Is this ANY way to run an Economy?
Posted: April 4, 2009 Filed under: Equity Markets, Global Financial Crisis | Tags: bailout, DeLong, Depression, Financial Crisis, Krugman, Obama/Geithner Bailout Plan, recession, Stiglitz, Summers Hedge Fund Salary, unemployment 4 Comments
The US economy is in a fragile state right now which begs the question: Why do our policy makers seem oblivious to lessons from the great meltdowns of the past? Adam Posner of the Daily Beast asks the question out right: Does Obama Have a Plan B? Posner asserts that the administration appears to be hellbent on recreating the Japanese Lost Decade. This is something that I’ve been harping on for months as has Paul Krugman and Joseph Stiglitz–two big brained economists with Nobel prizes.
So it is with some irony if not humility that we should approach Treasury Secretary Geithner’s Public Private Investment Plan presented on March 23. A number of major American banks have lost huge amounts of money, and clearly have insufficient capital if they are not literally insolvent. Why else would they be pushing so hard to change the accounting rules to avoid showing what they really have on their books instead of raising private capital? Why else is the U.S. government taking so long to perform “stress tests” and trying to get expectations of overpayment for some of the bad assets on the banks’ books before the test results are out? In short, the U.S. government is looking to shovel capital into the banks without sufficient conditions, hiding rather than confronting the actual situation.
That is just like the Japanese government in their lost decade, or the U.S. officials during the 1980s before they really tackled the savings-and-loan crisis. In those cases, the delay simply made the problem worse over time and in the end the government had to put more money into the troubled banks directly, taking over or shutting down the weakest of them. Whatever the political culture, it would seem we have not learned from experience. Or perhaps we cannot act on our learning. The universal barrier would appear to be the political difficulty of recapitalizing banks. That seems obvious, but the constraint it puts on good policy is enormous.
That is why the Geithner plan is so complex and jury-rigged, to avoid the need for public requests for more money for banks. Unfortunately, it is unlikely to succeed absent additional public money and more-intrusive government action. The plan will buy some time and certainly some appreciation in bank share prices. Current shareholders will be getting a new lease on life with subsidies from taxpayers. For that reason alone, the plan certainly will cost the taxpayer more in the end than a more direct recapitalization with public control would have.
The Zombie Connection
Posted: April 2, 2009 Filed under: Equity Markets, Global Financial Crisis, Team Obama, U.S. Economy | Tags: AIG, Azora, Cerebus, Credit Default swaps, GM, GMAC, Madoff 6 Comments
Goverment Motors?
Bloomberg.com is reporting that GM is unlikely to survive the government’s latest requests and will head towards bankruptcy. This begs the question: Why have we poured so much money into what most folks thought was a lost cause anyway? My first response to that would be to point to the timing of requests which occurred around election time. No Republican or Democratic Pol in their right mind would want to irritate the huge number of states that will be impacted by the fall of GM. The second reason is one that is just becoming obvious with the Obama approach. It appears the administration is much more concerned about the impact on the investment banking sector and AIG than with GM.
There’s some very interesting relationships in these deals. First, take a look at Seven Things You Should Know about the next GM CEO at Business Insider.
So who is this Fritz guy? Here are seven things you should know.
- He’s a native of Detriot, born there in 1958.
- University of Michigan, 1980. Harvard Business School, 1984.
- Started at GM the year he got his MBA, in the Treasurer’s office.
- Came up through GMAC, eventually becoming the head of mortgage finance.
- He has run GM’s Latin American, Africa and Middle East division, as well as the Asia Pacific and European units.
- Became vice chairman and chief financial officer in January, 2006.
- Became president and chief operating officer in March, 2008.
Now isn’t that red point interesting? (Thanks to Jonas8 for this.) Let’s look at a few other interesting things. GMAC is owned by Cerberus who acquired 51 percent of GMAC from General Motors in 2006 for $7.4 billion. You may also know that Cerberus owns 80+% of Chrysler. Cerberus is having its own interest issues like this:
Embattled Cerberus Capital Management, a private-equity firm named for the mythological three-headed dog that guards the gates of Hades, has been overwhelmed by clients seeking to withdraw money from its $2 billion hedge fund, Cerberus Partners.
Website FINAlternatives said that fund investors representing 17 percent of the assets wanted to withdraw their money in December, the most recent month for which statistics are available. Now, with Cerberus’s investments in Chrysler and GMAC going bad and unemployed investors needing to tap more funds, that figure may be heading higher.
Just look at this Wiki list of what things they also own:
- Real Estate – Through investment affiliate Cerberus Real Estate, the company has been making direct equity, mezzanine, first mortgage, distressed and special situation investments in all asset types. It also controls Miami Beach-based LNR Property, a large real estate development and investment firm through subsidiary Riley Property. Cerberus also controls Kyo-ya, a Japan based group of entities that owns several Starwood managed assets in California, Hawaii and Florida.
- Government Services (Military, Energy, and Food & Drug) – owns IAP Worldwide Services, which bought Johnson Controls‘ World Services division in February 2005, and Netco Government Services.
- Financial Services – General Motors sold a 51% stake in its GMAC finance unit to an investor group led by Cerberus Capital Management in November 2006. GM expected to receive $14 billion over the next three years from the sale of General Motors Acceptance Corp. In December 2006, Cerberus acquired the Austrian bank BAWAG P.S.K. for a reported EUR3.2 billion. In August 2007, Cerberus announced that it was closing one of their mortgage companies, Aegis Mortgage. It owns half of a 9.9 % share (5%) with the Gabriel Group in Bank Leumi
I want to jump on over to something BostomBoomer sent me this morning at the Market Ticker by Karl Denninger. Just start connecting the dots here and start with an earlier piece here. This is the line that starts connecting ALL these little dots.
And then there’s the nearly $1 trillion in CDS that will trigger. There is no accurate way to know what the net exposure is on those, but I’d take the “over” on $100 billion, focused in you-know-where.
CDS would be Credit Default Swaps. Yup, those would be those toxic assets that are still sitting out there in banks and most likely AIG. So, who exactly are we worried about here? GM? GM’s stock holders? GM’s auto workers? GM’s retirees? If you’re any where as pessimistic as I am about this, you’re going to say, I bet it’s the bondholders and the holders of the CDS based on GM. DING! Let’s go a little bit further into that Denninger thread.
The government has provided a history now that says that if you are a holder of CDS written by AIG, you will get 100 cents on the dollar, even if the notes don’t default. In addition that 100 cents is above what you would normally get even if there IS a default, because normally you have to tender the defaulted bond or the payout is limited by the recovery, and recovery on a defaulted bond is almost never zero.
So in this case the winning play, if you’re a big bondholder, is to tell GM to suck eggs; you’ll get paid 100 cents on your CDS even though AIG has no money, because the taxpayer will make you whole on those CDS, even if the bonds have a recovery in bankruptcy.
In other words you could conceivably get more than 100 cents if you hold those bonds – so long as you also hold a CDS as a hedge.
It must be nice to be able to screw the taxpayer for more than a 100% payout, right?
The bondholders “committee” is all made up of big players who presumably are hedged, ergo, this has to be assumed to be part of their “thought process” – if not the controlling factor.
Small bondholders on the other hand (who have no hedge, unless they were smart enough to buy lots of PUTs a few months ago) are just going to get plain old-fashioned screwed.
Since the only way GM survives is for it to get the bondholder committee to agree to restructuring it therefore follows that the only way this can happen is if the administration (and Fed!) makes very clear that all funding to AIG has been cut off and therefore no further “pass through” payments will (or can) occur.
That is, The Obama Administration has to bankrupt AIG to save GM, or we will instead see the banks again rip off the American Taxpayer through yet another “passthrough” CDS payout stream AND GM will go bankrupt.
Get ready America – you’re about to get it in BOTH holes this time.
This is analysis and deduction based on the available and public facts – I have no proof – but I’ll bet this is exactly how this deal will go down, and why.
PS: Every firm in America that has a significant amount of CDS outstanding is potentially subject to this same attack. It’s all very nice that our government is permitting banks to rob the citizens like this, isn’t it?
So, let’s see. Cerebus, through its financial holdings gets TARP money. Cerebus through its Chrysler holdings gets cheap government loans. AIG and all those investment banks holding those swaps get taxpayer money. GM’s getting cheap loans and has bonds that have been securitized into CDS. I’m with Denninger on this one.
Oh, and just in case you’re not seeing a lot of stuff on Cerebus, let’s try these little tidbits:
On October 19, 2006, John W. Snow, President George W. Bush‘s second United States Secretary of the Treasury, was named chairman of Cerberus.
J. Ezra Merkin is a partner in Cerberus. Merkin invested his funds into Cerberus and its portfolio companies. His Gabriel fund invested $79 million in Chrysler, $66 million in GMAC and $67 million in Cerberus partnerships, according to year-end statements. The Gabriel Fund was a feeder fund for Bernard L. Madoff Investment Securities LLC.[3]
Japanese bank, Aozora, a Cerberus company lost $ 137 million to Bernard L. Madoff Investment Securities LLC. Aozora was part of the investment group that acquired 51 percent of GMAC from General Motors.
I’m just hoping some one in the MSM can pick up on this and go after it. If not that, then Cuomo needs to get a forensic accountant and go after it all. This just doesn’t look right to me AT ALL.
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Does this Worry You?
Posted: April 1, 2009 Filed under: Equity Markets, Global Financial Crisis, Team Obama, U.S. Economy | Tags: auto industry bailout, Chrysler Merger, dealer network, FORD, GM, Obama team, UAW 5 Comments
I‘m one of the first folks to argue that government intervention is necessary in a failed market and is usually a positive thing. There are several US markets that need rebooting and government oversight and participation is the only way. In my opinion, the markets for health care, financial services, and transportation are all pretty messed up. There’s always this fine line, however, between rebooting a market so that it works again and booting the failed market deeper into a hell realm. That’s why I’m concerned about the auto industry. While the financial markets have been assigned to limbo, the automobile industry appears to be waiting in purgatory for the final blow.
I have to say that I’m mostly displeased about the way government has been handling the auto industry in this country. They have ignored the foreign owned plants which also contribute to our GDP and create local jobs and suppliers. They initially wanted to drag Ford, which is relatively healthy, into the bailout equation. They extended loans in the fall with nearly everyone knowing that they were stopgap at best. I believe this was because of the election and neither party wanted to compromise seats in states with UAW, creditors, and small businesses dependent on the industry. The Bush administration punted. The Obama administration has a fair catch but appears unable to to move the ball forward. They’ve called a time out. They’ve replaced one of the coaches, mid-game. They’ve put in referees that primarily represent creditors. I own some Ford stock so I have a bet on this game and I can’t stand it when the rules and the players are changed while the action is still on.
The car business just appears to be getting worse. We’ve learned that investment bankers have generally screwed the pooch in just about every recent endeavor, yet Obama has put one in charge of the GM and Chrysler ultimatums. The first move, seen last week, was quite investment banker-like. Chrylser is being married off to a perceived white knight, Fiat. GM’s CEO was told to walk the plank. At first I wasn’t sure if POTUS was just trying to challenge Donald Trump’s standing in TV ratings with the District version of “You’re Fired!” or trying to remove public attention from AIG anger.
Obama also announced (Treasury Secretary Geithner by his side) a series of initiatives meant to calm potential US auto buyers. Will these cheer up already nervous American consumers?
He also announced several steps to reassure consumers, and improve the chances that U.S. automakers will be able to sell their cars and trucks. The president said the government will now stand behind warranties issued by the carmakers, a sweeping new guarantee that some in Congress had sought.
He also noted that the economic stimulus legislation he recently signed allows the purchasers of new domestic cars to deduct the cost of any sales and excise taxes.
Obama said this provision could “save families hundreds of dollars and lead to as many as 100,000 new car sales.” He also said funds ticketed for the purchase of new vehicles for government agencies would be spent as quickly as possible.
It will be interesting to see exactly how the market handles these moves. Today’s Market Watch announced that both Ford and GM had experienced Sales declines in excess of 40%. Chrysler, Honda and Toyota also experienced declines but not to that extent.
“Despite some improvements this month, we just don’t expect to see a big recovery this year,” Edmunds.com analyst Jesse Toprak said. He added, however, that there’s now more upside to his 2009 sales target of 10 million vehicles than there is downside.
The monthly results, no matter how promising, take a back seat to further speculation as to what’s next for GM. With the CEO Rick Wagoner gone and a new deadline imposed by the White House, viability concerns are again dogging the company.
“Bankruptcy risk is real and running higher than ever for GM and Chrysler, even though the automakers and the government will do whatever it takes to avoid it,” Toprak said.
Still, President Barack Obama reportedly said he believes a “quick and surgical” bankruptcy for GM is most likely the next step.
So, that’s what we’ve seen to date, but what worries me is what comes next. We’ve just had the US government basically remove a CEO and several board members of one of the largest companies in the US. What role will the US government play in the future? How will they influence the pick of a new CEO and new board members? What exactly will be their priorities? Will it be corporate governance changes? More efficient operations? Payment to creditors above all us? Fair dealings with the unions? This is unprecedented territory and I’m not sure we can actually speculate about this.
Today’s Washington Post has brought the topic up. What does it mean to give the government control over a major US manufacturer?
The president’s auto task force plans to consult with the company as it replaces a majority of its board, a White House official said. The board today largely consists of the current and former chiefs of major U.S. corporations such as Coca-Cola, Ernst & Young, Pfizer and Eastman Kodak. It is not known which of the 12 board members will leave.
The president said Monday that “the United States government has no interest in running GM.” But in practice it is already exerting tremendous influence over it, a situation that has triggered fierce debate over how much power the government should wield over the companies that it aids.
Kent Kresa, 71, GM’s new chairman, said yesterday that company officials will seek to replace a majority on the board by August, as the automaker moves to restructure operations.
Downsizing GM means downsizing supply chains and dealer networks. It means deciding which small town keeps its
Goverment Motors?
major employer and which small town dies. It means one little league team will keep its sponsor and another one will have to look for another. I’m the daughter of a retired Ford dealer raised in small town, middle america. My dad was head of the local chamber of commerce at one time. He also served as chair of the United Way Fund drive. We employed a large number of people in our small little Iowa town. I was trained by Dr. W. Edwards Deming in the 1980s to go around and help auto suppliers in small town Nebraska and Iowa implement SPC to keep their GM and FORD contracts. These are towns that are totally reliant on one or two little manufacturing units. Which town will live and which town will die? Who is going to decide and on what basis?
Does Size Matter?
Posted: March 31, 2009 Filed under: Equity Markets, Team Obama, U.S. Economy | Tags: bank asset size cap, bank bailout, Felix Salmon, Geithner bank bail out, Kwak, Too big to fail banks 2 Comments
The antithesis to market capitalism is monopoly. High market concentration has been historically a reason to use the US Justice Department to trust bust. We’ve had laws on the books since the late 19th century. The last real monopoly challenge was during the Clinton administration that took on Microsoft and its software bundling practices. The Bush 2 administration promptly walked away from enforcing the suit. The Eurozone found Microsoft guilty of monopoly behavior and are still in the process of enforcing their court’s findings. We’ve been ignoring monopoly-creating behavior on the part of lawmakers and corporations for decades now and we’re living with the high costs of market failure as a result.
Much of the problems in the current downturn can be traced to the behavior of some of the country’s largest banks. Banks that were allowed to grow to sizes that allowed them power in the market, power in congress, and power in the setting the terms of their regulation. Several rationalizations were used to allow banks to grow from the 1980s to present time. First, there were the arguments for economies of scale. Big banks were more able to process huge batches of ACH transactions and checks. These money center banks replaced the FED as the transaction processor of choice since they were generally cheaper given the various expenses of being a FED member bank that include leaving large amounts of money in reserve and on-going regulation and monitoring.
Second, there was the argument that huge money center banks were necessary to offset the power of the up and coming huge Japanese banks. During the 1980s period, one US bank after another on the top ten largest banks in the word was knocked off the list by a Japanese bank, then later by Eurozone banks. It was argued that in order to compete with these larger foreign institutions, US banks concentration should be looked at in a global context. In a global context, they were ‘competitive’ and not part of a market concentration problem. The basis of this argument was that the bank might be big in US terms, but as a global entity it was one of many. During the 1990s, it was typical for market concentration to be defined more on a global basis which in turn led to less prosecutions based on the traditional measures.
We now know that poor regulation and terrible understanding of the role of financial innovations in the financial system led to the current meltdown. We also know that many of the offenders and the biggest failures have been the huge money center banks. Many regional and small banks that continued to follow the loan and hold model of lending, rather than the loan, securitize and sell model are still thriving and did not contribute to the current crisis. Given the global financial crisis and the role of the mega banks and the resultant demands on tax payer funds to bailout those deemed too big to fail, should we look at regulations that limit bank size?
Many economists, liberal pundits, and I question the Geithner plan because it assumes we need the financial system to just work as it exists today. His paradigm doesn’t really question the failure of the system in terms of the current set-up of the system itself. Geithner’s plan blesses the poor system that was just swept off its feet by a passing oddity that surely won’t repeat itself. James Kwak of Baseline Scenario questions the basis of the Geithner plan that we need just need to prop up these too big to fail behemoths until they are back on their feet. Here’s the central part of the Geithner proposition questioned by Kwak and others.
“. . . [W]e must create higher standards for all systemically important financial firms regardless of whether they own a depository institution, to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy. We will work with Congress to enact legislation that defines the characteristics of covered firms, sets objectives and principles for their oversight, and assigns responsibility for regulating these firms.
In identifying systemically important firms, we believe that the characteristics to be considered should include: the financial system’s interdependence with the firm, the firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding, and the importance of the firm as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.”
Toxic Treasuries Redux
Posted: March 26, 2009 Filed under: Equity Markets, Global Financial Crisis, U.S. Economy | Tags: Bond Auctions, FED, quantitative easing, UK Auctions, US Treasury bonds Comments Off on Toxic Treasuries ReduxWhile the equity markets are reacting positively to whatever bit of good news they can grab, economists are eying the
market for government bonds. The United States and the United Kingdom have huge deficit driven budgets and stimulus plans that are testing the willingness of their creditors. The US is skating on the thin ice. The UK fell into the pond. This from Market Watch:
NEW YORK (MarketWatch) — Treasury bond auctions, not usually the stuff that fires up equities traders, rocked stocks this week as investors homed in on worries about the ability of the government to borrow more than $2 trillion to fund its financial and economic rescue plans.
On Wednesday, concerns were sparked after the U.K. failed to get enough bids to sell the full amount of 4-year gilts it offered, the first time this happened in 14 years. Later in the day, a U.S. government auction of $34 billion of 5-year notes drew only tepid interest from foreign investors.
“Everybody knows that the government is auctioning stuff like there’s no tomorrow,” said Paul Nolte, director of investments at Hinsdale Associates. “The question is who’s going to buy all this stuff,” he said. “If there’s not enough buyers, interest rates will have to go higher, which means mortgage rates would have to go higher and that could derail any recovery we might have.”
Treasury bond yields, which move inversely to bond prices, are used to benchmark the interest rates on many consumer loans, including some mortgages. When buyers don’t show up at an auction, bond prices fall and their yields rise.
This brings us back to China and their call to review the dollar’s role as a reserve currency. The offset on the Fed’s balance sheet to Treasury Bills and Bonds is dollars. These things and the interest rates that prevail in the economy are causally linked. You mess with one, you mess with them all.
Meanwhile, China, the largest buyer of U.S. Treasury bonds, expressed concern earlier this month about the safety of its investments. The massive amounts of U.S. debt issued have pressured bond prices and also threatened the strength of the dollar, which could further reduce the value of holding Treasurys.
China also rocked the boat when the governor of its central bank on Monday called for a new global reserve currency to replace the dollar.
The Treasury had announced that the would be heavily involved in the market this week. The FED is also out there with its quantitative easing program. Odd things are happening. It became obvious by mid Wednesday that their announcements and actions were causing the Treasury to actually buy at high price mid-morning then selling much later at a low price. It doesn’t take a rocket scientist to know that’s bad math for the taxpayer. Larry Doyle over at NQ heard that Wall Street was trying to sell three times the amount that the Treasury actually bought.
Bloomberg also noted the supply concerns.
The Treasury Department is selling a record $98 billion in notes this week, eclipsing the record $94 billion auctioned the week ended Feb. 27. The U.K. failed to attract enough bidders today at an auction of 1.75 billion pounds ($2.55 billion) of gilts for the first time in almost seven years.
President Barack Obama’s government is selling record amounts of debt to revive economic growth, service deficits, and cushion the failures in the financial system. Debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc.
Orders for U.S. durable goods unexpectedly rose by 3.4 percent in February, the Commerce Department said today in Washington. Purchases of new homes in the U.S. unexpectedly jumped in February, increasing 4.7 percent to an annual pace of 337,000 after a 322,000 rate in January, Commerce said.
“Better than expected economic data, failure of the long- end auction in the U.K. and low demand at the five-year Treasury auction; all these factors combined are leading to higher yields,” said Anshul Pradhan, an interest-rate strategist in New York at Barclays Capital Inc., another primary dealer.
The Fed said it purchased $7.5 billion of U.S. debt spread among 13 of the possible 19 securities eligible for purchase. The notes mature from February 2016 to February 2019, the Federal Reserve Bank of New York said in a statement today. Nearly $22 billion was submitted to the central bank in the first day of buying, the New York Fed said.
“We are really not seeing any kind of meaningful support for the Treasury market,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual investor clients. “Conventional wisdom in the market is that the Fed will concentrate on the five- to 10-year or the seven- to 10-year sector.”
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