better than even the best reality TV.
Access to the money, however, would require plans for a host of prickly topics, such foreclosure prevention and federal aid to struggling municipalities. The immediacy of the problem -- GM and Chrysler both say they won’t make 2009 without a cash infusion -- eliminates the possibility of designing programs to effectively use the rest of the bailout money.
The Fed, up to this point, has been reluctant to get involved. Chairman Ben Bernanke claims car-makers are outside his realm, and that the Fed doesn’t want to overstep its bounds. Such a claim borders on the absurd, since Bernanke’s stated vision is to protect the economy by any means necessary. His supposed fear of politicizing the "apolitical" Fed is akin to closing the barn door a few months after the horses left.
In previous government-sponsored bailouts, such as AIG (AIG) and Citigroup (C), taxpayers received warrants for ownership of the companies the government deemed worthy of propping up. Now that state-owned companies are bleeding into the broader economy, the Great American Socialist Experiment can finally begin in earnest.
Bailouts are now being bailed out.
After the Senate failed to agree on terms for the rescue of General Motors (GM) and Chrysler, Detroit asked the Bush Administration to jump in and play savior. Over the weekend, White House officials pored over the 2 automakers' books, trying to figure out how much cash the Treasury Department would need to cough up to keep them alive.
According to the Wall Street Journal, estimates for the total amount vary from $10 billion to as much as $40 billion, but no one can seem to agree on how best to spend the money - any of it. GM, Chrysler and Ford (F) have been asking for money for months, to no avail. Ford, for it’s part, claims it doesn’t need an emergency loan - but still likes to remind lawmakers just how bad things would get if GM or Chrysler were to fail.
Since the $25 billion allocated earlier in the year for renewable energy investments appears too politically costly to touch, the money has to come from somewhere. While Congress, the United Auto Workers, and the Big 3’s top brass slog it out on Capitol Hill over the terms of a potential bailout, bean counters are scurrying around Washington scrounging up the cash. That's a tall order, since all but a paltry $15 or so billion is left of the first tranche of the $700 billion financial system bailout.
If Treasury wants to tap TARP, it needs to ask Congress to release the rest of the money. And if there were ever a day to keep the television locked on C-SPAN, this will be it. Watching irate senators and appalled members of the House rail at Treasury Department officials and their smug Federal Reserve cohorts who've been begging for more money like spoiled teenagers asking for bigger allowances would be better than even the best reality TV.
Access to the money, however, would require plans for a host of prickly topics, such foreclosure prevention and federal aid to struggling municipalities. The immediacy of the problem -- GM and Chrysler both say they won’t make 2009 without a cash infusion -- eliminates the possibility of designing programs to effectively use the rest of the bailout money.
The Fed, up to this point, has been reluctant to get involved. Chairman Ben Bernanke claims car-makers are outside his realm, and that the Fed doesn’t want to overstep its bounds. Such a claim borders on the absurd, since Bernanke’s stated vision is to protect the economy by any means necessary. His supposed fear of politicizing the "apolitical" Fed is akin to closing the barn door a few months after the horses left.
In previous government-sponsored bailouts, such as AIG (AIG) and Citigroup (C), taxpayers received warrants for ownership of the companies the government deemed worthy of propping up. Now that state-owned companies are bleeding into the broader economy, the Great American Socialist Experiment can finally begin in earnest.
Thursday, December 11, 2008
Auto Bailout Still Has to Get Past Senate
This post first appeared on Minyanville.
Here we go again.
It all sounds eerily familiar: Old, white guys getting harangued on Capitol Hill as they beg for billions to save their dying industries. The House of Representatives, in its infinite benevolence, offers up a rescue package at the 11th hour. Sure, there are strings attached and it's a far cry from what the old white guys asked for, but hey, this is Washington.
Last night, House Democrats hammered out a $15 billion rescue for the General Motors (GM) and Chrysler, allowing the struggling automakers to draw on emergency loans to avoid imminent collapse. Their fate now rests in the hands of the Senate, where the financial system bailout met stiff resistence just months ago. Act II is playing out just as you'd expect, with Senate Republicans vowing to block the House's bill.
The rationale, again, for handing out billions of dollars in taxpayer money is to ostensibly save the American economy from sort of alternative too terrifying to imagine. As John Dingell, a Democrat from Michigan told Bloomberg, "Without this bridge, we're going to fall into the biggest calamity this country has known since the Great Depression. A terrible disaster looms."
The money is meant to keep the 2 firms alive (apparently Ford (F) isn't sick enough to be bailed out, yet) until restructuring plans can be drawn up and approved by the soon-to-be-appointed "Car Czar," who will oversee an overhaul of the 2 firms.
Taxpayers could receive stock warrants for as much as 20% of the amount of the loan, which in the case of GM means Joe Taxpayer will own almost the entire company. Still, the bill could die in the Senate as House Speaker Nancy Pelosi claims her brethren won't come back to the negotiating table if the Senate passes a materially different bill.
What a mess.
Proponents claim allowing the automakers to go bankrupt is foolish, risking millions of American jobs while they've provided a workable alternative.
Opponents to the bailout on the other hand, contend the rescue simply delays an inevitable bankruptcy filing and complete restructuring.
One contentious issue (of many) is whether or not consumers would buy cars from a bankrupt automaker. As I wrote last month, if American Airlines (AMR) and United (UAUA) could fly planes through Chapter 11, Detroit can certainly make cars during bankruptcy.
And a marked difference between the environment in which this bailout is being debated versus the one for the financial system, is the election. Now that representatives know their fate and no longer have to pander for votes, they're much more likely to play political hardball.
This doesn't bode well for Detroit.
Here we go again.
It all sounds eerily familiar: Old, white guys getting harangued on Capitol Hill as they beg for billions to save their dying industries. The House of Representatives, in its infinite benevolence, offers up a rescue package at the 11th hour. Sure, there are strings attached and it's a far cry from what the old white guys asked for, but hey, this is Washington.
Last night, House Democrats hammered out a $15 billion rescue for the General Motors (GM) and Chrysler, allowing the struggling automakers to draw on emergency loans to avoid imminent collapse. Their fate now rests in the hands of the Senate, where the financial system bailout met stiff resistence just months ago. Act II is playing out just as you'd expect, with Senate Republicans vowing to block the House's bill.
The rationale, again, for handing out billions of dollars in taxpayer money is to ostensibly save the American economy from sort of alternative too terrifying to imagine. As John Dingell, a Democrat from Michigan told Bloomberg, "Without this bridge, we're going to fall into the biggest calamity this country has known since the Great Depression. A terrible disaster looms."
The money is meant to keep the 2 firms alive (apparently Ford (F) isn't sick enough to be bailed out, yet) until restructuring plans can be drawn up and approved by the soon-to-be-appointed "Car Czar," who will oversee an overhaul of the 2 firms.
Taxpayers could receive stock warrants for as much as 20% of the amount of the loan, which in the case of GM means Joe Taxpayer will own almost the entire company. Still, the bill could die in the Senate as House Speaker Nancy Pelosi claims her brethren won't come back to the negotiating table if the Senate passes a materially different bill.
What a mess.
Proponents claim allowing the automakers to go bankrupt is foolish, risking millions of American jobs while they've provided a workable alternative.
Opponents to the bailout on the other hand, contend the rescue simply delays an inevitable bankruptcy filing and complete restructuring.
One contentious issue (of many) is whether or not consumers would buy cars from a bankrupt automaker. As I wrote last month, if American Airlines (AMR) and United (UAUA) could fly planes through Chapter 11, Detroit can certainly make cars during bankruptcy.
And a marked difference between the environment in which this bailout is being debated versus the one for the financial system, is the election. Now that representatives know their fate and no longer have to pander for votes, they're much more likely to play political hardball.
This doesn't bode well for Detroit.
Wednesday, December 10, 2008
Obama's New Deal
This post first appeared on Minyanville.
Ideology, it appears, has taken a backseat to expediency.
72 hours ago, President-Elect Barack Obama announced plans to reinvigorate the American economy with the biggest public-works project since the 1950s. Criticism of what's being called the “New New Deal” has been scant, as even ardent capitalists seem willing to wax socialist if it gets the country back on track.
After all, with unemployment on the rise, the financial system crumbling around us, General Motors (GM), Chrysler and Ford (F) facing extinction and a host of other economic maladies plaguing the system, anything has to be better than the status quo.
Details of Obama’s intentions remain sketchy at best, but fixing highways and bridges, updating the rail system, new telecommunications infrastructure, modernizing health care and improving the public school system are atop the President-Elect’s holiday wish list.
Commodity Prices soared on the heels of the announcement, as investors poured money into US Steel (X), Freeport McMoRan (FCX) and others who pull stuff out of the ground that hurts when it falls on your foot, as Dennis Gartmen is now famous for saying. With all that new construction, steel, copper and the like will once again be in high demand.
If, of course, the plan even works.
Detractors cite impracticality as one of the primary flaws of the massive spending program. Many wonder if it’s realistic to expect the government to spend hundreds of billions of dollars efficiently, getting money and jobs to where they’re needed most. The $700 bailout plan, now half spent, hasn’t exactly been a model of prudent use of taxpayer funds.
Others wishing to rain on Obama’s populist parade question the economy’s ability to absorb millions of jobseekers, few of which have been trained to lay new railroad, pour cement or install fiber optic cables. America’s labor pool has become increasingly focused on service-sector jobs, yet the new public works focus on traditional blue-collar employment. Structuring debt securities doesn’t exactly translate into structural engineering.
Finally, there’s that whole pesky issue of the national debt. Obama has repeatedly vowed to ignore near-term budget deficits in favor of getting the economy back on track. But at some point, the printing presses will seize up, and Washington’s debt experiment will run aground.
The world seems able, although not altogether thrilled, to absorb an American budget deficit now running at around $1 trillion per year. Can it handle $2 trillion? What about $3 trillion? Or $5 trillion?
At some point, trillions do in fact start to matter. If holders of US Treasuries start to get skittish and demand a higher return on their not-so-safe-haven investment, government debt will become that much more expensive, deepening the deficit and resulting in the mother of all feedback loops.
No one’s quite sure what will happen if we really do bankrupt the country trying to save it - some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It’s an outcome no one really wants to provision for.
To be sure, it’s hard to find many who hope Obama fails, preferring instead to look back at 2009 and chuckle, remembering when the country went all in and made that straight flush on the river.
Ideology, it appears, has taken a backseat to expediency.
72 hours ago, President-Elect Barack Obama announced plans to reinvigorate the American economy with the biggest public-works project since the 1950s. Criticism of what's being called the “New New Deal” has been scant, as even ardent capitalists seem willing to wax socialist if it gets the country back on track.
After all, with unemployment on the rise, the financial system crumbling around us, General Motors (GM), Chrysler and Ford (F) facing extinction and a host of other economic maladies plaguing the system, anything has to be better than the status quo.
Details of Obama’s intentions remain sketchy at best, but fixing highways and bridges, updating the rail system, new telecommunications infrastructure, modernizing health care and improving the public school system are atop the President-Elect’s holiday wish list.
Commodity Prices soared on the heels of the announcement, as investors poured money into US Steel (X), Freeport McMoRan (FCX) and others who pull stuff out of the ground that hurts when it falls on your foot, as Dennis Gartmen is now famous for saying. With all that new construction, steel, copper and the like will once again be in high demand.
If, of course, the plan even works.
Detractors cite impracticality as one of the primary flaws of the massive spending program. Many wonder if it’s realistic to expect the government to spend hundreds of billions of dollars efficiently, getting money and jobs to where they’re needed most. The $700 bailout plan, now half spent, hasn’t exactly been a model of prudent use of taxpayer funds.
Others wishing to rain on Obama’s populist parade question the economy’s ability to absorb millions of jobseekers, few of which have been trained to lay new railroad, pour cement or install fiber optic cables. America’s labor pool has become increasingly focused on service-sector jobs, yet the new public works focus on traditional blue-collar employment. Structuring debt securities doesn’t exactly translate into structural engineering.
Finally, there’s that whole pesky issue of the national debt. Obama has repeatedly vowed to ignore near-term budget deficits in favor of getting the economy back on track. But at some point, the printing presses will seize up, and Washington’s debt experiment will run aground.
The world seems able, although not altogether thrilled, to absorb an American budget deficit now running at around $1 trillion per year. Can it handle $2 trillion? What about $3 trillion? Or $5 trillion?
At some point, trillions do in fact start to matter. If holders of US Treasuries start to get skittish and demand a higher return on their not-so-safe-haven investment, government debt will become that much more expensive, deepening the deficit and resulting in the mother of all feedback loops.
No one’s quite sure what will happen if we really do bankrupt the country trying to save it - some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It’s an outcome no one really wants to provision for.
To be sure, it’s hard to find many who hope Obama fails, preferring instead to look back at 2009 and chuckle, remembering when the country went all in and made that straight flush on the river.
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