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The Speech

So I thought the President overstated the nation's problems a bit:

"America, in the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations. "

What's he talking about here, the economy? Yes, things are bad, but we are not in a Depression, at least not yet. One wonders if it's true--if Obama really does aspire to be the next Lincoln, and is trying to paint a picture of America-in-crisis worthy of a Lincoln-like address. And yet, at the giving of his speech, the nation doesn't face a crisis of the magnitude of Secession. (Unless you want to say that Terrorism is that kind of crisis--which it may very well be, since it just as surely threatens our existence. But of course Obama won't make that argument).

At any rate, good luck to him. If a true crisis ever does occur during his tenure, we at least know he's ready to give a good speech. Hail to the Chief!

Auto Bailout

Can someone explain to me why the government writes a check to these bozos without owning part of the company? The automakers, from the initial reports, have received the best deal from TARP. Better than any bank. The government writes them a check for $13.4 billion with another $4 billion on the way and the instructions are to come back with a viable business plan by March 31, 2009. Are you kidding me? The money could be gone by then. This will lead to the automakers coming back asking for a total of over $50 billion in my opinion. First it started at $25 billion, then it increased to $34 billion a week later, it will easily be over $50 billion in 3 months. How can it not be? This is ridiculous! This is the worst use of the TARP funds yet, and there have been many other poor uses over the past few months.

Illinois Governor Trying to Force Bank of America's Hand

http://www.cnn.com/2008/US/12/08/chicago.labor.protest/index.html

As the linked article states, Gov. Rod Blagojevich of Illinois is trying to force Bank of America to loan a bankrupt company money. He has held a proverbial gun to BofA's head by saying they will not get anymore state of Illinois business. This is ridiculous. It was irresponsible lending that got the banks into this mess. Just because the government has given banks loans does not mean banks should give bankrupt companies loans. If banks do that, the Federal Government (by way of the taxpayer) will be lending them more and more money.

I understand that the layoffs were not handled correctly, but that is the company's fault not Bank of America's. The government should be going after management, not BofA. This is ridiculous.

Oprah - Obama Link

Well it has now surfaced that a close friend to Oprah Winfrey is Harold Simmons. Who is Harold Simmons you ask? He is one of Barack Obama's biggest foes and a huge republican. He was the one behind the swift boat ads that ran against John Kerry and the William Ayers ads that ran against Barack Obama. Mr. Simmons gave millions to both of those campaigns. The one against Kerry was probably more successful than the one against Obama.

Harold Simmons has given $5 million to Oprah's school in Africa, and is her neighbor in California. She referred to the family on her show a couple of weeks ago when she was talking about the California fires.

Another interesting fact that surfaced was that Winfrey, who is a huge Obama supporter, only gave to his primary campaign, not his presidential campaign.

Why am I writing about Oprah's relationship with Harold Simmons? Because people are attacking her for her relationship to Harold Simmons, while she was clearly in the Obama camp. Last time I checked we lived in a free country. Just because Oprah and Harold Simmons do not see eye to eye on political issues, doesn't mean they shouldn't be friends. This is ridiculous to even make a spectacle of this situation. Oprah and Harold Simmons have done nothing wrong (Simmons has had to pay fines in the past because of political contributions, but for the most part he has not broken any laws, and has done great philanthropic work). They've just supported their political views. This is America people. Land of the free.

Citigroup Bailout

From Hugo Dixon:

"First, Citi’s terms are too lenient. The 8% dividend on $20bn of capital the government is injecting in the form of preferred shares is more than the 5% it paid for $25bn of government capital last month. But it is far less than the 12% the UK authorities are charging troubled British banks.

Citi is also giving the state a further $7bn of preferred shares in return for guaranteeing the “bad bank” – which will house a stockpile of troubled assets – and $2.7bn of warrants. The strike price on the warrants is generous to current Citi shareholders – nearly three times the Friday closing price. "

The plan was announced by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

Citigroup (NYSE:C) and the government have targeted a pool of about $306 billion in troubled assets. Citigroup losses from this pool will be capped at $29 billion. The three government agencies would largely take on losses above that from these assets, although Citigroup could still be held responsible for a small portion of them.

The Bulldog's Comments:
It seems to me that the government is basically buying these bad assets. Isn't this what TARP was going to do in the first place instead of putting equity in all of these banks? I know this deal is somewhat a combination of both the old and new TARP, but I think based on the stocks' reaction that the Old TARP plan would have worked better than the new TARP plan. By clearing out the bad assets, it makes the company's balance sheet much healthier. By putting money into the company's, the bad assets do not disappear, they are still there right in front of your eyes. You still have to worry if they go down in value. In this case, even though the assets are staying on Citigroup's balance sheet, investors know that their potential loss is limited to $29B. I am sure the investment community is basically assuming they lost $29B and valuing the company after that loss. The government is on the hook for at least 90% of the loss over $29B.

Bankruptcy or Bust

This past week, Congress delayed a vote until December on whether to give General Motors, Ford, and Chrysler a $25M bailout. However, as much as Speaker Pelosi says the automakers need to be "accountable" and that they need "to submit a viable business plan" to gain government financial assistance, she also says that bankruptcy would be "digging a hole far too deep." Translation: she intends to give the money and the delay is simply political posturing to get the votes.

The U.S. automakers are clearly in big trouble with each company posting losses in the third quarter. GM and Ford each reported losses between $2B and $3B. Yet, somehow Toyota made a profit. Why? Simply put, the Detroit 3 are operating with a business model from the past. Their Union contracts require them to pay their workers an average of $30 more per hour than competitors like Toyota; they have to support 15,710 dealerships across the country compared to 4,000 for their Japanese competitors; they pay enormously for outdated facilities they may never use again; and, they pay billions annually for more than 800,000 retirees' pensions and health care. A bailout will not change any of that.

The only way to assure what Speaker Pelosi calls a "long-term viability of the industry" is not through a Congress oversight committee that reviews the automakers' business plans, but through bankruptcy. That wouldn't mean the end of the world. Rather, it would mean a chance to reorganize the business structure to create a model that is competitive in the global marketplace including against the Japanese competitors. Even though the Union wants the current salary structure, pensions, and retiree health care benefits to remain the same, these companies cannot continue to be viable in that structure and the jobs will continue to go away, and eventually the Union with them. Bankruptcy allows the Union agreement to be ripped up and a new agreement forged as part of a sustainable business model that will then create competitive product offerings and more jobs, and the government can step in to guarantee the pensions and heath care of retirees.

Bankruptcy gives the U.S. automakers a chance to be viable again. Congress and President-elect Obama even have a chance to present a pre-packaged bankruptcy solution, about which there have been rumors. This type of program would provide government financing in the form of a loan if the automakers go into court with a new agreement with and concessions from workers and suppliers that would present a viable and sustainable business model. Such a program is the only way to free the automakers from the poor management decisions, crippling debt and untenable labor contracts and, in its wake, to create a new beginning and a productive, profitable, and sustainable U.S. auto industry that is competitive in the global marketplace and creates jobs for years to come.

Geithner to be Treasury Secretary

Reports from multiple media outlets are that New York Federal Reserve Bank President Timothy Geithner will be nominated to be Obama's Treasury Secretary.

http://online.wsj.com/article/SB122729804822648663.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNjuf7YTw6Ys&refer=home
http://firstread.msnbc.msn.com/archive/2008/11/21/1685124.aspx

Geithner is a a solid pick for the job. He has the experience including his time at Kissinger Associates, earlier assignments at Treasury (in three administrations) and also as head of the New York Fed, and he has personal experience in handling the current crisis as he has been working closely with Hank Paulson.

The first sign that this was a good pick came from the stock market itself, which rallied (+300 points) after the news to cap off a bad week with a positive gain (+494) on the day.

Listen to Geithner in his own words on financial reform and regulation:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vpktqsmzfunA.asf

Gotta Love the Big 3

If you were heading to Washington to beg for money, would you show up in your $40M private plane that costs over $20,000 to fly from Detroit to DC? I probably wouldn't, and I bet a lot of you wouldn't either. Do the CEOs of the Big 3 have no shame? How can you tell Congress you are going to cut costs, and watch your bank account, when 10 minutes ago you took the most cost inefficient route to the meeting. Just unreal.

Citigroup vs. Big 3

Now Citigroup can layoff 10-20% of its workforce basically overnight, so why can't the Big 3 layoff 20% of their workforce overnight (even though they need to layoff at least 30%). Oh, it's because of the unions. I listened to the UAW president (Ron Gettelfinger) speak the other day and he sounded very much like President Elect Obama. When Obama was asked about pork barrel spending during the primaries he said, "It really isn't as big of an issue as people make it out to be because it is such a small part of the budget." Yes this is true, but if you cut 1% of the budget here and there all of a sudden it is balanced. Perhaps if anyone in congress ever ran a business they would understand this (there are actually a few who have run businesses, but not many).

The UAW president talked about how labor costs only make up about 10% of the cost of a car. Now for GM alone if we assume GM sales are about $170B per year, and if they break even, the labor costs are $17B; if they cut costs to be equal to the foreign automakers operating in the US, labor costs would be $8.5B; and if they right-sized the business and reduced headcount by 30%, they would be at $6B in labor costs. Wow, that is a savings of $11B per year! Now if GM had done this over the years they would not need $25B themselves from Congress. This could have been saved in a little over 2 years, but the UAW president tells me I shouldn't worry about union labor costs because it's not the problem. I know it is not the only problem, but it surely is a big problem. GM could probably cut another $4-5B in corporate overhead and now they would be saving $15-16B per year and they wouldn't need a government bailout.