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HomeThe Unknown Costs of Saving the Auto Industry
Posted by Larry Doyle on June 6th, 2011 7:41 AM |
This past Friday’s unemployment report was beyond disappointing. With non-farm payrolls increasing by a token 54,000 and the prior month’s report indicating a downward revision of 12,000 our ‘walking pneumonia’ economy continues to languish under the weight of excessive debts and grave uncertainties. What is an administration to do when faced with such a challenge? Spin, baby, spin.
Where do I witness this spin cycle working in overdrive? The Obama administration’s touting of success in saving our automotive industry. There is little doubt that the Obama team will be ‘driving’ this ‘saving’ of the automotive industry hard as part of his 2012 reelection platform. (more…)
Throw the Book at Steven Rattner
Posted by Larry Doyle on March 11th, 2010 9:31 AM |
Does crime pay on Wall Street?
When those implicated in ‘pay to play’ schemes on Wall Street are not dealt with in truly appropriate fashion, everybody loses. Why? We end up with a loss of confidence not only in the markets, but even moreso a loss of confidence in our judicial system. I am not so naive as to think that our fields of justice are level, but that doesn’t mean we should not pursue that goal and highlight inequities when and where we see them.
Those engaged in financial crimes or schemes including ‘pay to play’ should never be able to buy their own justice by writing a check. That system of justice will never truly dissuade those engaged in or attracted to ‘pay to play.’
I see a strong sign of just such a potential inequity this morning. It smells. (more…)
Toyota is to Wall Street as NHTSA is to SEC/FINRA
Posted by Larry Doyle on February 24th, 2010 6:26 AM |
In light of the Congressional hearings addressing the problems swirling around Toyota, I am reposting this commentary which was originally posted on February 12th.
*****************************************************
When regulators are in bed with industry, bad things happen. When regulators actually go to work for the industry, then really bad things happen.
Evidence of this dynamic on Wall Street is overwhelming. Yet, don’t think that Wall Street has a monopoly on this incest. Bloomberg highlights that incestuous activity has also played out in the disaster encompassing Toyota. Bloomberg reports, Regulators Hired by Toyota Helped Halt Investigations:
Former regulators hired by Toyota Motor Corp. helped end at least four U.S. investigations of unintended acceleration by company vehicles in the last decade, warding off possible recalls, court and government records show. (more…)
Toyota:Wall Street as NHTSA:SEC/FINRA
Posted by Larry Doyle on February 12th, 2010 10:35 AM |
When regulators are in bed with industry, bad things happen. When regulators actually go to work for the industry, then really bad things happen.
Evidence of this dynamic on Wall Street is overwhelming. Yet, don’t think that Wall Street has a monopoly on this incest. Bloomberg highlights that incestuous activity has also played out in the disaster encompassing Toyota. Bloomberg reports, Regulators Hired by Toyota Helped Halt Investigations:
Former regulators hired by Toyota Motor Corp. helped end at least four U.S. investigations of unintended acceleration by company vehicles in the last decade, warding off possible recalls, court and government records show. (more…)
Keep Bailing: GMAC Needs More of YOUR Money
Posted by Larry Doyle on October 27th, 2009 8:33 PM |
Turning the corner? No more bailouts? You didn’t actually believe the wizards in Washington, did you? Why?
GMAC is back in line for another injection of YOUR money. Recall that GMAC was bailed out initially during the government takeover of GM. GMAC was then spun off in order for Uncle Sam to effectively provide taxpayer funded consumer auto loans and mortgages.
GMAC is not a public entity and thus not currently able to hoodwink investors and raise equity capital. What’s a cash strapped entity to do? Let’s play some more of that ‘bailout bonanza.’ The Wall Street Journal just reported on this developing story and writes, GMAC Asks for Fresh Lifeline:
In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said.
The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government’s 34% stake in the company could increase if existing shares eventually are converted into common equity. (more…)
TARP Transparency Is a Joke as Uncle Sam’s $81 Billion Investment in Automakers Unlikely to be Recovered
Posted by Larry Doyle on September 9th, 2009 7:52 AM |
Do the ends justify the means? Is the American taxpayer better off not knowing how his money is being spent when rescuing private corporations? Is the Obama administration’s claim of transparency a mere facade? I believe a strong case could be made that all of these assertions are true in reviewing the likelihood of the American taxpayer recouping taxpayer funds injected into GM and Chrysler.
While government pundits and market analysts will crow about positive returns on TARP funds injected into banks that never truly wanted the money in the first place (Goldman Sachs and JP Morgan amongst others), they have little to say about the TARP money which will not likely be coming back from the automotive industry.
I highlighted this point on June 30th in writing “The TARP Has a $159 Billion Loss”:
Of the $699 billion in total capital, $142 billion has yet to be committed. Of the funds already allocated, Uncle Sam has incurred a total cost of $159 billion. What does that mean?
Recall the number of times that government officials told taxpayers that we would make money on investments in AIG and the like. Well, so far we’ve lost $159 billion dollars across all our TARP investments. The loss is calculated as the difference in funds committed and allocated to securities and the market value of those securities. That loss represents 36% of the funds committed and actually allocated.
Where do a large percentage of the funds unlikely to be recovered reside? Detroit, as in GM and Chrysler.
Bloomberg sheds further light on losses embedded in the TARP in writing U.S. Taxpayers Unlikely to Recover Auto Investment, Panel Says:
U.S. taxpayers are unlikely to recover their $81 billion investment in General Motors Co. and Chrysler Group LLC and were “left in the dark” on specifics of a decision to aid automakers, a congressional panel said.
The report didn’t estimate how much of taxpayers’ aid to the auto industry will be recovered. The panel said GM stock would need “highly optimistic” returns in order for the full investment to be repaid.
The report of the panel, which oversees the Troubled Asset Relief Program, raises questions about the Obama administration’s transparency in aiding automakers and challenges the Treasury Department to make more disclosures about company decisions and the government’s future role.
“Congress and ultimately the American taxpayer have been left in the dark concerning details of Treasury’s review process and its methodology and metrics at a time when Treasury committed additional TARP funds to these companies,” the panel said.
“The Treasury auto team failed to disclose to the public both the factors and criteria it used in its viability assessments, the scope of outside involvement in its evaluations, and its basis and reasoning for selecting particular benchmarks,” according to the report. “Simply, its disclosures did not go far enough.”
As these companies try to recover, taxpayers should not expect a return of any of these $81 billion. Taxpayers should also not expect transparency from Washington. Being truthful and transparent are not exactly consistent with the ‘Washington way.’
LD
‘Cash for Clunkers’ Misrepresentations Lay Groundwork for Fraud
Posted by Larry Doyle on August 10th, 2009 3:12 PM |
Fraud begins with intentional misrepresentation. From there, revenues generated become captivating, the fraud grows, and society suffers.
The potential for fraud is my greatest concern with the ‘Cash for Clunkers’ program. Why?
With the economic tide having gone out, no surprise that more frauds have been exposed. Additionally, given the challenging economic times, we should not be surprised to see intentional misrepresentations laying the groundwork for more frauds in the future. Against this backdrop, I am not surprised by a Bloomberg report, Cuomo Tells Dealers to Stop Deceptive Clunkers Ads:
New York Attorney General Andrew Cuomo today told 40 auto dealers across the state to stop issuing misleading advertisements for the Federal Car Allowance Rebate System, known as “cash for clunkers.”
The government-funded clunkers program, which seeks to boost the economy, allows dealers to credit $3,500 or $4,500 for trade-ins that may be worth less. Dealers’ ads mislead consumers into believing that their trade-in vehicle qualifies for the program when it does not or that they are eligible for a several-thousand-dollar rebate, Cuomo said in a statement today.
Letters by Cuomo order the dealers “to immediately modify promotions and advertisements to clearly explain how the program works,” he said. Included on his list were dealers for General Motors Co., Chrysler Group LLC, and Ford Motor Co., as well as foreign car companies.
In metropolitan New York, Cuomo named Plaza Hyundai Ltd., City World Toyota and City World Hyundai, while in Westchester he cited Smith Cairns Ford Inc. of White Plains and Central Avenue Chrysler Jeep Dodge.
One would have to be quite naive to think intentionally deceptive ads are not widespread in our country. Are car dealerships hoping to target these ads to those who may be less financially savvy? If so, these misrepresentations are particularly heinous.
I would encourage AG Cuomo and other attorneys general to be intentionally aggressive in meting out penalties and punishments for those involved. As word of mouth is the best form of advertising and publicity, I only hope that this post is widely disseminated.
The need for honesty and integrity never takes a vacation.
Please share all thoughts and comments.
LD
FYI: Addendum to my August 5th post “Fair and Fraudulent Mortgage Lending.” Bloomberg is now reporting Freddie Mac Says Its Loss from Taylor Bean May Be ‘Significant.’
There is a reason why it smells so bad at low tide!!
How Charitable is ‘Cash for Clunkers’?
Posted by Larry Doyle on August 7th, 2009 11:09 AM |
With the Senate’s approval of another $2 billion in funding for the ‘Cash for Clunkers’ program, the automotive industry will breathe a sigh of relief. I have nothing against the automotive industry, but there are aspects of this program that I find disconcerting both in style and substance.
While economists purport that this program will add measurably to next quarter’s GDP report, I would question the true integrity of that assessment. Why? GDP measures:
the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
Others have already put forth that the Clunkers program is merely accelerating demand. I concur, but will grant that a spark within the automotive sector may help generate benefits across other parts of our economy.
Are consumers increasing debt and redirecting purchasing power that may have gone elsewhere given the presence of this program? I guess we could make that case with a purchase made on credit at any point in the economic cycle.
My main issues with this program revolve around the requirement that cars being swapped are required to be destroyed. Certainly not all of those cars are worthless. Shouldn’t the implicit value of cars being destroyed be subtracted from GDP if we want to have real integrity in our economic measurements? Why? If goods being produced, in this case autos, are predicated on others being destroyed then it only makes sense to net the values of the autos.
My biggest issue with this program, however, centers on the fact that there is real value being destroyed via this program. Why couldn’t or shouldn’t the cars being swapped be provided to worthy charities? I saw this point raised early this morning and it hit me: how many charities would love to have these vehicles in order to do their work? In fact, how many of these vehicles would have gone to these charities if not for this program?
Not sure if it was divine intervention, but I received an e-mail later this morning from the Charity Assistance team at Donate Car USA addressing this topic.
I would strongly encourage anybody who may be interested in the ‘Cash for Clunkers’ program to review the costs and benefits of donating your vehicle. ‘Cash for Clunkers’ may very well have an immediate negative impact on charities who depend on car donations. Ultimately, I hope this program will actually raise the awareness of donating vehicles versus destroying them.
Let’s not forget those in need.
LD
GM: General Motors, Government Motors, or Going, Going, Gone Motors?
Posted by Larry Doyle on June 3rd, 2009 6:00 PM |
What will the future hold for GM? I believe there are three potential scenarios, with likely overlap in the short run but less overlap over the long haul. Let’s see if the real GM is behind:
Door #1: A Revitalized and Profitable General Motors
Behind this door, for GM to be a viable entity they need to address the deeply embedded culture and values within the organization. In order to effect change, the people of GM need to understand dramatically different expectations, define and live a new value structure, and execute.
Why do losing teams in professional sports change general managers and coaches? Culture. GM has a culture that allowed a failed financial framework to gain a foothold and ultimately crush the organization.
Without new management at the senior level and throughout the organization, how does the new culture – predicated on total discipline – get established?
Some may argue that Chrysler came out of bankruptcy with no cost to the taxpayer. That is a fair point. Time will tell, though, if the same can happen with GM.
In my opinion, Chrysler benefitted from the growth of the shadow banking system in the mid 1980s which increased leverage throughout the economy. Currently our economy and culture are headed in an opposite direction, that is, consumers and corporations are delevering and will likely continue to delever going forward. As such, I do not envision vehicle sales rebounding as strongly as GM needs to prosper.
Sense on Cents handicaps a vibrant General Motors as a longshot.
Door #2: A Bureaucratic “Government Motors”
Behind this door, I see an entity burdened by red tape, sluggish proceedings, and social agendas. Why?
Any organization is ultimately a reflection of the people and its ability to attract dynamic, entrepreneurial, intelligent leaders at all levels. With all due respect to those currently working at GM, I have a hard time believing this organiztion will be able to attract sufficient numbers of these leaders going forward. Why?
Leaders of that ilk do not tend to enjoy and thrive within an environment burdened by systems, processes, and hurdles inhibiting its success. With government ownership, those hurdles just got much higher.
What are the hurdles?
– How will success be measured? Will it be bottom line profitability? Market share? New vehicles? Social goals, such as environmentally efficient vehicles?
– Is it better to survive than thrive? Organizations in the private sector take prudent risks to drive growth. Will GM be risk averse in an attempt to maintain stability rather than pushing ahead in the spirit of venture capitalists?
Sense on Cents handicaps a bureaucratic Government Motors as a better than even money bet over the next 5 years.
Door #3: A “Going, Going, Gone Motors”
Behind this door, I see an entity that will ultimately utilize the $60 billion (and potentially more) government injection of equity capital as nothing more than an interim bridge loan.
Is the new GM on the other side of the bridge? No. Behind this door, GM will have been flushed down the river and out to sea unable to compete in the Brave New World.
The equity injection of government funds will actually be utilized as more of a stopgap to prevent the immediate dissolution of the company.
Robert Reich addresses this likelihood at Wall Street Pit.
Reich flies in the face of his Democratic Party leaders in asserting that the true motive of the government takeover of GM is ultimately:
The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise.
Reich views the GM situation from a macro standpoint and in the context of a shift in our economy and the world to new technologies. GM is not well positioned currently to adapt and thrive in that environment. Over and above that, GM will be downsizing and not in a position to invest the necessary human and financial capital to lead the company and the industry.
Although Reich’s assessment is not exactly a rosy picture, I give him credit for voicing his opinion and looking beyond the immediate landscape. While Reich sits in the comforts of academia, where are the political leaders who are willing to take these risks in making these statements. As Reich asserts:
US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.
So the Obama administration is, in effect, paying $60 billion to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.
So once again the American public is forced to deal with a correction based
upon the lapse of time. What do we know about time?
“Can you teach me about tomorrow
and all the pain and sorrow running free?
Cause tomorrow’s just another day
and I don’t believe in time
Time, why you punish me?”– Hootie & the Blowfish
LD
Does Populism Take Precedence Over Rule of Law?
Posted by Larry Doyle on May 7th, 2009 11:09 AM |
Bill Gross of Pimco recently wrote:
If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned.
Will the manner in which Chrysler has been handled up to now and is handled going forward serve as legal precedent for future bankruptcies? We will learn a lot VERY quickly as General Motors is in very much the same predicament. Given the issues raised by Tom Lauria, attorney for some of the non-TARP Chrysler creditors, are our markets witnessing populism taking precedence over the rule of law? Will our courts try to “thread the needle” under the guise of these automotive companies being special situations?
Answers to these questions will likely develop over time. Different justices may read the law in a different manner. I caution investors, though, that costs associated with parsing the rule of law may be postponed but are not foregone.
To that end, I believe it is also wise to take heed from Jeff Matthews of Ram Partners who raises these questions in a recent short interview on TechTicker:
Additionally, for those who have not listened to the ten minute interview Tom Lauria provided Frank Beckmann on WJR Radio, I will provide my recap and link here: Is Barack Obama Going Tony Soprano? This interview is a MUST LISTEN!!
LD
