Too big to fail?

Are they really?

Failing

The “Big Three” US automakers are trying to convince Congress and the American taxpayers that they are too big and important to the US economy to be allowed to fail. But are they? And if they do, what are the real ramifications? The truth is, they already have.

Presently, they are asking for $25 billion dollars, money that was conceptually set aside for an R&D infusion to develop new vehicles that would be better suited to today’s market, realities of fuel supplies, and environmental concerns. However, that money would have better been offered a few years back so that they would now have the vehicles that the markets want, rather than SUVs and trucks. Of course, they wouldn't have had interest back then, seeing he profits to be made by building bigger, so that’s a moot point. If that money were given to them, now, it would be sucked down the drain like that rest of their remaining capital, and they would return to the trough within a year, still without progress on new vehicles.

So, what to do?

Let them go into Chapter 11. It won't be the economic disaster that the automakers and their unions predict. Of course, some jobs will be lost in the short term, but when (or if) they emerge from bankruptcy, if done right, they will be more competitive in the market and their remaining employees will have more job security.

Solutions

The US automakers are bloated dinosaurs, still working under business plans put together many decades ago, when they truly were the engines of the US economy. Things have changed, but they haven’t. They have too many brands, overlapping models that mean that each company competes not just with other automakers, but also with themselves. This was fine back when GM, Ford, Chrysler, AMC (remember them?), etc. had the entire market. But those times are long gone. Consumers have more choices, and have voted with their feet. In order to survive, GM, Ford, and Chrysler have to reorganize or die. It’s just that simple.

Ideas

Does GM really need all of those brands? Does it really need two truck brands selling the same product with slight cosmetic differences? Does it really need to have Chevrolet, Buick, Pontiac and Cadillac? Toyota and Nissan have two main brands- Toyota/Lexus and Nissan/Infiniti. GM could be successful with just Chevrolet and Cadillac. Does Ford really need the Mercury brand? Chrysler sells the same SUVs as Chryslers, Jeeps, and Dodges. And they sell their minivans as both Chryslers and Dodges. They could easily have Chrysler sell cars, Jeep SUVs, and Dodge trucks.

Why all of this redundancy? Too many dealerships left over from decades past. They should be consolidated, along with the brands that they carry. The dealers, along with the manufacturers, would become more profitable.

Labor is another problem for the “Big Three.” Their costs are such that they can’t compete. And to top it of, they are paying people not to work so that they will be available to work again when shuttered plants are reopened (like that will actually happen). Though I feel badly for the effected workers, their leaders went into collusion with their employers many yeas ago with a plan that can't survive today.

Bankruptcy

It’s the only solution. The automakers are spreading rumors that consumers would lose confidence in them if they went into chapter. Unlikely. Most of their previous customers left a long time ago an the remaining ones are their because of brand loyalty. If they haven’t moved on before now, they will stick it out. Airline passengers didn't stop flying when the major airlines reorganized, and the automakers will survive.

If we throw a TARP over everything, will it all get better?

The problem with “quick fixes” is that the ramifications aren’t necessarily apparent at the beginning

FDIC

The FDIC has finally come up with a plan for mortgages. It addresses the realities of the mortgage market and the need to clean up underwater loans for the greater good of the economy. Although some will protest that it’s a giveaway to banks and imprudent borrowers, the facts are that recasting the mortgages so that they reflect good underwriting will be better for financial markets and will help the economy. Non-performing loans will become performing again and their values can be quantified, something that has been lacking.

Treasury

The new Treasury proposals are a perfect example of flailing about. First, they were going to buy nonperforming loans from banks to give liquidity to the market. Then they changed that to capital infusions. Then they realized that they needed to put restrictions on that capital so that it would be used in a manner that would have a positive effect on the economy, rather than to give banks the money needed for acquisitions, bonuses, and dividends. Most recently, they are looking at using the money that Congress allocated to free up consumer credit.

All good things, but they are coming in dribs and drabs. It appears that they didn’t really have a plan at the beginning, and are reacting, rather than being proactive. Don’t they have people who can see ramifications?

Automaker bailouts

The US automakers, over many decades, got themselves into their current situation by ignoring market trends and being greedy. Although there is a fear that they have to be “saved” so that unemployment won’t worsen, that’s a bad solution. In decades past, the “Big Three” constituted a major share of the county’s industrial output and were too big to fail. No longer. If they can’t compete in the market, they should fail. It wouldn’t be the worst thing. In their present configurations, they have too many remnants of the days when they only competed between themselves. If they had no choice but to go into bankruptcy, they, or their successors, would have the opportunity to delete redundant products, renegotiate franchise and labor contracts, and again become competitive. They may not survive as independent entities, but how important is that, really?

Global anxiety

Yeah, that’s the ticket…

Fear

According to Roger Cohen of the New York Times, “America's moment of reckoning is global. Economic anxiety has spread far and wide, as far and as wide as the hopes vested in Obama. This moment of moral opportunity is not confined to the United States.”

While there are serious financial blunders behind the current world-wide economic problems, fear is definitely the main hindrance to recovery. Until it leaves the market, things won't measurably improve.

Opportunity

As I have said before, because the markets have beaten down “good stocks” along with bad, there are excellent opportunities to be had to invest very cheaply in well-run, profitable companies. Some investors have realized that, but more need to return to the market.

Hope

The US has a new President-elect, who sees things much differently than the current one. He have assembled an impressive team of economic advisors. Hopefully they will come up with plans that will help turn the economy around and that Congress will let those ideas have an opportunity to prove themselves.

Promising signs

But will they continue?

Has the stock market finally found its bottom?

It appears that investors have returned to the market. At least some have noticed that there are bargains available. Many very good to excellent companies have had their stock price beaten down by the market with no respect to the individual company situations. Savvy investors have noticed this and are returning to the market. Hopefully that will continue.

Mortgage reality

JP Morgan Chase has joined Bank of America’s restructuring of mortgages. In addition, the FDIC, as the owner of the successor of IndyMac Bank, is experimenting with radical restructuring. As I have said on October 8th, the only way that the toxic mortgage situation will be solved is the somewhat radical idea of doing a true “mark to market” of bad loans.

What’s happening now can be characterized as “baby steps.” What I propose goes further than what is being done on a small scale, but if implemented, would restore liquidity to financial institutions and will go a long way to unfreeze the credit markets.

All nonperforming loans should be reviewed.

Borrowers who feel that they are in danger of going into default should be invited to have their loans reviewed also.

The loans should be restructured so that the payments are in line with generally accepted underwriting guidelines.

In order to achieve this, the loans may have to have radical reductions in rate, extension of term, or a write-down of the principal balance.

While there will be cries of “giveaway,” the reality is that all of these nonperforming and potentially nonperforming loans will go into the performing category. They will have true value and liquidity will be restored.