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The 10 Worst Assumptions of 2008
Tweet Share on Facebook December 15, 2008 Comment (51)An old military saying has become popular on Wall Street: "Amateurs study the plan. Professionals study the assumptions."
It's too bad that nostrum wasn't in fashion a few years ago, when it seemed as if nothing could go wrong in the go-go economy. An epic housing boom fueled by low interest rates was turning ordinary Joes into real estate magnates, and everybody wanted in. Home equity materialized out of nowhere, helping everyday Americans buy fancy vacations and luxury cars. When Henry Paulson was nominated to be treasury secretary in 2006 and came to Washington for confirmation hearings, nobody even brought up the topic of subprime loans or a housing bust. What, us worry?
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Why AIG Gets Billions, GM Gets Scorn
Tweet Share on Facebook December 12, 2008 Comment (58)Let me see if I’m getting this right: AIG, the huge insurance company, has so far gotten $173 billion worth of federal aid, because traders at one small division made bets on exotic securities that were so calamitous they threatened to bring down the whole company. So far, the amount of money the feds have pledged to this one firm equals nearly one-third of the nation’s defense budget.
General Motors, America’s biggest automaker, has asked for a $10 billion federal loan, equal to one-seventeenth of what AIG has gotten – and Congress has said no. There were no rogue traders at GM, and the company’s problems have intensified in plain view, over several months, instead of coming from out of nowhere in a single, cataclysmic episode.
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How The Smart Money Turned Dumb in 2008
Tweet Share on Facebook December 11, 2008 Comment (26)If you feel like you got sideswiped by the 2008 financial meltdown, you're in good company: Some of the smartest money minds in America got fleeced, too.
With the stock markets down about 40 percent since the start of the year, most investors are feeling pain. Yet this is the kind of environment in which many of the richest money mavens have made fortunes: By making shrewd counterconventional bets; or buying damaged assets others won't touch and finding a way to breathe life back into them; or taking on astounding levels of debt, certain of their own abilities to turn it into profit; and, above all, putting total faith in their moneymaking intuition.
Except for this year. It turns out that the same overwhelming developments that swamped millions of ordinary Americans—an unprecedented housing bust, frozen credit markets, and a reeling economy—knocked the wind out of billionaire investors who should have known better. Here's how a few of America's most fabled financiers went astray in 2008:
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Even With a Bailout, Automakers Would Still Be Running on Fumes
Tweet Share on Facebook December 10, 2008 Comment (14)Call it a starter bailout. And get ready for a second, a third, or even a fourth.
The $15 billion in emergency loans that the White House seems ready to approve for GM and Chrysler would extend their lifeline into the first weeks of the Obama administration. And by putting a "car czar" in place to oversee the companies, the bailout would create a new structure for forcing change in the beleaguered automakers.
But GM and Chrysler would remain very weak and continue to lose ground to the competition. Ford may, too, although it hasn't asked for any emergency cash just yet. Here are some problems that Detroit Bailout I doesn't address:
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Bailout Tally So Far: Twice the Entire U.S. Budget
Tweet Share on Facebook December 9, 2008 Comment (7)Don’t say your government isn’t generous.
It may have gotten hard to follow bankers-aid programs like the term auction facility (TAF) and the primary dealer credit facility (PDCF), but rest assured, your represenatives in Washington are spending a a tidy sum – a gargantuan fortune, actually – to keep the arcane financial system humming. The nonprofit Milken Institute in Los Angeles has added up all of the money the government has spent or pledged to help the ailing economy so far, and come up with a tally of $7,500,000,000,000.
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In Defense of Rick Wagoner
Tweet Share on Facebook December 8, 2008 Comment (35)It’s been a bad year for CEOs, and Rick Wagoner, the head of General Motors, seems poised to join an ignominious crowd: Corporate leaders who have resigned after their firms sought federal help. Key members of Congress have said that Wagoner should step down before GM gets a big chunk of a $15 billion automaker aid package, and incoming President Barack Obama has said that GM’s leadership “has to move on.” It’s hard to imagine Wagoner staying on, in defiance of his new lords in Washington.
But even if he leaves, Wagoner doesn’t fit the mold of the rapacious CEO. Like his Motor City colleagues – Alan Mulally of Ford and Bob Nardelli of Chrysler – Wagoner showed poor judgment by flying a corporate jet when he came to Washington in November to ask for aid. And his insistence that “bankruptcy isn’t an option” for GM has seemed presumptuous – as if the feds are obligated to rescue his company.
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How To Grill a CEO
Tweet Share on Facebook December 5, 2008 Comment (2)Imagine if General Motors CEO Rick Wagoner called up Mary Peters (Secretary of Transportation, for those unfamiliar with the invisible half of the Bush Cabinet) on a Friday evening and said, “Psssttt. We’re in trouble. We need money. Can you help?” And then, a couple of days later, there was a middle-of-the-night announcement detailing billions in bailout funds for the foundering automaker.
That’s effectively what has happened with Citigroup, AIG, and several other huge companies that managed to arrange rapid-fire rescue packages from the government through a weekend’s worth of negotiations. Except instead of the Transportation Secretary, they’ve been dealing directly with Treasury Secretary Hank Paulson, a fellow banker with a CEO’s push-it-through mentality.
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Grading the Automaker Bailout Plans
Tweet Share on Facebook December 4, 2008 Comment (20)Now that's more like it.
After a disastrous performance before Congress in November, execs from General Motors, Ford, and Chrysler have finally offered some meat to members of Congress wondering if the automakers deserve $34 billion in federal aid. All three automakers have submitted plans to the government showing how they would slash costs, build better cars, become profitable, and pay back the taxpayers. Members of Congress will be able to peruse private plans containing proprietary information on operations and competitive strategy, but each automaker also released a public plan outlining its goals. Here's how the plans rate:
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Auto Industry: Who Gains From Detroit’s Pain
Tweet Share on Facebook December 3, 2008 Comment (21)You'd think an automotive apocalypse was nigh. In their pleadings to the government, executives from General Motors, Ford, and Chrysler make it sound as if the entire U.S. auto industry will crash if they don't get billions in aid. But we're forgetting something: Americans will still need to buy cars, even if they don't say GM or Ford or Chrysler on the badge.
Once the recession fades and prosperous times return, in fact, Americans might buy 16 million or 17 million cars per year, a lot more than the 12 million or fewer they'll buy this year. So who will get all that business? Here's some handicapping on who might benefit from the woes in Detroit: -
The 7 Worst Ways to Rescue Detroit
Tweet Share on Facebook December 2, 2008 Comment (32)Commence Kabuki.
With the Detroit automakers in the late stages of supplication, a predictable ritual will now take place. The CEOs of GM, Ford, and Chrysler will do as instructed: travel like common men from Detroit to Washington and present the government with new-and-improved restructuring plans showing that this time, they really are serious about slaughtering sacred cows and right-sizing their businesses. Members of Congress will deliver a few lashings about overpaid CEOs and overentitled union workers. Then, in the end, the feds will pony up at least $25 billion—and maybe $50 billion or more, eventually—to help stave off automotive Armageddon.
There are many routes to a Detroit bailout, however, and some go straight through Follyville. Here's how the feds could mishandle the automaker rescue package:
