Les Jones

“Some days I really wish I could go back to being completely clueless about the economy”

Wednesday, September 30th, 2009 | Economics | Permalink | 3 Comments |

From a financial board I read. “Some days I really wish I could go back to being completely clueless about the economy. Now I know enough to be scared but not enough to actually know what to do.”

I know the feeling.

In speaking to some local bloggers this past year a couple of people said things like, “I can barely read your site anymore. The economic stuff you talk about is too depressing.”

It is depressing. Worse, I’ve been holding back on how bad I think some parts of the economy are going to get.

For instance, I basically think the U.S. banking system is gone. Insolvent. Bankrupt. As in their liabilities greatly exceed their assets if their assets were fairly priced. It only takes a small writedown in assets to destroy a highly-leveraged bank in a fractional reserve system. Even by conservative estimates most banks are wiped out.

In the last few decades the banks made mountains of loans that will never, ever be paid back in full. Every foreclosed property you see is a loan gone bad. As Karl Denninger says, for decades credit expanded much faster than GDP. Do that long enough and you’ll never have any hope of paying back all the money.

The only reason the banking system hasn’t shut off the lights is that the government bailed it out. After they bailed it out they changed the rules so that the banks could mark their assets to fantasy and not be shut down.

The next step was to effectively replace the banks’ lending function. The U.S. government is now the de facto banker in the United States. The banks are just the places with the brick buildings, free toasters, and lollipops for the kids. Any money they lend ultimately comes from the Federal Reserve’s purchase of Treasury notes, Fannie Mae and Freddie Mac debt, and mortgage-backed securities.

If that sounds like paranoid rambling, see yesterday’s post, Federal Reserve has bought 100%+ of 2009 mortgage market. I’d love to be convinced I’m wrong, but I don’t think I am.

Tags: bailouts, banks, mortgage mess, the fed

Stock of bailed-out AIG up more than 200% this month

Thursday, August 27th, 2009 | Economics | Permalink | No Comments |

CNN - AIG stock up 274% in August:

NEW YORK (CNNMoney.com) — Shares of AIG were selling for $49.16 in midday trading on Thursday. At the start of the month, shares were at just $13.14.

What’s going on here?

AIG’s stock has nearly quadrupled in August, but the company is no closer to paying back the $80 billion it owes taxpayers.

AIG was up 27% today alone, closing at $47.84, despite the fact the AIG and other bailout recipients are pleading with Federal courts to not let the public know how much money government had to to give them to keep them from going bankrupt. And despite previous assertions that AIG was in a strong financial position and could pay back the government TARP funds, they haven’t paid back any of the money.

Google Finance AIG chart for August.

LATER: Here’s a distressing take on AIG’s future.

Today’s Wall Street Journal reported that AIG has changed its timetable for selling assets.  That was to be expected, because if it sold its assets quickly, shareholders would get nothing, and the government would not get paid in full.  It is also AIG’s probable future scenario, albeit the losses may be mitigated.

Benmosche’s own analysis shows AIG “wouldn’t be able to repay the government even if it sold everything.”  His strategy is loss mitigation, not a return to AIG’s salad days.

Even the U.S. Treasury, not known for its transparency or candor during this crisis, wrote that its AIG investment is highly speculative.

AIG seems disappointed that its Asia focused life insurance unit,  American International Assurance Co. (“AIA”), might only raise more than $5 billion as estimated last spring, especially since AIG valued it at $20-$40 billion in February 2009.  AIG is also disappointed with valuations for American Life Insurance Co (“Alico”).

Yet despite AIG being worth less than zero its stock price is soaring. Welcome to Bizarro World.

Tags: bailouts, investing

Zombie Chrysler Clearance: Every Link Must Go!

Monday, June 8th, 2009 | Economics | Permalink | No Comments |

Can Fiat put Chrysler on road to recovery? “Fiat is easily the weakest of all the major automotive companies. It does not even generate enough revenue to fund its own investment.” If Daimler-Benz couldn’t turn Chrysler around I’m having a hard time seeing how tiny Fiat could.

Mickey Kaus: “P.S.: Chrysler can learn from its new partner: Chrysler scored second to last in customer satisfaction in this 2009 survey of “vehicle ownership satisfaction” in the U.K.  Only one company did worse! … That company? FIAT. …”

Why is Chrysler closing 789 car dealerships? “Toyota sells more cars than Chrysler with fewer than one-third of the number of franchises. (The average Toyota dealer sold 1,589 vehicles in 2008; the average Chrysler dealer sold 124.)”

Chrysler’s sorry state revealed via Tam:

• Chrysler pays its suppliers 45 days after delivery. So if it suspends production - as it has now - for more than 45 days, the suppliers would have to resume manufacturing without their regular source of revenue. According to Scott Garberding, Chrysler’s chief procurement officer, this imbalance of expenditures and revenues would be “catastrophic” to these marginally profitable companies.

• Chrysler can’t start making 2010 models until it finishes building the 2009 models presently sitting on the assembly line. So the longer Chrysler is shut down, the later its 2010 models will be to reach showrooms.

• Chrysler vehicles are such slugs on the market that 20% to 25% of the wholesale cost goes to dealer incentives, according to Peter Grady, director of dealer operations. Yet not only were there 286,687 2009 models - more than three months supply - sitting on dealer lots at the time of the filing but there were 36,370 2008 models left. In other words, they had been sitting around unsold for more than a year.

Bankruptcy: Cui Bono?

As the administration has pointed out in defense of its plan to commandeer the bankruptcy process, asset sales (known as 363 sales, based on the relevant provision) have become a common feature of Chapter 11 cases in the last 20 years. What makes the Chrysler plan unique, and makes it similar to the receiverships of the New Dealers’ era, is that it is not really a sale at all. It is a pretend sale and its main purpose is to eliminate the pesky creditors who might otherwise interfere with the government’s plans. It also seems to flout bankruptcy’s priority rules by giving Chrysler’s employees (who are general creditors) a big stake in New Chrysler while forcing senior lenders to take a major haircut. The usual rule is that senior creditors must be paid in full before lower priority creditors are entitled to anything.

Why I Am Freaking Out. “BTW, to compare what’s going on at GM and Chrysler today to Chrysler in 1980 is apples and Agent Orange: In 1980, the US government guaranteed Chrysler’s bonds. In 2009, the US government is guaranteeing CHRYSLER—and GM too.)” True. Unlike Obama, Jimmy Carter didn’t promise to warranty the transmission on your Plymouth mini-van. More:

Moreover, Team Obama hasn’t presented any rationale for the de facto nationalization of Chrysler and GM—so what’s to stop any other industry (or union) from asking to be nationalised? I’m not one of these fools who says that any state-run enterprise is “Communist” or “Socialist”—I would prefer bankruptcy for an insolvent business, but on principle I have no problem with a government takeover of a business or industry, so long as there is a clear, compelling, non-trivial, non-political reason, and so long as there is a clear horizon for the exit of the government, if the interference was for exigent or unique reasons. But the arbitrary de facto nationalization of Chrysler and GM through this sham (and probably illegal) pre-pack bankruptcy has no rationale, no raison d’etre, aside from propping up some union (which is receiving a shockingly sweet and possibly illegal deal in the Chrysler case, a deal presumably to be repeated in the imminent GM bankruptcy)—the way it’s being done makes no rational business sense, but makes terrific POLITICAL sense. These are the twin problems with Team Obama and their auto industry meddling: It’s not that they are meddling in the private sector, it’s that they’re giving priority to political considerations over financial or macroeconomic considerations, and they’re meddling without a clear and compelling rationale, opening the door for every private business to seek state subsidy so long as they have the political muscle to get the sweet taxpayer-financed deal out of Team Obama.

Tags: bailouts, chrysler, gm

GM bailout a lousy deal for taxpayers

Wednesday, June 3rd, 2009 | Economics | Permalink | 1 Comment |

The (Scary) Math Behind the GM Taxpayer Bailout

The government effectively will get 60% of General Motors in exchange for $50 Billion in aid. This, using standard investor math, means that GM has an implied value of: 50 Billion/.60 = $83.3 Billion. Currently (or as of last Sunday) GM had 610 million shares outstanding.

That means that for the taxpayer to break-even GM shares (in the pre-bankruptcy world) would need to be worth $136.55 PER SHARE (83.3 Billion/610 Million)

The lifetime HIGH for GM is $93.62 back in April 2000 when the going was good. So good luck with that.

Everyone seems to think GM will need even more govt. cash before this is all over, so the deal just gets worse.

Tags: bailouts, gm, we're from the government

More underfunded public pensions

Saturday, May 23rd, 2009 | Economics | Permalink | No Comments |

Baltimore Sun - Baltimore pension dispute illuminates public/private divide:

Severe market downturns lay bare any number of Ponzi schemes, and under-funded defined benefits pensions, public and private, can be justly described as such schemes. The problem with private plans is large enough. The Pension Benefit Guaranty Corp., which insures the pensions of 44 million Americans, said in a report this week that its deficit has tripled in just six months to a record $33.5 billion. Chances are it will have to be added to the growing list of entities to be bailed out by Uncle Sam. But this is trivial compared to the under-funding in public plans, which cover about 22 million workers. The deficits in the latter systems are said to total more than a trillion dollars. And these are not insured.

The gap between the public sector and private business in wages and benefits continues to grow. Last month, USA Today reported federal figures showing that public employees earned benefits worth $13.38 per hour in December 2008, compared to $7.98 for private sector workers.

What would you say about a government whose employees make more money than non-government employees performing the same job? That doesn’t sound like a government that has the best interest of its people at heart.

There was a time when people took government jobs for the security they offered. The bargain was that they would sacrifice pay for that security. Over time, the bargain tilted totally in favor of the government workers as they got both job security and higher pay than their counterparts outside government. Can this system be sustained? I think not, but we shall see.

The nature of our current bailout mania is wealth redistribution in reverse. Ordinary people are bailing out banks, car makers, and unionized and public sector workers who make more than them and who have better benefits. If California gets bailed out it will be bailed out by all of the states that are smaller and poorer. The rich are becoming a burden on the middle class and the middle class is becoming a burden on the poor. This can’t last.

Hat tip to Instapundit.

Tags: bailouts, pensions, unions

Chrysler gets $7.2 billion in free taxpayer money

Thursday, May 7th, 2009 | Economics | Permalink | No Comments |

CNN - Chrysler won’t repay bailout money:

Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing.

This revelation was buried within Chrysler’s bankruptcy filings last week and confirmed by the Obama administration Tuesday. The filings included a list of business assumptions from one of the company’s key financial advisors in the bankruptcy case.

Some of the main assumptions listed by Robert Manzo of Capstone Advisory Group were that the Treasury would forgive a $4 billion bridge loan given to Chrysler in the closing days of the Bush administration, a $300 million fee on that loan, and the $3.2 billion in financing approved last week by the Obama administration to fund Chrysler’s operations during bankruptcy.

So not only is the government picking winners and losers to bailout, they’re pumping up some companies with free money that never has to be repaid. Remind me again why some companies get this money and some don’t?

For the record, I don’t think any company should simply be given taxpayer money without expecting to repay it. Companies that can’t make it on their own should go out of business. Propping up zombie companies with free government cheese hurts healthy companies like Ford that have to stand on their own to feet and compete in the marketplace.

All of this is on top of alleged White House threats to Chrysler bondholders to play ball or have the White House destroy them in the court of public opinion.

Who the fuck do you think you’re dealing with? We’ll have the IRS audit your fund. Every one of your employees. Your investors. Then we will have the Securities and Exchange Commission rip through your books looking for anything and everything and nothing we find to destroy you with.

Tags: bailouts, chrysler

Chrysler’s Nerf bankruptcy is bad for American automakers

Monday, May 4th, 2009 | Economics | Permalink | No Comments |

Mickey Kaus:

If Chrysler fails in the marketplace again two or three years from now, after billions more in government subisidies, won’t that reflect badly on Obama and his “economic team”? WIll it then appear to have been better to let Chrysler go into an actual, non-prearranged, non-jawboned bankruptcy, in which it would likely have been liquidated or in which the UAW would have had to make far more substantial concessions, like workers in other bankruptcies? The government could have assumed some of the U.A.W.s pension and health care liabilities (which it will probably end up doing, in part, in any case). But Chrysler’s demise would have been a real cautionary example that gave the administration leverage in the GM negotiations (which may be what the U.A.W. was really scared of). Chrysler’s rapid departure would also have opened up market share for GM–and for Ford, which is not wildly healthy itself.

Chrysler was bailed out once in the 80s, failed again, was bought by Daimler, was disgorged by Daimler, was bought by turnaround vultures Cerberus, and failed again. It’s about time they died already and the parts were sold off. People still want Jeeps and Dodge pickups. If the world can live without Neons and Plymouth mini-vans then so be it.

We’d be better off with one or two healthy American car companies than one healthy American car company that starts with an F that has to constantly fight off the two zombies being kept alive by our government. Let Chrysler die so Ford can live.

And maybe GM. When I get so old I have my pants hitched up to my armpits I might actually want a Cadillac. I can’t imagine being senile enough to want a Chrysler.

Tags: bailouts, bankruptcy, chrysler, gm