Van Santos

Wait a second…. was the world asleep when this happened – Canada has offered $3.29 billion in loans to the Canadian subsidiaries of U.S. Automakers.

How much will the automakers obtain from governments around the world in the name of a “bailout”? For those keeping score at home, thus far we have…

$17 Billion from the United States
$3 Billion from Canada 

That’s a nice $20 Billion thrown at a problem that is larger than simply running short of money, it’s bad corporate management.  

Just so that I don’t offend any of my Canadian friends, I have no problem with your Government doing what it sees fit for it’s own interest. My issues are a) the automakers having loans in general and b) what will the the worldwide total “loaned” to Detroit?  

This will end up costing tax payers world wide more money than anyone had ever expected.

Anyone who knows me can easily say I have never been a supporter of U.S. automakers.  For years I have felt their products to be inferior to the majority of their competitors, plus poor business management has created the situation the American Auto Industry is currently in. 

That said, recently my respect for the Ford Motor Company has been building.  

One of the most impressive accomplishments recently was having 16 cars listed with the IIHS as “top safety picks“. While not available in the US, the Ford Fiesta ECOnetic  shows how serious the company is about creating a feet of vehicles that falls into the “fuel efficient” category (65.3 mpg – and for the record, it’s too expensive to import to the US at this point) and now Ford is making it clear the do no need the loan money for survival at this point – it’s a last resort.

Like a decently run company, began to restructure and secured almost 28 B in cash over the last two years. Ford has also cut capacity to match demand and let go of the unnecessary workforce.  The were rightsizing the ship, quick to recognize the F-150 wasn’t going to always be either bread and butter, and started developing smaller cars and hybrid vehicles.  

When did Noah build the ark?  Before the rain.  

It looks as if Ford really put the majority of their heavy lifting in before the market turned south – they had, apparently, started to run like a real company. So, to hear…

I think if they see Ford as a company trying to pull itself up by its own bootstraps, and making it on its own and pulling the right levers, I think that could be a positive for us,” Ford (Bill) 

I have to say fully agree, with the effort and steps taken thus far – it could be a huge positive for Ford.

Surprise, surprise… the “Big Three Bailout” ballooned from $25 Billion to $34 Billion in a matter of weeks, $18 Billion going to General Motors alone.  The remainder will be split between both Ford and Chrysler.

A number of ways I feel as if automotive executives are using fear, preying on the general public’s worry about a “Greater Depression”, when comments like this are made:

“Failing to act now will hurt many American families and undermine our country’s economic recovery, far outweighing the costs related to supporting an industry that touches every district in every state of the nation,” Chrysler said.

“There isn’t a Plan B,” said GM Chief Operating Officer Fritz Henderson. “Absent support, frankly, the company just can’t fund its operations.”

Or what about this…

“We’re on the brink with the U.S. auto manufacturing industry,” Press told The Associated Press in an interview. “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.”

Not only are the executives trying to pander to the emotions of you and I, they are clearly trying to make this a political issue by saying “an industry that touches every district”.  

Really, how many people talk like this?  Do you ever say, “God, the economy is bad.  Every district in the country must be hurting.” 

No, don’t think so.

Let me ask you this.  Why should the American public provide a bailout when the companies cannot run their business?   Ignore the potential impact to the economy, which I do believe would be significant, and strictly look at this from a business perspective.

Sales, year over year, were down 47 percent at Chrysler and a 41 percent decline at General Motors.  It is true that all automakers saw a significant fall in sales, Honda, Toyota, BMW and VW all manage to turn a profit somehow.  There are not begging at the alter of Congress, are they?

We will see political posturing next.  Politicians will say how they don’t like the plan under consideration but that Bankruptcy of one or all three automakers is not an option.  A fuss will be made but the coffers will open, giving the companies more than the revised request of $34 Billion (over the next several months) due to “harder than expected economic conditions” and, in the end, either the U.S. will witness a bankruptcy of one or two manufactures and/or the sale to a competitor based outside of America.

Update: UAW Concessions

This is this first time I’ve seen the UAW talking about giving somthing up to help the industry.  It’s about time someone in the UAW brass wake up to see that without the Big 3 they are gone.

Ron Paul, who at one point was running for the Presidency, has a long history of speaking out on negative government policy before the impact of the policy is felt. Today, he has a commentary on CNN regarding the current financial bail-out:

The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.
It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.

So, what Paul is saying is do not bail-out the companies, rather put an end to the policies that have created an environment that lead to economic turmoil.

In general, I do not agree with everything Paul says.  He has been spot on with past some predictions, but he also has some questionable individuals tied to him which make me - and the general public - less likely to listen to him.

What about this time? Should we be taking his warning?

What the financial markets face today are two ugly monsters, walking hand and hand, causing devastation wherever they seem to go.

First off, the economy is stuck in the middle of a Sub-Prime mortgage crisis. Essentially, banks became greedy and started handing out mortgages and loans to just about anyone who had a pulse, couple this with falling real estates values and there is a disaster waiting to happen.

A large number of the recipients of said loans often had poor credit and little to no money down on the property they purchased. Suddenly, home owners can no longer pay on their mortgage (loss of a job, mortgage rates changed) and the bank is left with property deflated in value and no one to pay on the loan. This means financial institutions are now holding “bad debt” - receivables that can no longer be collected on – which needs to be covered on the company’s balance sheet. When the bank can no longer cover the debt situations like Countrywide, Lehman Brothers or Bear Stearns take place, they go out of business and the remaining assets, or anything of value, are purchased by competitors for pennies on the dollar.

The second crisis facing Wall Street – no, the economy in general – is now a credit crunch.

Due to the risk seen in the mortgage industry, and the bodies on Wall Street, banks and institutions are unwilling to provide, or make it incredible difficult to obtain credit for, individuals or companies.

You want a new car? Maybe you cannot get a loan because your credit is under 700. What about that oil producer? BigOil Co. wants to expand operations but cannot obtain a loan because the cost is too great, there by reducing a competitive advantage. Worse yet, companies that need bridge funding – funding for the short term to fund operations – may be unable to get the cash they need and as a result go out of business.

AIG, one of the largest bond insurers in the World, is being hit by both the sub-prime crisis and the credit crunch.

One of the many products AIG offered was insurance on financial products and what is hurting the company at this point is their insurance of mortgages. When a financial institution had a loan that is considered to be “bad” they file a claim (AIG) in order to recoup their money. While AIG could be able to insure the mortgage portfolio of one institution, say Country Wide for example, it did not have enough money to fund the portfolios of Country Wide, Lehman and Bear Sterns combined. So, what does the company do? Go to the credit market…but that well may be dry due to the credit crunch as described above, leaving the company trying to find a buyer for it’s assets, find funding at a steep price, or going bankrupt.

Note: Constellation Energy fell almost 40% as investors fear banks may pull lines of credit - this is how the credit crunch can impact ALL aspects of the world economy.

The sub-prime crisis triggered the credit crunch. As a result every individual, world wide, is at risk of being impacted in some way – be it large or small. The lack of credit or liquidity has the ability to send economies around the world into recession. If businesses are not spending money, people are not spending money, and economies shrink until the deflation has worked out of the system.

While I understand the government’s reason for stepping in to socialize Fannie Mae and Feddie Mac, I am sure I agree with the decision to do so. The only thing I can assume is the impact on the U.S., and potentially global, economy was so great no other option existed. So, in this political season the question that seems to be asked quite often is “What policy could be put in place to stop this?” Short answer: none.

As much as people do not want to hear it, this is what happens in a free market. Ups and downs occur. The government should not be rescuing companies because of their greed or poor judgment, nor should they be bailing out the “man on the street” that purchased too much home.

The one place government does need to look; however, is their enforcement of financially significant data. A number of the financial institutions with bad debt were unable to tell investors or regulators just how much risk was on their books (i.e. – we don’t know how many of our loans are bad). This lack of visibility in financial information led to the sudden collapse of firms like Bear Sterns and Lehman

Funny thing… I thought SOx was going to fix all of that.

Hang on, the ride is going to be bumpy for some time.

Others Covering:

The Anchoress: Wall Street Woes, Media Meltdown & More
Hot Air: Who’s policies led to the credit crisis
Right Voices: Dodd says he was on top of the financial crisis
Flopping Aces: Democrats rewriting history once more
The Dude’s Blog: Disingenuous Dems Lying About Credit Crisis

Another bank hit the skids today - Silver State Bank in Nevada.

Silver State had 12 branches in Nevada and Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.  As of June 30th, Silver State had $2 billion in assets and $1.7 billion in deposits.  All insured deposits will be assumed by Nevada State Bank and brances will be open on Monday.

Ok, a small bank isn’t too bad but there is news that Fannie Mac and Freddie Mac will be taken over by the government this weekend.  In terms of big business events, this one is HUGE.  According to the article the cost to the tax payer is yet known but you can be 99.999% sure that any share holder equity will be wiped out.  (Translation - the stock will be worthless)

While I would never have been a long term share holder of either company, I think it is highly irresponsible for for Treasury Secretary Henry Paulson to come out and claim there would be no Bail Out of either company. Also, in July, each company said they had plenty of capital to withstand the mortgage meltdown.  Either conditions drastically changed or the companies were lying to investors, as well as the public.

Expect banks to continue to fail over the next several months but, remember, we are not in a banking collapse, we are experiencing a correction.