Here Comes Another Bailout

The Wall Street Journal reports that GMAC Financial Services Inc. and the US Treasury Department are in advanced talks to prop up the lender. It will be the third infusion of cash into the troubled financial services company that was granted an exemption and allowed to become a bank holding company so that it could tap into the TARP money.

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity.

The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company's importance to the revival of the auto industry. Founded in 1919, GMAC has $181 billion in assets and is a major financier for 15 million borrowers and thousands of General Motors and Chrysler car dealerships in the U.S.

The new capital would help firm up GMAC's balance sheet and solidify its auto-loan business. GMAC provides the vast majority of wholesale financing for GM dealerships across the country, meaning scores of local distributors would be unable to bring new vehicles onto their lots if GMAC were to collapse.

Federal officials also are moving to shore up GMAC's ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year.

Good thing we get equity for all this crap, not sure if that's a financial term or not. The government's current 35.4 percent stake in GMAC is the result of the Obama Administration's restructuring of the auto industry earlier this year. While GMAC was long General Motors' financing arm, in 2006 GM sold a majority stake to private-equity firm Cerberus Capital Management. Cerberus is a value shop. They look for undervalued companies and hope to turn them around. They are finance professionals. They knew the risk and yet we are paying the price. In effect, a bailout of GMAC is a bailout of Cerberus.

Meanwhile, GMAC's market share in the auto financing market has fallen sharply during the crisis as its cash available for lending declined. Increasingly banks like JP Morgan Chase and Wachovia are making inroads winning market share. GMAC had 3 percent of the auto financing market in the first six months of the year, down by almost half in the same period a year ago, according to Experian Automotive.

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The Pain in Detroit

The Michigan Messenger has the bloody numbers. They are painful.

The September unemployment stats for Michigan came out this week and they are high -- as expected. highlighted the statistics on a municipal level, showing the five cities with the highest jobless rates are all over 25 percent. The cities of Highland Park and Pontiac, which leaned heavily on auto-related employment, had the highest unemployment with 35.2 percent of residents reportedly jobless. Both cities have declared bankruptcy in the recent past. Highland Park recently emerged from state receivership and Pontiac just slipped under state control last year.

While the overall state's unemployment rate is the highest in the nation at 15.3 percent, the top five hardest hit cities in the state are all former automobile production hubs.

According to

   1.Highland Park 35.2%
    1. Pontiac 35.2%
    3. Detroit 27.9%
    4. Flint 26.3%
    5. Port Huron 25.7%

Back in April, the Detroit News reported that a Michigander family was leaving the state once every 12 minutes. Using US Census Bureau data, the paper found that Michigan gets less populated, less educated, and poorer because of outmigration.

The state's net loss to outmigration -- the number of people leaving the state minus those moving in from other states -- has skyrocketed since 2001. Although the Census Bureau does not report totals moving in and out each year, Internal Revenue Service records show that the population decline is a result of two disturbing trends: The number of Michigan residents leaving the state rose 25 percent between 2001 and 2007, while the number of new residents moving in plummeted by nearly one-third.

Since 2001, migration has cost Michigan 465,000 people, the equivalent of the combined populations of Grand Rapids, Warren and Sterling Heights -- the state's second-, third- and fourth-largest cities.

Population loss of that magnitude is so rare that its impact has never been studied. But The News' analysis discovered some sobering trends:

* Those leaving Michigan are the people the state most needs to keep -- young and college-educated. The state suffered a net loss to migration of 18,000 adults with a bachelor's degree or higher in 2007 alone -- the equivalent of half the staff of the University of Michigan crossing the state line.

* Michiganians who fled the state in 2007 took with them almost $1.2 billion more in paychecks than the paychecks of those moving in. That represents a 45 percent increase in lost wages in just one year, money no longer spent in Michigan businesses, paying mortgages or paying taxes.

Those leaving Michigan had incomes 20 percent higher than those who moved here ($49,700 to $40,000), a disturbing reversal of a long-standing trend.

And those figures don't take into account the "ripple effect" those paychecks would have had here -- an estimated $3.7 billion.

* The net loss of school-age children was more than 12,000 in 2007 alone, costing individual school districts roughly $84 million in state aid.

* With about 36,000 more households leaving the state than moving in, that leaves 36,000 empty houses and apartments, damaging already weak home values. "When there are more properties on the market, it drives down prices," said Ron Walraven, a real estate agent in West Bloomfield. "With the layoffs and the buyouts at the auto companies, people are leaving. Some are just abandoning their homes."

* People moving from state to state are disproportionately young. While almost 13 percent of Michigan's population is over 65, only 2.5 percent of those leaving are that old. That means outmigration is adding to the costs associated with an aging population, such as the state's share of Medicaid payments to retirement homes.

* There will be fewer tax dollars to pay for those services, maintain roads or run schools. According to Senate Fiscal Agency estimates, the income leaving the state cost Michigan more than $100 million in personal income tax revenue in 2007 alone.

How desperate are people? This desperate: Help Me Leave Detroit. It is just painful.

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About That Banking Crisis

Ten days ago, I wrote about how a proposed rule change at the Federal Deposit Insurance Corporation (FDIC) underscores the severity of our banking crisis. Then I commented on how the Board of Directors of the FDIC had adopted a Notice of Proposed Rulemaking (NPR) that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. In doing so, the FDIC collected about $45 billion to shore up its liquidity as it closes failing banks transferring their assets to larger ones. And on a number of occasions, I've touched upon the crisis in the nation's commercial real estate sector.

These two stories are not unrelated. About $870 billion, or roughly half of the industry's $1.8 trillion of commercial real estate loans, sit on the balance sheets of the smaller and medium-sized banks that are now under increasing duress as defaults mount. In September 2008, the commercial real estate default rate stood at 1.38 percent; it is now projected to hit 3.9 percent by year's end and 4.7 percent in 2010. And what this portends is an increasing consolidation of the nation's banking sector that will benefit the already rich and powerful.

In the past 15 years the US commercial banking sector has already undergone an unprecedented concentration. In 1995, the top five banks had a combined 11 percent deposit share; today they have nearly 40 percent. The top three - Citigroup, Bank of America, and JPMorgan Chase - account for 30 percent of the nation's deposits. These three banks also account for over 40 percent of bank loans to corporations. Half of all Americans do business with Bank of America. Expand the list to the nation's top 15 banks and they control a full 70 percent of the nation's deposits. In size, these banks have become too big to fail. They are allowed, if not encouraged, to take on risk because ultimately Uncle Sam will bail them out if their practices run awry. But such conditions do not exist for Main Street banks.

Small banks are failing at a prodigious rate. Ninety-eight US banks have failed so far in 2009, up from 25 during 2008 and only three in for all of 2007. Twenty-four insured institutions with combined assets of $26.4 billion failed during the second quarter of 2009 alone. But this is just the tip of the iceberg, the banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009. And since defaults are still increasing, the sector faces an even more turbulent 2010. Christopher Whalen of Institutional Risk Analytics, for example, forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. It's all quite a mess and it requires attention because the sector is under-capitalized and reluctant if not unable to lend causing a drag on the overall economy.

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Getting It Wrong As Usual

Once again Ross Douhat is wrong as usual. In a column entitled Inequality As Usual in the New York Times, Mr. Douhat seeks to divert attention from the causes of social inequality and reassign culpability from its conservative progenitors to liberalism for failing in nine short months to reverse a three decade assault on the middle class and the poor.

According to Mr. Douhat should the Obama Administration fail to reverse our still-widening social inequality, it "will represent a significant policy failure." Perhaps but I take issue with a number of Mr. Douhat's assertions. Only a deluded conservative could claim that the federal income tax is already quite progressive. Quite the opposite. In 1948, still at the start of our "Great Compression", the effective Federal Tax Rate (Income Tax + FICA) for median families stood at 5.30 percent while the effective Federal Tax Rate on the richest one percent was 76.9 percent. Even as late as 1980, the effective Federal Tax Rate for median families was 23.68 percent versus 31.7 percent for the top percent. By 1985, Reagan's tax cuts narrowed that margin to just 46 basis points, 24.44 percent on median families versus 24.9 percent on the richest one percent. While real income for the bottom 90 percent of the population fell by 11 percent between 1973 and 2005, those in the top .01 percent bracket, comprising some 14,000 households with annual incomes averaging nearly $13 million, saw their take increase by 250 percent over the same period and yet they were gifted by the Bush Administration with unparalled tax cuts.

I'm also struck by the problem is too vexing so let's not fix it mentality of Mr. Douhat.

There's only so much that politicians can do about broad socioeconomic trends. The rise of a more unequal America is a vexingly complicated issue, whose roots may wind too deep for public policy to reach.

The zenith of fairness in America was the mid-1960s. That achievement was the fruit of the public policies that were enacted during the Administration of Franklin Roosevelt. The great reduction of inequality that undid the gross divide of the 1920s and created middle-class America between 1935 and 1945 was driven by political change that included the adoption of a progressive tax structure that enabled a larger government role in the economy and provided the basis for a broad range of redistributive programs. Mr. Douhat is simply wrong to suggest that there's only so much that politicians can do about social inequality. History proves otherwise.

On the other hand, we face problems that FDR did not have. One critical difference between then and now is that the Federal Government, thanks largely to 'limited government' GOP Administrations, is encumbered by over $11 trillion in debt. Much of that debt was accrued to pay for a defense build-up that ultimately was little more than a redistributive transfer of wealth to the arms industry. Or take the Bush-Cheney Energy Bill which provided $6 billion in direct subsidies to the oil & gas sector plus another $20 billion to $32 billion in indirect subsidies over 20 years. Our five-year $300 billion Farm Bill includes $15 billion in annual subsidies mostly to large agri-businesses such as Archer-Daniels-Midland and Cargill. Note that 75 percent of these subsidies go to a handful of commodities (mostly wheat, corn, and oilseeds) used as food additives, making highly processed junk food cheap – while fruits and vegetables and whole foods currently get almost no aid. Nearly 70 percent of farm subsidies go to the top 10 percent of the country's biggest growers – while America loses one family farm every half an hour. There's socialism for the wealthy in this country. Conservatives just seem to want to gloss over that fact, perhaps because they are the beneficiaries.

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Obama Still Has His Job, Do You?

If I were to predict a GOP bumper sticker for the 2012 election cycle, it might be "Obama Still Has His Job, Do You?" If the President and by extension the Democrats have an electoral Achilles Heel, it is the continuing erosion of the nation's labor market. By 2012, the nation's electorate will no longer remember that the bleed of jobs began in 2007 under George W. Bush nor are they likely to pin the blame on Reagan-era policies that set in motion a three decade destruction of the country's manufacturing sector. For too many Americans, this is not a recession but a quiet depression, an epic crash of living standards. Even for those still with jobs, wage deflation is a harsh reality and falling wages are a symptom of a sick economy. This sick economy may be a GOP legacy but if we fail to stem the ebb tide of jobs then a political day of reckoning will await us.

An editorial in the New York Times published on Saturday sets forth the urgency of the matter:

September was the 21st straight month of job loss -- the longest unbroken stretch of losses since record-keeping began in 1939 -- bringing to 7.2 million the number of positions that have been axed since December 2007. And that understates the damage. During the recession, the economy has failed to create another 2.7 million jobs that were needed simply to employ new workers -- like high school and college graduates, immigrants and stay-at-home parents who want to go back to work.

The unemployment rate for September -- 9.8 percent -- also understates the damage. It would have been higher but for the fact that 571,000 people dropped out of the work force last month -- in general, it's assumed, because they've despaired of finding work. If they had kept looking, they would have been counted as unemployed.

The combination of a rising unemployment rate and a quickening pace of labor-force dropouts is especially worrisome. In September, the employment rate for all workers -- defined as the share of the population with a job -- fell to 58.8 percent, its lowest level in more than 25 years. For adult men, who have been particularly hard hit by job loss in this recession, the employment rate fell to 67 percent, its lowest level since the government began keeping track in 1948. Before this recession, that rate had never dropped below 70.5 percent.

A shrinking labor force represents a tremendous waste of talent and potential, a loss of value that will not be entirely retrievable. Widespread joblessness among men is particularly devastating for the economy and many families, because men tend to earn more than women and to have jobs offering health insurance.

To make matters worse, unemployment among men and women is proving relentless. Of the 15.1 million people who are now officially counted as unemployed, over a third have been out of work for 27 weeks or longer, the highest percentage of long-term unemployment on record. By the end of the year, benefits will expire for more than one million unemployed workers.

Those are bleak numbers and the Administration seems to revel in celebrating a "catastrophe averted" when the pain remains all too evident. As the Times editorial board concludes, "Congress and the Administration also have not done enough to directly create jobs." Creating jobs is not just an economic necessity but a political imperative.

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