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After a tumultuous 2008, can 2009 be better- or worse?
Is the ride over, or have we only experienced the beginning?
It’s now obvious that the current recession is likely the worst the world has seen since the 1930’s. Not only is it far-reaching, it has exposed many follies in the financial markets. The pessimists have had a field day, projecting that the US (and UK) real estate markets will fall further. The US Treasury seems to have no clear-cut plan and keeps coming up with ideas that haven’t been fully vetted before being implemented.
Hopefully the new US administration will bring sanity to the situation.
Here are some ideas:
- Don’t continue to prop up failed industries (automakers). If they aren’t viable, let the market decide what to do with them. Consolidation, reorganization, whatever, now, is much better than putting off the inevitable.
- Speaking of putting off the inevitable, the only real solution to the mortgage situation is to recast all mortgages, not just those that are in default. The lenders made grievous errors in judgment, and they should be responsible for them. A stable mortgage market will stabilize housing. “Band-aid” approaches just push the inevitable out. But that was likely the plan anyway, to put the hard decisions into the hands of the new administration.
- Let’s have a real stimulus package. No giveaways or pork. Good uses of the money for infrastructure improvements will bring about economic health and could also accelerate the timeframe for combating global warming. There’s an opportunity-take it!
About time…
So, the Bush administration is considering an “orderly” auto bankruptcy
As I’ve said in previous posts, the best solution to the automakers’ situation is a “pre-packaged” Chapter 11 reorganization with Treasury money structured as “debtor in possession financing.” It’s good to see that the administration is finally recognizing that concept as the correct path, rather than giving the automakers just enough ever few months to prolong the agony. Hopefully Congress will recognize it, too.
Credit cards
The Office of Thrift Supervision (OTS) has finally come out with their new regulations on credit cards. While many in the banking industry won’t like them, they’re the right thing to do. For too long lenders specializing in credit cards have used predatory practices that were inherently unfair and “bottom fishers” have preyed on people struggling to reestablish their credit. It’s about time that things were changed. The credit card business was a healthy, profitable one for many years before the concept of greed stepped in.
Now, besides economic troubles, pirates, ineffectual band-aids, there’s massive fraud
Charles Ponzi was a piker
It seems almost unfathomable that the SEC was so inept at its job that they let Bernard Madoff run his scheme for decades. And, too, that his investors who continued to invest. The signs were there. The red flags are numerous. It would seem that any astute investor and competent regulator would have seen the signs. But apparently, nobody paid attention. The rule of thumb regarding possible fraudulent schemes has always been “if it’s sounds too good to be true, it probably isn’t.”
Speaking of ineffectual band-aids
The Treasury’s continued “fix du jour” plan marches on. Only $15 billion left before they have to go back to Congress for the other half of the $700 billion bailout fund. But that seems to be set aside for the automakers in a futile plan to “save the industry.” As I’ve said previously, it won’t. They will just come back for more.
But then, maybe a ray of hope
GM and Chrysler are again talking about a merger. Maybe they’ve finally realized that they’re running out of time and that the prospects for getting last minute unencumbered cash are dwindling. That’s good. The US auto industry needs a major reorganization in order to stay in business.
Wrong reasons, but right result
What to do…
Though the reasons that some Republican senators gave for not supporting the administration's hand-out to the automakers smacked of partisanship and dogma, the result was a positive one. The hope is that the Treasury’s anticipated funding from TARP won’t have the same result.
While many are predicting doom and gloom if the automakers don’t get funding, the reality is that it won’t be all bad. True, some will lose their jobs, and there will be difficulties for the related suppliers, however, letting them go into bankruptcy can be a good thing.
If properly structured, Chapter 11 for GM, Ford, and Chrysler can work. Very rarely these days do large companies go into bankruptcy without a carefully worked out plan for eventually coming out. Witness the airlines in years past. Granted, there are some issues that need to be carefully worked out, but they can be.
First, the TARP money should be structured as “debtor in possession” financing. The automakers have given the tight credit markets as a reason for not considering bankruptcy. TARP funding as “debtor in possession” financing gives the Treasury a double guaranty of getting its money back first.
Second, warranties need to be protected. As part of a bankruptcy, the buying public need to get the assurance that the automakers won’t use restructuring to alleviate themselves of their obligations. Doing so will also eliminate another reason to avoid bankruptcy.
Thus, Chapter 11 filings are a viable solution. The manufacturers will be given the opportunity to shed excess capacity, rationalize their products, streamline their dealership networks, and get their labor costs in line.
Once they have started down that road, they have the real potential of being viable profitable companies. It’s quite possible that once they have eliminated their excess costs they will be potential merger candidates with each other or with more successful automakers.
There are others in Detroit, too
Ransom
Now the Big 3 US automakers are preaching doom and gloom for the economy if they aren’t bailed out. To hear them (and their congressional apologists) tell it, if we don’t give them the money that they are asking for, they will bring down the country. That’s no better than the pirates of Somalia demanding ransoms for ships and crews they have captured. They have been termed terrorists. Maybe the automakers are, also.
Appeasement
The official policy of the US government is not to give in to terrorists’ demands for ransoms for kidnapped victims, as the money doesn’t guarantee release and just encourages them to do it again. Economists have stated that the amounts the automakers are asking for are just the tip of the iceberg and that they will come back again and again. The problem is that they are failed businesses that failed to learn from their mistakes. In a capitalist system like ours, firms that fail to control costs or respond to the marketplace either disappear or are restructured (often by liquidation or consolidation) into profitable enterprises. Market forces should be allowed to work in this case. They aren’t “too big to fail.” Either consolidation will happen or they will be forced to make the hard decisions that they so far have not been able to make.
Does it make sense to loan money to the Big Three automakers?
61% of those who participated in a poll this week by CNN/Opinion Research Corp. didn’t think so.
The real question is: Would the money that GM, Ford, and Chrysler are requesting make a real difference? The answer is likely no. it will just delay the inevitable. The automakers have come up with the plans that Congress demanded as a precursor to getting funds, but they are in reality “too little, too late.” the companies’ problems are deep seated, and many of their proposals should have been implemented long ago. All three have too many brands, too many dealers, and aren’t efficient manufacturers. Throwing money at them won’t solve the problem.
GM’s CEO said that bankruptcy wasn't an option. Actually it is. Only if they can renegotiate legacy costs, recast their debt, eliminate redundant product lines, and reorganize their distribution systems can they become profitable. They, and the UAW know that, but don’t want to take the bitter pill. They need to.
I could have told you that before…
The National Bureau of Economic Research released a report today stating that the US has been in a recession for the past year. I would think that most people already knew that, but it’s “nice” that there’s now an official proclamation.
So, what does that really mean?
Not much, other than those of us who have said for months that we were in a recession are vindicated. A hollow victory, as it doesn't really change anything. However, since the recession is now official, maybe the politicians will take it more seriously. The Treasury has been making a lot of stabs at correcting the situation, but they seem more like the “solution du jour” than real plans. They, Congress, and their equivalents in the other major economic powers, need to come up with real solutions to the problems, and that includes real international cooperation, not just “feel good” pronouncements.
