Monday, March 30, 2009

A Plan For The Automakers

After watching President Obama's ultimatum to the automakers one couldn't help feeling bad for his cabinet. After all, with so many problems coming at them every day, it is natural that they miss a few solutions from the available set. Of course, as a taxpayer, it is in my interest to see the Obama Administration succeed in their attempt to rescue our economy even if a few trillion dollars are wasted along the way.

Thus, it is in the the best spirit of capitalist self-interest that would make Adam Smith proud that I offer the following plan to save our automakers.

The problem seems to be that GM and Chrysler have produced and keep producing more cars than people want to buy at prevailing prices. The automakers are convinced that the problem is psychological and temporary. Thus, the vehicles are really worth a lot more than the market is prepared to pay for them at this time. Our Treasury Secretary, a connoisseur of intrinsic value, agrees with this assessment.

So, for the purpose of this plan, we will designate GM and Chrysler's inventories as "toxic vehicles." Furthermore, since the new cars they produce and fail to sell increase their inventories, new unsold models will also be designated as "toxic vehicles" henceforth known by their new Washington official acronym: "TVs."

Thus, having defined "the problem" as clearing the TVs clogging our vehicle markets, we may proceed to our solution:

1) The US Treasury will pre-qualify suitable partners to buy all TVs currently in inventory including the new vehicles produced (defined as 51% finished) as of 3/31/09. The Treasury, at its sole discretion and without congressional interference may extend this date up to a decade or more if necessary.
2) Suitable partners may include large companies specialized in large purchases of US made vehicles such as the car rental companies and certain hedge funds incorporated specially for this purpose.
3) A special purpose vehicle (in the financial sense, not to be confused with the real vehicles) will be formed for the purchase of the TVs. The Treasury shall fund 50% of the special purpose vehicle (SPV) and the private partner the remainder 50%.
4) In order to encourage private participation, the SPV will be allowed to issue non-recourse debt guaranteed by the FDIC up to 85% of the final value of the leveraged entity or 11.33 times the value of the private partner's contribution.
5) The US Treasury shall make available $30 billion of the TARP still available for this plan which, by the magic of leverage, will make $400 billion available for the purchase of TVs.
6) Should the plan be successful, President Obama will invite Rick Wagoner for a nice chat in the White House such as the one he had with our most successful bankers last Friday.

Needless to say that this model maybe used for any other American industry that runs into a similar inventory indigestion.

Who knows, maybe if Larry Summers had been president of the University of Michigan...

Wednesday, March 25, 2009

How they use the TARP money II

The TARP money, which in case anyone has forgotten is a taxpayer subsidy to the largest banks, was supposed to help recapitalize the banks so that they would lend money.

For people with even a tiny knowledge of accounting, like me, this was never a credible idea. Money, after all, is fungible. In other words, if you give Citi $30B and they lend $30B there is no way to know how much they would have lent without a the subsidy. The Treasury Secretary knows this, but many members of Congress and other lay people do not which is why, on the one hand, they ask the banks to produce nonsensical reports about "how the money is spent", while on the other complain about the fact that they spend money to compensate their employees.

The problem with subsidies in general is that they are treated as "other people's money." People who spend OPM, as we know, are not subject to the same constraints as the rest of us, namely, fear and scarcity.

That is why, as we about to commit another huge amount to save these "essential" institutions in their present form, I think it is interesting to see how much they care about out money.

According to an article in today's NY Post (link below), two of the largest banks we are trying very hard to save from THEIR past risk-seeking behavior have found new interesting ideas for your money which have nothing to do with lending. Why? who knows. Perhaps is an attempt to game the up-coming auctions that are supposed to provide "transparency" to the market.

Perhaps someone should ask Mr. Geithner how come HIS banks have no trouble finding the correct prices when they want to buy these securities with OUR money. In addition, it would be nice to know whether the prices BofA and Citi use when they buy are consistent with those they show on their balance sheets.

Meanwhile, I am scared of the reaction of my fellow taxpayers when they find out as they inevitably will.

Monday, March 23, 2009

Questions for Mr. Geithner from a taxpayer

Dear Mr. Geithner,

I was very pleased to hear that you were finally able to put together a plan to save the large speculative banks. I have heard that these banks are very important and staffed by the best and brightest which is why we, the taxpayers, must make sure they do not go bankrupt. So, given that my family will pay this bill for generations, I thought it would be appropriate to ask a few questions. I assure that, at this point, I am just seeking clarification and that I am not under any illusion that my opinion counts in any of this.

1) Will the pre-approved managers charge the government for the management of its position? If so, will this mean that BlackRock et al will charge 2+20% on the whole amount rather than on the amount they actually raised from their investors?

2) How will these managers get approval? Will anyone check how they have performed over the past couple of years or are we just going to round the usual suspects ala Casablanca?

3) Will there be a vetting process to make sure all of our "partners" have paid their taxes, etc, or are we going to use a lower standard than that required for other positions in your Administration?

4) Will the banks be forced to sell their securities at the auction or will they have a reserve price?

5) If the banks are allowed a reserve price, where will they mark the securities? at the bid? at the reserve price? at the old price?

6) What will you do if you discover that, at the available prices, a large bank has negative tangible equity? will you then force them to accept reality or will they be given a "gimme?"

7) What is the plan to unclog the balance sheet of the banks from the new assets which are still not considered by the bankers as "troubled," like Commercial Real Estate for instance, will there be another one of these when the time comes?

I had planned to ask you about your plan B in case the economy does not recover in 2009 as you have assumed, but I rather be a fan.


Harry Tuttle
American Taxpayer

Monday, March 16, 2009

Who works for us?

Yesterday, as I was about to enjoy my copy of the NYTimes with my breakfast, I came across the news about AIG bonuses. Sure, it said that Geithner himself tried to stop the payments, that Summers was upset, that Liddy found the whole thing "distasteful" but, to no avail, the bonuses would be paid in full.

Then, I came accross the following quote:

“We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he[Liddy] wrote Mr. Geithner on Saturday.

They are the brightest indeed!

How else would you rate someone who manages to get paid millions of dollars after proving beyond reasonable doubt to be either unscrupulous, extremely incompetent, or both.

Wall Street seems to be the only place where bankrupt companies continue to reward their employees for past successes that have resulted in the bankruptcy of the same companies. After all, the contracts negotiated by the AIG employees a year ago assumed that they were doing great deals for AIG, didn't they? How hard would it be to prove negligence when the same deals resulted in the failure of a formerly rated AAA company?

The explanation, hard as it may be, is that these people continue to behave as if the gravy train had not stopped, because it hasn't. For all its promises of change and its protestations about the republican administration, Obama tapped a member of the Greenspan Fed to reform the system. Thus, it is no wonder that we continue to insist in the narrative of Fuld et al being "the best and the brightest."

The sad thing is that as much as we critized the Japanese for not reforming their financial institutions and prolonging the crisis, we seem to be following the same script. At least, in their case, the excuse was that their culture, which promotes communal armony above all, precluded them from nationalizing and liquidating their banks. On the other hand, adding insult to injury in our case, we are simply being taken for a ride by the same people who created the problem.

So, don't blame Wall St. bankers for trying to get paid millions. That is their nature. The fault is with the administration which was supposed to be working for the rest of us.

By the way, I have no position in any financial stock, I am, however, an American taxpayer.