Bailouts for Everyone, Forever

Posted by Ray on December 29, 2009 under Main | Be the First to Comment

GMAC is apparently close to yet another $3.5B in additional aid from the government. This is on top of the original $12B the firm already received the first go around. Of course, the government will insist that this ‘investment’ will be profitable just like CIT, GM, Chrysler and anyone who invested with Bernie Madoff. This news comes on the heels of the Freddie and Fannie announcement that the government will backstop all, not just the original $400B, of the GSE’s losses which could be trillions at the end of the day.

Of course in the case of Freddie and Fannie the top executives will continue to receive millions in compensation because it takes talent to lose billions, it must because Brewster, of Brewster’s Millions, could barely do it if you remember. I find it hard to believe that anyone could possible argue that these bailouts are not permanent or will end at any point in the future. I think this latest blast of reality from the state owned automaker and mortgage issuer is proof enough that these bailouts will continue indefinitely.

The irony is that we are seeing all of these bailouts or ‘additional investments’ in the face of the greatest economic recovery that never was. Let’s face it, when the fantasy 3.5% GDP was whittled down to 2.8% you could live with that because that meant there was still private sector activity, but now that the official 3Q09 GDP figure is 2.2% that means there was no private sector activity at all. That was also with cash for clunkers and the housing tax credit in full force as well. Of course last week’s housing numbers showed us what the housing numbers will look like without government help, in a single word awful, but imagine when mortgage rates are at 6%. Regardless, if things were rosy then I find it hard to believe that GMAC would need more money.

Oh, I forgot, Citi and the rest of the banks are paying back TARP, sure, that means that banks are doing fantastic. Did you read the beginning of the story, the bailouts are permanent and these banks know 2 things, 1) the government will never let them fail; and 2) TARP is not going anywhere. Not only that, but these banks also carry massive guarantees on their portfolios and FDIC issued debt so the repayment of TARP, I am stealing this from Whitney Tilson, is the greatest scam ever. Basically the banks now can pay themselves whatever they want, they have guarantees on the crap on their books, implied guarantees, can issue guaranteed debt (in some cases), now they pay far less for many of those privileges and the government lost 90% of its leverage – nice job guys.

The payback of TARP does not mean banks are healthy it simply means the banks can go to the market and get other suckers to buy their debt to get Uncle Sam off their back. I did not think it was very hard to figure out, but apparently it was because the media and investors are swallowing this stuff hook line and sinker. The proof is in the pudding and bank stocks have done nothing since August and, frankly, the only good one is JP Morgan and who really knows what is on their offshore books or what they are really on the hook for through Bear? To think there will not be a need for another TARP bailout in the near future is crazy, banks would not be holding all this cash if; 1) the economy was really recovering; and 2) they were really as healthy as they want us to believe.

I may have been wrong about a correction this fall, I admit that, but there is no way that the continuous flow of bailouts can be framed as a good thing. Oh, if you are happy about Freddie and Fannie executives paying themselves millions, I would suggest calling your representatives and letting them know how you feel, especially if your in Barney Frank’s district because he really doesn’t care about you.

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Why American Car Makers Fail

Posted by Ray on August 30, 2009 under Main | Be the First to Comment

Just when you think the Big 3 learned their lesson they go and repeat the same things that got them in trouble to begin with. One would think that after 2 decades of bad decisions and one other major bailout from the government the industry would get its act together, but that is not the case. The only one of the Big 3 I have respect for is Ford, who told the government to pound salt over the terms of a bailout, but that makes me question why they went to the bailout table to begin with.

However, all three just made the worst decision of all time, well kind of. It appears that they bought into the whole ‘the economy is recovered’ and that the artificial demand for cars, through cash for clunkers, is somehow permanent. In fact, there is little demand left for new cars and all the pent up demand for cars was pushed forward to now through the very expensive government incentive.  Unfortunately, the greatest recipients of the whole cash for clunkers deal were the Japanese car makers, not the Big 3.

Toyota has realized this and has recently cut their production by 10% and, for the first time ever, closed a plant down. However, the Big 3 has done the exact opposite of Toyota, which shouldn’t surprise anyone. GM and Ford recently announced the addition of more shifts, rehired workers and boosted output by 10%. All when traffic in dealerships is reported down 10% below Junes traffic.

I guess when you are backed by the government, except for Ford, you can afford to do this, but it is not reassuring to me to see that type of decisions being made. Especially since we are, more than likely, not out of the recession and the consumer is still not spending money. Not to mention that 25% of people buying cars under the cash for clunkers program have buyer’s remorse which goes to show they really never wanted to buy a car, but free money is free money.

What you can surmise from this is that the big 3 are living in a fantasy land while Toyota, Honda and Hyundai continue to clean the clocks of its US competitors. It makes zero sense that the Big 3 would ramp up production when the more successful Japanese makers are cutting back, perhaps GM and Ford know something we don’t, but I highly doubt that.

Based on this recent decision to ramp up production it is really no wonder why 2 out of the Big 3 failed, miserably I might add. Not to mention this is Chrysler’s third chance at survival after they were successful after the first bailout, but their second failure just illustrates how bad their business plan was to begin with.  In my opinion, I think any car maker is far from a buy as I see shrinking credit and lack of demand driving car sales further down instead of up.

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