Thursday, December 18, 2008

More Auto Talk

Looks like Hank Paulson is back in the news.

"WASHINGTON — The White House and the Treasury are deep into negotiations with General Motors andChrysler over reorganization plans that could result in freeing up more than$14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official...
...In the negotiations, the Treasury secretary, Henry M. Paulson Jr., is effectively taking on the role of “auto czar,” which was envisioned in the carmakers rescue bill written by the White House and Congressional Democrats and approved by the House but blocked by Senate Republicans."

I've made a number of posts about Paulson recently, and I thought it was time to check out his resume. So I went to that most trustworthy of all sites, Wikipedia, and took a gander at his page.

I'm glad I did! His career is quite impressive: football player at Dartmouth, as well as Phi Beta Kappa and an English degree (apparently, you CAN make money with an English degree), MBA at Harvard, assistant to John Ehrlichman during the Watergate scandal (which got Ehrlichman convicted and sent to prison), and then of course the career at Goldman Sachs.

But I didn't find the one thing that I was looking for. Maybe Wikipedia dropped the ball on this one, but I was sure I'd see a reference to his years as an analyst in the auto industry. Or maybe even a line or two about his days as a successful CEO of Ford, or some small reference to when he worked as a designer during the golden days of Detroit. 

I was doubly surprised because with all the talk out there of how ole Hank is "taking on the role of 'auto czar'", you'd think they'd update his page to reflect his deep reserves of knowledge and expertise in these areas. The White House is going to let him decide what to do with $14 billion, and if I know one thing about the current president, it's that he would never entrust large sums of money like that to someone who wasn't over-qualified to handle it. 

Of course, Hank has other qualifications for this kind of work. He's given away nearly $350 billion with a series of confidence-crushing, flip-flopping decisions in which he injected huge amounts of pessimism in to the financial markets. Smaller men would have tried to hide their incompetence, but Hank found a way to rise above the petty crimes and find a way to screw things up in such a massive and blatantly unapologetic way that he was instantly inducted into the Bush Administration Hall of Fame. 

Still, wasting taxpayers money on cars is a different animal altogether. I hope that he's up for the challenge.

The was another quote in this story that caught my eye:

“Because of the failure by Congress, we’re left with suboptimal options,” said Tony Fratto, the deputy White House press secretary. Cautioning that no decisions had been completed, Mr. Fratto added, “We’ll do what is in the best interests of taxpayers and the national economy.”

I am so happy that someone is going to step up and do Congress' job. When Congress does not pass a bill, it's a prima facie failure. You would think that after 232 years or so, we'd be able to figure out a way to make Congress pass bills every time something happens, but until we do, it's a good thing that the Bush White House is there to do what Congress can't.

Now, some people might say that Congress was performing it's Constitutional function, but I say that something needed to get done, and the fact that there weren't enough votes to pass a bailout for auto-makers is not enough to keep this president from doing what he knows is best. After all, this is a man who has consistently been on the right side of almost every major issue, and has been convincingly elected in a way that Congress never has, and, most importantly, he'll be in office for years to come and will be able, in his usual inimitable fashion, to take responsibility for how this all turns out.

I can't wait!

Sunday, December 14, 2008

Bush - Projecting American Power In the Mideast Since 2000!

No one even seems surprised...

Don't Miss This Link

This is maybe the best thing I've read yet on the financial system meltdown. Michael Lewis is perhaps better known as the author of Moneyball, a fascinating look at economics of building a winning baseball team. 

Moneyball chronicles the revolution in empirical analysis of the actual worth of baseball players in what has grown to be a multi-billion industry. It is a celebration, of sorts, of what can be done with an open mind and the realization that much of what we think we know, we don't. 

I actually rekindled my interest in economics because of this transformation in baseball thinking. Baseball had always been a passion of mine- as a kid I religiously read the baseball section of the newspapers every morning before I set out to deliver them. But as I got older, I got tired of the same "analysis". The writers weren't telling me anything new, and they wrote as though there was nothing else to know about the game. By my high school years, I was no longer interested.

With the advent of the internet, however, I found writers and analysts who were not part of the traditionalist network, who questioned everything, and who applied empirical standards to their analysis. Baseball is a sport which prides itself, above all, on tradition. And analysts like Bill James and Billy Beane would have no part of it. 

It's unfortunate that there was no analogue to this on Wall Street. But often, this kind of shift in the way we think can only be effected by a cataclysmic shift in what we experience. If the last few months haven't provided this, I don't know what will.

Friday, December 12, 2008

It's Not Like He Didn't Warn You

If you enjoy watching someone get mocked for what they believe, and then get completely vindicated when it turns out they're right, you'll want to see this.

Thursday, December 11, 2008

Reason For The Bailout

I'd like to look at the reasons being offered for bailing out Detroit and comment on them.

1. We will lose 1 million jobs. 

First off, if there are a million jobs associated with the auto industry, they will not go away overnight. Detroit still makes almost half of the cars and trucks sold in the US. One of these companies will find a way to survive. Which brings us to...

2. If one auto-maker goes down, they will all go down.

I have heard Ford's CEO say this, yet he has never offered any convincing evidence, nor have I seen the claim questioned in the media. The supposed reason is that a collapse of GM and Chrysler will result in the collapse of suppliers that service Ford. I find it hard to believe that this would be the case. There is still great demand for vehicles, even if it is down. As vehicle prices rise temporarily as a result of lower supplies, Ford will find a way to keep the suppliers in business. And the suppliers may have to consolidate or change as well. This will not be easy, and will result in job loss, but the job loss is coming one way or the other.

3. This will add an intolerable shock to the economy.

The economy is not going to collapse. Despite the confidence-destroying comments of Hank Paulson, the credit markets have not collapsed. Things will be not be as easy they were a year ago, but we are not going to witness the end of civilization. The economy will probably always go through booms and busts; it always has and it always will until we find a way to allow every player to have perfect  information. The economy right now is telling us that our information, which we use to determine the best place to invest money, was wrong. It is telling us to find a better place to put that money. 

4. We cannot lose such a big part of our manufacturing base.

Building on the last point, a manufacturing base that is losing money is not worth having. But there are, undoubtedly, manufacturing sectors that need capital and will use it correctly. They will create jobs that will last longer than Mar. 31, when we realize we've wasted $15 billion. But they won't get this capital if we insist on propping up broken companies.

I realize that real people occupy those jobs at GM and Chrysler. I know they will be hurt. I do not think it enough to say the hell with them. I think the government should find a way to help them- retrain them, make sure they have sufficient unemployment benefits, etc. We live in a society that can do that, and it is the right thing to do. 

But if GM was in the business of selling steam powered buggies, we would not be trying to save them in order to save the jobs. We would find different jobs for there employees. We should be working on this. It's time to move on.

De Facto Bankruptcy?

With the current auto-bailout bill dead in the water, Republicans are offering an alternative. At first glance it seems that the main differences between it and the previous bill are that the Car Czar would be required (as opposed to being authorized) to call in the loans if requirements are not met. Calling in the loans would, presumably, result in bankruptcy. 

The requirements are also changed. The bill would require the automakers to cut their debt by two-thirds, which is a huge amount. GM and Chrysler alone may have nearly $100 billion in debt. 

This seems to be a pseudo-bankruptcy. In a bankruptcy proceeding, debt can be modified by a judge. There will be enormous pressure on creditors to renegotiate their debt in order to avoid that situation. In this sense, the bill does more to force change. 

However, I don't believe this will have the intended result, if that is what it is. GM and Chrysler are facing imminent bankruptcy as we speak, and nothing is happening. No one will want to make the first move, although, in fairness, some creditors may be waiting to see if the government will write Detroit a blank check.

I hope it will not. Detroit cannot continue on the path it is taking. Chrysler is finished. GM can only hope to survive by downsizing enormously. Ford must do the same. We cannot let our sentimentality for these American icons compromise the future economic well being. Life will go on. 

Tuesday, December 9, 2008

Knowing The Rules

Here's a link to an interesting article about fund manager Bill Miller. After years of record-breaking returns, he lost everything by betting it all on companies like Bear Stearns, AIG, Freddie Mac, WaMU and other firms who were on the verge of collapse. 

Miller made a career and a fortune out of going against the market, but this time the market was right. There is an interesting quote in the story from Miller where he explains finally selling AIG shares because "we don't know the rules."

In fact, it seems to me that not knowing the rules was a big part of the problem here. Inasmuch as this is a crisis in confidence, the confidence has been lost because the rules of the game have changed. And the biggest culprit here may have the government, which arbitrarily picked winners and losers, nationalized Fannie and Freddie, and promised to buy mortgage-backed securities one day before switching to capital injections the next. Investors and lenders, after all, require predictable rules. When arbitrary decisions are forced on the marketplace from without, as was the case with the Treasury interventions, then predicting the future becomes far more difficult and risky, as does lending or investing. This, of course, leads to frozen credit markets, as lenders find themselves as deer in the swerving headlights of government.

Maybe we should have a plan ready for the next time. You can believe there will be a next time.

This Will Never Happen

More details from the proposed package: the Car Czar (I hate that term already) will have the power to demand immediate repayment of the $15 billion if he or she is not satisfied with the automakers' long term plans, or if they are not submitted by March 31.  This is meant to reassure taxpayers that their money won't be wasted.

In reality, there is almost no conceivable way that the Czar and his ministers, who are a political entity, will be able to demand repayment of the loan. Barring a miracle, calling in this loan would result in the immediate insolvency of both companies. Passively letting one of the Big 3 go bankrupt is politically very difficult; actively moving to cause their collapse will be impossible. 

In fact, denying further requests from Detroit for money will be almost impossible once the government is invested. The political cost of ignoring sunk costs will be far too high to overcome, and we will throw good money after bad.

There are two main components of the current economic crisis. One is a crisis in confidence, and the other is a crisis in misallocation of capital. For the most part, this has been limited to misallocating capital in the housing sector. This bill will exacerbate that by extending it to Detroit.

Car Czar to the Rescue!

The new bailout bill is approaching finalization. Among the highlights are Congress' insistence on the elimination of corporate jets and the creation of a "Car Czar".

Eliminating the jets is the bone to throw the taxpayers for the imminent immolation of $15 Billion or so, which will be only the beginning. I will venture that we will be lending all three automakers another $30 Billion or so by March. To quote the late Sen. Everett Dirksen, "A billion here, a billion there, and pretty soon it starts to add up to real money."

The Car Czar is much scarier. He will basically be running GM and Chrysler, (and soon, in all likelihood, Ford). The good news is that he will have oversight. The bad news, (which is so bad it renders the good news bad), is that the oversight will come from Congress and the White House. There may only be two institutions on the face of the earth that have proven to be more incompetent at management than the Big Three. And that would be Congress and the White House. And the incoming administration's most valuable asset in this regard will likely be their willingness to admit they know next to nothing about making money by selling cars.

There is still a good possibility that the Republicans will block this bill. Whereupon Wall Street will respond with another day of heavy losses and the Republicans will cave and pass a modified version. Because, as we all know, people who bought stock in GM were guaranteed to get their money out. Weren't they? No? It's getting hard to remember, after all.


The Real Fear


On January 1, 2007 Denver Broncos cornerback Darrent Williams was murdered in his limo during a drive-by shooting.

On November 27, 2007, 24 year-old Washington Redskins free safety Sean Taylor was murdered in his home.

On September 2, 2008, Jacksonville Jaguars offensive tackle Richard Collier was shot 14 times while he sat in his car, and was left paralyzed with an amputated left leg. 

On November 28, 2008, New York Giants wide receiver Plaxico Burress shot himself in the leg at a nightclub, and was subsequently arrested and charged with criminal possession of a handgun. The charges carry a mandatory minimum of 3 1/2 years in prison.

Public opinion was harsh. The media painted Burress as just another angry, young, (black) NFL player who thought himself above the law and was a danger to society. In the wake of the Michael Vick saga, whatever Burress gets he will deserve. But in light of the tragedies mentioned above, we should suspend our hasty judgment. 

We should pause to see this from Burress' point of view. His fear of getting shot or attacked is patently rational. He did not intentionally discharge the weapon. No one has shown or even alleged any malicious intent on his part in any way. He is a black man, with a gun and an attitude, and that's all we need to know.

There may be nothing that can be done for him. The ridiculously unfair mandatory minimum sentencing laws may doom him in the end. But the next time you see someone on TV talking about how we should throw away the key, if you find yourself agreeing then ask yourself this: if it was Tom Brady, how would you feel?

And the answer to that question may be be an indication that our problem with Plaxico isn't that he was carrying a gun, but that he is a young black male with an attitude. 

Thursday, December 4, 2008


The UAW is saying that they are open to making a few concessions if that's what it will take to get a bailout from the government. They will not consider reopening contract negotiations.

I think that UAW management should listen to what GM's management is telling Congress (presumably, under oath.) They are saying that GM will be insolvent by the end of the year without more money. This is in 3 weeks. When they become insolvent, those contracts won't be worth the paper they're printed on. If they want GM to survive, if they want to continue to work in the auto industry, then they had better consider every option, and they had better be prepared to renegotiate everything. Congress is, remarkably, resisting help for a company and a union that will not change it's ways. 

The UAW has a sense of entitlement that is possibly exceeded only by that of GM's management. They continue to make claims of great sacrifice, as though their members are not compensated better than the vast majority of Americans. They call themselves the backbone of the country, but if they refuse to accept the changes that are needed, and cause the bankruptcy of GM, then they may instead become the straw that broke the country's back.

Where The Decider Got His Mojo

It seems as though neither Congress nor the White House are very interested in bailing out the automakers. And if they are, they obviously don't want to take credit for it. Sen. Chris Dodd today suggested that the Bush administration should take executive action, since it seems unlikely that Congress would act in time. 

If you stop and think about it, what Sen Dodd is really saying is that, even though the legislative branch (whose job it is to decide policy) has decided that bailing out Detroit is bad policy, the executive branch (whose job it is to carry out Congress' decisions) should ignore that decision and do whatever it wants.

The next time you hear someone in Congress complain about how the Bush White House has bypassed and marginalized Congress, and how they have used scare tactics to do so, consider how Sen. Dodd has advocated the abrogation of congressional responsibility. Recall how Congress did the same after 9-11. This is how the job of "Decider" was passed off to Bush. But when the president decides, democracy suffers.