February 27, 2009
Obama the "Gambler": Read, "Speculator"
With yesterday's budget proposal for next year, even the New York Times has labeled Obama a "gambler." Gambling is in: Poker players are on television and romanticized in Westerns. Speculators are out: They caused our economic crisis and are vilified by Oliver Stone. But gamblers are speculators. I prefer another word entirely: Obama is "Confused." He wants a stable housing market but is willing to cut back the interest deduction on mortgages; he wants not for profits to flourish but is willing to cut back on deductions for charitable donations; he wants private investors to get back in the market but is willing to up the tax significantly on the returns on new private investments. He goal of economic recovery is conflicting with his social redistribution goals. Either he is confused or intentionally sacrificing economic recovery for social goals (a deceit). I prefer "confused."
February 26, 2009
GM lost $10B in the last quarter and $31B for the last fiscal year. The $4 B government loan went in and out immediately to pay creditors and salary. The current quarter will be worse, with sales declining further. GM has a deficit of $13B in its pension plan. With a cash reserve of $14B at the end of its fiscal year, this means that the company has probably (given how accounting works) already eaten through its reserve. The company has to be on the verge of not having the cash to met payroll. Any more government loans will go in and out immediately to creditors and workers. RIP GM.
February 25, 2009
TARP II Terms: The New Bank Bailout Program
Treasury today issued the terms for its new Capital Assistance Program (CAP) for handing out TARP funds. There are some very interesting wrinkles. First, the government will purchase funny convertible preferred stock instead of preferred stock and warrants (on common). The conversion ratio is based on a 10% discount from the price of the common stock on Feb. 9th. Second, the preferred pays 9% for seven years rather than 5% for five and 10% for the second five (that some banks received). On the seventh year the government can force redemption of the new convertible preferred. Third, the preferred is convertible into voting common at the option of the issuer (not the holder, the government) with the approval of the government. Previously the warrants were for non-voting common only. Fourth, banks are encouraged to exchange the new convertible preferred for the old TARP preferred. The wrinkles are designed to allow banks to convert preferred into common to aid with TCE ratios (Total Common Equity ratios) that are the rage now for assessing bank health. But to get the issuer conversion flexibility an issuer must sacrifice some short term dividends and give up, potentially, voting stock to the government. Banks that need the more have no choice but to sell the convertible preferred but should hold on to the old non-convertible preferred issued under TARP I unless pressured by the government to exchange it to the new convertible preferred. Then there are the new executive compensation caps that apply retroactively. The stock market rose a bit on the terms and then tanked again after the President appeared on television at about 4:00 to warn of "heavy oversight." This new cash is going to come with plenty of strings. At some point bank boards should think about whether they will get more money to shareholders by voluntarily winding up than accepting government cash and government "oversight." Indeed, the boards have a fiduciary duty to make the calculation and wind the bank up if the calculation favors the process.
Citigroup, of course, is getting a special deal. The government with exchange up to $25B of the old preferred for new convertible preferred (with an 8% rate) if the private shareholders also participate for the same amount. If it works out the government would have potential voting rights on close to 40% of Citigroups common. The offer hit the markets hard as Citigroup shares broke trading volume records and fell close to 40% on the announcement.
Bernanke's Reassurance Scare
To reassure the market that the federal government would not nationalization Bank of American and Citigroup the Chairman of the Federal Reserve said "We do not need majority ownership to work with the banks... We have very strong supervisory oversight. We can work with them now to get whatever's necessary." In other words, "we run the banks without majority control of voting stock." This to me is worse than the reverse, "we need majority control of voting stock to run the banks." Couple this with the front page WSJ story that miscellaneous government officials from four or five departments are running around Citigroup issuing orders and making demands, some contradictory. What a mess; what a scare.
February 23, 2009
Government Into Car Companies Too Deep to Get Out?
The principals in the auto companies are negotiating in light of a government bailout. This makes their negotiations difficult and less than satisfactory; everyone is encourage to hold out. We now find that even if an auto company takes a traditional Chapter 11, we may have the same problem -- the government financing will determine the winners and losers. Even in a Chapter 11 then the private parties will negotiate in anticipation of government funding. In or out of bankruptcy, the government will call the shots -- it has owns the problems.