Friday, May 29, 2009

BE CAREFUL WHAT YOU WISH FOR

5/29/09

Preppy Timmy Geithner heads to China tomorrow. His main goal, according to today’s (Friday, 5/29/09) Wall Street Journal, is to express gratitude for the Chinese stimulus package, a package on which the Obama administration has heaped the most sincere form of gratitude, that Mr. Geithner seems to think has done so much to “revitalize” the world economy. Though the Journal did not, and would not, report this, another part of his mission is to beg the Chinese to continue to buy our debt even as it loses value as we hyper-inflate our economy, debase our currency, and watch our interest rise as a consequence.

Another of Mr. Geithner’s goals, according to the Journal, is “to press Beijing to take drastic measures to run China’s economy into one that depends heavily on sales to domestic consumers and less on sales to the U.S. and other foreign markets…” He plans to do so by “encouraging Beijing to offer more generous health care, retirement, welfare, educational, and other benefits in order to persuade the average Chinese citizen that spending now doesn’t mean starving later.”

A realist, whom some would call a cynic, would conclude that Mr. Geithner and his fellow Obamacrats are trying to transform the Chinese from the hard working, thoughtful, prudent, thrifty people that they are into the wastrel spendthrifts of the type that comprises a large and growing share of the U.S. population. This approach to life and personal finance has not worked so well for us; perhaps this is just a case of misery loving company.

There is a more immediate problem with Mr. Geithner’s entreaties to the Chinese to reorient their economy more toward domestic consumption. To understand this problem, one must understand how the world economy works: We buy stuff (very little of which we actually need) from the Chinese (and other nations, primarily developing nations, but China is the focus here). They lend us our money back to us. We buy more of their stuff. They lend more of our money back to us. We buy more of their stuff. And so the daisy chain continues until the Chinese find another outlet for their stuff. This reduces the American role in the U.S. economy to buying stuff (i.e., consuming) and figuring out how to get other people to pay for our brazen, obscene consumption (i.e., finance). (This description excludes our exports of agricultural and capital goods, still very important roles for the U.S. in the world economy, but the dollar amounts involved in such exports remain small, and continue to shrink, relative to the types of goods involved in the aforementioned daisy chain.)

So what if the Chinese, along with India, Brazil, and other developing countries, do develop a middle class capable of absorbing a far larger share of those nations’ output, thus reorienting their economies more toward domestic consumption? They thus will have found another outlet for their stuff. What is to become of the United States then? One would guess that our only remaining role would be as an exporter of agricultural goods and raw materials. Thus we would assume the role of a third world nation while the former third world nations would assume the role of industrial and, eventually, financial powers. Nice thinking, Timmy.

The really scary aspect of such a scenario is that it will unfold regardless of what the Obamacrats, or any politicians, want or think is desirable. It is the natural order of things: productive, thrifty countries prosper while coasting, spendthrift nations decline. While Timmy and the Obamacrats may hasten this already quick evolution, the tides of history are going to sweep over us no matter what we do unless we change our behavior. Don’t bet on the latter.

Wednesday, May 27, 2009

AND THE MATERIAL KEEPS ROLAND IN

5/27/09

At the request of the U.S. Senate (try not to laugh) Ethics Committee, Chief U.S. District Judge James Holderman released the transcript of a conversation between now Senator Roland Burris and Rob Blagojevich, the brother of and advisor to then governor of Illinois Rod Blagojevich. Attorneys for neither Mr. Burris nor the former first brother objected to release of the tapes.

According to the transcript, Mr. Burris and the first brother discussed, without really discussing, Mr. Burris’s accession to Rod Blagojevich’s thinly veiled demands that Mr. Burris raise money for the governor if Mr. Burris wished to be considered for appointment to the Senate seat vacated by then President-Elect Barack Obama. While Mr. Burris did not come out and say “Okay, Rob, how much? I’ll have it for you in the morning.”, he did say:

“And, if I do that, I guarantee you that, that will get out and people said, oh, Burris is doing a fund-raiser, and then Rod and I both gonna catch hell.”

“And if I do get appointed that means I bought it.”

“If I don’t get appointed then my people who I’m trying to raise money form are gonna look at me, yeah, what, what’s that all about, Roland. I mean so, Rob, I’m in a, I’m in a, a dilemma right now wanting to help the governor.”

“I know I could give him a check. Myself.”

“And, and my law partner we were gonna try to do something at the law firm. I might be able to do this in the name of Tim Wright. (Mr. Wright is Mr. Burris’s former law partner and current lawyer.) Okay, ‘cause Tim is not looking for an appointment, okay.”

And the call ended with the following assurances from our well deserving, and deserved, Senator:

“I will personally do something okay? And it will come to you before the 15th of December.”

Several points are merited.

First, my (too) long awaited novel of Chicago politics is damn good, but even I would have a hard time coming up with material like this. Grist for a sequel or prequel grows more abundant with every passing day. As a reader of the Pontificator, you will be kept abreast of developments on the book front.

Second, while probably not provable in court, it is clear to anyone that Burris was trying to buy the Senate seat, as were a host of other Chicago politicians, from a guy who they knew was willing to sell it. His only concerns were

--would he get caught?
--how would it look?
--given the greater financial resources of others vying for the seat (Jesse Jackson, Jr., J.B. Pritzker, et. al.), could he raise enough money to come up with the winning bid?

Third, none of this should come as a surprise to anyone other than those few denizens of the national media who, clearly not being readers of the Insightful Pontificator, have not been disabused of the notion, widely shared in Washington and New York when Mr. Burris was first selected by our former governor to serve out the President’s term, that Roland Burris was a man of impeccable integrity, a veritable man on a white horse. (See my now seminal 12/30/08 post, “ROLAND, ROLAND, ROLAND, KEEP THEM PUNDITS ROLLIN’…”)

Fourth, Mr. Burris immediately came out in the wake of the release of the transcript and stated that it exonerates him. People from out of town, or people from in town who don’t follow our deliciously intriguing brand of politics, might find this astonishing. But one who understands the mindset of the typical Chicago politician and the workings of the politics of this city completely understand Mr. Burris’s thinking. As I reported in the aforementioned 12/30/08 post, Roland Burris is a lifelong, garden variety Chicago politician. He understands the game and he plays it quite well, if a bit sloppily and solipsistically. As a Chicago politician, he understands that any pol from our fair city, or our state, who is reasonably confident of being able to beat a felony rap qualifies for the pantheon of the just and the righteous. (See my 5/23/09 post “ST. PATRICK’S DAY?”) It is quite clear that nothing on the tapes is indictable, and even more clear that the lily-livered Dick Durbin and Harry Reid wouldn’t dare do anything that stands even the slightest chance of offending a major constituency, like moving to unseat the nation’s only Black Senator, even if he did try to buy the office. Since he hasn’t done anything that would cause him to go to jail or lose the Senate seat he has coveted since it became clear, if it ever became clear, to him that he would never became president, Roland Burris, in his mind and in the minds of most of his colleagues back in Cook County and its environs, is about as clean as a politician can get.

“GIMME A BROMO”

5/27/09

As part of the deal worked out between GM and the UAW, a deal that looks like it will remain in effect even though it apparently didn’t save GM from having to visit bankruptcy court, the union agreed to reduce retiree health care benefits immediately. This will, as the Wall Street Journal put it, “leave hundreds of thousands of retirees paying higher out of pocket medical expenses. For decades, these retirees paid only minor charges.” This facet of the GM/UAW deal is by no means unique; not only did the Chrysler deal contain such language (and Ford cannot be far behind), but legions of employers inside and outside the car business (broadly defined) have cut back on medical benefits for both active and retired workers. Doubtless these are important developments for the companies, and especially for the workers and retirees, involved. However, they have broader ramifications for the entire economy and for society.

For years, health care has been one of the hottest sectors of the stock market. As an example, the Vanguard Health Care Fund, though having trouble, like most stock funds, over the last few years, has delivered an average annual return of 16.1% since its inception almost exactly 25 years ago (5/23/84). The logic behind this enthusiasm for health care stocks was that our population is growing older, as we age we consume more health care, and the economy will have no impact on our need for health care. The first two contentions are inarguable in a general sense (The second is arguable from the personal standpoint of the Pontificator. My consumption of health care has not grown as I have grown (rather rapidly, it seems) older; it remains at zero. I steadfastly refuse to see medical professionals of any type (other than on a non-professional basis, largely for the sake of a rather wonderful marriage). This is an effective way of combating the ever growing cost of health care (though my insurance rates continue to climb) and, so far, of maintaining my health, and sanity. The last point may be argued by many of my readers, and definitely by my wife and children, but that is another point.), but the third is nonsense if we substitute the noun “demand” for “need.” “Need” was never an appropriate word, as applied to health care in the United States, in the first place.

We think we need a lot of health care as long as someone else is paying for it; i.e., the demand curve for health care is nearly horizontal (if, as properly understood by mathematicians, price, the independent variable, is plotted on the x axis) or nearly vertical (if, as preferred by economists, demand, the dependent variable, is plotted on the x axis). As employers have provided ever richer health care coverage (Believe it or not, this is the situation that prevailed from World War II until about three years ago.), aided by one of the richest subsidies in the tax code, the “back of the store” at your local Walgreen’s or CVS has come to resemble Penn Station at 5:00 PM on a typical weekday afternoon. We run to the doctor for minor maladies that we once treated with a home remedies or cheap over the counter bromides or simply toughed out. People, encouraged by inane commercials for drugs they previously didn’t know existed, let alone think they needed, are going to their doctors (for a laughable deductible and/or co-pay) and demanding the latest trendy piffle from behind the drug counter in order to combat the latest perceived maladies that have, oddly, become a very hot topic for lunchtime conversation. What we used to call “indigestion” and we treated with Brioschi or Bromo-Seltzer is now “acid reflux disease” treated by a hyper-expensive drug for which we pay an even more laughable co-pay. What we used to call nervousness and we treated with a few stiff shots of Old Open Switch, a walk around the block, a few moments of communication with the Creator, a massage (which we paid for), a good night’s sleep, perhaps with the aid of a little Sominex, or a little enthusiastic private time with one’s spouse is now “anxiety disorder” that we treat with psychotropic drugs. Kids we used to describe as “all boy” and who were easily handled, and their energy redirected, by the likes of the sainted Sister Monica, are now in dire need of Ritalin. And don’t even get me started on strictly vainglorious cosmetic surgery that, while not always (but often, either according to plan outlines or through creative application for benefits) paid for by third parties, can easily be dispensed with when things get tight. This is not to say that there are plenty of legitimate needs for the aforementioned remedies (excluding purely vainglorious plastic (old fashioned term—thanks) surgery), but if their makers had to rely on purely legitimate needs for the sales of these products, one shudders to think what would happen to those makers’ revenues and profitability.

My point is that we only “need” a lot of the health care we consume because we only pay for a small portion of such care. When we have to pay for such things and/or finances get tight, maybe that tummy tuck, er, breast augmentation , or, ahem, very broadly defined male equivalent is not so necessary. Perhaps we try a little NyQuil or Pepto-Bismol before we run to the doctor with a sniffle or a stomach ache. Demand for health care will go down cyclically as the economy continues to struggle and secularly as third parties pay for less and less health care. While people will always need come health care, they certainly don’t need all the “health care” we as a society are consuming. As rational market forces are brought into play, and the bizarre distortions wrought by the dominance of third party payer schemes are wrung out the system, many of the most profitable operations (no pun intended) of the sector we call health care will be greatly reduced in magnitude and probably rendered unprofitable. And, while by no means an expert in the field of health care, I suspect our society will be healthier, or at least less neurotic, as we consume less “health care.”

Thus, the market’s enthusiasm for the health care sector may be coming to an end, though perhaps not an abrupt end. I suspect that the fat days for this sector are behind it. As I do with most of my hunches, I will find some way to act on this notion, probably by looking for good shorting opportunities as they arise in the months and years ahead.

(I also should try to limit the parenthetical remarks in the Insightful Pontificator; excessive use of these crutches is the mark of a poor, or at least a lazy, writer.)

CHEVY CAPRICE?

5/27/09

Secured lenders wound up with 29 cents on the dollar in the bankruptcy of Walter P. Chrysler’s company. Under the latest government proposal, which looks likely to prevail whether Billy Durant’s creation ends up in bankruptcy or somehow miraculously manages to avoid that once sorry fate, GM secured creditors will get 100 cents on the dollar.

Hmm…

What’s going on here? Why do GM’s secured lenders get treated so royally while the Chrysler lenders get stiffed? Could it be the relative sizes of the secured debt obligations? Admittedly, almost all of Chrysler’s debt (other than debt to the government and Cerberus) was secured, while most of GM’s debt ($27 of $33 billion) is unsecured. However, total GM secured debt of $6b is less than total Chrysler secured debt of $6.9b. Admittedly, GM has a much bigger balance sheet than Chrysler, but whose balance sheet is relevant here, the car companies’ or the U.S. government’s? After all, the government, by the time this is all over, is projected to put about $12b into Chrysler and about $70b into GM. And those numbers are probably a best case scenario.

Could GM’s lenders’ preferential treatment arise from GM’s being in better shape than Chrysler? Operationally, as I have argued on many occasions, GM is in far better condition than the hapless, productless Chrysler. Some might argue that the General is financially stronger than Chrysler, but both companies are bankrupt, de jure, de facto, or both. So to argue that GM can “afford” to pay its secured creditors while Chrysler can’t is silly, especially when the money is coming out of your, not either of the companies’, pockets.

Perhaps the government feels it was in a better position to muscle Chrysler’s secured creditors. Even though the lead lenders, most notably Chase and Citicorp, are the same in both instances, there might be something to this argument. GM’s assets are more valuable than Chrysler’s assets, or at least it would appear so. Consequently, GM’s secured creditors could be more bothersome in court, especially since they have so much unsecured debt under them. However, the hyper-talented and stouthearted Jim Lee (See my now immortal 5/11/09 post “MY HEART IS ACHIN’….FOR YOU MR. LEE”) has shown how easily he can be rolled, so it’s hard to see Chase and Citi, both wards of the state, putting up much resistance to being back-doored by the government in the GM case. And the other secured lenders, two fisted Wall Street tough talking types all, showed that they can fold more quickly than a certain north side ball club in September once the government decides to make their lives the least bit uncomfortable. So the comparative regal treatment of GM secured holders cannot be ascribed to the difficulty of getting these lending lapdogs to roll over and play dead.

The relative treatment of GM is indeed a mystery, but it leads to two conclusions. First, Chrysler secured lenders should be figuratively screaming bloody murder in the wake of the GM deal. This point is moot, however; it looks as though only various pension funds in the proud state of Indiana are putting up any kind of a fight in the Chrysler instance, and they will be steamrolled, with the complicity of the hard talking lenders who spend much of their spare time deriding the investment acumen of those in charge of public pension funds, resulting in what looks like a quick exit of Chrysler from bankruptcy, an outcome that, should it indeed come to pass, will very much surprise me, by the way.

More important, the disparity in the GM and Chrysler outcomes for these former titans’ secured lenders reeks of the capriciousness that the Bush/Obama administrations has shown in its efforts to have the taxpayers come to the rescue of the U.S. economy. Most people get bailed out, but some (e.g., Lehman and the smaller banks) don’t. Some people keep their jobs and get huge bonuses (e.g., Wall Street wonderboys who spend half their time espousing the glories of the free market and the other half begging the government for handouts when they prove they can’t handle the free markets) and some people just have to suck it up because they are so outrageously overpaid (e.g., line workers at the Big 3). Some get treated according to established contract law (e.g., GM secured lenders), some don’t (e.g., Chrysler secured lenders). Such capriciousness will do little to encourage the type of saving, investing, and capital formation this country so desperately needs.

Saturday, May 23, 2009

ST. PATRICK’S DAY?

5/23/09

Governor Pat Quinn (no relation) of Illinois admitted on Friday that a campaign aide has been hitting up special interest groups for $15,000 donations at the same time that the governor is pushing legislation enacting supposedly sweeping campaign reforms, reforms that include limits on campaign contributions. A Springfield based trade association has confirmed these malodorous machinations, saying that it received a request to host a fund raiser after the legislature completes work on the campaign ethics legislation the Governor is pushing with very public ardor.

The Governor, however, has said that such apparently meretricious solicitation was a mistake. Further, one of the governor’s spokesmen, Bob Reed, reassured us with the admonition:

“At no point in this process should anyone think Pat Quinn was being anything other than honest and aboveboard throughout this process. This was a mistake on the part of the campaign, and it’s not going to happen again.”

We, of course, are all supposed hit ourselves with a flattened palm on the forehead and say something like “What was I thinking? Even though his people may have made a ‘mistake,’ St. Pat would never take part in such nefarious dealings!” Then we would be expected to flagellate ourselves, perhaps literally, for even entertaining the notion that our crusading governor could be anything less than beatific.

But I ask why we are supposed to react in such a manner. Pat Quinn is a good guy. I had lunch with him once, many years ago. He listened carefully as I and a friend of mine (and regular reader of the Insightful Pontificator) gave our views, views decidedly contrary to those of Mr. Quinn, on public finance and the state of the economy. He asked great questions and left a very positive impression on a skeptical, to say the least, audience of two. Mr. Quinn is clearly a smart man, having graduated, reportedly, at the top of his class at Northwestern University Law School and obviously having had a very successful career in politics. But Pat Quinn is a lifelong politician, whose only experience in anything resembling the private sector has been working on property tax matters while waiting for the next public sinecure to become available. He has, however, had the good fortune to have been a career politician in Illinois, where having avoided getting convicted of a felony somehow entitles one to veneration of the magnitude and intensity generally afforded the likes of Mother Teresa.

Perhaps Mr. Quinn has been as clean as we are all repeatedly told we must believe; I have little reason to think otherwise and am not accusing him of being on a par with some of the worst actors in this state. However, I don’t feel compelled to accept his denials of what closely resembles the double dealing and old fashioned pay to play politics that has been the norm in this state as long as anyone can remember simply because good St. Pat has told us that what looks nearly felonious was a mere oversight. Can you imagine the response Mayor Daley or House Speaker Madigan would get if they expected us to believe their denials simply because they are who they are? I also don’t feel compelled, as apparently everyone else in this state does, to preface any criticism of the governor, be it of his lunatic tax program, his starry-eyed approach to government, or his richly deserved reputation for grandstanding, with “I know the governor is an honest and a good man, but…”

Mr. Quinn, like his counterpart from the fringes of Chicago politics who now finds himself in the White House, is not some kind of man on a white horse. He, along with the President, has avoided the worst aspects, felonious or otherwise, of the politics of the city from which he emerged. But that does not qualify him for canonization or exempt him from criticism and suspicion. The sane person looks at all politicians with a jaundiced eye. Perhaps “Guilty until proven innocent” is going too far in dealing with such characters…but only perhaps.

Friday, May 22, 2009

A TIP OF THE CAP

5/22/09

Yesterday, the House Energy and Commerce Committee voted in favor of a cap and trade system, i.e., a system that allows companies to buy and sell rights to pollute within the framework of overall limits on emissions of the harmful detritus of industrial and energy producing processes. Most Democrats voted for the bill while most Republicans opposed it. Republican opposition to this bill is very curious.

The idea of a cap and trade system emerged from libertarian/conservative think tanks over twenty years ago as a free market method of cleaning up our environment. The idea was and is brilliant; companies would be incentivized to pollute less because doing so would enable them to sell their resultant excess pollution rights. Those companies that refused, or decided not, to reduce pollution would be forced to buy rights from cleaner companies. Thus, clean and green companies would get rewarded by dirty companies, thus inducing companies to become clean and green. Further, the pollution rights would be tradable commodities and would, and probably will, under the proposed system, be actively traded on commodities exchanges, providing real time updates of the cost of being a polluter and the potential rewards of cleaning up one’s (industrial) act.
Perhaps more importantly, though more arcanely, companies could make rational economic decisions concerning the balancing of the costs of their externalities and the costs of reducing them. Such a system is right out of the free market playbook of the branch of the Republican Party that used to be personified by the late, great Jack Kemp before Mr. Kemp became enamored of “big government conservatism” and other such nonsense.
Cap and trade did, and does, have its flaws, the largest of which is what the aggregate limit on emissions would be and who would render such a decision, along with the potential for corruption that the latter would provide (which, one would think, would make the system especially attractive to the gang of louts that populates the ranks of our public servants in Washington), but, by and large, it is a perfect example of the application of free market approaches to societal problems that the Republican Party laughably argues it favors.

So it should come as a supreme irony that the first administration to propose a cap and trade system was the administration vilified by self-styled conservatives (with a great deal of justification, seeing as how Henry Wallace never captured the big prize back in the ‘40s) as the most liberal in our nation’s history. When Mr. Obama proposed such a system, opposition from Republicans, and from the quarters of the media that fancy themselves “conservative,” was vociferous. A cynic might say that such opposition was wholly partisan, but opponents to cap and trade, as proposed by Mr. Obama, had some valid objections. The largest and most legitimate of these objections was that, under the Obama plan, such rights would be sold by the government, which made cap and trade one of the largest tax increases in recent history, a tax increase that would hit our struggling industrial sector especially hard but that would also hit anyone who uses energy. Note that it is not necessary for the government to sell the rights for the system to work and that thus the only justification for the government’s selling the rights is the supposition that the government somehow has rights to pollute while productive economic actors don’t, a very questionable assumption indeed.

However, the Republican’s valid objection to cap and trade, the government’s using the system as a revenue generating cudgel, was largely eliminated not by Republicans but by Democrats from industrial states. Under the bill passed out of the Energy and Commerce Committee, 85% of the rights will be distributed free of charge. Thus, the major valid objection of the Republicans has been mitigated, indeed, largely eliminated, so further GOP opposition can be construed as simple intolerance of the notion that one of the best ideas of true free market conservatism has been adopted by an administration the Republicans consider anathema after their boy George Bush did nothing on, or actively opposed, this ultimately conservative idea. So opposition by Republicans to cap and trade is a desperate attempt to prevent their exposure for the hypocrites, or handmaidens of industry, the free market be damned, that they are. Or it could be just a negotiating ploy to get that last 15% of the rights to be distributed for free, but I’m betting on the former.

The existing cap and trade proposal still has flaws that transcend selling some of the permits. The most glaring is the government’s ability to issue new pollution permits once their price exceeds $28 per ton of emissions (up from the minimum initial bid price of those that will be auctioned by the government of $10 per ton). This amounts to the government’s putting price controls on pollution rights, and we all know how well price controls work. In this case, such controls would go a long way toward wrecking the entire system and thus causing it to fail in its goal of substantial reduction of emissions. A cynic might say that this “additional permits” provision was inserted by those Democrats who want such a free market system to fail. A cynic, in this case (as in many, if not most, cases) might be right. However, anyone who really believes in the free market, as opposed to members of a certain political party that like to mouth paeans to the free market when it serves other, more nefarious, goals, should support the cap and trade system despite its flaws.

True free marketeers ought to rejoice, rather than be sullen and down in the mouth, when Democrats seize our best ideas. What, after all, have the Republicans done for us lately?

“I’LL TELL YA WHAT’S SATISFYIN’—CASH!”

5/22/09

This is a (n almost) pure follow-up post to my 5/16/09 post, “HAIL CAESAR!”:

It looks like interest in Opel is wider than was earlier thought. In addition to Fiat’s bid, which involves no cash but a merger of Fiat’s automotive operations with Opel to form a new company that would assume all Opel’s debts and possibly afford GM a minority interest, bids involving cash are reportedly on the table from the Canadian auto parts maker Magna and RHJ, a buyout firm with extensive holdings in the car parts business. This morning, talk has arisen of a bid from an unidentified Chinese company. This one might be real, but such talk always seems to arise when substantial developed world automotive assets are on the block. Take this one, as all others, cum grano salis.

I have no idea who will win this bid. The German government is reported to like Magna’s bid, and Magna has extensive experience as a major subcontractor to auto companies worldwide, including assembling Mercedes E-Class sedans and BMW X3s at its Magna Styr subsidiary’s operations in Austria. And cash is always nice.

As for RHL’s bid, one wonders whether, in the current climate, the German, or any, government would want to have an auto manufacturing it is working to save fall into the hands of a buyout firm whose bid will, despite rabid denials, involve plenty of leverage (Note Cerberus’s repeated insistences that its Chrysler bid involved no new debt.), especially when there are alternatives available.

In any case, it looks as though there will be viable alternatives to the Fiat scheme. This would be a favorable development for Fiat and Chrysler; perhaps Fiat CEO Sergio Marchionne will not be afforded the opportunity to have his apparent bout of megalomania get the better of him. But maybe not; Fiat’s bid still makes at least as much sense as the rival bids for Opel, if only because of the relative sizes of Opel, Fiat, and Magna, the questionable financing of RHL, and the possible non-existence, or the lack of experience, of those supposedly always lurking Chinese bidders.

Again, though, even Mr. Marchionne’s being saved from himself won’t be enough to save Chrysler; it’s doomed. See my 5/1/09 post “CAN THEY MAKE IT? CAN THEY MAKE IT?”

Wednesday, May 20, 2009

NO SENSE GETTING CHARGED UP ABOUT THIS

5/20/09

Yesterday, the Senate passed much ballyhooed restrictions on credit card companies, restricting at least the timing of the rate increases they can impose on overdue balances, requiring greater disclosure of charges and policies, barring over-limit fees unless the holder consents to such fees, allocating payments to higher interest rate balances, and, generally, making it more difficult for extenders of these unsecured credit lines to price for the risk involved in the granting of such parlous credit. The House will soon go along with the plan, which was, as it turns out, largely unnecessary because essentially the same restrictions would have gone into effect under Fed rules by July, 2010. What this bill does is move up those rules by a whopping five months, to February, 2010, and give our public servants yet another opportunity to grandstand.

The obvious counter to the perceived need to punish the credit card industry for extending credit to people who otherwise would be left to the tender mercies of payday loan operations, pawn shops, or guys who take knee caps as collateral is to tell people that if they don’t like the terms demanded by their credit providers perhaps they ought to forego credit cards or at least pay their bills in full every month; i.e., live within their means and/or use their credit cards for convenience (i.e., as charge, rather than credit, cards) if they feel they cannot conduct their lives without a credit card. However, what would have seemed like the very essence of common sense to a prior generation now seems so crass and cruel that one who has the audacity to suggest living within one’s means risks castigation as being cold, uncaring, and completely unsympathetic to the plight of those who somehow feel compelled to borrow at rates that would make the late Sam “Moony” Giancana and his associates envious. You can just hear it now: “You mean you want me to live without a flat screen? And eat at places like Denny’s? And forego the mini-bar? You monster! Have you no sympathy? How much sacrifice can you demand from this generation?”

One of the predictable consequences of banks’ being unable to price their unsecured credit lines for risk will be, besides pulling back on credit and thus opening new avenues of opportunity for the aforementioned pay day loan usurers, pawn shops, and leg breakers, will be the reimposition of annual fees for credit cards and the desweetening, if you will, of rewards programs for all cardholders, even those who pay their bills in full each month and thus use their cards for convenience and to save a few bucks on a car, vacation, or gasoline. So, once again, the government is punishing the responsible in order to prevent the irresponsible from bearing the consequences of their actions. This, of course, is par for the course; modern government is seemingly set up to punish responsible behavior and reward irresponsible behavior. This, of course, leads to more irresponsibility which creates the need for more government, creating a self-perpetuating business model for blowhard politicians. Nice work if you can get it.

So, yes, people who pay their credit card balances in full each month will probably get hit with annual fees and watered down, or eliminated, rewards programs. But I say “So what?” I know at least one such defier of modern financial wisdom who will simply cancel all his cards that demand an annual fee and will similarly cancel, or not use, those cards with stingy, or newly non-existent, rewards programs. If all of his cards demand annual fees, he will simply use a debit card. If fees are demanded for debit cards, he will (Saints preserve us!) pay with cash. It’s no big deal. He can live without credit and will do just fine. If all consumers had the same attitude toward credit, we wouldn’t be having this national discussion regarding punishing those big, mean credit card companies.

Whether our modern economic system, which has at its very foundation profligate use of credit and living beyond one’s means, could survive an outbreak of financial rectitude is another matter. Perhaps we would have to modify the system, to adapt it to the frugal, responsible model that was in place when this nation was becoming the economic superpower it once was. But I am being uncharacteristically starry-eyed and optimistic to even admit the possibility that the typical third millennium American could bear the unbearable sacrifice that living within one’s means entails.

Tuesday, May 19, 2009

“IT’S WHAT YOU NEED…”

5/19/09

Today we witnessed the spectacle of President Obama, in a celebratory ceremony on the White House lawn, announcing that all sides in the automotive/environmental debate had “agreed” to moving up the 35.5 mpg mandate for passenger vehicle in the U.S. by four years, from 2020 to 2016 in exchange for a national standard for fuel economy. Where does one begin criticizing this deal?

First, let me surprise my readers by not being critical for a brief moment. Even as one of the seven or so remaining defenders of federalism in this country, I applaud the portion of this deal that mandates a national standard for fuel economy. If there ever were a case in which the commerce clause genuinely applies, this is it.

Second, the Obama Administration and its lapdogs and lackeys in the emasculated car industry defend this deal, arguing that the $1,300 increase in the price of a typical light vehicle wrought by the imposition of this standard will be offset (Strangely, I have yet to hear the adverb “partially” used with the verb “offset” in these arguments…hmm….) by savings in fuel economy. The sensible response to this argument is that if the payback is so clear and certain, why must there be a mandate for such increases in mileage? Wouldn’t informed, smart, diligent, dollar conscious consumers see the advantages of such high mileage vehicles and cry out for them rather than have such purchases dictated by Big Brother?

There are two possible counters to the above argument. The first, and very likely, counter is that the payback is not so clear and obvious or the streets would be teeming with such econoboxes. Or perhaps the payback is not so clear and obvious at current fuel prices. If that is the case (and I suspect it is), this whole charade is just an effort to provide a convenient scapegoat for an inevitable increase in motor fuel taxes and/or other incentives to get people into cars they currently show little desire to buy. Already, Dave McCurdy, president of the Alliance of Automobile Manufacturers, is saying “Unless there is a huge spike in the price of gasoline…there will have to be incentives from the government.” Given that the purpose of trade associations is to seek handouts from the government while extolling the virtues of the free enterprise system, Mr. McCurdy’s fully extended and uplifted palm should not be surprising, but he has a point. But a sensible person might ask if the government is going to raise gas taxes anyway, why all this rigmarole with mandates, etc.? Why not just raise gas taxes and thus provide incentives for people to want cars with higher gas mileage, if that is what the government is intent on doing anyway? This is the approach used in Europe, and it seems to work there. I might even go along with such a scheme, provided that all the revenue generated by such a tax was rebated to consumers, thus providing even more incentive to conserve fuel. But such a rebate scheme is, to put it mildly, very unlikely.

The second possible counter to the “consumers can figure this out” argument is that consumers are not informed, smart, diligent, or dollar conscious and thus can’t figure it out. There might be something to this argument, but, as skeptical as I am about the sharpness, diligence, or resilience of the typical third millennium American, even I would argue that if there is one thing Americans are capable of doing it is shopping. Shopping is, after all, one of our few remaining roles in the daisy chain that constitutes the modern world economy. So I suspect that if there were such a clear payback to fuel efficient vehicles, dealers wouldn’t be able to keep Corollae, Foci, Civics, 3s, Cobalts, Fits, Versae, Prii, etc., in stock. Currently, the lots are littered with such cars. In fact, sales of compact cars, as a percent of all light vehicle sales, are down so far in May to 16.8% from 22.0% in May, 2008. And, yes, I know gas prices are way down from a year ago, but that only lends credence to the argument that Americans are still able to make rational shopping decisions, at least once in awhile.

Third, more important than what the perceived need to impose tighter fuel economy standards says about what the typical American consumer can do is what it says about the government’s perception of what the typical American consumer can do. What we are seeing here is yet another reflection of the thinking of most government officials, thinking that is especially virulent in the Obama administration; i.e., that we are all just a bunch of benighted saps who need the learned and benevolent guidance of our betters in the public sector in order to conduct our daily lives. We have to be told that we’ll save the extra $1,300 in gas; we couldn’t possibly figure that out for ourselves. After all, we didn’t go to Harvard. We didn’t work on the staff of an omniscient Congressperson or an omnipresent federal agency. We never worked at a think tank. We never organized communities. What could we possibly know?

Fourth, how about those tough guy captains of industry bleating like helpless little lambs as President Obama told them (and their customers) what to do? Of course, this is a special case; two of the Big 3 are effectively owned by the government. (What is scarier, thought, is that such a case will grow less special as the Obama administration continues with its industrial policy while the Republicans offer a veneer of token resistance while secretly salivating as they await their turn at the helm of the super industrial state.) But anyone who contends that a typical corporate chieftain is a champion of free enterprise is either, as Ace Rothstein might put, an idiot or in on it. If it suits them (I was going to say “their shareholders” before the reality of modern corporate governance slapped me in the face.), such corporate hard guys would row vigorously the boat that pulls us all to socialism or, more properly in this case, fascism, the latter in the economic sense. Economic fascism of the type that seems to be taking shape before our very eyes would put such corporate poohbahs in an even loftier position than the one they occupy in the charade of capitalism we currently employ in this country, so their enthusiasm for such a system is understandable; there is an element of the mercenary in all of us that is especially virulent in those who run corporations in which they personally hold very small stakes. However, that these people hold themselves up, and are often held up, as paragons of capitalism is misleading and laughable.

Saturday, May 16, 2009

HAIL CAESAR!

5/16/09

Fiat’s CEO Sergio Marchionne said yesterday at a conference in Turin that “We will be able to make an offer (for Opel (and maybe the other components of GM’s European operations, Vauxhall and Saab, but the situation is very fluid)) by May 20.” Given the dearth of other bidders for GM’s European operations, it looks as though Fiat will control Opel. Fiat also, according to the plan outlined late last month, will control Chrysler. Marchionne will wind up being in charge of Opel and, at least nominally (The government will be calling the shots at Chrysler, with its four of the nine board seats despite formally owning less than 10% of the company. Can you imagine how much influence it will have at GM, where it will own something like 50% of the company? See my last post, “WILL THAT BE ALL TONIGHT, SIR?”, 5/15/09.) in charge of Chrysler.

Megalomania is a dangerous thing in life, and it has not been good to the captains of the auto industry, at least not since about 1920. The latest example of overreaching by an individual in the industry is that of Carlos Ghosn, the Renault exec who was sent to Japan to run Nissan. Mr. Ghosn did a tremendous job at Nissan, becoming such a popular and adulated figure that he became the subject of a super hero comic book (okay, graphic novels (O tempora, o mores!)) series in Japan. His success with Nissan led the Renault board to ask him to run Renault, the senior partner in the Renault/Nissan alliance. Mr. Ghosn took the Renault job, but did not relinquish the Nissan job. Both companies have since floundered and Mr. Ghosn’s star has dulled considerably. This was simply a matter of a very talented man putting too much on his plate. And Mr. Marchionne, while having done a superb job at Fiat, largely with the help of a $2 billion check GM issued Fiat a few yeas ago to buy itself out of a put option it wrote on Fiat’s auto operation, he has yet to establish the track record that Mr. Ghosn had established at Nissan. Why should we suspect the outcome will be discernibly different, and perhaps far worse, for Mr. Marchionne?

Meanwhile, both BMW and Honda remain (relatively) small car companies that are amazingly resilient and about as healthy as a car company can be nowadays. Alan Mulally, like Mr. Marchionne, a non-car executive put in charge of a car company with salubrious results, is working not to expand Ford’s, and his, empire but, rather, to pare it back considerably. Notice how much better F is doing than GM or Chrysler?

Mr. Marchionne’s empire building does not bode well for Chrysler, but it might not matter; Chrysler is probably doomed anyway. (See my 5/1/09 post, “CAN THEY MAKE IT? CAN THEY MAKE IT?”)

Thursday, May 14, 2009

“WILL THAT BE ALL TONIGHT, SIR?”

5/15/09

I wrote the following letter to AutoWeek in response to a column by Dutch Mandel, one of the better automotive journalists, heaping adulation on Fritz Henderson as a “car guy” who will not turn GM into “Government Motors and produce only neutered enviro-boxes built not to offend.” It’s worth sharing with readers of the Pontificator:

5/15/09

I didn’t know Dutch Mandel could be so naïve. (“Spending Time with Fritz, the GM Cat,” Offside Undo, 5/18/09). Fritz Henderson may be “a finance man in a product guy’s body.” He may very well be “one of us.” But it doesn’t matter; Fritz Henderson does not, and will never, run GM. The government, which will own 50% of the “new” GM, is in charge of GM and will remain in charge of GM for the foreseeable future. Even if Mr. Henderson is as enthusiastic about the Camaro and the C7 as Mr. Mandel thinks, this enthusiasm will count for bupkus if the Obama administration and the Congress do not share it. (How excited do you think, say, Nancy Pelosi is about the new C7?) And if Mr. Henderson fails to do the bidding of his federal overlords, he will be summarily dismissed just like his ex-boss Rick Wagoner.

If Mr. Mandel is correct in his assertion that Mr. Henderson “does not suffer fools,” Mr. Henderson’s prospects for success, or even for holding onto his job, are limited. Suffering fools will be a very valuable, indeed essential, skill in dealing with the people who will really be running GM.

Monday, May 11, 2009

“MY HEART IS ACHIN’….FOR YOU MR. LEE”

5/11/09

In this morning’s Wall Street Journal, we heard the story of James B. Lee, Jr., the (or perhaps a, with the inflation of titles at banks that has been going on for the last, oh, 40 years or so) Vice Chairman at J.P. Morgan Chase. Mr. Lee, it seems, just leaps from success to success. First, he led the banking syndicate that lent $6.9b to Chrysler when it was bought by Cerberus. Had he had anyone on his staff who actually knew something about the car business, or even if he had heeded the knowledgeable voices on, say, the blogosphere, who defied the conventional wisdom and proclaimed the Chrysler deal doomed before its inception, he would not have come close to making that loan. (Readers of the Insightful Pontificator and its predecessor, the Insightful Irregular Commentary, know of at least one such voice, but that is another matter.) But, of course, Mr. Lee is a corporate chieftain, and thus he worships at the altar of the conventional wisdom. To defy the conventional wisdom, to the typical American corporate bigwig, is as unnatural act as, say, coprophagy would be to a normal person, but I digress. So Mr. Lee (who, presumably, is not the same Mr. Lee made famous by the Bobbettes in their eponymous 1957 hit, one of the Pontificator’s favorite songs of all time) went ahead and made the loan, doubtless sure that he and his staff, who clearly know little or nothing about the car industry, put a great asset on the books because those guys at Cerberus are (Can’t you just hear the conversation in the J.P. Morgan executive dining room? “These guys are sharp, sharp…just can’t miss…rowed crew at Yale…”) Predictably, Chrysler went in the tank. But, hey, anyone can make a bad loan. The Pontificator, back in the very distant past when he almost was somebody, bought his share of bad junk bonds, and so is in no position to question the credit savvy of so imperious a personage as Mr. Lee.

But then Mr. Lee compounded the problem and further manifested his particular brand of idiocy by playing the tough guy. When the going, mirabile dictu, got tough at Chrysler, Mr. Lee called Steven Rattner, another walloping wonderboy type whose most salient feature in this instance was his (very similar to Mr. Lee’s) utter lack of knowledge of cars and the car industry, but who heads the Obama’s administration’s automotive industry task force. Mr. Lee, doubtless thinking that he was dealing with the obsequious mediocrities who populate his bank, and most mammoth American banks, demanded in that 3/29/09 call that Chrysler’s secured creditors be repaid the entire $5.6 billion “and not a penny less,” as Mr. Lee put it in what was probably only the latest expression of the triteness that has doubtless characterized his career. Forget the validity of Mr. Lee’s claim, which, unlike Mr. Lee himself, actually has some merit. (See my 5/1/09 post, “WE ARE NOT AMUSED”.) Just imagine this bloviating blowhard, who has spent his career surrounded by sycophants who, if such a thing were possible, are even less qualified for any position of responsibility than is Mr. Lee, and whose only trait even remotely resembling talent is the ability to answer every question thrown their way with “Yes, sir. Right away, sir. That’s a brilliant idea, sir. Have you lost weight, sir?” on the phone saying “Not a penny less!” and expecting compliments on his perspicacity, tenacity, and testicularity. Unfortunately for our hero Mr. Lee, on the very next day (3/30/09), Mr. Rattner and Mr. Obama called his bluff and effectively told him to take a hike. A few hours later, one day after the intrepid Mr. Lee demanded “not a penny less” than the $5.6b the secured creditors were owed, he called Mr. Rattner and said “We need to talk.” Within a month and a day, Mr. Lee settled for 29 cents on the dollar, plenty of pennies less than the amount for which he had blustered just a few weeks before.

You would think that after embarrassing himself twice, Mr. Lee would have gained a little humility. No sir. He then made it his business to get all Chrysler’s secured lenders to agree to the deal which he was forced by his government paymasters to swallow whole, an abomination that turned bankruptcy law on its head by presidential diktat. (See again my 5/1/09 post, “WE ARE NOT AMUSED”.) Unfortunately for Mr. Lee, many of his fellow creditors, unlike himself, were not big time corporate types who got where they were by virtue of their heavy cudgels for use on their underlings and their thick knee pads for use on their superiors. And they didn’t owe the government anything. They refused to go along with Mr. Lee’s entreaties (One can again hear the old boy now: “C’mon…the bank has some great seats at Yankee tickets. Ever been to Chase’s skybox? Hey, do you play golf? I have a great tee time at Ardsley!”) and doubtless were as amused as would be the Pontificator by this peacockish popinjay’s attempts at bullying. So Mr. Lee failed again.

Three strikes for Mr. Lee. But, of course, he’s not out. He’s in the club, which assures him outrageously remunerative employment for life, no matter how many times he strikes out. But normal people who work for a living and who at least occasionally show signs of talent and intelligence might ask “Why does this man still have a job that demands anything more challenging than asking if one would like a certain scrumptious deep fried side dish with one’s plastic burger?”

Does anyone out there think that Mr. Lee is unique in his incompetence or arrogance? I have nothing but anecdotal evidence from having dealt with and worked for such corporate personages, and from reading the papers, but I would answer with a resounding “NO!” Corporate America is teeming with pusillanimous poltroons like Mr. Lee who got their jobs through bloodlines, connections, shameless bootlicking, or some combination of all three. It is the dominance of our modern corporate and political worlds by people of the talent, temperament, and character of Mr. Lee that is a vital element in my generally dismal outlook for the future of our once great nation.

Sunday, May 10, 2009

CHANGE WE CAN BELIEVE IN, PART II

5/10/09

House Speaker Nancy Pelosi went to Iraq for a one day photo op yesterday and piously proclaimed:

“In the end, all this struggle will be worth it because it will have been done for the Iraqi people.”

For the Iraqi people, Madam Speaker, or to the Iraqi people? Hundreds of thousands of Iraqi people have been killed. Many more have been rendered at least temporarily homeless, and thousands remain so. Iraq’s infrastructure has been destroyed. Its economy is in tatters. Conducting daily life remains an ever present danger. At least until recently, when things seem to have started on yet another rapid descent, we were constantly being told how that the situation was improving, that things were getting better, but, conveniently, what was left out was that the situation that was improving from the utter destruction we had wrought on that sad country. For the Iraqi people indeed.

And for what did we display such beneficence to the Iraqi people? When George Bush and Dick Cheney first decided to wage this war, with the near unanimous support of the Democratic “opposition,” the stated purpose behind this imbroglio was that Saddam Hussein was somehow behind the 9/11 attacks. When that argument fell apart, despite the Bush administration’s, er, aggressive tactics to develop evidence of such a connection, the argument changed to Hussein’s (whom every American administration has somehow chosen to lionize by referring to him by his first name, calling him “Saddam,” thus adding to the mystique of this garden variety half a tin pot dictator of the type we have so lovingly embraced throughout the third world whenever it served our purposes to do so) possession of “weapons of mass destruction.” When that argument fell apart, the justification for the invasion and decimation was that Hussein was a bad guy. When the Bushmen realized that, uh-oh, the guys they were supporting in what is broadly called the “Middle East,” and throughout the “developing world,” were at least in Hussein’s league as far as nefariousness was concerned, and that Hussein’s suddenly reprehensible evil was very tolerable when he was fighting our war against Iran, the rationale for George’s Excellent Adventure became spreading “freedom and democracy” throughout the Middle East and, indeed, the world. That no one in Iraq, except for a few stooges on the CIA payroll who spent their time hiding out in Washington and various Mediterranean beach destinations, had asked for our particular brand of “freedom and democracy” didn’t matter; we were going to give it to them, and we were going to give it to them good.

Now that Speaker Pelosi has embraced the Iraqi struggle and President Obama has pledged to continue that particular manifestation of American swagger until at least the end of 2010 while jumping into the Afghanistan War (now properly called “Mr. Obama’s War”) with both feet, we are presented with further evidence, as if any were needed, that there is no Democratic or Republican foreign policy, there is no Bush or Obama foreign policy, there is no Gingrich or Hastert or McCain or Pelosi or Reid or Clinton foreign policy, there is only what, for convenience’s sake, can be called the Bush/Obama foreign policy. It is arrogant, it is messianic, and it is expansionist. It is Manifest Destiny run riot on a global scale. It is the logical consequence of what our best post-war President, Dwight Eisenhower, warned us of as he left office: the military industrial complex. We didn’t listen then, by which time it was probably too late anyway (largely due to Ike’s failure to aggressively confront it, or aggressively do anything, for that matter. The latter was a large contributor to Ike’s greatness, but that is another story.).

In their most febrile imaginations, the conspiracy theorists imagine a new president being brought into a room with a coterie of largely, but not exclusively, anonymous notables and being congratulated on having won that quaint exercise we call an election. Then the starry-eyed president is told, in no uncertain terms, who is really in charge and, if he would like to maintain the pomp, circumstance, and perks of the office, he had best just shut up and play the role. Sometimes one wonders just how far off such theorists are.

Thursday, May 7, 2009

MISSION IMPOSSIBLE

5/7/09

There is a theory circulating among those who normally think much like I do that the sole purpose of the Obama administration appears to be to make the former administration look good. Such thinking is ludicrous for two reasons:

--Even if President Obama were the messianic figure come to bring sweetness, light, and wisdom to the benighted masses that his most loyal acolytes, including CNN, CBS, NBC, and ABC, seem to suppose, even if he were some reincarnation of Moses, he could not make the Bush administration look good. Getting the government’s finances in order, bringing some kind of coherency and reason to American foreign policy, turning around our doomed, ramshackle economy, parting the Red Sea, even if our new president had a desire to do any of these things, would be easy compared to making Bush/Cheney anything but the tragic, perhaps game ending blunder that it was.

--The worse the Obama administration does, the worse Bush looks. Why? Because without Bush’s bumbling incompetence, consummate arrogance, crass stupidity, and/or worse, we never would have had Obama as our president.

More conventionally, I am still willing, perhaps hoping against hope, to give our young president a chance. He’s smart, adaptable, and from Chicago. He wants to succeed. And he’s not George Bush.

STRESS? I’LL GIVE YA STRESS!

5/7/09

This may be one of the more naïve questions arising out of the bank stress tests, the purpose of which still puzzles me, but here goes: What does converting preferred stock to common stock, or conventional preferred stock into these newfangled mandatory convertible preferred shares accomplish for a bank’s primary capital? I’m no expert in bank accounting or bank regulation, but aren’t common stock and preferred stock both considered primary capital? And if not, why not? Both stand behind, and thus, in a sense, “support” deposits and other forms of bank indebtedness.

One could argue that exchanging preferred for common helps shore up capital by removing the drain on retained earnings caused by payment of preferred dividends, but a bank, or any corporation, can suspend preferred dividends without converting the preferred into common.

Just what is getting accomplished by such conversions? This is more than another example of my customary ornery objection to the conventional wisdom; I really want to hear from any banking experts out there with an answer to that question.

There are numerous other questions arising from the much ballyhooed stress tests, like:

--What did they accomplish, other than reversing the government’s former policy of treating all banks alike in favor of separating the wheat from the chaff? The former was misguided, the latter makes sense, but it is the market, not the government, that should be making such distinctions.

--Were the downside scenarios used in the stress sufficiently severe? Loyal readers don’t need to guess as to what I think here: Of course not. The “experts,” who are insisting that what we are experiencing is a somewhat more severe version of a normal, garden variety recession that should be ending any day now have not lived long enough to realize that the way we have been conducting ourselves financially for the last twenty or so years has laid the groundwork for a grinding, backbreaking depression that will take many years to work its ameliorative magic, and that’s my OPTIMISTIC scenario.

One more thing…you might want to make a note of the banks and other financial institutions the governments have deemed, if not good, in no further need of capital, just so we can all share a hearty, if misanthropic, laugh when they go down the tubes, or come begging for more of your dough, in the relatively near future:

American Express (Yeah, that credit card business is just terrific, eh?)
Bank of New York Mellon
Capital One Financial (See my parenthetical comment re Amex)
Goldman Sachs
JP Morgan Chase (See my parenthetical comment re Capital One)
MetLife (Yeah, those variable annuity contracts and other guaranteed contracts are going to work out just fine.)

Friday, May 1, 2009

“WE ARE NOT AMUSED”

5/1/09

President Obama’s scrofulously disingenuous demonizing the hedge funds, mutual funds, and other secured debt holders of Chrysler was nothing short of appalling. According to Mr. Obama, “a small group of speculators whose decisions endanger Chrysler’s future…decided to hold out for the prospect of an unjustified taxpayer-funded bailout.” He went on to tell us “I don’t stand with those who held out,” lest we benighted types thought that he would stand with such obvious Snidely Whiplashes. Mr. Obama was bested in his vitriol by Representative John Dingell who called the holdouts “rogue hedge funds” and “vultures.” Mr. Dingell assured his listeners that such recalcitrants “will now be dealt with appropriately in court.” Hmm… Thank the good Lord for separation of powers, eh?

President Obama understands bankruptcy and contract law better than I do, so he surely knows that for the last, oh, century or several, that secured lenders (i.e., the villainous buccaneers in this case) stand in front of unsecured lenders (i.e., the UAW and the government in this case) and way ahead of parties that might be interested but who have, as yet, no skin in the game (Fiat in this case). So he knows he is vilifying the secured lenders for something they have the right, indeed, in most cases the fiduciary obligation to do.

Some might argue that the government’s offer of 33 cents on the dollar to the secured lenders was a good deal, that the security these lenders are counting on is worth little, especially if Chrysler is forced out of business, and might be worth less than nothing once environmental issues have to be addressed. Given what I know of the industry (which, at the expense of sounding somewhat bragadocious yet realistic, is probably far greater than that of most of the holders of the secured debt), I suspect this argument is true. (See my next (or last, depending on one’s perspective) post on Chrysler’s prospects.) But that doesn’t matter. The holders of this debt bought the debt based on any number of assumptions, one of which was doubtless that the collateral was good, and they are entitled to test those assumptions in court. Further, from what I know of bankruptcy and contract law, that one is secured is more important than by what one is secured because being secured gives one a senior claim. In any event, these lenders are entitled, and indeed are obligated to press their arguments in court.

What does the administration’s unilaterally declaring hoary principles of law invalid as it sees fit do for the investment climate? As a long time friend and loyal reader of the IP (and a bankruptcy attorney by training) said in a note, perhaps the American people have been wise to not save and invest if the terms of those investments can be altered, and their value made to vanish, by presidential fiat.

The Chrysler situation presents yet another series of examples of hubris that is endemic to the Obama administration and to government in general. Contract law can be changed at will if it suits the administration’s purposes. One of the largest, if not the largest, bankruptcies in U.S. history can be equated to a mere rinse and completed in 30-60 days. The Obamacrats can run one of the most complicated businesses in the world though they have no experience doing so. The administration can make people knuckle under to its whims by questioning their patriotism and subjecting them to public ridicule…or worse. We can only hope that the prototypical Greek tragedy plays itself out and this hubris leads to the Obama administration’s downfall, or at least its comeuppance. A little humility on the part of the young president and his insular team would serve our nation well.

“CAN THEY MAKE IT? CAN THEY MAKE IT?”

5/1/09

A more fun, and less scary, line of argument regarding the Chrysler bankruptcy is whether the company can make it in whatever guise in which it emerges from bankruptcy. Three, or maybe two and a half, items are most salient here.

First, the UAW will own, if not 55%, as currently envisioned, a substantial chunk of the company. Some fear that this union ownership will inhibit Sergio Marchionne (the latest in a long line of very coolly monikered car executives), or whatever puppet he installs, from making rational decisions regarding where to assemble and/or source product. It will be impossible, some argue, for Chrysler to manufacture overseas, even when doing so makes eminent sense, if the UAW is in charge. On the other hand, some argue that the UAW will need Chrysler to be profitable if it wants to get its members’ and retirees’ health care bills and pensions paid and thus will give the apparently very talented Mr. Marchionne more or less free reign to do what is necessary to make the company profitable, within reason. Given that the UAW has, in my opinion at least, behaved very responsibly, almost too responsibly, over this whole “car industry imploding” drama, I suspect the latter, and hence am betting that UAW ownership, while in a larger sense a very dyspeptic development for the separation of capital and labor that has served the western world so well, will, at least in the short run, be a good thing for Chrysler’s survival.

That having been said…

I think Troy Allen, a third generation owner of a Chrysler-Jeep-Dodge dealer in Derry New Hampshire, put it best when he said, as quoted in the Wall Street Journal, that what the government and Fiat do won’t matter for the next few years when “we have the same product that isn’t selling.”

Mr. Allen is right that the product line isn’t selling. He may not agree with me on the reason, though. Chrysler product isn’t selling, and Chrysler would have failed eventually anyway, because it produces lousy products. It’s as simple as that. One looks at the Chrysler product line and one sees…well, maybe not nothing, but very close to nothing.

Jeep? If I were given to trite expressions, I would say “Please.” Only Wall Street thinks Jeep is a good brand. Its moment in the sun came twenty years ago when no one produced that then latest yuppie fad called the SUV. Its twilight started when Ford began selling the Explorer. It is now hopelessly behind in the crossover race, producing the ridiculous Compass and slightly less laughable Patriot. It is on the verge of a slow death.

The minivans? I’ll grant Chrysler this one; the minivans are good products that sell in large numbers and dominate their market. However, the buff books and the consumer publications almost unanimously find the Honda Odyssey and the Toyota Sienna superior, usually far superior, products. I am inclined to agree, having driven them all, but find the Voyager/Caravan good and interesting products…for the money. My wife, the minivan driver in our household, wouldn’t come near a Chrysler, even with the bargain pricing on them of late and a pretty good relationship I have developed over the year with a local Chrysler dealer. That may be attributable, though, to her continuing “Japanese cars are always better than domestics” mentality. The same mentality might also be driving at least one of the consumer publication’s opinions regarding the relative virtue of the Caravan/Voyager, the Sienna, and the Odyssey.

The car lineup? Pretty good five years, pathetic today. Even the 300, a car with which I have been infatuated since its introduction (but which lacks a manual transmission (Strike one for yours truly), my wife says she would not be seen in under any imaginable circumstances (Strike two for yours truly)) and that was great about five years ago (about the time the President bought his (a 300C with a hemi, no less—the man has great taste in cars) that he later ditched for a Ford Escape hybrid when he decided to run for his current office), has gotten long in the tooth. The Challenger is cool (but huge! Have you noticed how BIG that car is?) and not versatile enough to be a big seller and compete with the Mustang. The PT Cruiser is gone and probably would have died a natural death anyway. The Sebring is not even worth discussing.

The great hope for the product line is the new alliance with Fiat, and the President spent part of his speech yesterday praising Fiat’s engineering and technology. While Fiat has come a long way under Mr. Marchionne, remains a major factor in Europe (the second largest European car company, I think), and is no longer the legitimate butt of the old “Fix it again, Tony” jokes, it’s no Toyota or VW. It makes some great little cars, some passable mid-sized cars, and some beautifully styled cars (as Italian cars tend to be), but it’s Fiat, after all. How many Americans do you know who are dying to buy a Fiat and have been marking their calendars in expectation of the day Fiat and Alfa return to this country? How many people are out there saying “I’d never buy a Chrysler, but I’d sure love one of those Fiats!”? Enough said.

Chrysler is a dead company under any circumstances simply because its products, for the most part, are not even close to being competitive. As the saying goes, if Fiat is the answer, it couldn’t have been a very good question.

I HEAR ROD BLAGOJEVICH AND TONY REZKO MIGHT HAVE TO DO SOME PUBLIC SERVICE IN THE NEAR FUTURE…

5/1/09

A blurb in today’s (Friday, 5/1/09’s) Wall Street Journal, page A1:

“Afghanistan needs more help from Washington to battle corruption, a top U.S. government watchdog said.”

The only thing that would make this contention more comedic would be to change it to:

“Afghanistan needs more help from Chicago to battle corruption, a top U.S. government watchdog said.”