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.
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
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?
Thetruthaboutcars.com 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.
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.
Afscme's Webrider's Blog regarding the law, the auto industry, and popular culture, for Local 3357's members. The Webrider is Steve Hofer, staff attorney in the Indianapolis West Office.
