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Is Obama Fixing to Own Some Banks?

The other day, I suggested that Obama’s principles of government ownership sounded like they were designed for more than just GM.

There’s evidence to support that suggestion in this reasonably good David Sanger article on the GM bankruptcy.

In interviews in recent days, Mr. Obama’s economic team said it anticipated [political pressues regarding business decisions related to companies the government owns], and had moved to cut them off early.

It started right around the time of the bank stress tests,” said Rahm Emanuel, Mr. Obama’s chief of staff, in an interview on Monday. During one of the president’s daily economic briefings, Mr. Emanuel added, “he said that taking over companies like this is a big deal, and that no president has ever faced anything like this before. And he said he wanted to see some rules of the road about how the government should act” when it suddenly becomes the biggest shareholder in the market.

Mr. Obama clearly wanted protection: a set of principles he could hand to angry members of Congress, campaign contributors or executives to explain why he would not call Fritz Henderson, G.M.’s chief executive, to discuss whether an engine should be made in Saginaw or Shanghai.

The result was an interagency task force informally called “The Government as Shareholder,” headed by Diana Farrell, the deputy director of the National Economic Council and formerly the head of the McKinsey Global Institute, the research arm of McKinsey & Company.

It was Ms. Farrell’s report, delivered to the Oval Office fewer than 10 days ago, that laid out the principles that Mr. Obama described on Monday.

The White House insists the principles will apply equally to the government’s investment in the American International Group, the fallen insurer, or in Citigroup and other banks that the government has rescued. [my emphasis]

Sanger doesn’t seem to get the implication of Rahm’s comment. Rahm tells us these principles–principles the government will use with companies it owns–came up not during auto task force discussions, but during the bank stress tests.  That means the conversation about socialism how big a deal it is for the government to own companies came up in the context of owning banks, not owning car companies.

Sure, we already own an insurance company and Freddie and Fannie. Sure, maybe the reference to Citi is a very pointed reference. 

But it sure seems like these principles suggest we’re going to be owning a bank in the near future, to go along with GM and AIG.  Read more

Obama: They Said We Couldn’t Fast-Track Chrysler, Now I’m Doubling Down

Since I’m in town anyway, I decided to go hear the President announce the government taking a 60% stake in GM at the White House today (and they let me in!).

Given the finalization of the Chrysler sale today, the announcement had the distinct tone of an "I told you so:"

And keep in mind — many experts said that a quick, surgical bankruptcy was impossible. They were wrong. Others predicted that Chrysler’s decision to enter bankruptcy would lead to an immediate collapse in consumer confidence that would send car sales over a cliff. They were wrong, as well. In fact, Chrysler sold more cars in May than it did in April, in part because consumers were comforted by our extraordinary commitment to stand behind a quick bankruptcy process. All in all, it’s a dramatic — an outcome dramatically better than what appeared likely when this process began.

And I will confess, I was one of those who–in January–doubted that the Chrysler bailout could have ended as well as it did (though I regard it more as a "least worst solution"). So kudos to Obama’s auto task force team, thus far, they’ve pulled this off.

Of course, with GM’s additional size and complexity, Obama’s announcement of the GM restructuring was basically a bold doubling down. They admit that BK will take three times as long, and I’m sure it’ll be every bit three times as difficult.

In all likelihood, this process will take more time for GM than it did for Chrysler because GM is a bigger, more complex company. But Chrysler’s extraordinary success reaffirms my confidence that GM will emerge from its bankruptcy process quickly, and as a stronger and more competitive company.

There was one piece of news–or news to me–that I hope to check the math on. Obama claimed that this BK process will result in GM "building a larger share of its cars here at home."

As this plan takes effect, GM will start building a larger share of its cars here at home, including fuel-efficient cars. In fact, if all goes according to plan, the share of GM cars sold in the United States that are made here will actually grow for the first time in three decades.

Given the sharp decline in production they’re forecasting, this may just be a matter of math. But it does suggest they’re going to close down some Mexican production (or something) in an effort to keep factories open here. Read more

GAO: Advanced Hybrids May Not Be Best Way for GM to Rebound

picture-98.pngThere’s a lot of good information (and bleak news) in this GAO report on GM’s and Chrysler’s efforts to become viable again–including this picture that shows the key relationships in the industry and the credit that underlies each of those relationships.

But I wanted to point to GAO’s explanation of something I’ve often argued–to much skepticism here and elsewhere. Investing heavily in new technologies like hybrids may hurt GM’s efforts (certainly in the short term) to become more viable.

In a section addressing the things that GM and Chrysler aren’t doing to achieve viability, GAO warns that advanced technology vehicles don’t have the return on investment GM needs to become profitable again.

Several panelists noted that not only is developing advanced technology vehicles expensive, but also the return on the investment in those vehicles can be low because the initial demand for new technologies can be slow to develop. For example, the Toyota Prius was on the market for 10 years before reaching 1 million units sold. According to our panel, given the high development costs and low initial demand, especially if gasoline prices remain relatively low, these new vehicles are not likely to generate a profit for several years. Thus, changing the companies’ product mix to include more advanced technology vehicles may not be the best way to improve the financial bottom line in the short term. Furthermore, at least one panelist questioned whether the necessary energy infrastructure, such as electrical outlets to charge batteries, will be available to support these new technologies. Without adequate infrastructure, consumers will be reluctant to purchase these new advanced technology vehicles. GM officials acknowledged these challenges but indicated that the company decided to continue investing in advanced technologies even during the current financial crisis because they need this technology in their fleet to help meet federal fuel economy standards in the future. In addition, GM officials said they are planning for higher oil prices than current futures market expectations, in order to make GM’s plan more robust against oil price volatility. [my emphasis]

Now, frankly GM is right to remain committed to the Volt even given such challenges. The Prius took a long time to become profitable, but the halo effect Prius has had on Toyota’s overall brand is one of the main reasons people believe a company that invested heavily, strategically, in the Tundra is all about gas efficiency.

But I wanted to point out Read more

No Wonder Bob Corker’s Trying to Play Politics with Spring Hill

Bob Corker attacked the US automakers for months, arguing they had a failed business model. But as soon as bankruptcy looked likely, Corker suddenly remembered many of his constituents–the GM workers at Tennessee’s Spring Hill plant–work for one of those "failed" automakers. Since then, he’s been pitching the relative merits of Spring Hill. He has gone so far as to suggest that if anything were to happen to Spring Hill, it could only be because of politics.

With sweeping new power the White House will be deciding which plants will survive and which won’t, so in essence, this administration has decided they know better than our courts and our free market process how to deal with these companies.

It’s been a long time since Washington has seen the kind of kowtowing that’s about to occur among members of Congress trying to curry favor with the administration to keep plants in their states open, and it will be interesting to see if the administration makes these decisions based on a red state and blue state strategy or based on efficiency and capable, skilled workers at each plant. If they use the latter, our GM plant in Spring Hill, Tennessee should do very well.

It’s a nice narrative for Corker, one that absolves him of  any responsibility for talking the company into bankruptcy. Yet there’s a detail Corker doesn’t want you to know. 

It’s that the Spring Hill facilities have already been mortgaged away as collateral to secure credit.

Note that GM has approximately $29 Billion in debt; $7 Billion of which is secured by Saturn assets (including Spring Hill, TN plant). The government’s $13.4 Billion loan to GM is also considered secured debt, with a vast amount of assets up as collateral. [my emphasis]

In other words, politics will have nothing to do with the decision on whether or not to close Spring Hill (not that any of you would believe a word Corker says, anyway). That decision will be left entirely up to whatever buyer comes along and buys it, because it will be the first thing liquidated in bankruptcy.

I guess Corker should have thought of that before he joined the plantation caucus, huh?

About those [Stress] Test Results

Peterr had a great post this morning reading some troubling tea leaves at the bottom of Citi’s and Bank of America’s tea cups.

My, the little things you notice when you peruse the job listings at the FDIC website. There are a lot of them to scroll through, but a couple of them caught my eye.

[snip]

Further down the list of positions comes a posting for two Senior Large Financial Institution Specialists, one in the New York office and the other in Charlotte, North Carolina.

Hmmm . . . large institutions, New York and Charlotte?

Can you say "Citibank" and "B of A"? Sure you can.

Speaking of New York, they are also looking for a new Chief, Examination Support and Risk Analysis Section who would be based in either New York or DC. Again, from the major duties section of the posting, the first three are these:

Serves as technical advisor on a broad range of risk management issues particularly regarding the analysis and supervision of large, complex financial institutions.

Reviews and evaluates studies, reports, and proposals prepared by staff members, financial organizations and other government agencies as these relate to large, complex financial institutions.

Directs the monitoring and supervision of large, complex financial institutions to protect the deposit insurance fund.

I’d be getting a little nervous right about now, if I had a corner office at Citibank and saw these two job postings. And if I noticed that the FDIC is also looking for two more of those Senior Large Financial Institution Specialists in their DC office, I’d be getting more than a little nervous. (As if I didn’t already have some banking nightmares to deal with.)

All in all, it looks to me like somebody thinks the FDIC needs some senior folks to deal with eating Very Big Banks — and to judge by the closing dates on these job postings and this little teaser from the Wall Street Journal, they think they need them fast.

The teaser he linked to describes the problem of what to do with the results of the stress tests investigating–among others–BoA and Citi.

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country’s 19 largest banks, people familiar with the matter said.

Only, it seems like those bank regulators have decided to punt, at least until we get past earnings season.

Read more

Fire Ken Lewis for the $3 Billion in Merrill Lynch Bonuses

I’ve been meaning to point to Andy Stern’s call to give Ken Lewis, CEO of Bank of America, the same treatment Obama gave Wagoner–the boot.

Both Rick Wagoner and Ken Lewis sunk large public companies — putting thousands out of work and toppling the American economy — while accepting billions in taxpayer bailouts. Yet only Wagoner got a pink slip. It’s time for Treasury Secretary Geithner to replace Ken Lewis as CEO and let real reform take hold at Bank of America.

And Change to Win’s petition calling to fire Lewis. 

But this tidbit–courtesy of Howie–will really make you want to oust Ken Lewis.

In its last days as an independent company, Merrill gave performance-based bonuses exclusively to employees earning $300,000 a year or more and holding a rank of vice president or higher, according to their financial statements. $3.62 billion was handed out to these executives – a sum equal to 36.2 percent of the $10 billion in taxpayer funds that were allocated to Merrill as part of the Troubled Asset Relief Program (TARP) before the bonuses were paid.

The company had been failing as a result of misadventures in the now infamous mortgaged-backed securities market which began crumbling with the decline of home values as the bubble burst.

The performance bonuses were determined by Merrill’s compensation committee on December 8, 2008, before Merrill revealed that it lost $15 billion in the final three months of 2008, unusual timing according to court documents filed by New York Attorney General Andrew Cuomo in an ongoing suit against Merrill’s former CEO.

In prior years, Merrill paid performance bonuses of this type after the end of the year, in January or February of the next year.

[snip]

The questionable timing and the amounts of these bonuses were not revealed to Bank of America shareholders when they voted to acquire Merrill. These facts raise questions about what government officials knew about the bonuses and when they knew it, according to Kucinich’s letter. 

$3.62 billion would keep all of GM in business for a month or two. Read more

Bob Corker: “Bust the UAW Already, Obama!!!”

Bob Corker was one of the people in Congress who refused to include auto dealer concessions to GM and Chrysler in restructuring negotiations last year. As such, he–and his cowardice–bears significant responsibility for neglecting one third of the concessions that needed to be made from automaker stakeholders; the Obama Administration has, for the first time, addressed dealer concessions in today’s announcement.

In addition, Corker’s purportedly brilliant bailout compromise last year (which amounted to "bust the UAW") included none of the bankruptcy-like legal authority to cramdown bond-holder debt. Partly as a result (and partly because of a sweetheart deal Corker’s buddies at Cerberus got), GM had no leverage to convince bond-holders to take the haircut they need to on its debt.

Nevertheless, Corker wasted no time in bitching about Obama’s announcement today.

“Firing Rick Wagoner is a sideshow to distract us from the fact that the administration has no progress to announce today,” said Corker, a Republican. “The administration is hoping the media and the public will stay focused on Wagoner and fail to notice that negotiations have not progressed since December.”

[snip]

“The administration is pursuing much of what we pushed for in December, but the delay of several months has increased the severity and sent billions of taxpayer dollars down the drain,” Corker said. “Now any investment is likely unrecoverable.”

Corker, you see, is hoping everyone will stay focused on his showboating, and not notice that Corker left several key elements off the table last year out of political expediency. Corker’s also hoping you ignore that Bush basically used Corker’s plan when he pushed through the Christmas Eve bailout–so if this plan has failed, it is Corker’s plan that failed. 

I guess Corker, who just a few weeks ago, was attacking draconian laws directed at just one class of people…

People out around this country, that have a right to be outraged, should also understand that if we do draconian things through laws, where we pass laws just to target a very few people, that they could be the very next person. 

…is sad that he wasn’t able to pass a draconian law that targeted a very few union workers. I guess Bob Corker is just impatient for someone to bust the UAW.

Though not impatient enough to recognize that the Administration’s criticism of GM’s focus on SUV’s and crossovers may jeopardize the new Traverse assembly in his state.

With the White House taking a harder line with automakers and insisting on more aggressive restructuring plans, Corker also predicted that members of Congress will begin “kowtowing … to curry favor with the administration” to keep auto plants in their states open. Read more

Honda, Toyota, Fail More in December than Two of Three "Failed" US Carmakers

Car sales in December were–as expected–still way down as compared to last year. But as with November, there were some interesting numbers last month. Remember–these are year on year declines (which suggests the total market is down slightly less than it was in November):

Make      Decline

Chrysler   53%
Hyundai   48%
Toyota      37%
Honda      35%
Ford          32%
Nissan      31%
GM            31%
Daimler    25%
VW            14%
Subaru      7.7%

I’m still looking for Hyundai’s US numbers, and Chrysler (which I suspect really tanked) won’t announce until later in the day.

While GM and Ford still lost more sales across the year than Toyota and Honda (because they also tanked during the gas price crash of the summer), their performance against Toyota and Honda more recently demonstrates the degree to which recent sales are a credit driven issue, and not what Richard Shelby likes to claim is a failed business model. 

Moreover, there is better news for Ford in the numbers, as its market share is beginning to rise for the first time since 2001.

Ford took an optimistic view of December’s results, noting that its December market share rose to 14.6%, up 0.7 percentage point from a year ago — the first time since 1997 it had achieved a market share increase for three straight months.

"This is a strong ending to…a very challenging year," said marketing chief Jim Farley. Ford projected a fourth-quarter 15% market share for Ford, Lincoln and Mercury — beating the year-ago figure for the first time since 2001, it said.

I keep looking at these relative numbers because we’re basically looking at two questions in the auto market right now. First, who can survive in the next two years, as the market for cars remains at these contracted levels? Because of the debt the American companies have, the answer to that question is undoubtedly the Japanese car companies. But the other question is who can survive best over the next two years? The rules of the game have changed, and surviving best will be as much about managing inventories on a month to month basis as anything else. And Ford, at least, (which outperformed Toyota and Honda last month as well), looks like it is winning that game in the short term.

Particularly as more people realize that Ford is somehow "different" than GM and Chrysler (because it didn’t need a bailout), Ford has the opportunity to really turn its brand image around. Read more

We Are All Banks Now

GMAC wins bank status–gains access to TARP.

Optimistic emptywheel:

One of the critical problems in the auto industry is the absence of credit (I’ve heard folks under 750 can’t get a car loan, for example).  By making GMAC a bank, you relieve one of the biggest problems in the sickest parts of the auto industry, and thereby stimulate one of the key segments of the economy, and you begin to get to get money the economy moving again.

Pessimistic emptywheel:

Dan Quayle and John Snow have an (increasingly limited) ability to suck at the federal teat to make their private profit.

The small print:

GM must now reduce its stake in the auto lender below 10 percent, from 49 percent. GM has three years to sell the rest of its shares, which in the interim will be placed in a trust that the company does not control. The automaker and GMAC also agreed to unwind a number of exclusive agreements, freeing GMAC to offer financing on equal terms to customers of other car companies.

Cerberus and its chief, Steve Feinberg, must reduce their stake below 15 percent, from 51 percent. The private equity fund plans to distribute its GMAC shares proportionally among its investors.

The No-Fail Business Model Fails

Richard Shelby and Bob Corker like to squawk about how the Big Two and a Half have a failed business model as compared to the wonderful Japanese automakers.

Funny. I thought successful business models were profitable.

Toyota Motor will lose money in its core automaking business for the first time in 70 years this fiscal year, the company said Monday, in a sign of how the global economic crisis is hurting even the mightiest carmakers.

I raise this not to gloat over Toyota’s misfortune, but to point to some of the issues behind Toyota’s setbacks this year. Of course, there’s the collapse in the US auto market, which, because it’s so large, devastates everyone’s global success.

They have also suffered from the recent steep declines in United States auto sales. In November, Toyota saw its sales drop 33.9 percent and Honda Motor 31.6 percent, faring just slightly better than G.M.’s 41 percent decline.

This is a particular problem for Toyota, because the US is usually its most profitable market (by comparison, I’m guessing that China remains GM’s most profitable market).

The carmaker’s sales in the U.S., traditionally its most profitable market, plunged 34 percent in November.

[snip]

“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad. 

Go here for more details about everyone’s dismal November.

Then, there’s particularly strategic decisions that exposed Toyota to a greater degree than other Japanese manufacturers–notably, its attempt to expand its market share in one of America’s traditionally most profitable segments.

Toyota has been seen as the most vulnerable of Japan’s big automakers because it had been investing heavily in new products, including a full-sized pickup truck for the United States market, just when auto sales started to fall.

But I thought only those failed business model American companies built trucks?!?! Toyota idled its Tundra plant for three months this year, and backed off its attempts to cut into the F150 and Silverado market share.

Finally, though, with the weakness of the Euro and dollar compared to the yen, Toyota’s now on the wrong side of globalized currency exchange, Read more