Friday, October 31, 2008

The Return of "Spanish Mike"

Earlier this year, I embedded a youtube video "The One Semester of Spanish Love Song", since then, Spanish Mike has graduated to the second semester and completed his 2nd Semester of Spanish, Spanish Love Song Starring Erik Estrada. "Keep your pantalonies on Erik Estrada."

Bush Administration says No $ for Chrysler/GM Merger

Yesterday, the big news was that GM and Chrysler had the merger terms all wrapped up except for the money. A $10 billion triviality. Today, the Treasury Department said no funding will be available for the merger, and the prospects for merger now seem to be all but dead.

What happened to the merger? I'm guessing what happened to the merger is that in their mad panic, the GM/Chrysler crew put together a deal filled with holes, then mis-sold it to the Treasury Department. It looked like Cerberus was trying to dump its crap on the US government and walk away clean. To get a deal done, they probably would have had to put something together where one of the two companies, probably GM was sent through a prepackaged Chapter 11 and immediately rescued by the other company with government help. To sell the deal, Cerberus would have to bring some new money to the table, and Cerberus's bankers would have had to be in for some new money as well. Oh yes, they would have had to give "Hey Rick" Wagoner the boot as well. Since they couldn't/wouldn't do any of those things, the merger was destined to go nowhere.

Apparently somebody in the government got wise to the catch 22 about the GM/Chrysler merger. To be popular, the merger would have to save jobs. To work, a lot of jobs, maybe 40,000 or 2/3 of Chrysler's workforce, would have to be cut. Using government money to pay people $100,000-140,000 each to leave their jobs doesn't sit well with Joe Six-pack (or Joanna Lawyer) who can expect to receive a big fat nothing sandwich when he or she gets laid off due to the bad economy.

Although both Obama and McCain have pledged support to the domestic auto industry. It remains to be seen whether Chrysler or GM can hold out until February. GM in particular has shown signs of being in a severe cash crunch. The General has recently announced cash saving measures from the mundane, shutting down escalators and, to the drastic, suspending most product development including must-have models such as the compact Chevrolet Cruze.

The importance of the product development delays can't be overemphasized. The Cruze is the replacement for the Chevrolet Cobalt, one of General Motors' best selling cars, but the Cobalt is destined to suffer as newer competitors come out. The Cruze is already in production in Korea as the Daewoo Lancetti, and GM either was set to receive, or has already received, millions of dollars in incentives from state and local governments to tool up the Lordstown, Ohio facility to build it. In other words, this isn't a low-volume, fringe product that needs billions of dollars in R&D to turn into a product, this is a current product set for production in a current factory where there are already incentives in place to start production, and it's a product that could perhaps outsell every other model in the Chevrolet line-up. Still, General Motors can't come up with the cash to get this thing into production by 2010.

If General Motors is already in such a cash crunch that it can't fund essential projects like the Cruze, one wonders whether it's even too late for a Chapter 11 bankruptcy. As we have seen with Delphi, getting sufficient debtor-in-possession financing to continue business is not easy in this climate. Robert Farago postulates that Chrysler is headed for an imminent Chapter 7 liquidation. Ironically, if it doesn't kill the supplier network, the liquidtion of Chrysler might be GM's last best hope, because it might cement the political will to keep GM alive. (Can you say "Lehman Brothers"?) Without government funding, General Motors' chances of survival look bloody awful. With government funding, GM actually looks to have some pretty good long term potential. GM has supported a $30 billion market cap in the past, if the government put $30 billion into the company, assuming the development delay doesn't slow the new model pipeline unduly, the company could easily be worth that much again. GM has some good models and some world class technology. It just needs to pare down deadweight brands and trim dealers. It's going to take $30 billion though, $10 billion will just delay failure.

Tuesday, October 28, 2008

Barack Obama Stiffs Blogger

According to, Barack Obama's chance of victory is now up to an astounding 96.7%. I guess that's why his campaign has decided that I don't need a yard sign even though I paid for it weeks ago. You'd think that they'd make sure I received my sign because I live in the middle of the only white (totally up for grabs) state of the union, Indiana. Apparently his people have seen my yard.

Friday, October 24, 2008

From the "Dave's not here, man" file:
Oot & Aboot

I'm going to be without a computer through Sunday, it appears. There's a lot of news about Chrysler & GM. Chrysler is laying off 25% of its white collar workforce. There's a boatload of anecdotes about emergency cost-cutting measures at GM. Check in at ( for the latest news and rumors.

Monday, October 20, 2008

test two

test two

Friday, October 17, 2008

Chrysler take over General Motors?

I've been working out a potential hypothetical scenario whereby Chrysler would technically take over General Motors. It would be messy, but it could be done. In my mind, it makes more sense than for GM to acquire Chrysler. More details as I sort them out, or abandon the idea entirely.

Thursday, October 16, 2008


The picture with the last post was not Bob Nardelli, it was the late actor John Vernon. This is Dean Bob.

Maybe it's Dean Bob they want?

Maybe GM's board wants Dean Bob Nardelli to to replace Rick Wagoner as CEO. There's no question that Nardelli has cut expenses with more ruthlessness at Chrysler than Wagoner has at GM. Precedent? Steve Jobs was head of faltering Next Computer when Apple acquired Next. Apple got the Nextstep operating system which became OS-X, and Steve Jobs became a capitalist icon, the only person alive with a reality distortion field. If there's one thing the domestic auto industry could use right now, it's a reality distortion field.
GM - Chrysler Merger

You will be Assimilated

Those not in the know have been scratching their heads trying to figure out any sensible reason for Chrysler and General Motors to merge. It doesn't make sense for GM to take over Chrysler just to get Chrysler's cash, because there's not enough of it. Even if there is $11 billion (and I think it's more like 4 billion), it's not enough to cover Chrysler's unavoidable liabilities, the cost of the merger and the cost of restructuring Chrysler's good bits into GM, at least not in the long term.

The Detroit News has an article today speculating that GM's goal is to dismantle Chrysler, keeping Jeep, much like the way Chrysler took over American Motors 20 odd years ago. This would mean the death of the Dodge and Chrysler brands, the shuttering of most Chrysler plants and the dismantling of the entire dealer base. Such a plan would raise a lot of questions relating to state franchise laws, and there would likely be a lot of litigation. Prior to the dismantling of Chrysler, the combined entity would have even more political power to demand government assistance in various forms. The Detroit News speculates that such a combined entity would be "too big to ignore." If GM got rid of Chrysler cars and trucks, it would eliminate 1.6 million units of capacity, an amount close to the amount of overcapacity in the marketplace.

Not stated in the Detroit News article is another possibility. GM may want to acquire Chrysler to get Chrysler Financial. If GMAC is terminally ill, GM may feel the need to get a captive finance company on an emergency basis.

Wednesday, October 15, 2008

Investment Advice for Today's Markets

Thanks to Wilma T. for the link.

Sunday, October 12, 2008

Wild West in the Pre-Implosion Mortgage Market

There's an excellent Businessweek article titled, They Warned us about the Mortgage Crisis, that describes how the attorneys general tried to warn the Comptroller of the Currency about increasingly risky and prededatory lending pervading the mortgage market. The Comptroller responded by preempting new state anti-predatory lending statutes. Here's a quote:

More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern warning for the nation's top bank regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr., expressed skepticism.

Roy Cooper of North Carolina and Tom Miller of Iowa headed a committee of state officials concerned about new forms of "predatory" lending. They urged Hawke to give states more latitude to limit exorbitant interest rates and fine-print fees. "People out there are struggling with oppressive loans," Cooper recalls saying.

Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn't budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the nascent fight against reckless real estate finance. The OCC "took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West," Cooper says.

Saturday, October 11, 2008

From "The worst they can say is no" file:
News reports of Secret Merger talks, GM/Ford and GM/Chrysler

For my fellow 3357 members heading to Cleveland next week, there certainly has been enough automotive industry news to give us something to talk about.

It seems weird that about the same time GM's stock dropped to within a hair's breadth of worthless that news reports come floating in that GM and Chrysler have had and may still be having merger talks. The kicker is that before the talks with Chrysler, GM also asked Ford to hook up. Apparently Ford only liked GM as a friend.

Thursday rumors started about GM/Chrysler talks. Friday the story was confirmed. Allegedly the talks have been cooled by last week's stock plunge, but the possibility hasn't been ruled out. I struggle to come up with any good reason for GM to acquire Chrysler. GM already has too many brands to service with its current product portfolio, and many of the Chrysler vehicles duplicate what GM already has. (Pickups, SUVs . . .) One possibility is that Chrysler is not quite as bad off cash-wise as GM. If you believe Cerberus, and I don't, Chrysler has lost (on a cash basis) only about $400,000,000 in the past year; about a third of the cash GM has been burning through each month as of late. If true, Chrysler would be sitting on a cash horde of a few, let's say four, billion dollars. Also, if you believe the news reports Cerberus doesn't want cash for Chrysler, just GM's 49% of GMAC. Let's face it, GMAC isn't going to make any money any time soon. GM couldn't be proposing a merger with moribund Chrysler just to get its hands on a paltry 4 billion dollars, could it?

Here's where my personal experience kicks in. Once upon a time, I was hired by a company, but I couldn't start work until it completed its merger with another company. I finally started work, and I was immediately laid off. Apparently each company was looking to the other for much needed cash. Both companies were defunct within 3 months.

If GM does acquire Chrysler, GM will have to, in short order, cancel several vehicle lines, shut down several redundant plants, probably kill at least one line of vehicles (and deal with dealer terminations agreements), renegotiate with the UAW and perhaps more unions, and figure out how to change the acquisition from cash negative to cash positive before GM's cash runs out sometime in 2009.

I can think of only one scenario where acquiring Chrysler makes sense, and that is if GM has a secret deal with Exxon-Mobile or another sugar daddy acquiring company, and if that sugar daddy wants GM to have more market share (and/or more political weight) than GM already has. A company like ExxonMobil can afford not just to buy GM and Chrysler but also to roll-up Delphi and start a new financing subsidiary for good measure. Under ordinary conditions, a company like General Motors would be ripe for the pickings. GM still posts annual revenue of about $160 billion, so its current market cap of $2.77 billion is really chicken feed compared to theoretical future profits. To get to those profits, though, a company buying GM would have to plan to put a few tens of billions to cover short term losses and additional restructuring expenses. Still, GM has made progress on its turn around, it's just running out of money and time. With the worst stock market week in history this week, these aren't normal times.

If there's no sugar daddy in the picture, then the news of the merger talks plus the news of other desperate cash raising measures, such as trying to sell its headquarters by begging, putting its suppliers on 60 day payments and mysterious withholdings from employees' pay may signal that the current credit crunch is squeezing the last lifeblood out of an American institution.

One marginally relevant video coming up.

Thursday, October 09, 2008

From the "Always the Negative Waves, Moriarity" file:
Dow plunges below 9,000, GM off 20% on the day, etc.

The stock market continued its plunge as Hank Paulson continued to do his best "We need more power, Cap'n!" Scotty impression. "I've tried buying all the mortgage securities. I've tried taking an equity position in the banks. I've tried shoving a wiener in the warp drive, but it didn't do a bit of good." The Dow is down below 9,000, off 33% for the year. Retire? pshaw.

General Motors stock is down 30% for the day, to $4.86 per share. What's driving the sale of GM stock? It could be that the SEC lifted the short sale ban on GM stock and this is just pent up negative demand. It could be that Standard & Poors put GM on "Credit Watch" status. It could be that word got out that GM is unilaterally putting non-production creditors on 60 day payment terms rather than previous 35 day term. For some creditors, waiting an extra month for Uncle Jimmy to pay his bill will be more than they can take, especially since the commercial paper market has dried up.

Could things get worse for GM's share price? Absolutely. If GM is dropped from the Dow Jones Industrial Index, and some other indexes, the mutual funds that must carry indexed stocks will be under pressure to dump their holdings.

I think Hank Paulson is the wrong person for the job of Treasury Secretary, we need Oddball from Kelly's Heroes. "No more negative waves -- have a little faith, baby."

Two Blows to Chrysler

I want to mention two items to watch that might have a significant impact on the ability of Chrysler LLC to rebuild itself.

The first is rapid decline of Dollar Thrifty Automotive Group, Inc. In the past year Dollar-Thrifty (DTG) stock has fallen from the mid 30s to about a dollar per share. The Dollar-Thrifty rental car company used to be owned by Chrysler. In its separation from Chrysler, there was an agreement that for a certain period of time, Dollar Thrifty would continue to buy the majority of its cars from Chrysler. Things are tough overall in the rental car industry, but things are even tougher for Dollar-Thrifty. Would you rather be Hertz, who can buy a Toyota Camrys wholesale, rent it for a year, and sell it for 80% of what it paid, or Dollar, which buys a Dodge Avenger wholesale, rents it for a year and sells it for 40% of the purchase price? In the meantime, the Camry is going to have a higher "take" rate. Why? People like Camrys.

In the past few months Chrysler has been posting sales volumes 35-40% below the levels of a year ago. Many of Chrysler's models are completely dependent upon fleet sales. If Dollar-Thrifty goes Chapter 11, Chrysler's subsequent sales losses will be immediately noticeable.

The second significant development is the revelation that the new dual clutch transmission plant that is being built as a joint venture between Getrag and Chrysler is stalled due to a squabble between the partners. Apparently somebody was supposed to bring $300 million to the table to complete the project, and nobody has come up with the dough. It already looks like the original target date for production, 2009, is out of the question. Chrysler desperately needs these transmissions. A dual-clutch transmission gives you the drivability of a conventional automatic with the fuel economy and performance of a manual. For example, a vehicle like the 4-cylinder Dodge Journey which goes 0-60 in almost 12 seconds with its conventional 4-speed automatic, would typically improve to 10 seconds with a dual-clutch trans. Fuel economy would go up a couple mpg as well.

The competition is not sitting still. The 2009 Chevrolet Malibu, Saturn Aura, and Pontiac G6 each receive a new 6-speed automatic transmission for 2009. This new transmission transforms the 4-cylinder versions of these cars from laggards to highly competitive. Highway fuel economy in these GM products goes from 30 to 33 MPG, higher than anything in the Chrysler lineup. Ford is supposed to introduce a similar 6-speed automatic in the Ford Fusion and Mercury Milan in the first half of 2009. The Sebring and the Avenger were uncompetitive in the segment even before the new transmissions in the Ford and GM models, failure to bring a new transmission to the Chrysler midsize entries will marginalize them even further.

Hey, time flies, it's time for a marginally relevant video, my favorite scene from Planes, Trains and Automobiles, AND a bonus for people for people who have too much time on their hands FROM people who have way too much time on their hands, the same scene done in Lego. WARNING - LANGUAGE - Not SAFE FOR WORK

Chances of Obama Win: 90%

There is a 90% chance that Senator Obama will win the presidential election according to the website This website combines the data from various polls and compares the data to models of past performance. I believe we still have three weeks of October, so surprises are to be expected.

Wednesday, October 08, 2008

McCain & Neel
Neel before Zod?

Last night's Town Hall debate between Obama & McCain was mostly an uneventful rehash of the two candidates' stump speeches. I'm always amazed at what the audience takes out of these these debates. One man interviewed switched his allegiance to McCain because he liked McCain's plan to solve the financial crisis by buying the problem mortgage loans. Uh, isn't that why we're spending $700 billion?

Speaking of the $700 billion, there was a story on NPR about assistant treasury secretary Neel Kashkari. Kashkari is the person Hank Paulson is tapping to figure out how to spend our $700 billion. He's a 35 year-old ex-rocket scientist, so apparently that makes him good at everything. As it turns out, Kashkari is the person who came up with the idea of the Hope Now program. The Hope Now program involves voluntary restructuring by creditors. As it turns out, nobody has seen a Hope Now loan except Luna Lovegood. Hence, I call the HopeNow loans "Luna loans". See my blog from February for details. Based on the Luna Loan fiasco, it does not appear that Kashkari understands how securitization and credit default swaps have distorted the market and created a tangled web of conflicting interests.

We don't need a rocket scientist to figure this stuff out, we need a couple hundred good bankruptcy judges with the authority to modify loans and the willingness to get their hands dirty. That's what our lawmakers have so far refused to give us.

Tuesday, October 07, 2008

From the "So Crazy it Just Might Work" file:
ExxonMobil to Buy General Motors? has posted what it calls its "Wild ass rumor of the day". The rumor is that ExxonMobil will buy General Motors. Why would ExxonMobil (or anyone) buy GM? For almost any other buyer, it wouldn't make sense. To complete a turnaround, General Motors will need tens of billions in new capital. Capital is in short supply these days.

Nevertheless, ExxonMobil is sitting on $38 billion in cash and has been buying up its own stock at the rate of $8 billion per quarter. With the recent stock market slide, GM's total market capitalization (the total value of its stock), is only $5 billion. For that price, and for taking on the sugar-daddy role for those economically dependent upon General Motors, Exxon might buy enough political support to defeat any proposed windfall profits tax. Through what it saves on windfall profits taxes alone for a year, Exxon would be guaranteed a net positive return on the investment. In one fell swoop, Exxon's credit would lower GM's cost of borrowing and breath new life into its financing arm.

Yeah, this deal seems ridiculous upon first look, but on second look, it has some real possibilities as a win-win venture.

Friday, October 03, 2008

From the "Here Comes the Boom" File:
Toyota Debuts 0% Financing.

Ever since soft spring auto sales slipped down into the summer doldrums, Toyota has been willing to drift with the auto industry as a whole, with sales dipping, but market share increasing or remaining stable. In September though, Toyota actually lost market share as increasing incentives lured customers to other makes.

Look out - Toyota finally decided to get serious about incentives and is offering 0% financing on most of its vehicles. (Yaris and Prius aren't included.) This could really hurt the Detroit 3. Prior to the Toyota announcement, the members of the Detroit 3 were all looking at base sales levels a third below last year. The financial arms of the Big 3 are facing a shortage of capital, and any money they can borrow is at a double digit interest rate.

This leads me to the Wikipedia Entry of the Day

Coup de grĂ¢ce

Thursday, October 02, 2008

From the "Lowered Expectations" File
Biden and Palin Fight to A Draw

Sarah Palin and Joe Biden each could declare victory in tonight's VP debate. Governor Palin insisted that the McCain-Palin administration would be significantly different than the Bush administration, even though she used the "n-word" (nuculer) repeatedly.

This of course leads me to a marginally relevant video.

Wednesday, October 01, 2008

September Auto Sales (or lack thereof)

The initial figures for United States auto sales for September 2009 are our. Nobody came off well. General Motors came out better than most with sales down only 16%. Ford's total sales were down almost 35%, with SUV sales down 57%. Chrysler's sales were down 37%. Even the Asian brands were not immune from plunging sales. Toyota's sales were down 32%.

Why did GM's sales fall only half as much as Toyota's? Credit GM's employee prices for everyone campaign, for pulling GM's chestnuts out of the fire just like after the 9/11/2001 attacks.

With tight credit and news reports of an impending recession, it is unlikely that industry sales will improve until well into 2009 at the earliest.