General Motors needs money…lots of it. The fatigued automaker is seeking some $10 billion in cash from the U.S. government to help facilitate a merger with the third largest U.S. automaker Chrysler. The money they seek would be above and beyond the $25 billion in loans already promised to the auto industry to retool their product lines for greener more and marketable product. The merger would put GM in control of Chrysler and would give them an 11% share of the U.S. market surpassing Toyota for control of domestic auto shares.
All good, right? Just what is needed for the crippled auto company to turn around? Well, not exactly. The U.S. auto industry is hurting due in large part to the industry’s reliance on large trucks and SUV’s and a struggling line of smaller, fuel-efficient vehicles that has had trouble competing with their foreign counterparts. With sales down 12.5% this year (Chrysler’s sales down double this figure)and GM alone having lost $18 billion dollars so far , the U.S. automakers desperately need to become more competitive in a rapidly changing automobile market. The problem is it takes time to change and it is becoming clear that the domestic auto makers don’t have the capital to make it through to the next innovation and GM’s next generation of greener vehicles isn’t slated to hit the market until 2010. Keith Naughton of Newsweek suggests this dearth of cash is the real reason GM is seeking this merger. Sure the merger would increase GM’s market share but more importantly it would give GM access to Chrysler’s $11.1 billion dollar cash reserve, possibly enough for GM to hold on until 2010.
But does this mean that the U.S. government should provide the capital to GM allow this merger to go through? The answer in my opinion is no. If GM as a company is insolvent on its own, what assurance can be provided that, with the introduction of another struggling company with a non-complimentary product line, the new company would reap financial gain? This is an especially relevant question when you consider that private investors consulted by GM and Chrysler had little interest in investment in the merger without government backing. If this merger is too risky for private investment, what makes it a good idea for the American taxpayer.
Friday, October 31, 2008
Friday, October 17, 2008
Make Them Pay?...I wish we could
The Emergency Economic Stabilization Act of 2008 was signed into law on October the 3rd in an attempt to shore up failing banking institutions by relieving them of their “toxic debt.” This was the second attempt by Congress to pass a stabilization act after the first failed, in part, due to overwhelming popular opposition. It seems that the average American taxpayer found it unconscionable to spend their tax dollars bailing out private institutions whose poor judgment, greed and often illegal activities led to the problems that they were experiencing. Would this not reward the bad behavior that led to the crisis to begin with? How could banking institutions and their leaders be held accountable when their failed policies aren’t allowed to naturally lead to the institution’s demise? In his article Make Them Pay, which appeared in the Newsweek web edition on Oct.16, Michael Hirsh, Newsweek’s Washington web editor, argues that with the bailout such accountability will be difficult to attain.
It has been generally accepted by economists and lawmakers that the bailout was necessary to instill confidence in the markets and allow the exchange of credit to begin again. Hirsh does not dispute this, in fact he agrees with the Fed chairman’s favorable assessment of the current government’s action when compared to the pitfalls of the late 1920’s and early 1930’s that lead to the Great Depression, stating the “we may have saved ourselves from a devastating downturn because of these moves.” Hirsh does not argue the necessity of the package but instead laments the unintended consequences that such a large government-sponsored rescue plan would entail.
According to Mr. Hirsh, the central obstacle in holding groups accountable for their improper or illegal fiscal activities is that some institutions are simply too big or are too “systemically critical” (to use Chairman Bernanke’s term) to fail. And in an environment of very large banking firms teetering on the brink of failure, the government is hesitant to investigate mortgage and securities fraud for fear that more of these institutions would fail. The concern that fraud would be uncovered in major banking institutions, should they be investigated, is not difficult to imagine given some of the statistics provided by the author. Mr. Hirsh notes that by some estimates up to half of all sub-prime loans that were repackaged as securities were fraudulently created. While Wall Street has no say in the formation of these mortgages, including the terms on which they were created, many on Wall Street did not fully disclose their volatility when they were traded as securities. This deception, the author notes, is tantamount to securities fraud.
According to the author, assigning accountability is made more difficult given the diffusion of responsibility seen in current political policy. For instance, Chairman Bernanke encouraged all nine of the nation’s top banks to sign on to the government’s plan in an effort to prevent “retalia[tion] against the ones that took the government funds, viewing them as weak sisters.” Mr. Hirsh argues that with this action, financially solvent institutions that did not endanger themselves (or their shareholders) with risky investments will experience a guilt by association with other less reputable banks, further complicating the picture of who really is to blame and who should be reprimanded. The author illustrates this point when he describes the chairman of Wells Fargo’s reluctance to “sign [his company’s] freedom (and his compensation) away to the U.S. Treasury” when they did not participate in these reckless investments.
Hopefully with the unlimited resources at the disposal of the governments of the world, this current crisis will not go the way of the Great Depression. The author’s final argument is that all the money that can be thrown at this problem will be a waste if it exonerates and perpetuates the culture and judgments that resulted in this mess. This message will most assuredly resonate with the average American, and if we’re lucky, it will resonate with our lawmakers too.
It has been generally accepted by economists and lawmakers that the bailout was necessary to instill confidence in the markets and allow the exchange of credit to begin again. Hirsh does not dispute this, in fact he agrees with the Fed chairman’s favorable assessment of the current government’s action when compared to the pitfalls of the late 1920’s and early 1930’s that lead to the Great Depression, stating the “we may have saved ourselves from a devastating downturn because of these moves.” Hirsh does not argue the necessity of the package but instead laments the unintended consequences that such a large government-sponsored rescue plan would entail.
According to Mr. Hirsh, the central obstacle in holding groups accountable for their improper or illegal fiscal activities is that some institutions are simply too big or are too “systemically critical” (to use Chairman Bernanke’s term) to fail. And in an environment of very large banking firms teetering on the brink of failure, the government is hesitant to investigate mortgage and securities fraud for fear that more of these institutions would fail. The concern that fraud would be uncovered in major banking institutions, should they be investigated, is not difficult to imagine given some of the statistics provided by the author. Mr. Hirsh notes that by some estimates up to half of all sub-prime loans that were repackaged as securities were fraudulently created. While Wall Street has no say in the formation of these mortgages, including the terms on which they were created, many on Wall Street did not fully disclose their volatility when they were traded as securities. This deception, the author notes, is tantamount to securities fraud.
According to the author, assigning accountability is made more difficult given the diffusion of responsibility seen in current political policy. For instance, Chairman Bernanke encouraged all nine of the nation’s top banks to sign on to the government’s plan in an effort to prevent “retalia[tion] against the ones that took the government funds, viewing them as weak sisters.” Mr. Hirsh argues that with this action, financially solvent institutions that did not endanger themselves (or their shareholders) with risky investments will experience a guilt by association with other less reputable banks, further complicating the picture of who really is to blame and who should be reprimanded. The author illustrates this point when he describes the chairman of Wells Fargo’s reluctance to “sign [his company’s] freedom (and his compensation) away to the U.S. Treasury” when they did not participate in these reckless investments.
Hopefully with the unlimited resources at the disposal of the governments of the world, this current crisis will not go the way of the Great Depression. The author’s final argument is that all the money that can be thrown at this problem will be a waste if it exonerates and perpetuates the culture and judgments that resulted in this mess. This message will most assuredly resonate with the average American, and if we’re lucky, it will resonate with our lawmakers too.
Friday, October 3, 2008
Tell us how you really feel.
The editor of the international edition of Newsweek, Fareed Zakaria, published a scathing editorial disparaging the experience and qualifications of McCain’s vice presidential pick Sarah Palin. In an opening request that is sure to resonate with many liberal and left-leaning moderates(not to mention a few veering to the other side of the road), Zakaria asks if someone won’t “please put Sarah Palin out of her misery?” If that plea leaves any doubt as to where the author stands with regard to senator McCain’s nominee, the rest of Mr. Zakaria’s editorial is sure dispel any lingering misconceptions.
Mr. Zakaria’s commentary was published in Newsweek shortly after Governor Palin appeared in a third interview with CBS’s Katie Couric, an interview in which Governor Palin did…well, let’s just say she did less than stellar. The author argues that Sarah Palin, while a “charismatic politician who has done good things in Alaska”, is completely unqualified for the office of the vice president and should ‘fall on her sword’, so to speak, and resign from the republican ticket. Citing many of the Governor’s responses during this interview as evidence of her lack of political experience and sophistication, and given the challenging climate the country faces, Zakaria argues that it was “fundamentally irresponsible” for John McCain to pick her as his running mate.
In his commentary, I believe Mr. Zakaria states the concerns and beliefs of many political pundits (and many average American as well) that feel hindered, by the perception of sexism, bullying or their general duty to impartiality, to state their dismay for Senator McCain’s pick for running mate. Only time will tell if the American electorate shares the views of Newsweek’s international editor.
Mr. Zakaria’s commentary was published in Newsweek shortly after Governor Palin appeared in a third interview with CBS’s Katie Couric, an interview in which Governor Palin did…well, let’s just say she did less than stellar. The author argues that Sarah Palin, while a “charismatic politician who has done good things in Alaska”, is completely unqualified for the office of the vice president and should ‘fall on her sword’, so to speak, and resign from the republican ticket. Citing many of the Governor’s responses during this interview as evidence of her lack of political experience and sophistication, and given the challenging climate the country faces, Zakaria argues that it was “fundamentally irresponsible” for John McCain to pick her as his running mate.
In his commentary, I believe Mr. Zakaria states the concerns and beliefs of many political pundits (and many average American as well) that feel hindered, by the perception of sexism, bullying or their general duty to impartiality, to state their dismay for Senator McCain’s pick for running mate. Only time will tell if the American electorate shares the views of Newsweek’s international editor.
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