GM and Chrysler

April 4, 2009

There are too many intricacies to the auto bailout, and it is moving way too quickly, to adventure an opinion.

But I will say I am ecstatic they have decided to act separately on the two companies and put Chrysler in the tighter spot.

GM was staging a remarkable turnaround when the crisis hit, and their new models are best-in-class.  Plus the Volt has a good chance of succeeding.

Chrysler on the other hand couldn’t find their way.  They don’t have a single well-designed model except for the 300M.

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Business Week proposes five ways that it can be gamed.

So the administration now has floated a concrete plan, but gets a couple weeks to let everyone help flesh out the potential pitfalls before writing the fine print.  That can only be good.

I like the plan.  And the two criticisms I often hear don’t make much sense to me:

It’s a giveaway to Wall Street

Well isn’t it better to entice new players with profits (while exposing them to losses) than giving the bad actors hundreds of billions outright as we have been doing?  But most importantly, any profits will be shared by taxpayers and private investors dollar for dollar.  If next year there is a AIG-style populist fracas over a hedge fund making 10 billion in profits, at least the administration can point to the 10 billion we also made on the deal.  This is brilliant.

The taxpayer is taking 93% of the risk

Technically this is true, but it gives people the impression that if the plan doesn’t work we will pay the full 93%.  This is not so.  Even if the plan fails, and assets wind up being worth less than investors priced them, the chances they will go to zero or even close to zero is negligible.

It’s like saying that your life insurance company is exposed to 10 billion in losses if all its policy holders die all of a sudden.  Well that’s just not going to happen.  Or more technically there is a 0.0000000000001% chance it will.

Even if the plan fails miserably assets will be worth something, say 50%-80% of the purchase price (which is itself already a fraction of the original price on the banks’ books). So the FDIC (which holds the securities as collateral) would only lose 20% to 50% on the loans, and taxpayers’ (worst case) total exposure is more like 50%

Also, the government is actually protected because the losses are borne disproportionately by the private investor at the top end:  Private investors will always have to lose all of their 7% share (along with treasury’s 7%) before the FDIC loses a cent on the other 85%

How it’s likely to play out

Some banks probably won’t want to sell.  I think there is a good chance the administration will require some or all (bailed out) banks to sell a portion, and then more, over time.

This is where stress tests come in:  Simulate a fall of another 30% in home prices over the next two years, and price assets in balance sheet based on that… bankrupt?  well then we order you to dump some of them now, even if that means taking a (not quite as bad) hit right now.

And like that Geithner will have achieved creating an artificial market with true natural price discovery.

I caught him recently on Fareed Zakaria’s GPS and it struck me that he is so uniquely qualified to restore confidence in the markets.

At a time when everyone including the left (from Krugman to the HuffPo) alleges that bankers are taking over in a ‘quiet coup‘ and that even Obama’s administration has been compromised, Spitzer’s record as the tough cop is unimpeachable.  He took AIG to court (dethroning Greenberg), as well as many others even as the party raged on, which made him few friends.

Unlike everyone who doesn’t make a living at an investment bank, he understands how they operate and the instruments they peddled.

The question is, would people be willing to forgive his personal indiscretions?  And would Obama have the stomach to take a chance?  He was never actually indicted of anything since the government found no evidence that public money was used improperly, and apparently feds don’t go after johns in prostitution cases.

Nocera nails it

March 27, 2009

Nocera is cautiously optimistic on Geithner’s plan, for all the right reasons.  His is a thoughtful analysis.  A sample:

“There is something called the leverage cycle,” said John Geanakoplis, an economics professor at Yale. During the bubble, he continued, when the country was awash in debt, toxic assets rated AAA were leveraged at an outlandish 16-to-1 ratio. That leverage was the primary reason those assets made such big returns. Now we’re in the opposite end of the cycle. There is no leverage at all available — yet without it, the return on these assets would simply be too small to make them interesting enough for investors to purchase. The only entity capable of injecting leverage in the system is the government.

I have been so disappointed this week with the HuffPo.  Every one of their bloggers seems to have bought into Taibbi’s conspiracy theory or Krugman’s attention-seeking rant.

I also found myself agreeing somehow with David Brooks:  Even if the plan doesn’t work, it succeds, because it will have made the case without a doubt that nationalization of X or Y bank is necessary so it will make it less messy politically.

Matt Taibbi is pissed about the bonuses.  Unlike the rest of the angry mob though, he is particularly well informed.  In fact he does a wonderful job explaining how it all happened, with particular attention to the central role of AIG and Goldman Sachs.

But he fails to support his claim that the crisis is a massive power-grab by Wall Street insiders (though it definitely sounds plausible).

My fear is that in these most unsettling of times we are all so desperately looking for a culprit, plausible is all we need to render a verdict.  Never mind proof or at least a solid case.

Sure Blankfein and Paulson were old Goldman friends and that’s why Goldman was involved in AIG’s bailout unlike all other counter-parties.  In fact half of these guys are Goldman alumns.  Sounds very fishy.  It reminds me of Michael Moore unearthing how Bush helped some of the Bin Ladens leave the country on 9/11 and using it as ‘evidence’ of a cover up by the administration.

But what exactly does it prove?  Perhaps it just means that they have traditionally attracted top performers in the field, which naturally have gone on to high posts.  Perhaps these relationships have put them in front of the rescue line, which is great for its stockholders (individuals like you and me, mutual funds, insurance companies, hedge funds, etc.)

I’m not saying he’s wrong, I’m just saying his theory is only as likely as the conspiracy-free “they screwed up royally, we have to bail them out (or we go down with them), and then we’ll regulate the hell out of them so it doesn’t happen again” explanation.

Useless fingerpointing

February 3, 2009

Unrest is kicking in already, and it’s going to get much worse.

Thing is, it’s easy to blame the Masters of the Universe.  It’s easy for Chinese, Russian and French crowds to blame America.

But let’s not bring that guillotine back just yet.  The quicker we all take responsibility the quicker we’ll get through it.  Let’s keep in mind that …

…we are all guilty:

  • My friend who flipped 3 houses in 4 years, installing tile and wood with her bare hands, literally building her nest-egg.
  • The guy who bought a condo in Las Vegas or Miami instead of playing the stock market (and how is the stock market not speculation also?).
  • My other friend who took out a home equity loan to start a business.
  • All those who used a HELOC for a new car, a Mexico trip, daughter’s wedding and a 50″ LCD TV.
  • The low-income family that used an option-ARM to grab a piece of the American dream.
  • The brokers and agents that made an easy buck.
  • The mortgage bankers who thought they had created legitimate groundbreaking financial innovations.
  • The Wall Street bankers who securitized the loans.
  • The European bankers who couldn’t get enough MBSs and lobbied our government hard so they could get more.
  • The Chinese, Japanese and Russians whose governments invested almost 1 trillion in Freddy and Fannie bonds for a delicious return.

…we all benefited:

  • The consumers worldwide (you and me) who got a better rate on a CD, money market or savings account from a bank that that was buying MBSs.   Ditto for those that got a lower insurance premium, free or lower tuition at a suddenly well-endowed private college, or even a lower interest credit card.
  • The Chinese workers who made the TVs and iPods we bought with our home equity ‘wealth’.
  • The Arab Sheiks, Venezuelans and Russians, when we needed more oil to propel the boom and were willing to pay more for it.

It was all an illusion.

It was fun while it lasted FOR EVERYONE.

Now please let’s not all go pointing fingers at each other.  It helps noone.

Just about everything being said against this bailout is based on misinformation and prejudice. Narrative seems to be driven by preconceptions accrued over the last two decades, not from current facts.

Here are just a couple things I keep hearing that make me cringe:

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