“…not everyone gets rescued"

As Bart Simpson would have said, “Well, duhh”

In an article in today’s Financial Times, Avinash Dixit, a professor in the department of economics at Princeton University, uses game theory to show the fallacy of governments giving in to doomsday scenarios proffered by companies looking for an easy out.

Major corporations and banks have ignored the realities of their actions and instead have begged to be saved, stating that the world as we know it will end if they aren’t given the bailouts that they have demanded. Yes, demanded. Although couched as “requests,” their statements about the dire situations that would occur if the money isn’t handed over is more like blackmail. But would the world really end if bailouts weren’t so freely given? Granted, things would be messy for a while, but we would survive. And the ablest companies would also, in true Darwinian fashion.

Unfortunately, governments have fallen for the horror stories. But the facts are the facts, and it can easily be seen that these badly managed enterprises aren’t willing to make the hard decisions necessary for their survival. Thus, those decision must be made by others. Let them fail. We’ll all be the better for it.

A Going Concern…

Or is it really a concern that GM is going, going, gone?

General Motor’s auditors are on the fence when it comes to defining the company as a “going concern”. While technically it is now, it’s on the tipping point, and even a small negative change could send the company irretrievably into the abyss. Given the current state of the economy, it appears to be a given that the company cannot survive in its present state.

Although GM has proposed eliminating nonperforming brands, the plan has several flaws: The reality is that there is no real buyer for Hummer. It’s not a separate product that can be easily sold. Except for the H1 (the original one), which is merely a marketing agreement for a vehicle produced by AM General, LLC, the line is actually just a rebranding of Chevrolet/GMC light trucks. Thus, a potential buyer would need to reengineer the vehicles so that they could be produced without proprietary GM parts. In today's market, especially for SUVs, that’s highly unlikely. The same goes for Saturn. When the brand started, it was a line of unique vehicles. Now it is a rebranding of other domestic GM products and GM’s German subsidiary Opel. So again, there’s nothing to sell. Saab has always been a niche brand. Today it is a mix of its own products and rebranded GM products. Thus, of all the lines proposed to be sold off, it at least has some own unique vehicles and manufacturing facilities. But in today’s economy, would anyone be interested in a niche brand?

Thus, it should be clear to those in Washington that granting them their request of more taxpayer funds is throwing more good money after bad. The solution, of course, is a “packaged Chapter 11” proceeding where debtor in possession financing (most likely from banks that took TARP bailouts and guaranteed by the government) and a guarantee regarding warranties are worked out in advance. That will allow the company to renegotiate its crushing labor situation, pare its over-large dealer network, and come to real terms with its product mix.

Wishin’ and Hopin’

Transparency is good, but is there actually something there?

I’ve been quiet lately, absorbing the new administration's proposals and trying to understand what they plan to do. However, like many, I’m flummoxed. What’s been laid lout sounds good in principle, but there are no details. I’m not the only one to notice- the financial markets are reacting negatively. So, what is the proposal?

It appears that the administration is also flummoxed. They are continuing in the footsteps of the previous administration, throwing the “idea du jour” against the wall and hoping that something sticks. That’s likely why the details are absent. They haven't really thought it all out, which should make us all very nervous. Not only is there likely no plan, but there’s probably no “Plan B,” either.

From the latest missal, the current “bank plan” is that all banks will be inspected to determine their viability, including “stress tests” for the major ones. Reading between the lines, it would appear that those that fail will be force-merged into healthy institutions, sort of a preemptive strike, instead of picking up the pieces. That could be a good idea, if it is what the Feds plan. It might save the FDIC money in the long run. But, will it actually work? It’s likely that in today’s financial climate, many (or possibly most) banks won’t pass muster. Putting a “good” bank together with a “bad” one may not be the answer. It certainly hasn’t helped Bank of America’s situation.

I’m waiting to hear something real, that has a likelihood of working. Let’s hope that it comes soon, and isn’t just a wish.

Fishing

There’s more to the story than many people know

Somalia…

…is a “failed country,” as most are aware. And the lack of a working central government is the reason most reports give for he piracy emanating from its shores. While that situation has allowed the pirates to operate generally unfettered, it isn’t the entire story.

The pirates are local coastal fishermen. They operate small boats, mainly dhows, which are suitable for day trips. Up to a few years ago, they were able to make a decent living from fish that they caught within a reasonable distance of their villages. But that was before factory fishing fleets arrived off the Horn of Africa. As they have in many places in the world, they decimated the fishing stocks in the area, leaving the local fishermen in dire straights.

With no viable source of income, and a government incapable of helping its citizens, they took to piracy to survive. “Survive” is probably not the right term, though. They are apparently doing better at their new profession than they did in their old. Plus, new businesses have popped up to service the “industry,” housing and food for hostages, and merchandise and new homes for the pirates. The old fishing villages are doing much better than they have in the past.

Thus, the solution to the piracy problem there isn’t just stopping the fishermen/pirates from pursuing their new trade. It also requires helping them to reestablish a legitimate livelihood, a difficult task in the absence of a government.

Doom and gloom… But, is it just fear?

In Franklin Delano Roosevelt’s first inaugural address 77 years ago, he stated “… the only thing we have to fear is fear itself”

Like now, the country, and indeed the world, was in deep financial trouble. Then, it lead to a depression. Now, hopefully, it won't go that far.

Yet, the worst is what’s on people’s minds, fueled by the media. But, is it really all that bad?

There have been positive things:

• Overvalued assets have realized their actual value. 
  
• CEOs of major companies are now being paid for performance. The era of bonuses as an entitlement, regardless of a company's performance, are over. 
  
• Massive fraud that managed to survive for decades has been discovered.
  
• Companies have had to address the realities of their industries and markets.
  

These are things that may not have changed were it not for the situation.

But, now what?