Wednesday, November 19, 2008

AutoMakers Plead For Government Funds as Economic News Worsens

The CEOs of GM, Ford and Chrylser are scheduled to testify for a second day on Capital Hill, this time in front of the House Financial Services Committee after hitting up the Senate for cash yesterday.  I don't have a particularly strong stomach so I only watched bits and pieces of the testimony as the remarkably contrite auto chiefs attempted to make a case for some sort of capital injection.  They repeatedly emphasized that a Chapter 11 filing would be catastrophic and would more than likely push them into Chapter 7 liquidation as consumers fled their brands due to fears that their warranties would not be honored.  Not surprisingly, the Senators bashed the CEOs and accused them of financial mismanagement.  It is hard to stomach, given that this administration that has presided over the grossest financial mismanagement in the history of the free world.  Aside from the billions upon billions that have been thrown at the banking system, let's not forget that AIG just received $150 billion in government money about a week ago.  Why, for the love of god, is okay to grant the giant money-sucking-CDS-selling-insurance-mismanager $150 billion in government funds to prevent systemic risk, but not okay to give the auto-companies a $25 billion injection?  What about Citigroup?  Citigroup, made the front page of the Financial Times today because it is liquidating it's ninth hedge fund due to catastrophic losses.  This is a fund, mind you, that the bank already injected capital into and will wind up costing Citi hundreds of millions of dollars.  The US government had no problem forking over $25 billion to Citigroup so it could bailout its failed hedge funds.  But somehow, because the unions are involved and blue collar workers face the prospects of losing what are viewed as very cushy benefits, it is not as palatable as handing money to an industry that paid out billions in bonuses for years on phantom profits that ultimately caused the collapse of the global economy.  I don't like the UAW either, but seriously, isn't anyone else disgusted by this hypocrisy? 
I definitely don't think our government should've bailed out any of these firms but the systemic risks were viewed as too high and even with government bailouts our economy is tanking, so clearly something had to be done.  The problem is that decisions now need to be made to determine who is big enough and poses enough of a systemic risk to need bailout funds.  Had you asked me a year or two ago if we should bailout the automakers, I would have emphatically said "no."  But I think that the unintended consequences of a Chapter 11 filing right now of the entire US auto industry would be far too catastrophic.  The economy is too fragile, and attempting to settle all of the outstanding debt of the automakers would send the credit markets into a further tailspin.  
Meanwhile, in headline economic news, CPI fell 1% last month mostly due to a plunge in energy prices (good), although food prices rose .3% (not good) and ex food and energy declined .1% (just okay.)  Housing starts plunged to an annual rate of 791,000, the lowest since records began in 1959.  Although economists and the media will focus on the devastating effects of deflation and start comparing the US to Japan in the 90's, I actually think it's positive that builders are slowing down the pace of construction.  Maybe at some point we can finally clear out all of the inventory that is sitting around.  As for paying less at the pump for gas, frankly, I'm a big supporter of that too.  

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