Banks, Cars, Class wars, frustrations, and petty politics
by johnny venom, Fri Dec 05, 2008 at 09:09:13 PM EST
Amazing, simply amazing. For the past two days I've been watching these hearings on the automakers, and find myself more aghast than anything else. Actually, it's more than that. I think I've had this almost sickening feeling, a feeling where anger is meshed in with a humiliation and sadness. It isn't just the automakers that has been the cause of this, but that they symbolize how far we've fallen.
I've made no secret that I am in favor of helping out the automakers. I've also made no secret that free-market capitalism (and I'm saying this as someone who makes his income as a speculator) is dead. There is no question in my mind, that the type of capitalism Milton Friedman or the Libertarians advocated does not work. Human beings are not efficient creatures, they will make irrational choices at times (another reason why I am not too excited about Health Savings Accounts). In an economic perspective, I believe this is one of the pillars of why we have boon and bust cycles of such exaggerated outcomes.
Do the automakers deserve the pain they are in? For the most part, yes. Only an idiot would think otherwise. They had the time, they had the capital, and they had the resources to avoid much of what has befallen the industry. Where are the fuel efficient automobiles that so many of us has requested? I've heard all the "whys" that the "Detroit 3" (formally the "Big 3") are in the situation they are in, with most taking the subjective tone that they "deserve" to be in that situation. Now you will disagree with what I will say next, but I also blame the consumer.
Markets provide a mechanism of asset allocation and a disseminator of information. It shouldn't be the only mechanism, but it is simply one of many. What the market has told me was that much of the consumer base was also complicit. They say that Detroit doesn't make anything anyone wants, to which the SUV says you're wrong. And it wasn't just Detroit making these monstrosities, for if you want to pin that product as a symbol of failure of management, then be prepared to do the same for most of the foreign automakers.
Why did so many purchase these Tahoes, Expeditions or Rav4s? When gas was cheap and consumer credit more loose than Texas truck-stop whore, I remembered seeing roads clogged with those vehicles. And it wasn't just SUVs, trucks as well were purchased in great numbers. Now I am excluding circumstances like commercial purchases, I'm simply focusing on Jane and Joe Consumer. We've heard the complaints about SUVs, yet I did not see consumers en mass reject these gas guzzlers. While we love to bash the average automaker executive, I think if they saw that average consumers were not buying sports utility vehicles and trucks, they would rethink their strategy. Yet the demand for these products grew so much that we even saw BMW come out with SUVs. The market said that you wanted these things and you wanted even bigger ones, hence the Hummer. Think of it as the car buyer's version of irrational exuberance.
Things that make you go hmm?
Now watching this, I have to give credit to Representative Barney Frank, who was also chairman of the House Finance Services Committee. He pointed out that the automobile companies were being more scrutinized than the financial sector. That isn't to say that the automakers shouldn't be given the 4th degree. Just that it would have been nice if the various executives of Wall Street had gone through similar grilling.
Indeed, I think behind much of the anger or frustration aimed at the likes of Wagoner or Mulalley or Nardelli stems from what Congress is seeing with the banks. The Troubled Asset Relief Program (TARP) was supposed to patch the holes in the financial dam. At the time the market, from equities to corporate bonds, were collapsing. Liquidity had dried up, nobody trusted no one, and fear not seen in decades (if ever) appeared. This was personified with the Chicago Board of Options Exchange (CBOE) Volatility Index (also known as the "Vix") in the equities world catapult to maddening highs. In the bond world we saw LIBOR spreads (the rate banks charge each other essentially) skyrocket. So here comes the Treasury Secretary (and former Goldman Sachs alum) Hank Paulson basically proclaiming : "Gimme $700 billion or kiss your financial asses goodbye!"
Well, alright, it wasn't exactly like that. But something had to be done, that is for sure. Even I came out for some sort of stabilization. Still looking back now, how we went about it with the financial sector, mistakes were made. Reports of bonuses being masked as something else at AIG to other shenanigans at the insurance firm has gotten people steamed. Money that was supposed to go to buy bad assets (hence the name of the damn program) is now going for God knows what, because Paulson keeps changing his mind. The money the banks did get, are now going towards things other than what we were promised. Wait, let me retract that, as "promise" seems to be a bit of a strong word in their case; allow me to use the words "hinted at" instead.
On top of it all, we don't even know if what has been spent has even been that effective. The markets are still going down, though it appears we may be making a bottom. Yet it seems that lending is still nowhere near what we were told it would be. Despite the fall in LIBOR spreads, liquidity is still an issue. Is it any wonder why folks like Congressman Frank or Senator Dodd or the rest of Congress would be upset?
Now, I suspect they seem to think, they've gotten a second chance to "do this right." More scrutiny will be applied, questions and probes will be pursued. And I say good on them, it is the taxpayers' money. Two things though, if I may. That, as Rep. Frank has thankfully said, that we should haul in Wall Street's executives for that second half of the TARP money and put them on notice. Secondly, and this really disgusts me, that the situation has been exploited by some to serve as a venue for petty politics of the worst kind.
The Borgias would be proud of the GOP
Anyone who watched the hours of testimony would have picked this up. Now while I'm normally skeptical of politicians and Washington (especially these past few years), I would like to think in a crisis something productive would get done. Of course, instead of looking for answers or solutions, some politicians instead have found the current problems the perfect opportunity to attack their enemies.
There's a growing profile of those opposing any aid to automakers in Congress. They tend to be from Southern congressional districts/states. They tend to be conservatives, particularly vocal about the supposed benefits of free markets. And they have, 9 out of 10, been Republicans. Now let me say this also, there has been some constructive criticism coming from some within the GOP, particularly Sen. Corker.
Yet time after time, each of these Republicans went first on promoting bankruptcy first, settle after the smoke clears. They raised repeatedly that the reason they are failing wasn't because the Detroit 3 put all their eggs in the SUV basket, but because they were unionized. I watched how one even hinted that it might be better for them to close down shop and that perhaps those firms would be better run by say Toyota. For many of these congressmen, the domestic auto industry are those foreign transplants and not the ones residing up North.
You see, for the GOP, this has nothing to do about saving the economies of Ohio or Michigan. These are "Blue States," who they viewed propped up politically by organizations like the United Auto Workers. The Republican partisans believe they smell blood, if they can knock out one of the supporters of the Democratic Party, what a coup!
Then there are the Kudlowites, the ones who believe in unfettered free-markets, economic Darwinism. For the GOP in the Congress who adhere to this, they need to see these firms go bankrupt. Bankruptcy and the destruction of the UAW is meant to serve as a validation of their economic theories. For them, this is Joseph Schumpeter's creative destruction, that economies destroy older dying firms to make way for newer supposedly better rivals.
I will say history has in some instance borne this out to be true, but not always. Listening to these goons, they believe that once bankruptcy is achieved, that a "better GM" will be a non-unionized one. I also suspect, that some of these south-based reps quietly hope that the "new" auto companies will open up shop in their areas. It isn't an insane idea, a GM in pre-packaged bankruptcy would be able to ditch it's old facilities and perhaps move South. Yet, given the economic environment and as many expert witnesses have stated over and over again, throwing the automakers in Chapter 11 Bankruptcy would actually pull them into Chapter 7.
The Money Shot and Give-backs
Wow, didn't realize how long this has gotten. I'll finish this up quick. You know, while I'm bashing conservatives, it was actually a conservative Republican senator, Bob Bennett, that I think said had the money shot quote. While I'm sure he was not advocating it, he did say that what this country has not produced was a real concrete industrial policy. That other nations, like Japan through their Ministry of Economy, Trade & Industry, coordinates policies promoting and protecting their domestic industries. Now supposedly, the Department of Commerce has a similar job, yet so far they've been doing the opposite. Commerce has been on the forefront of a lot of free trade deals. Compare their actions to METI, and tell me what you see.
The other stakeholders besides the unions in the automakers are also going to have to realize that the jig is up also. Organized labor has been making concessions left and right. But what about the bondholders? What about the equity holders? Sure you could say that shareholders "conceded" when the price of the stock of these companies crashed. Yet there are still stirs of confrontation by many major shareholders about seeing their shares diluted by a possibly sale of stock to the government. If the government is going to give these companies cash, then when times are good, I think they should share in the profit as well in the form of warrants and preferred shares.
The bondholders are going to have to realize they have to take stock instead of coupon payments, bottom line. The automakers' debt, as it is now, is simply too big. either take shares instead of cash or a reduced amount back (hey write it off if you don't like it!). Right now you have bond speculators buying up corporate paper somewhere between 12-15 cents on the dollar hoping that something will happen and they'll get a buck back. That's got to be put a stop to for immediate sale of corporate paper. Lastly if the Federal Reserve is handing out cash and taking in dubious assets like stock as collateral, then they have to take in automaker stock. For one, this private institution (you didn't think the Federal Reserve was a government entity did you?) should try and pick up the slack off of the taxpayer. Secondly the banks need to get in on alongside the taxpayer. Right now all those banks are sitting on that cash like it was pirate treasure.
The automakers are going to have to realize that they are in the car building business, not the banking business. The various Democratic congressmen were spot on to criticize GM and their GMAC operations. Sorry boys, time to divest those financial arms from your manufacturing business. Lastly, the automakers need to drop those lawsuits they have in various states trying to stop emission standards. For one, it makes you look like bigger douches and less deserving of help; secondly your competitors are going to adhere, and once more you will lose market share! The future is green, time to get on track with this!