Posts Tagged ‘bankruptcy’

FDIC to borrow its way to solvency

Friday, March 6th, 2009

The “solution” to the FDIC being insolvent is for the US Treasury to loan the FDIC $500 billion (It currently insures around $4 trillion sitting in bank accounts – probably more by now)

The problem with this?  The total revenue the FDIC raises by assessing a fee to banks on their insured deposit accounts is $2 billion a year.  It takes a long time to pay back $500 billion at $2 billion a year.

To dig the hole deeper, part of the mortgage cram-down bill’s language (probably to blackmail the American Banker’s Association into supporting it) is making the “temporary” insurance limit raise from $100k to $250k per account permanent.

The stupidity and unintended consequences continue.

Bankruptcy Watch – Masonite

Wednesday, March 4th, 2009

Bloomberg Story

Not a huge surprise since they mostly make and sell counter tops for new houses.   With 19 million empty houses, unless there is a huge influx of new immigrants, demand for new houses will be very slow for at least a decade.

The final nail in the GM coffin

Wednesday, February 25th, 2009

One of the reasons for GM’s prosperity in the “good old days” was GMAC.  The amount of money that GM made selling a car was secondary to the money it could make from the financing of the car through GM’s car financing subsidiary.

President Obama’s idea to get the US government involved in car loans tries to replace the market forces that drove GM to seek profit from lending money for cars rather than building cars with a central government controlled agency which will be motivated by policy objectives and government control.  Create a fund like this, you put everyone else in the financing business out of business.  Car finance companies don’t have a printing press that lets them print money to lend.

If the US Government starts becoming an auto loan lender, how can it avoid repeating the mistakes of Freddie Mac and Fannie Mae?  What if someone wants to borrow money to buy a car made by a non-UAW manufacturer?

The woman who was widely mocked for saying that now that Obama is President, she won’t have to make her house payment and will get a free car was telling you the truth – the problem is people didn’t believe her.

…rosebud…

Wednesday, February 25th, 2009

Story Here

Hearst newspapers says it will probably have to sell or close the San Francisco Chronicle.

Question to think about:  once all the newspapers are dead, where will Matt Drudge get his news?

AIG “investment” going sour

Tuesday, February 24th, 2009

Story here

Remember when the US Government stepped in to “Save” AIG?  (even though AIG is an insurance company and not a bank).  At the time, various people in the government suggested that in the long run, the taxpayers would make a profit.

Now AIG says it is going to convert the Preferred shares we (the taxpayers) bought into common shares.  They can’t afford to pay the 10% interest that the preferred stock requires.  That was the whole point – that this would make the “investment” temporary and force AIG to quickly pay off the US Treasury by buying back the preferred stock.

That’s not what AIG is proposing.  Like CitiGroup, they want to take the US Treasury from the front of the line to get paid, and put them at the end of the line – so if/when AIG declares bankruptcy the US Treasury is holding only worthless common stock.

The bizarre part of this notion is that AIG thinks converting preferred stock to common stock is -their- decision.  That’s not how preferred stock works.  The owner of the stock decides when or if they wish to exercise their conversion option, usually based on the common stock getting above the conversion price by enough to justify letting go of the guaranteed interest income stream.

They’re talking like they have a friend inside the US Treasury (Geithner comes to mind) who is agreeable to this.  It’s time to say “NO” to AIG.

What is going on here is that most people do no realize their life insurance policies and annuities have no government “insurance” protection. 

Insurance company policies are typically guaranteed by a state run Guaranty Fund.  The fund has no assets of its own – the only tool it has to stand behind insurance policies is to impose an assessment on the other insurance companies that haven’t failed (making them more likely to fail, also).   Unfunded Insurance Guaranty funds are completely unprepared to deal with the largest insurance company in the world failing.  

When people realize their insurance policies and annuities are at risk, a “run” can begin on insurance companies as people withdraw the “cash value” of their whole life policies or demand an early termination of their annuity. 

This has happened before – in 1933, regulators declared an “insurance holiday” to stop runs on the insurance companies.  Here is the story in Time Magazine from April 1933.

Dodd says “Short Term” nationalization is necessary

Friday, February 20th, 2009

Senator Chris Dodd, head of the US Senate Banking Committee (who has not yet produced copies of his sweetheart mortgage deal with Countrywide Mortgage) says that “Short Term” Nationalization of Bank of America and CitiGroup may be necessary.  Bloomberg Story

Remember that once the government gives itself “temporary” powers, it never gives it back voluntarily.  US Treasury dictator Timothy Geithner will release details of this plan “next week”, unless of course he’s too busy saving the automobile industry.

So why not Chapter 11 for GM?

Friday, February 20th, 2009

The Wall Street Journal lays out the case for GM to let the bankruptcy process resolve their issues here

This is exactly why the bankruptcy law was created in the first place.  It allows a company with an unviable business model to either do the things it needs to do to fix itself, or be sold off or dismantled in way that protects the interests of the people who are owed money or who have purchased the company’s products in the past.

Having worked inside GM (not as an employee), the thing that I think the Harvard Law Professor is missing is the “cost” of cutting loose those “legacy” costs of the promises to the UAW workers.  Many of the people in the UAW are third generation auto workers.  Reducing the pensions and retiree benefits to a current worker’s father and grandfather will lead to sabotage, aggression, violence and deliberately defective products.  I can’t see a GM filled with angry UAW workers surviving, and I doubt Toyota wants to buy additional assembly plant capacity and the “legacy” that GM leaves behind.

TheStreet.com seems to be thinking the same thing.

Bankruptcy Watch – Saab

Friday, February 20th, 2009

Svedish car maker Saab (owned by GM) has sought protection from creditors.   GM had previously intended to sell Saab, but apparently has decided to jettison it.