The Economy, stupid

[southsider2k5]

My key point...without the Federal government stepping in, it would wind up in chapter 7. The only reason why it is not in chapter 7 is the actions of the government. No one is buying a car from a bankrupt company if they think there's a 10% chance their warranty is going to suddenly vanish because the car company went up in smoke. But if the government guarantees to keep the company running and guarantees the warranties and uses its funds as the bridge loan that the company can't get otherwise right now because of the credit market, then the company has a chance to survive chapter 11.

 

In other words, the only reason those bondholders are getting anything is that the government stepped in. Otherwise, it was going to chapter 7 and its doors would already have been shut.

 

And why would it end up in Chapter 7? Because no sane investment group would touch an automotive company right now because they know what the governmental interference in this industry could mean for their investments. Going off of the steel example, investors know there profitable potential in the US auto industry, but they want no part of the government in their pocketbooks. It isn't a coincidence when the last GDP numbers were broke down, the area that had by far the largest contraction was investment spending, even with a rebound in consumer spending. That is a huge red flag.

[Balta1701]

And why would it end up in Chapter 7? Because no sane investment group would touch an automotive company right now because they know what the governmental interference in this industry could mean for their investments. Going off of the steel example, investors know there profitable potential in the US auto industry, but they want no part of the government in their pocketbooks. It isn't a coincidence when the last GDP numbers were broke down, the area that had by far the largest contraction was investment spending, even with a rebound in consumer spending. That is a huge red flag.

Weren't you the one who insisted to me a few months ago that because the government started investments in sub-prime mortgages it was guaranteed that every investor in the world was going to jump in to an infinite degree?

 

The reason why people aren't investing isn't that they're scared of something the government might do, it's that they're afraid of taking massive losses. Which right now is a pretty darn good bet. If there's money to be made, people are going to find a way to make it, regardless of whether or not the government is involved.

[kapkomet]

Between the mess that Chrysler is in general and the economic conditions right now, I simply disagree, and I'll leave it at that.

You cannot believe everything you read on blogs, my friend. There are deals being made right now where the right opportunities exist, and the government doesn't need to be involved, contrary to everything that's being pushed in the media right now. I guarantee that Chrysler could have easily been absorbed in a reorganization without government help. But that's not how it happened, so we won't ever know, except I do know that there's some serious White House strong arming going on to force a cram down the exact way they want it. That's a fact that cannot be disputed. There are ALWAYS two sides to every story in deals like this.

 

 

[Rex Kickass]

You cannot believe everything you read on blogs, my friend. There are deals being made right now where the right opportunities exist, and the government doesn't need to be involved, contrary to everything that's being pushed in the media right now. I guarantee that Chrysler could have easily been absorbed in a reorganization without government help. But that's not how it happened, so we won't ever know, except I do know that there's some serious White House strong arming going on to force a cram down the exact way they want it. That's a fact that cannot be disputed. There are ALWAYS two sides to every story in deals like this.

 

Isn't that what happened when Daimler spun it off to Cerberus?

 

Chrysler had been looking for a buyer for a year. There was a reason FIAT wouldn't even bother to get involved (and frankly any buyout there would result in a bigger disaster when FIAT implodes in 18 months).

 

Chrysler had been seriously f***ed for years.

[StrangeSox]

It doesn't help that Chryslers cars are all usually in the bottom of their respective classes in terms of value, depreciation, quality, reliability, desirability, etc. At least Ford and GM have improved their model lines lately.

[kapkomet]

Isn't that what happened when Daimler spun it off to Cerberus?

 

Chrysler had been looking for a buyer for a year. There was a reason FIAT wouldn't even bother to get involved (and frankly any buyout there would result in a bigger disaster when FIAT implodes in 18 months).

 

Chrysler had been seriously f***ed for years.

 

 

It doesn't help that Chryslers cars are all usually in the bottom of their respective classes in terms of value, depreciation, quality, reliability, desirability, etc. At least Ford and GM have improved their model lines lately.

Yes, they have been screwed up. And yes, it's true that Chrysler is the bottom of the big three. But they would have not outright liquidated (Chapter 7). And FIAT was not the only suitor... but it's the one the government took.

 

 

[southsider2k5]

Weren't you the one who insisted to me a few months ago that because the government started investments in sub-prime mortgages it was guaranteed that every investor in the world was going to jump in to an infinite degree?

 

The reason why people aren't investing isn't that they're scared of something the government might do, it's that they're afraid of taking massive losses. Which right now is a pretty darn good bet. If there's money to be made, people are going to find a way to make it, regardless of whether or not the government is involved.

 

I did, and it absolutely holds true because the government is f***ing bondholders in the ass in this deal, and others, and trying to give the company to labor instead. They are also afraid instead of having influence in the company, the government is going to throw their weight around and force them into company management decisions that they don't want to make, forcing them into smaller future profits, or even bigger losses.

[NorthSideSox72]

This is so ridiculous. People in here were clamoring for this EXACT thing a while back, when Obama wasn't looking to do it. Now that he is, of course, its stupid.

 

This is undoubtedly the smartest available move here. I have yet to see anyone who can tell us why one of the other available moves would be better overall - because they aren't. Of course the bond holders are getting f***ed - their bonds will be defaulted or called in for a % of par - WELCOME TO INVESTING IN QUESTIONABLE DEBT.

 

Among Obama's first 100 day moves, this is one of his best, assuming he can pull off the plan being laid out.

 

Anyone want to tell me how a full liquidation, which was entirely possible for a company hemorraging that much cash and market share, would be better for the country? How about continuing to pour government money in there to keep it propped up? Or how about letting it go Chapter 11 without Fiat (maybe), without government loan guarantees (definitely), and without pushing the management out? All of those would have been much worse alternatives, or in the last case, wouldn't have even worked anyway (without the government guarantees, Chrysler would not have been able to find financing to exit).

 

 

[Rex Kickass]

Yes, they have been screwed up. And yes, it's true that Chrysler is the bottom of the big three. But they would have not outright liquidated (Chapter 7). And FIAT was not the only suitor... but it's the one the government took.

 

Please name another suitor? The only one I remember hearing about was GM, and that seemed like a brilliant idea!

 

Keeping the company in private hands clearly didn't work, it wasn't going to stay solvent as a stand alone company... so who was gonna take it over?

[kapkomet]

Please name another suitor? The only one I remember hearing about was GM, and that seemed like a brilliant idea!

 

Keeping the company in private hands clearly didn't work, it wasn't going to stay solvent as a stand alone company... so who was gonna take it over?

Why does it have to be someone "public"? There's thousands of private and public companies. I'll just leave it at that. You all want so bad for everything to work just as Obama wants it, because "there's no other way", and I'm telling you that it's simply not true. It amazes me that you all keep saying "this is the only way" and it's not something that has to be that way. I've been in this road in real life, and there's ALWAYS more to the story. Bankruptcy is a damn fickle thing, and I've dealt with it on a couple of levels.

 

NSS, of course the bondholders are getting ripped off, but there is a difference between what is legally theirs in a "normal" CHAPTER 11 bankruptcy proceeding and what the government is forcing down their throat. They are losing at least 20% more then they otherwise would have. This comes back to the "redistribution of wealth" model that we've heard about over and over: and again, I do think that the UAW should get some of the company, but IMO not as much as they are getting - this is a model that "puts wealth back to its rightful owners" in the administration's mind. I'm not complaining about what's happening except to say there's too much of an interest going to the UAW where the bondholders should get more because it was their investments that kept the company going before the government threw their pittance in.

 

With a CHAPTER 7, all this doesn't matter because no one gets anything anyway. And Chapter 7 was pretty unlikely.

[Balta1701]

So, I have to say, I think this is somewhat fascinating...for all I know, Kap could be right, there could have been some hidden buyer out there that the public would never have known about. But as far as I can tell, there is zero evidence for it other than Kap's assertions. It wasn't the government that forced Chrysler to go to the government last December hat in hand begging for money. I seriously doubt they'd have wanted to put up with the spectacle of Congressman Sherman if they had any choice. If there was a legit buyer, the government would have jumped at it. The government gave Chrysler plenty of time to come up with a buyer, and they couldn't do so.

 

If there's this secret cabal of people out there who are willing to take less profit to avoid having government interference, that's kind of scary, but I guess I can't rule it out because it's kinda spooky too.

[Balta1701]

Jesus H. Christ. There's not enough lobbying money in the world to convince me this is a good idea. How in the world do they own the government this completely?

The defeat clears the way for a final vote as early as Friday for the legislation, which has several features that the banking industry has sought. One provision would have the effect of reducing a proposed special premium the banks would owe the Federal Deposit Insurance Corporation later that year by more than 50 percent — a $7.7 billion saving. A second provision would make permanent the temporary increase in deposits guaranteed by the F.D.I.C., to $250,000, from $100,000.

They haven't collected the FDIC insurance fees in a decade. There are right now 3 or so banks being seized by the FDIC every single week. The insurance limit was raised last year, dramatically increasing potential costs to the FDIC. And the banks can still find a way to lobby to avoid the insurance payments.

[NorthSideSox72]

Why does it have to be someone "public"? There's thousands of private and public companies. I'll just leave it at that. You all want so bad for everything to work just as Obama wants it, because "there's no other way", and I'm telling you that it's simply not true. It amazes me that you all keep saying "this is the only way" and it's not something that has to be that way. I've been in this road in real life, and there's ALWAYS more to the story. Bankruptcy is a damn fickle thing, and I've dealt with it on a couple of levels.

 

NSS, of course the bondholders are getting ripped off, but there is a difference between what is legally theirs in a "normal" CHAPTER 11 bankruptcy proceeding and what the government is forcing down their throat. They are losing at least 20% more then they otherwise would have. This comes back to the "redistribution of wealth" model that we've heard about over and over: and again, I do think that the UAW should get some of the company, but IMO not as much as they are getting - this is a model that "puts wealth back to its rightful owners" in the administration's mind. I'm not complaining about what's happening except to say there's too much of an interest going to the UAW where the bondholders should get more because it was their investments that kept the company going before the government threw their pittance in.

 

With a CHAPTER 7, all this doesn't matter because no one gets anything anyway. And Chapter 7 was pretty unlikely.

1. I think Chapter 7, or a 7-like tear-up while failing to exit Chapter 11, was highly likely, if no government guarantees on financing were provided.

 

2. No one can possibly know what portions the bondholders will get in this "controlled" bankruptcy versus a normal Chapter 11 - but either way, they wouldn't get full value. That is the nature of investing in debt.

 

3. I am tired of the UAW's negotiations partially ruining the very industry they work in, so I am ALL about them having to actually run the company. Let's see how they do things when they are in that position.

 

4. STILL, no one has proposed any alternative that ends better, other than to say there may be some other mystery suitors. Sorry, I don't buy it.

 

[kapkomet]

1. I think Chapter 7, or a 7-like tear-up while failing to exit Chapter 11, was highly likely, if no government guarantees on financing were provided.

 

2. No one can possibly know what portions the bondholders will get in this "controlled" bankruptcy versus a normal Chapter 11 - but either way, they wouldn't get full value. That is the nature of investing in debt.

 

3. I am tired of the UAW's negotiations partially ruining the very industry they work in, so I am ALL about them having to actually run the company. Let's see how they do things when they are in that position.

 

4. STILL, no one has proposed any alternative that ends better, other than to say there may be some other mystery suitors. Sorry, I don't buy it.

1. I don't think so. It's not the nature of something like this to just go belly up. And yes, I understand the government propping it. Which means they should get some ownership of it, as much as I don't like it.

 

2. I can know. The secured creditors ALWAYS get more then everyone else in a traditional bankruptcy. They get the highest equity amount in the new company. I don't understand why this is so hard for you people to fathom. The secured bondholders are getting screwed more then any other secured group in the long case history of bankruptcy as a % of debt owed by Chrysler going on. They had something like 40% (I can't remember) and they are getting 5-10%? That does not happen, traditionally. Are they going to get screwed more then the traditional bankruptcy? Yes, and I expect that, but not as much as they are getting shafted here, all for the government/UAW to take a larger cut then should normally happen.

 

3. I have said repeatedly, if you would read what I'm saying, that I agree with you - but I disagree with the amount they are getting. It's too much, IMO, but they CERTAINLY need to have an ownership stake because now they will be accountable. Hallelujah on this point.

 

4. Again, I say I agree with what has happened in principle. I'm not trashing it nearly as much as you want to say I am. However, I will always maintain that there were and are others that could have stepped in. There always are in things like this. But because the government had to back it originally, now they get to say what happens - which I totally disagree with but I understand. In this case, they are forcing a cram down that is contradictory to traditional bankruptcy law. And again, I don't know why you all are getting your panties bunched up by me saying this. It's a fact.

 

 

 

[Balta1701]

Graph of the day:

 

 

[southsider2k5]

So, I have to say, I think this is somewhat fascinating...for all I know, Kap could be right, there could have been some hidden buyer out there that the public would never have known about. But as far as I can tell, there is zero evidence for it other than Kap's assertions. It wasn't the government that forced Chrysler to go to the government last December hat in hand begging for money. I seriously doubt they'd have wanted to put up with the spectacle of Congressman Sherman if they had any choice. If there was a legit buyer, the government would have jumped at it. The government gave Chrysler plenty of time to come up with a buyer, and they couldn't do so.

 

If there's this secret cabal of people out there who are willing to take less profit to avoid having government interference, that's kind of scary, but I guess I can't rule it out because it's kinda spooky too.

 

Secret Cabal? Hell companies are BEGGING to give up TARP funds, and for many companies those have been pure profit. It's happening right in front of our eyes, just like I said it would when GS said they wanted out.

[Balta1701]

Secret Cabal? Hell companies are BEGGING to give up TARP funds, and for many companies those have been pure profit. It's happening right in front of our eyes, just like I said it would when GS said they wanted out.

And you'll notice...none of them have been able to do so despite wanting to do so for months now. Why? Because they can't raise the funds anywhere else! Goldman keeps saying it's going to pay back the money as soon as it can raise more private capital. And they flat out can't do so.

[southsider2k5]

And you'll notice...none of them have been able to do so despite wanting to do so for months now. Why? Because they can't raise the funds anywhere else! Goldman keeps saying it's going to pay back the money as soon as it can raise more private capital. And they flat out can't do so.

 

Because no one wants to be a part of the banks while the government is able to tell them what to do at the drop of a hat. My point exactly.

[Balta1701]

Because no one wants to be a part of the banks while the government is able to tell them what to do at the drop of a hat. My point exactly.

Because no one's dumb enough to be an investor in the banks when they have an idea of what's still coming through in terms of the loans they made. The government could be doing absolutely nothing and you'd have to be a fool to invest in most of these banks. Hell, just go up a few posts and look at the Alt-A reset peak that's still coming.

 

If I had the money I'd so be shorting these guys right now. Even where they still are. Because the only reason why they exist at all right now is the government, and there are at least 3 huge hits still coming in the Alt-A resets, the collapsing commercial real estate market that is just starting to hit right now, and the credit card debacle that is coming.

[southsider2k5]

Because no one's dumb enough to be an investor in the banks when they have an idea of what's still coming through in terms of the loans they made. The government could be doing absolutely nothing and you'd have to be a fool to invest in most of these banks. Hell, just go up a few posts and look at the Alt-A reset peak that's still coming.

 

If I had the money I'd so be shorting these guys right now. Even where they still are. Because the only reason why they exist at all right now is the government, and there are at least 3 huge hits still coming in the Alt-A resets, the collapsing commercial real estate market that is just starting to hit right now, and the credit card debacle that is coming.

 

I'd be shorting the banks, but mostly because of the run that is going to happen on May 7th when the stress test results are announced.

[kapkomet]

I'd be shorting the banks, but mostly because of the run that is going to happen on May 7th when the stress test results are announced.

^^^

 

And there's been some "selective leaking" already of the results. This will bring back the market back to near the lows.

[Balta1701]

^^^

 

And there's been some "selective leaking" already of the results. This will bring back the market back to near the lows.

Wow, all 3 of us agree on something.

[Balta1701]

Interesting things out there in the world of data. If you paid attention to the GDP numbers last quarter, you probably noticed that the stock market jumped when it saw a couple of things, like a decrease in inventories and a slight uptick in certain types of spending. The Markets reacted wonderfully...inventories are going down, that's a great step towards recovery.

 

There's something odd about that data...it happened at the same time as the savings rate went up. So somehow, people were still saving more but yet they were also spending more without making more money and without being able to take on more debt? How do you do that?

 

Turns out, the answer is actually Social Security. Social Security payments took a big shot upwards last year compared to the year before...because of the ridiculously high inflation numbers driven by the gigantic spike in energy prices that ended last year. Thus, the elderly got more money to spend, and they spent it (which is of course exactly what we keep saying about how to target stimulus dollars, but that's another debate).

 

The problem with that increase in spending is...it's unsustainable. Social Security is expected to cut back on outlays for the next 2 years, with virtually no cost of living increase for 2010 or 2011 because of the big spike in 2009 and the possibility of deflation replacing the inflation of last summer.

[NorthSideSox72]

Interesting things out there in the world of data. If you paid attention to the GDP numbers last quarter, you probably noticed that the stock market jumped when it saw a couple of things, like a decrease in inventories and a slight uptick in certain types of spending. The Markets reacted wonderfully...inventories are going down, that's a great step towards recovery.

 

There's something odd about that data...it happened at the same time as the savings rate went up. So somehow, people were still saving more but yet they were also spending more without making more money and without being able to take on more debt? How do you do that?

 

Turns out, the answer is actually Social Security. Social Security payments took a big shot upwards last year compared to the year before...because of the ridiculously high inflation numbers driven by the gigantic spike in energy prices that ended last year. Thus, the elderly got more money to spend, and they spent it (which is of course exactly what we keep saying about how to target stimulus dollars, but that's another debate).

 

The problem with that increase in spending is...it's unsustainable. Social Security is expected to cut back on outlays for the next 2 years, with virtually no cost of living increase for 2010 or 2011 because of the big spike in 2009 and the possibility of deflation replacing the inflation of last summer.

There is another factor you are missing - housing. Prices were still dropping, but home inventories started dropping too in recent months. People are dropping prices and selling their homes. That puts cash in some people's hands, and equity in other people's hands - which creates some cash to spend, for SOME of them. A way, way, way, way more blown up example of this is, as I pointed out on this very board, the 2004-2006 economic boom was unsustainably drive by phantom home equity.

 

[Balta1701]

There is another factor you are missing - housing. Prices were still dropping, but home inventories started dropping too in recent months. People are dropping prices and selling their homes. That puts cash in some people's hands, and equity in other people's hands - which creates some cash to spend, for SOME of them. A way, way, way, way more blown up example of this is, as I pointed out on this very board, the 2004-2006 economic boom was unsustainably drive by phantom home equity.

The sad thing is though, it's going to be another bump that hits soon. It's still people trying to reinflate the bubble. Add together Congress chipping in $8000 with the fact that people are looking at how much housing prices have dropped rather than whether or not the housing prices are actually affordable, and the reason those inventories are dropping is that people are still doing exactly the behavior they were doing at the peak; figuring that the housing prices have to go up from here and they can't possibly drop more so now it's a great investment.

 

The Alt-A resets are just going to hammer this thing. I'd wager that a majority of them are underwater.