Rick Newman

The financial bailout is on, and so far the government has injected upwards of $150 billion in a variety of banks, not to mention a $120 billion loan for insurance giant AIG and $25 billion for the Detroit automakers.

As for helping distressed homeowners, Washington is still thinking it over.

On the surface, this might seem like the outrage of the century. The huge commitment of $700 billion in taxpayer money is supposed to help taxpayers, after all, and it's hard for many people to understand how adding a bunch of bank stock or insurance-company IOUs to the government's portfolio does that, exactly.

Continue reading »

If Alan Greenspan lived on a flood plain, would he buy insurance?

When the former Federal Reserve chairman testified before Congress recently, he kicked off his remarks by announcing that "we are in the midst of a once-in-a-century credit tsunami." Those once-in-a-century analogies are usually used to explain away something that's so rare you can't possibly be blamed if you fail to prepare for it. Plan for every hundred-year disaster and there's little time or money left to invest in the good life.

Greenspan's shrug-off brought to mind Warren Buffett, who's made news lately by snapping up big chunks of Goldman Sachs and General Electric at depressed prices and by generally being the only living person expressing any optimism at all about stock markets. There's also a new book about Buffett, The Snowball by Alice Schroeder, who spent hundreds of hours talking with the Oracle of Omaha. Buffett is famous for his ability to calculate risk—and avoid it—which is the very thing that banks and consumers catastrophically failed to do over the past couple of years. "He always thinks through what's the worst possible thing that could happen," Schroeder told me during an interview. "What we're seeing now is a lot of people who said, 'This kind of calamity has never happened before, so it probably won't happen to me.' But that doesn't mean the calamity will never happen."

Continue reading »

They used to be known as the Big 3. Then they got much smaller, and GM, Ford, and Chrysler became known as the Detroit 3. Soon they might be the Detroit 2.

The news that General Motors is exploring some kind of merger with Chrysler is a startling turn in an industry where pride, heritage, and protection of your turf have been key parts of the business plan. But in Detroit, clearly these are desperate times. Plunging sales have hit the domestic carmakers much harder than their competitors, largely because of an overreliance on big gas guzzlers that many people can't afford these days. The credit crunch and deepening recession are scaring off even more buyers and leaving the automakers threadbare. If the rocky road persists into 2009—which seems likely—GM and Ford could run short of cash and face the probability of bankruptcy. Chrysler—which is now privately owned and enduring the steepest sales dropoff of all—might already be veering off the road.

Continue reading »

A lot of people who have been hearing about the ubiquitous credit freeze are probably wondering where the heck it is, since their credit card bills and mortgage statements seem to keep coming, unabated. It's even harder to understand how this unseen credit crunch is supposed to bring down the broader economy.

Well, here's one fresh glimpse of how the banking crisis is spreading into the "real economy"—and how the whole spiral is likely to get worse. GMAC, the nation's biggest auto lender, recently said it will lend money only to "prime" borrowers with credit scores of 700 and above. The reasons: rising losses, unstable credit markets, and other factors that essentially mean a lot less money is available for loans.

Continue reading »