Headline Financial News 12/2/2009

Another relatively slow news day, but here are some highlights:

• GM's CEO Fritz Henderson was given the boot after less than a year, and replaced on an interim basis by Chairman Ed Whitacre. Let's see how much better Mr. Whitacre is at getting US auto sales back up to a 16 million pace.
• The ADP employment report showed companies axing 169,000 jobs in November. This is the smallest drop since July 2008, but, alas, still a negative. All eyes are on Friday's employment report to get a better picture.
• If you are one of those crazy types (yours truly included) that are concerned that the extraordinary amount of monetary easing is going to lead to another bubble, then rest assured, you may not need to be institutionalized after all. The FT reports the return of covenant lite, PIK toggle notes and dividend recaps. Considered by many sane folks to be a preposterous assumption of risk for no upside, the fact that debt investors are willing to throw money at these types of deals again shows that the credit bubble might be back. Mission Accomplished Fed!
• Across the pond, the UK Treasury has taken control of the bonus pool at RBS. Seems like a fair deal considering the fact that the UK Treasury owns a 70% stake. RBS bankers, however, may not be so thrilled.

GM Shows Improvement, Only Loses $1.15 Billion

GM posted a $1.15 billion loss for the shortened third quarter and confirmed plans to accelerate repayments to the US and Canadian governments. The good news is that this loss was better than the $2.5 billion it punted last year. Furthermore, the automaker actually had positive cash flow to the tune of $3.3 billion instead of burning through $6.9 billion, like it did in last year's third quarter. But still, the automaker supposedly shed its burdensome cost structure in bankruptcy, emerged from Chapter 11, benefited from the government's massive cash-for-clunkers subsidy and it still lost money? Sorry, but color me not wildly impressed by this quarter's earnings report.

Nevertheless, an improvement is an improvement, so I'll give GM bonus points for that. Unfortunately, GM lowered its expectations for US auto sales in 2010 to 11 million to 12 million from the 12.5 million forecast in April. It expects global sales to come in between 62 million and 65 million sales. As for the loans that GM is planning to pay back to the US and Canadian governments, it will use other money it received from the government to pay back the borrowing. Just like a ponzi scheme, but it only requires one eager participant.

GM Set to File Chapter 11, Chrysler Set to Exit

In the most predictable event in bankruptcy history, GM is finally filing for Chapter 11 this morning. Uncle Sam will wind up owning a majority of the company with plans to inject another $30 billion in order to keep operations going while the creditors hammer out the details during the bankruptcy process. The US government will receive a 60% stake for its investment, while the Canadian government will inject $9.5 billion in return for a 12% stake. GM plans to eliminate all of its debt, halve its brands, shutter 2600 dealerships (out of 3600) and rewrite its labor contracts with its 56,000 employees. The bankruptcy process is expected to be swift, although complications may arise.

In a nice demonstration of tag-team, Chrysler is scheduled to emerge from bankruptcy as early as today, just one month after its filing. The administration managed to show all the naysayers that a quick bankruptcy for Chrysler was possible. Who knew that a little political jockeying, and the liberal sprinkling of TARP funds among lenders, would convince secured creditors to accept less than unsecured creditors in a bankruptcy? But it seems like the rules are rewritten every day when the government has a hand in the capital markets.

Although the long run consequences of the downsizing of the US auto industry are unknown, there is no doubt that having a streamlined, yet financially viable auto industry is preferable to the bloated uncompetitive mess we had before. The only problem is that the adjustment period is bound to be very difficult for the many whose livelihoods depended on a huge, bloated, inefficient auto industry. It’s not just the dealerships that have been forced to close, or the employees whose compensation and benefits will be slashed, not to mention those who will surely lose their jobs. What about the auto parts makers (some of whom are filing for bankruptcy too?) The advertising industry that relied on copious purchases of air time on TV and radio? Or the local economies that will suffer greatly as factories are shuttered and the tax base is eroded? Sure the easy part, (i.e. drafting the financial plan), might be behind us. But the hard part, that of filling the huge hole in the economy that the slimmer auto industry leaves in its wake, well that part lays ahead. That’s the part that concerns me the most.

GM Bondholders, BAC, C Shareholders – Not Happy With Government

Not surprisingly, GM’s unsecured bondholders weren’t pleased with the offer from the government of 10% equity plus zero cash, particularly since the UAW would wind up with 39% of equity plus 50% cash recovery. Bondholders are preparing a counteroffer, one that perhaps involves meeting everyone in a bankruptcy courtroom.

Meanwhile, in top leaked news, Bank of America and Citigroup may be required to raise more capital according to “people familiar with the situation.” I’ll never understand why people familiar with the situation felt it was wise to leak the news a week before the results of the stress tests were due, but I suspect it may just be someone who has a bone to pick with Ken Lewis, who is already facing a world of hurt from angry shareholders for not informing them in December that Bank of America was about to pay far too much for Merrill Lynch’s pile of garbage. Everyone knew Citi would need more capital, but Bank of America was perhaps tougher call. Both banks will contest the government’s findings, but this could mark the end of the road for Mr. Lewis’s career at B of A. Prepare yourselves for more leaks about other banks’ conditions in the next week. While the government may not want you to think that the need to raise capital is a sign of insolvency, it’s hard to take the news in any other way.

Automaker Update

Ford posted a smaller than expected loss of $1.4 billion in the first quarter and said it doesn’t need more cash in 2009. The car company lost 60 cents a share, significantly less than the $1.23 share loss that analysts were expecting. Ford slowed its cash burn rate down to $3.7 billion from $7.2 billion, as it idled most of its North American assembly plants during the first week of January. The company ended the quarter with a cash hoard of $21.3 billion.

Meanwhile, GM and Chrysler continue to suffer through the steep collapse in demand for new cars. Chrysler is preparing itself for a bankruptcy filing as early as next week, which would allow the company to shed some liabilities and allow Fiat to pick over the carcass of the bankrupt automaker. Apparently, the UAW is on board with the plan and the government would provide crucial DIP financing so operations could continued uninterrupted. Tensions are high between Chrysler’s lenders and the government, as the lenders believe they can receive more in a liquidation than the current deal they are being offered. Chrysler’s lenders are owed $6.9 billion. They are roughly $3 billion apart in negotiations. What’s $3 billion among friends, particularly when the government has thrown multi-billions at the lenders already? Suddenly banks are shrewd negotiators, when two years ago they were tripping over themselves to give everyone with a pulse a no-doc, no-downpayment loan.

Fiat is playing the field and also looking at doing a deal with GM to form some sort of partnership in Europe and Latin America. All of this is in the air, of course, until the Chrysler situation is resolved, which is also very much up in the air. One bankruptcy at a time, please. We’ll get to GM’s bankruptcy in a month or so.

Wagoner Out as Government Forces Change at GM and Chrysler

No more Mr. Nice Guy.  President Obama moved to impose sweeping restructuring measures on GM and Chrysler.  GM's CEO Rick Wagoner will step down and the majority of its directors will be replaced.  The administration's auto task force, after a month of analysis (which surprisingly only took my toddler about five minutes), determined that neither company had put forward viable restructuring plans.  The government said it would provide Chrysler with capital for 30 days, allowing it to come up with a workable plan with Fiat.  If the two reach an agreement, the government would grant another $6 billion.  If not, Chrysler would be allowed to collapse.  Yes, you read that right.  The task force is not taking the hard line with Chrysler's CEO Robert Nardelli, he will not be forced to step down as the administration does not consider him an "auto insider."  Although an executive put in place by the private equity goons at Cerberus Management, where John Snow and Dan Quayle hang their hats, is certainly an insider by anyone else's standards, maybe he's just an insider with the previous administration.  Perhaps the auto task force believes that attempting to lead Chrysler out of this mess is punishment enough for any CEO.  

GM will be granted 60 more days of working capital during which time a revamped board and management must work out a much more rigorous restructuring plan than it submitted last month.  The administration officials said that the companies were burdened by inordinate amounts of debt that would have to be extinguished (again no surprise to my child, as her first words might have been "Ga ga, GM has too much icky debt, goo goo".)  The government will, however, guarantee all warrantees on new cars from either company to keep consumers from fleeing the brands.

This move by Obama's task force is interesting, to say the least.  It would imply that the administration has no interest in supporting zombie institutions anymore.  However, it has yet to take this type of action with the nation's struggling banks.  Is this merely a sign that the government is going to get tougher on the banks after the stress tests?  One can only hope.  Needless to say, the market isn't taking this news very well.  After all, government support is the only thing keeping the market afloat.  When it gets yanked, look out below. 

 

The Good, The Bad and The Ugly

First some reasonably good headline news:

• The ECB cut its interest rates by 50 basis points to 1.5%.  The Bank of England also cut rates to nearly zero and said it will purchase $211 billion in government and corporate bonds.
• Wal-Mart's same-store sales soared by 5.1% last month, besting estimates.  At least consumers are buying something even if it is just bread, milk, bars of gold and guns.
• Jobless claims actually fell by 31,000 to 639,000, although the four-week average rose 2,000 to 641,750.  Continuing claims also slid 14,000 to 5,106,000, which is still very high, but down is better than up.  Brace yourselves for tomorrow's employment report.
• Andrew Cuomo has subpoenaed several Merrill executives who sucked more than $10 million a piece out of the dead carcass before it was handed over to sink Bank of America.  

Some Bad News:

• Barclay's is probably not too thrilled about being asked by Lehman's liquidators to explain what it did with $3.3 billion that was earmarked to pay bonuses and other liabilities when Barclays acquired Lehman's North American investment bank.  Apparently, not all of the money was paid out and the liquidators at Alvarez and Marsal are doing trying their best to recover as much as they can for Lehman's creditors.
• Here's a shocker:  GM's auditors say there is substantial doubt about the automaker's ability to remain a going concern.  
• The difference between the values of loans being carried on the books of our largest banks and the actual fair value of those loans is rather large.  In some cases, if banks were required to mark their loans to market, shareholder's equity would drop below zero.  This gets at the heart of the whole solvency issue of our banks which continues to plague the bank stocks.

And the ugly:

• GE's stock continues its steep decline as the confidence crisis continues.  The credit default swaps on the company's finance arm are trading at highly distressed levels.  Regular readers know that I have been warning about GE's balance sheet since I launched this blog a year ago, in pieces such as "What's Behind the Curtain at GE?" and most recently "Why is GE Still Paying a Dividend?" (not anymore.)  The company relied too much on short-term debt to finance a huge investment portfolio of god knows what (also labeled as "other" on its balance sheet.)  I suppose this kind of accounting used to fly a year ago, but no more.  Investors have woken up, demanded clarity, and want answers.  GE's protestations about everything being peachy are not being met with enthusiasm any longer. 

Citi and Car Makers in the Headlines, Again

So many big problems, so little time.  Although the banking sector is supposedly getting a rigorous stress test, Citi seems to be running out of time and is jumping the gun.  How about bolstering its tangible common equity before the stress test by swapping the government's preferred shares into common stock equal to a 40% stake?  This is the latest rumor floating around and reported in the Financial Times and the Wall Street Journal.  The market seems to like this news, as equity futures reversed a decline last night after the Journal reported the "talks."  Really, I have a better idea though.  What if the government just forked over an additional $10 billion (because really, what's another $10 billion at this point?) and bought 100% of Citigroup?  After all, this is the current market cap of the bank.  So really, why settle for a 40% stake?  It seems as if the administration is attempting to avoid the appearance of out-right nationalization at all cost.  Whether this strategy will work or is just an attempt to keep markets trading until the stress tests are under way on Wednesday, giving the government a little time to think of a better idea, remains to be seen.

Meanwhile, outside advisors to the US Treasury have begun lining up the largest bankruptcy loan ever to the car makers with banks and other lenders.  The financing package would amount to at least $40 billion for GM and Chrysler.  You know, "just in case."  It sort of makes you wonder why Congress didn't bring in the automakers and the bank CEOs at the same time to testify.  Then the awkward conversations before Congress could've been combined into the following snippet: 

Congressman: (to Rick Wagoner)  Why did you fly here on your private jet? You fat cat!

Wagoner:  (with head bowed) Can we borrow $40 billion?

Pandit:  We sold our jet, Mr. Congressman!  And I'm only accepting $1 in pay this year.  Did you hear that?  I'm only getting paid $1.  

Congressman:  Shut up!  You're a fat cat too!  Now since the taxpayers own you, I demand that you lend money!  Lend Lend!  Give the car companies a $40 billion loan.

Pandit:  Yes, of course, absolutely!  Whatever you say.

Congressman:  So then you will do it?

Pandit:  Yes, but there's a small matter of, um.

Congressman: Speak!

Pandit:  Can we borrow $40 billion?

See, wasn't that so much more efficient than the three days of painful testimony we were subjected to?  In any event, every option for the car makers is still on the table, even Chapter 11.  Again, the somewhat amusing part is that government officials are trying to browbeat the biggest banks, whom they accuse of not lending to consumers, aka Citi and JP Morgan, to use their capital to participate in the largest DIP financing of all time.  The government is looking at ways the Treasury could "prime" other banks making DIP loans so the government could be paid back before the private creditors.  Naturally, the banks are crying foul, while GM and Chrysler both insist they can avoid bankruptcy.  Certainly they can avoid bankruptcy, if the they can just get another $24 billion or so from the government.  But this is the last time.  No really, they mean it.  In any event, it should be understandable, given the questions of solvency of our banking and manufacturing sectors, that the market has taken it on the chin lately.  A tidy resolution to the whole mess would be welcome.  But really, that would be asking too much. 

   

    

January Car Sales - Horrible

Just when you thought it couldn't get worse for the auto makers, it did.  According to the Wall Street Journal "Sales by the Big Three US auto makers plunged to the lowest levels in decades."  The level is so demoralizing that the Journal has abandoned its usual effort to find the precise year that car sales were this bad.  So we're left wondering if the "lowest level in a century" is just around the corner, assuming, that the government is willing to keep supporting Detroit.

Chrysler's US sales fell 55% compared to January 2008, while General Motors sales were off 49%.  Ford managed to eek out a mere 40% decline.  These declines were steeper than expected and were blamed on sharply lower purchases by fleet operators as well as the inability of consumers to obtain car loans.  Industrywide, car sales were down 37% to 656,976 from January 2008.  Not only was this the lowest total since December 1981 but it was the first time that US sales were lower than in China.     

GM and Chrysler Get Government Loans

GM and Chrysler will get $13.4 billion in initial loans from the government in exchange for a restructuring.  The automakers will receive an initial $4 billion in February.  The government loans will have priority over other debts and will come due by March 31st if the companies can't demonstrate financial viability by that time.  As is customary with the government bailouts, the deal is vague as "financial viability" is a somewhat nebulous condition during these highly unpredictable economic times.  Fortunately the loans come with some conditions:  The automakers must provide warrants, accept limits in executive pay, give the government access to financial records and not issue dividends.  The automakers must cut their debt by two thirds in an equity exchange, make half of the payments to a union retirement fund in equity, eliminate a program that pays union workers when they don't have work and have union costs and rules competitive with foreign automakers by December 31, 2009.  

The market likes the news, sort of.  Equity markets are marginally higher, indicating that the market was expecting the news.  Wake me up when something exciting happens.    

Automaker Bailout Falls Apart in Senate, Grab Your Helmets

The Senate put the kibosh on the $14 billion temporary bailout of the U.S. auto industry.  Of course, the temporary bailout was merely a stopgap measure to keep the car makers operating until a more permanent bailout solution could be concocted by the new administration.  What held up the bill?  The sticking point was how soon union employees' pay should be adjusted to parity with employees of nonunion workers' at plants operated by foreign automakers in the U.S.  The Republicans wanted to reach parity in 2009 and the Democrats wanted more time because, according to Sen. Dodd, with the economy in recession, he thought it wouldn't be fair to force auto workers to accept wage cuts in 2009.  Apparently, he thinks it's completely reasonable for a bunch of autoworkers to be unemployed during the worst recession this country has seen in decades.  Without government aid, both GM and Chrysler will file for bankruptcy before the end of the year.  Wave goodbye to what remained of the U.S. manufacturing industry because once the companies go into Chapter 11 bankruptcy, it seems unlikely that they will emerge.  Unless the government is willing to provide DIP financing, they're headed straight for Chapter 7 liquidation, which is great news if you're in the market for a cheap manufacturing plant in Michigan.  Bad news if you happen to live in the Midwest, because the economy is likely to head straight into the toilet.  Although I suppose all of those out of work auto employees can just go work for AIG.  Maybe they can line up a $3 million bonus just for showing up for work.  

I'm not placing the blame solely on the Democrats, of course.  The Republicans didn't support the rescue package because of "concerns about government intervention in the marketplace."  You see, according to the Republicans, it's perfectly okay to intervene in the marketplace as long as you are keeping insolvent financial institutions afloat (i.e. AIG, Citi, Mer) and supporting bonuses for Wall Street employees.  Blue collar union employees are a whole different story.  Amazing, yet not surprising, where our legislators decide to draw the line.    

The market, of course, is officially back in panic mode.  Futures are off significantly, as investors understand that the repercussions of a bankruptcy of the Big Three will be spread far and wide.  If you thought we were out of the woods, you were sadly mistaken.  

 

Can it Get Any Worse For Cerberus?

While lawmakers were busy attempting to hammer out a bailout plan for the automakers, somebody looked up, scratched his head, and said "Wait a minute, isn't Chrysler owned by a private equity firm?  Don't we hate those guys for contributing to the credit crisis by piling on debt to cyclical companies, laying off employees under the guise of "efficiency" and then driving them to bankruptcy because they didn't really know what they were doing and it was just a bubble?  Don't we also hate them for paying themselves all kinds of money and getting favorable tax treatment?  Wait a minute!  Didn't they hire John Snow, a guy who was so bad as the Treasury Secretary that he was forced out by the worst President in the history of the US?  More importantly, isn't Dan Quayle on their payroll????!"  Bailing out the public automakers, GM and Ford, that have been shut out of the capital markets is one thing.  But why should the government bailout Chrysler, privately owned by the three-headed dogs at Cerberus?  Don't the dogs have loads of capital that they can inject?  Details of the bailout plan will be forthcoming, but I hope Cerberus is at least required to pony up some cash alongside the government.

In other Cerberus Sucks news, GMAC's application to become a bank holding company was denied due to insufficient capital.  GMAC is attempting to complete an old-crappy-debt-for-new-crappy-debt swap to restructure. Again.  After the last restructuring didn't work.  So far, only 25% of investors are going for it.  Without the debt swap, the company's prospects are not looking so hot.  Apparently, there are only so many financial engineering tricks investors are willing to fall for before they throw in the towel and decide to take their chances in bankruptcy court.  Did Cerberus really think that guarding the gates of hell would be easy? 

Wagoner Pressured to Resign, Thain Looking for Bonus

The front page of the Wall Street Journal rarely crackles with irony as much as today.  Clearly it was a fairly slow news day when two of the top stories revolve around CEOs.  Senator Chris Dodd is calling for Rick Wagoner's head (figuratively) if the government follows through with the billions in loans that GM has requested.  Meanwhile, in a separate, yet somehow completely related story, Merrill's John Thain is tussling with his board over a $10 million bonus, which he claims he deserves.  Mr. Thain believes that he saved the firm from imminent collapse by selling the company to Bank of America.  For this Herculean feat he is asking his (shocked? appalled? incredulous?) board for $10 million in comp.  I still firmly maintain, as I've stated many times before, that selling Merrill to B of A is not what averted the investment bank's collapse.  Sure, it was a shrewd move.  What saved Merrill was billions upon billions of financing from the Federal Reserve through a variety of new and unprecedented lending facilities, in addition to billions in direct capital injections from the Treasury.  Merrill's survival is due to actions by Ben Bernanke and Hank Paulson, not John Thain.  If Merrill's board is going to write a check to anyone, it should be to those two.      

Again, it is interesting that our lawmakers are even hesitating for a moment about helping the auto-industry, given how easily they showered their largesse over the banking system.  Furthermore, it is a bit hard to stomach that the bailouts were handed out to banks without any restrictions on dividends and pay.  The fact that Merrill's CEO is even thinking of asking his board for compensation in these politically charged times is unbelievable.  Even the heads Goldman Sachs, a firm that actually made money this year instead of losing billions like Merrill, gave up compensation.  Mr. Thain is demonstrating that what he lacks in common sense, he more than makes up for in cojones.    

Update:  The Wall Street Journal is reporting that Mr. Thain met with Merrill's board and will be passing on a bonus this year.

AutoMakers Plead For Government Funds: Take Two

Today was a very good day to make a case that the US auto industry needs a government bailout. November car sales were flat-out horrendous.  Even Toyota had a year-over-year decline in sales of 34%.  Ford outperformed the competition with a mere 31% drop.  GM saw sales plunge 41% and Chrysler won the prize for worst sales performance by an automaker with a wrenching decline of 47%.  Overall, the industry sold about 34%, or 400,000 fewer vehicles, in November 2008 than it did a year ago.

Both GM and Ford presented turnaround plans to Congress today.  GM requested a total of $18 billion in federal loans, stressing that it needed an immediate injection of $4 billion to stay afloat until the end of the year.  GM's situation is the most precarious as it will likely be forced into a Chapter 11 bankruptcy filing before Christmas without government funds.  The automaker began discussions with bondholders in an attempt to cut its debt load by $30 billion by swapping debt for equity in GM.  GM will also attempt to restructure obligations to a UAW health-care trust set to begin paying benefits to retirees in 2010.  Nevertheless, the company stated that it didn't have a "Plan B," and was depending on help from Congress.

Ford is in much better shape, primarily due to the fact that it borrowed every penny it could raise in 2006 before the credit markets fell apart.  Ford is only asking for a $9 billion credit line, in the event that the recession is longer and deeper than expected.  Ford estimated that it would return to profitability by 2011 and planned to accelerate the development of new hybrid and batter-powered vehicles.  Of course, with the price of gas plummeting every day due to the commodity rout, by the time the vehicles are completed, everyone is going to want to buy a Hummer again.  Because when you're living underground in a bunker with your canned goods, and your bars of gold (wondering what the hell they're good for) and you have to go out for groceries, it's going to help to have a Hummer handy.  You'll be using the electric car as a toaster.  

Obama Transition Team Considering Bankruptcy "Prepack" for Automakers

President-Elect Barack Obama's transition team is considering a prepackaged bankruptcy for the automakers as a potential solution.  This may be the answer for the beleaguered automakers.  Although many have been calling for a bankruptcy solution for GM, F, and Chrysler, the implications of a potential bankruptcy have been weighing on the markets like a ton of steel.  A Chapter 11 filing during ordinary markets wouldn't necessarily be catastrophic; the airlines seem to do it every couple of years.  The biggest concern about a bankruptcy filing by the automakers right smack in the middle of the credit crisis has been the lack of availability of debtor-in-possession financing.  DIP financing is crucial during a Chapter 11 in that it allows companies to continue to fund operations while working through complicated negotiations with creditors.  GE Capital, the largest provider of DIP financing, recently announced it was exiting the business.  Without access to this type of financing, the probability of a Chapter 11 bankruptcy leading to a liquidation has increased dramatically for any company seeking protection from creditors.  The thought of all three automakers needing a huge amount of this type of financing during a period of such constrained credit is just too much for the markets to bear. 

A prepackaged bankruptcy with the government providing the interim financing is perhaps the ideal solution.  The automakers could restructure all of their burdensome obligations, allowing them to better compete with the foreign automakers.  If a deal was reached with creditors prior to a bankruptcy filing, with the government's financial support, consumers would not shy away from purchasing vehicles from the companies because a clear exit strategy would be in place.    

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.  

GM: Can We Really Be That Bad? Yes We Can!

Ok, so it's true that GM reported a net loss of $2.5 billion or $4.45 per share for the third quarter of 2008.  However, the automaker lost $42.5 billion or $75.12 a share in the third quarter of 2007 so this is a big improvement.  Unfortunately, if you were looking for a silver lining in the largest US automaker's earnings results, that's it, because it only gets worse from there.  On an adjusted basis, GM's net loss was $4.2 billion compared with a net loss from continuing operations of $1.6 billion in the same period a year ago.  Revenues dropped to $37.9 billion, down from $43.7 billion in the year-ago quarter.  For those interested in combing through the details of the various charges, offsets etc, and whatnot, you can find them in the press release here.  The company sums up its situation fairly succinctly in the following paragraph from the press release:

"Even if GM implements the planned operating actions that are substantially within its control, GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business. Looking into the first two quarters of 2009, even with its planned actions, the company's estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing. The success of GM's plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the United States and Western Europe."

To summarize, GM can't stay in business unless:

• Automotive conditions improve SIGNIFICANTLY (the government buys everyone a car.)
• It can sell some assets (to the government)
• It takes more aggressive working capital initiatives (stops paying suppliers)
• Gains access to capital markets (Hello Fed?)
• Or other private sources of funding (Hello Kerkorian?)
• Receives government funding (Hello Pelosi?)
• Or some combination of the above (good luck with that)

Not the sort of news you want to drop on the market on a Friday, but perhaps we'll all wake up Monday morning with yet another government bailout announcement.  Sigh.

BOE, ECB Slash Rates as Economic Conditions Worsen

The Bank of England slashed its benchmark interest rate by 1.5% to 3%. the lowest since 1955.  The European Central Bank lowered its interest rate for the second time in less than a month by 50 basis points to 3.25%.  Here in the US, the fed funds target sits at 1% (for those who have lost track due to all the frenzied slashing.)  Market participants expect the Fed to lower rates even further, with some economists anticipating a Japanese-style zero interest rate environment.  Today's reported 1.1% rise in productivity has been the only positive economic news to hit the tape in some time, although an increase in productivity generally means that companies are cutting labor expenses.  The market is bracing itself for a truly horrendous employment report tomorrow.  Yesterday's ADP employment report showed that companies cut 157,000 jobs in October.  This prompted many economists to revise their estimates higher for the number of jobs lost when the non-farm payroll number is released.  

As if a bad payroll number wasn't enough, GM is also slated to report earnings tomorrow.  Yesterday, a top GM executive claimed that the next 100 days were critical for GM.  With auto sales dropping like a stone and financing scarce, the company is pleading for a government bailout.  Given all of this scary news, investors should expect a horrendous earnings report from the automaker.       

US Equity Futures Perk Up on the Heels of Global Rebound

Optimism about the Fed rate-cut? Renewed confidence that the government interventions are working?  Dead-cat bounce?  Whatever the underlying reason, equity investors around the world decided that stocks are a bargain, for today at least.  The Japanese Nikkei was higher by 6.4%, and Hong Kong soared 14.4%.  European stocks joined the party with sharp rallies across the board.  Germany's DAX jumped an astonishing 8.3% (related in part to a 90% surge in Volkswagen shares due to Porsche's plan to take three-quarter's of Volkswagen's stock.)  Germany aside, the FTSE 100 was 4.6% higher and the French CAC-40 rose 3.2%.  US futures are poised for a rebound.  

GM may receive a $5 billion loan to aid its planned merger with Chrysler.  Ordinarily I would spend at least a paragraph mocking the idea of two huge money-losing companies getting government aid to become one gargantuan money-losing company, but at this point, I am just relieved that they are ONLY receiving $5 billion.  If the government is giving $25 billion to Citigroup, might as well throw the US auto industry a small, but tasty, bone.  The only disheartening aspect of this news is that it indirectly aids the private equity firm Cerberus, who owns part of Chrysler and GMAC.  But at least the private equity guys are finally having to work their butts off to save an investment rather than just borrowing money to pay themselves dividends every few months.  If Cerberus can single-handedly turn the US auto industry around, then they've officially earned all the fees they've been collecting for operating in an easy-credit bull market for the past 15 years. 

Auto Sales, Beige Books and More...

US automakers reported continued declines in sales for the 10th straight month.  August sales dropped 20% for GM, 27% for Ford and a whopping 34% for Chrysler.  GM's results were actually better than expected due to heavy discounting offered yet again to entice potential buyers onto dealers' lots.  I've seen those happy GM employees on television eagerly announcing that GM's employee discount is now available to us all.  I have to give them credit.  None of GM's employees seem bitter about sharing the one and only advantage they derive from living in Detroit and slaving away for a near-bankrupt company.  In any event, the tactic managed to keep GM's numbers from being much worse, like Chrysler's, for example.

In slightly related news, GMAC, the auto and mortgage finance company still partly owned by GM, has announced that it planned to eliminate 5,000 jobs at its Residential Capital mortgage unit and close all 200 GMAC Mortgage retail offices.  The job cuts amount to roughly 60% of its workforce in addition to the closure of all of its retail offices.  It makes me wonder what exactly is left of this business, other than 3,800 employees who no doubt expect their own heads to roll soon.  ResCap claims it will continue offering mortgages directly "where there is a secondary market to sell the loans," assuming they can find that elusive secondary mortgage market.  

Clearly the $60 billion refinancing package crammed down the throats of ResCap's bond investors in June only offered a temporary respite from ResCap's mounting problems.  It was the financial equivalent of a little kid sticking his finger in the dike and hoping for the best.  Only the kid in this case was the private equity firm Cerberus.  And they have several fingers in many dikes, as they also own Chrysler.  Did I mention that Chrysler's sales were down 34% in August?

If you prefer your news to be more macro in style, the Fed released its Beige Book report this afternoon.  The Beige Book gave a rather bleak picture of the economy.  Business across most of the US was "slow," while all districts reported pressure to raise prices because of higher commodity costs.  Certainly commodity prices have dropped significantly in the past couple of weeks, which should alleviate some of those pressures.  But "slow" is never good, particularly when the Fed has little, if any, ammunition it can summon to counteract further declines in economic growth.