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The Showdown

Wednesday, June 3rd, 2009

A Federal Appeals court has put the sale of Chrysler to Fiat on hold for 10 days.   A group led by a pension fund in Indiana has filed suit that the Federal Government is breaking their own laws by putting an entity preferred by the government (the UAW health care fund) in front of the secured creditors, in violation of the way the bankruptcy law and decades of law say that bankruptcy law works.

The “Showdown” is whether the United States is going to continue to be a nation of laws, where everyone can make rational decisions based on knowing what the rules are and the government enforcing the rules.  The alternative is government by decree and personality cult, justified by government designated “emergencies”.  

The courts are supposed to be the checks and balances against a runaway President. The future of the country is at stake.  If the Court of Appeals caves on this issue, then we have become Venezuela.  Let’s hope the concepts put in place 225 years ago are stronger than the power of MSNBC.

A different theory about Air France crash

Wednesday, June 3rd, 2009

The current generation of large commercial jetliners barely need a pilot, other than to reassure the passengers.  The savings in fuel costs of the latest generation of planes are because most of the decision making is taken out of the hands of the pilot.  the plane decides based on the route, amount of fuel on board, weight of the passengers and cargo, and the wind conditions, etc… how fast to climb, how much throttle to apply, etc… so the plane arrives at the destination right on time and with the minimum amount of fuel consumed. 

The Airbus is a “fly by wire” aircraft – the controls in the cabin are nothing more than what a joystick and mouse do on your computer.   They are just control inputs into the computers – they aren’t actually connected to anything.  (your car probably has at least several controls that are also like that – your car doesn’t have a rod from the gas pedal to a carburetor – your “gas pedal” is just an input to the computer that controls the engine and the transmission.

So here is my crazy theory – the pilots were asleep – and the plane flew itself right into the thunderstorm.  By the time the pilots realized they had a problem, it was too late to solve.  The plane was 4 hours into its flight, cruising at 35,000 feet – it was beyond the range where ground radios would be pestering the pilots, and it was the middle of the night.   The plane flies itself, and will even prevent pilots from taking actions that the computer decides are unsafe.  Large thunderstorms in the middle of the night are a bit unusual.  The stories of pilots falling asleep are more common over the Pacific Ocean where the flights are even longer and more boring.

If you have cruise control on your car, you’ve had a small dose of this.  With a car with cruise control, you can become very inattentive to the journey…  you snap out of it and think…. wow, I just drove for 2 hours, and I don’t remember a single thing that happened.    Probably if some danger was apparent, you would have become more alert and reacted, but maybe not.

The unintended consequence of too much technology is you expect it to always work, and lose the ability to cope when the technology fails.

*** Update ***

My theory is looking really good at this point.  This report mentions that Air France does have the final 4 minutes of flight data from the satellite link.   The pilots took autopilot off the same minute that the plane started to break up.   They let the plane fly itself right into a fatal thunderstorm without taking corrective action until the plane was already doomed.

Banking, Chicago style

Wednesday, June 3rd, 2009

Having taken US Treasury TARP funds from Tim Geithner, and being subjected to his “Stress test”, several TARP recipients have surprised the U.S. Treasury by easily selling new stock and raised money in the past few weeks with the goal of paying back the TARP money, paying off their loan shark, and no longer being subject to the whims of President Obama and a Democratic Congress.  How naive.

Bloomberg reports that the [US Treasury has moved the finish line], saying that what they said just a week ago for the firm’s  capital requirements no longer applies, and the U.S. Treasury won’t allow the TARP money to be paid back.

Do banks have kneecaps?

Does anayone else hear the distance sound of the drums of war?

Repeating the same mistake

Wednesday, June 3rd, 2009

A number of sources are reporting that GM and Chrysler’s new car sales are “better than analyst projections” – in the case of GM – only down 30% from last year, instead of the expected 39%.  (See any “spin” there?)

So assuming that’s actually true, why the counterintuitive result of people returning to the showrooms of companies about to go into bankruptcy?  

Here is my guess:   One of the early companies that got the Tim Geithner “bailout treatment” was GMAC.   GMAC makes car loans (mostly for GM cars).   They borrow money using bonds and then use that money to fund car loans.   GMAC got clobbered by the Federal Reserve forcing down interest rates – they had borrowed a -lot- of money for terms of up to 10 years and more (longer than a car load lasts). 

When the Federal Reserve pushed down interest rates, GMAC ended up having to make loans for less than what they were having to pay for the money.   The value of GMAC’s bonds began to drop, and as people started to worry that GMAC would never recover, the credit rating and price of the GMAC bonds became close to worthless, which then seriously hampered GM’s’ ability to sell new cars, to the point that GM was referring potential buyers to banks and other lenders instead of GMAC.

So one of the first things Paulson and Geithner did was to flood GMAC with cheap money, and combine the activities of GMAC with Chrysler’s financing company.   In December 2008, The US Treasury injected $6 billion, and converted GMAC into a “bank” (GMAC having never paid into FDIC and not having any “deposits”).  GMAC acquired a small bank to make that magic happen – it was named GMAC Bank, and now Ally Bank.

Remember the woman before the election who announced when Obama was elected that she would not have to pay her mortgage and would get a free car?  People scoffed at how naive she must have been.  The joke’s on us.  Remember Oprah’s Free Chicken Dinner giveaway and how word spread  so quickly within the community that there wasn’t enough free chicken to hand out?

Given Obama and Geithner’s obvious desire to manage failure, it seems very probable to me that they sent the word to GMAC to “just forget the credit scores” – we’ve got your backs – the same way the government “backstopped” Freddie Mac and Fannie Mae for home mortgages.  So GM and Chrysler may be selling cars to people who can’t possibly qualify for the car loan in normal times, or at interest rates that don’t reflect the risk of repossession down the road. 

Toyota’s sales were down 47% – they don’t have the luxury of ignoring credit risk.   The more the government gets involved, the more they change the competitive environment.   While they may not take over Ford, the competitive advantage that being financed by the government may ultimately drive you out of business – until a few years from now when GMAC is holding a worthless portfolio of uncollectible loans, and then we have a hole another trillion deeper.

Just like a woman can’t be half-pregnant, you can’t half-nationalize an industry.

Sovereign Funds Explained

Monday, June 1st, 2009

You may have heard people on the news mention “Sovereign funds”, and some are pointing fingers at them as being the boogey man behind the global economic problems – especially people like Alex Jones.   What are they and what do they do?

From time to time, people suggest that Social Security invest in stocks rather than putting money in the “Social Security” lock box.   The Government would then own assets more substantial than an IOU from the U.S. Treasury.  If they did that, it would be an example of a sovereign fund.   They are pools of money that are owned by governments (or government agencies) to go around the world and “buy up stuff”.  Much of the money in the funds is oil money.   Here is [a list of the world’s largest sovereign funds].    Sovereign funds (in total) control about $3.6 trillion in assets.  [Keep that number in mind when you hear the U.S. is going to run a $1.7 trillion deficit for a single year].

Secretary of Treasury Paulson last year told these funds to “Bring it on“, inviting them to buy up as much of America as they wanted.   It’s very probable that the “Private Equity funds” in the United States that have financed much of the radio business are funded by these funds, either directly or indirectly.  U.S. law prohibits foreign governments from owning FCC licenses, but if you put up the facade of an “American” Private Equity fund managed by a group of Harvard MBAs, that satisfies the legal requirement.  If the countries are members of the WTO (like China), the presumption is that they can own U.S. Radio and TV stations, unless someone can make a case that they shouldn’t.

Congress is making noise about requiring more disclosure of where Private Equity Funds are getting their money.   Pay attention to see if that gains any traction.   With the US Government begging for money anywhere they can find it, it seems unlikely that anything will happen that might increase transparency or alienate sovereign funds.

The Hopelessly Naive Auto Task force

Monday, June 1st, 2009

So much to say so little time.

Bloomberg has a blow by blow story of how the Obama Administration concluded that GM Must Go Bankrupt.  The people on the task force are the same Harvard MBA types that have destroyed the U.S. Radio business – believing that businesses are run by free cash flows, leverage ratios and LIBOR interest rate swaps – get the numbers right in the spread sheets and your job is done .

My ire rose to the level to write this when I read “One member of the task force said he was surprised to learn that Japanese manufacturers can charge more than GM for a similar car because of their superior brand image.“.  Oh God, We’re all doomed.  How could someone involved in deciding the future of the car business and firing Rick Wagoner be so completely ignorant of the underlying business problems?

This is not a new observation.  When Ford and Mazda created their joint facility in Flat Rock, Michigan (1987) and GM and Toyota formed the partnership in Fremont California.(1984), both companies learned (or should have learned) a very important lesson.   The same plant with the same workers using the same parts producing essentially identical cars – people waited in line to buy the Japanese version and you couldn’t give away the American version.  This is 25 years ago.   If you don’t figure out why that is, no amount of “government backstopping” is going to turn the company around.   They should have started by spending a weekend speed reading “The Decline and Fall of the American Auto Industry” by Brock Yates.  [See what he is saying lately [here]).   While the car companies and their products have improved since the 1980s, you aren’t going to fix their problems until you ask the right questions.

There are two basic trains of thought on why this “brand image” problem persists.  One version is that prior to the arrival of serious foreign competition, GM, Ford and Chrysler produced cars that were increasingly cheap shoddy, unreliable, and poorly engineered and resisted any change to improve the technology, like radial tires, fuel injection, overhead cam engines, turbochargers, electronic ignition, antilock braking, air bags, catalytic converters, etc…   and cars were designed to wear out the day the warranty ran out.   People’s perceptions of “American” cars are that they are shoddy pieces of crap – even if they aren’t.  Once people believe you make junk, you won’t get a second chance….  and people talk to each other about their experiences…. and Consumer Reports systematically documents that you’re selling crap.  And Oldsmobile tries to create a diesel engine from an old Gasoline engine block, and then tries to run away from the disaster they created.

The other train of thought is that the issue has less to do with the cars than with the dealers and the “screw the customer” corporate culture.  Even if people understand that the Toyota and GM car were made at the same plant by the same workers from the same parts, they’ll pay $1000s more for the Toyota because they trust the dealership.  With the companies shifting corporate profits to the financing arms (so they can claim to the UAW that they’re losing money by making cars), the profit was in the financing, not selling the cars – dealers had any number of strategies to cheat the customer.  

One heard over and over on Clark Howard and Tom Martino’s radio shows follow the same basic script.   I went in to look at cars.   They sold me a car and told me a monthly payment and we signed a contract.  They told me to take the new car home and come back tomorrow to finish up the paperwork.  Tomorrow comes, and the dealer declares that unfortunately, the financing didn’t get approved because their credit isn’t good enough [which of course the dealer knew when they pulled the credit report], so the buyer doesn’t qualify for the interest on the contract (which had in small print “Subject to Credit Approval”).  So sorry for the misunderstanding.  So the payment is going to be *way* higher than the amount that was agreed to.   When the buyer says they want to back out because the dealer didn’t honor the agreement, the dealer informs them that unfortunately their old car has already been shipped out of state, and it isn’t possible to give them their old car back, so they can sign the new paperwork or take the dealer to court and sue them to try to get their old car back.  In a year or so, the buyer can’t afford the higher payments and the car ends up being repossessed.

Do that once and you make yourself some extra money…. but it guarantees that person will never ever buy a car from your company again.   Nor will anyone who ever hears that story.   The perception is that this isn’t a rogue dealer here or there, but a systematic way taught at Car Dealer School to screw the customer.  And this is only one of the strategies, let alone what the Repair Department is going to do to you for the next 5 years.

The basic conclusion of the Auto Task force about the way to ‘close the gap’ on the price gap between the GM and Toyota is to shut down GM dealerships and make it harder to get to a GM dealer and negotiate with more than one of  them    Only a Harvard MBA could come up with that as the solution (or a Detroit area GM car dealer).  Don’t they know you can now negotiate and buy the car on the internet, and merely have it delivered to the local dealer for pickup?

I wish some enterprising reporter would interview the members of the Auto Task force and ask them:

  • Do you drive yourself to work in a car you pay for?
  • Is it an “American” Car?
  • When is the last time you personally bought a car from a dealer?
  • Did you finance the purchase or pay cash?  Did you pay list price?
  • When your car is in the shop, do you go to the dealership or does someone else do that for you?

Congress chastised the U.S. Auto executives for flying to Washington on a private plane and being “out of touch” with what real people have to deal with.   The same standard needs to apply to the Auto Task Force.  And ask President Obama if you can see his Driver’s license and what kind of car he drove before becoming President.   And spend an hour asking Brock Yates what his opinion is.

*** update ***

The New York Times has aa [profile] of the 31 year old man who had never been inside a car plant, that is the member of the Auto Task force deciding how to dismember G.M.  So that partially answers the question – he was 6 years old when G.M. learned what he just found out.

The Other GM Shoe – unemployment insurance

Monday, June 1st, 2009

Back when I was working for GM (not as an employee – as a contract person), I learned a number of curious counterintuitive things – like people with seniority wanted to be laid off first during slow times.  Doing so, they would get 90+ percent of their pay and continue to vest in their pensions, then could work “off the books” doing construction work for cash or just tour the country in a motor home on an extended vacation.  The low seniority people were the ones who had to show up for work and make the cars.  It wasn’t called Generous Motors for nothing.

Another quirk was that the State of Michigan gave GM special exemptions on how Unemployment Insurance is supposed to work.   It’s a bit complicated, but there is a state and a federal fund with different sources of money.    The basic principle of funding is that each employer keeps a “balance” in the fund – how much they’ve paid in, and the amount of benefits paid out.  If a company gets in a deficit position, their contribution rate goes up to help rebuild the fund.   Other employers temporarily are subsidizing the ones (like GM) with lots of unemployed workers.

Well, GM had incorporated Unemployment Insurance into their business model.  When GM didn’t need all its workers, it would lay them off and let the State pay them.  Normally doing that would risk that those employees could drift away and when GM needed to restart the line, it would have to rehire and retrain people – so their agreement with the Unemployment folks was that GM workers collecting unemployment were NOT required to look for a new job to keep getting the check.  [Yes, I know that is a scam too] The Fund just became a way to subsidize GM at the expense of other employers.  Michigan didn’t want to lose GM, and many of those other businesses were indirectly in business because of GM so they were not in a position to complain.  This was in the 1980s, and also unemployment benefits were taxed differently than today.

Since GM will be declaring bankruptcy and shutting a lot of plants, those GM workers will be on unemployment for a LONG time, with no real assurance that GM will ever be in a position to pay back into the state uninsurance funds – especially in states where GM is going to shut down its only facility.

Look for a bunch of State Unemployment Funds screaming “we’re out of money” (It’s already started because the condition of the economy in general).  Not only are people collecting unemployment, but a lot fewer employers are paying into the fund.  Look for demands for a Federal Bailout  (did you read that IRS taxes paid in April were down 36% year over year?… yet Bloomberg and the economists think things are about to “turn around”)

In the spirit of just making problems worse, the Democratic party solution to this is to always feel compassion for The Worker – by extending unemployment so long that people forget what it is like to work.   Other employers become so burdened down with the costs and the artifically high costs of labor that they shut down or move to other countries to get out from under.

Do what you’ve always done, you’ll get what you always got.

McChristianity and Obama

Sunday, May 31st, 2009

For a variety of reasons, starting in the 1960s, Christian churches began to hemorrhage young people.    As Government-run schools scrubbed all references to religion from history, young people  lost interest in the religion of their parents.  TV and Big Bird became the teachers of how to live your life.

Some think that humans are genetically programmed to have to believe in something, and incorporating a belief in a Supreme Being is key to human survival.   The general notion was popularized by the term the [God Gene]

The Christian Church and its insistence that its religion was actually based on the life and teachings of Jesus – and following the rules and teachings of the church – led to a mass exodus to what some call the McChurch – where you go on Sunday to get a dose of McChristianity.  No need for rules or restrictions on your behavior or respect for authority – just do focus group research and find out what people want their religion to teach them and then feed it back to them on Sunday and they’ll flock to your brand.

Somewhere else on the web site, I wrote a really quick description of Contemporary Christian Music is “Jesus Loves me, and I love Jesus”, and nothing more substantive.  So I sat down and forced myself to listen to K-Love (EMF’s Contemporary Christian music channel) for half an hour and wrote down the theme or message of each song and seeing if I was overly harsh.

God is beautiful
God is love
Surrender your heart to God
There will be place with no more suffering, pain or fears
You won’t be alone with Jesus
God will rescue me from a life of misery
I’m alive because Jesus loves me
Jesus is the giver of every perfect thing
All that I am is due to the power and majesty of Jesus
My love of Jesus is forever
Jesus is my Savior
Trust in the Lord
God’s glory will reign forever and ever
I hold out my hands to the One who is worthy
God makes everything glorious, and since I love God, what does that make me?

In summary, every bit of the music is incredibly narcissistic – about my feelings, what I want, my love for God/Jesus, my pain.

It isn’t about an actual Jewish man who lived 2000 years ago in the Middle East, it isn’t about the 10 commandments, it isn’t about love for your wife or your children or your parents, the people who are with you in church, the other people around you who need your help, the people who died to keep the religion alive, the importance of leading a moral life and treating others with mutual respect.   It’s about Me.  It’s about what I want.  I want to Feel Good.  Jesus is my Drug.

Now, take the above themes and replace God/Jesus/Lord with Obama, and you will quickly see exactly why we are where we are today.  It’s only one small step to then replace Obama with Mohamed.

$582 Trillion

Thursday, May 28th, 2009

$582 Trillion.   That’s about $100,000 for every person on the planet.

That’s the amount of the leverage hanging over the heads of the world.   It is the face (notational) value of the sum of all of the unregulated derivatives.   Every radio company owner that I’ve looked at so far (those not privately owned) have used short term variable rate LIBOR credit facilities – with interest rate swaps derivatives to protect them from an increase in LIBOR.

One of the problems with things like Interest Rate swaps are today they are 1 on 1 contracts.  There are theories about how you figure out the value of an interest rate swap at a point n time, but there is no liquid market to prove what it is worth.   Typicaally you bought them as a condition of getting the credit facility, and you had to buy it from the same folks.  Interest rate swaps being 1 on 1 contracts have couterparty risk – if the bank (or insurance company) that sold you the interest rate swap goes under (AIG, for instance), you’re 100% screwed.

Tim Geithner is doing one thing right, but whether it works or will just speed the collapse is not known yet.   He wants a publicly traded liquid market in interest rate swaps and other derivative instruments.   (by proposing this as his project, he’s stepping all over the toes of the CFTC, and to a lesser degree the SEC).  It’s a pretty naked power grab.

If interest rate swaps become a standard commodity (I’ll trade you LIBOR vs 4% for 5 years), then it takes the guesswork out of how much leverage is out there and how much the contract is worth at any point in time.   A key part to a commoditized financial product is that you get rid of the counter party risk.  Instead of your contract depending on 1 company, all of the people involved in the marketplace pool their assets  to guarantee all trades.   You can’t play the game if you can’t prove you have the resources to back up your trades.  If one of the companies fail, all the other players agree to absorb their loss.

Either Geithner is a brilliant man who is going to save the world, or he is incredibly naive and leading us right off the cliff.   I think we’ll know shortly which he is.   I don’t see how you get past the fact that one party to the transaction introduces risk via their credit risk, but maybe I just don’t understand it yet.

Belling Geithner’s cat

Wednesday, May 27th, 2009

Perhaps it is better to not think you know what is coming.  Everyone who has had even a 1st year economics course knows you can’t monetize debt and not have consequences.  

The FDIC is out of money.  The banks (other than the “too big to fail” money center banks) are really pissed.  Geither has used the money they’ve been paying into FDIC for 50 years to bail out American Express and Goldman Sachs, who never paid a penny into the FDIC.  The FDIC wants to surcharge all of the country’s banks to build the fund back up.  The banks (via the ABA) are actively opposed to that plan.   Geithner’s plan B is to let the FDIC borrow $100 billion from the US treasury to keep destroying the banks he designates as the next target.  

Geithner has been threatening banks with seizure if they don’t cooperate with him.   Ben Bernanke does not run the Federal Reserve, the Board does.    The regional banks are controlled by their member banks.   People who run banks are smart and they are probably the only ones that have the power to “bell the cat”.

Tim Geithner has convinced current Fed Chairman Ben Bernanke to buy up  debt that Geithner needs to sell to finance the explosion of spending needed to fund the Geithner $700 billion fund to destroy all businesses.    If the Federal Reserve wasn’t cooperating, Secretary Geithner would have to sell US Treasury Bills (less than a year), Notes (1-10 years), and Bonds (10-30 years) .  For the government to acquire more power without the consent of the taxpayers, they have to borrow money from somewhere else.

In an unguarded moment (translation: no teleprompter), President Obama told the host on C-SPAN that the government is out of money.   [The dimwit host had reversed debt and deficit in his question, but at least he got a useful answer]. 

Well, we’ve reached the point that Geithner is losing control of the Bernie Madoff like game he has been playing.   People are not showing up to buy the instruments.  Bond Rating agencies are sending signals they may need to  downgrade US treasuries. 

Coercing the bond holders at Chrysler to surrender their “first in line” status in favor of the UAW will destroy the Bond market if this is allowed to stand.   Those bonds are held by folks like Pension Funds and Insurance companies that are holding annuity money.   If one person can wave his hand and make 400 years of commercial law “go away”, the entire system is doomed.   They cannot let his action stand.   It has turned into “it’s us or them”.   (Obama+Geithern vs capitalism).  Only one is going to survive.

This week’s competitive bid auctions are finding lenders wanting a higher interest rate from the US Treasury.    China seems to be looking to B razil as a place to start sending its investment money.  The market interventions of the past 8 months by the world’s central banks has been to try to force interest rates down to zero, because there is a huge consequence to interest rate swaps and LIBOR based credit facilities if the interest rates go up. 

All it’s going to take is one big event – like the government in Pakistan falling, Iran and Israel exchanging weapons fire, or South and North Korea turning into a hot war, and all bets are off.  The GM bankruptcy itself may be enough to start the chain reaction (since we’ve known it’s been coming for 6 months, proabably most people have already taken evasive action wtih GM).  The U.S. dollar has also been declining over the past few weeks – so be cautious about interpreting the stock market going up as meaning anything.    The two forces cancel out each other (for those people whose assets are not in U.S. dollars)

I wish I had a magic bag of pixie dust to spread around and make this all go away. 

Here is the [Bloomberg Story] today that provoked this rant.

[New York Times] is raising the alarm, too.