Tag Archives: Too big to fail

Dog Bites Man And Govt. Motors Pays Itself

Those headlines would deserve  equal credit as to newsworthiness in a sane world.  But over the last 18 months or so since the current administration took the reins of power such news is heralded as the most wonderous of events.  I watched some of the “ceremony” at GM this morning as they breathlessly announced their repayment of 5.8 billion to the US and Canadian governments as though that was some stupendous achievement.  There was lots of hoopla and all that was lacking was the confetti and balloons.  All that happened in reality was that the government paid itself.  Not one darn bit different than if you wrote a check to yourself out of your checking account and then deposited it right back.

The fact of the matter is that Government, Inc. owns GM.  It is merely paying itself.  The fact that they have been able to make a profit should come as no surprise to anyone with an IQ higher than weeds.  You could take almost any major company from the Standard and Poors 500 that had lots of debt and do the same thing as occurred with GM.  I mean the “new” GM came out of the government mandated Chapter 11 with nothing but assets.  All its debts were left behind with the old GM.  Is it remarkable at all that given that scenario it has made a profit?  The surprise would have been if it made only a small profit. 

Don’t forget that in addition to the 5.8 billion in direct loans during the Chapter 11 that GM had a capital infusion of about 50 billion.  Give me a company with no debt and a fresh 50 billion to play with and I will guarantee you a profit even if I was selling buggy whips.   Also don’t forget that GMAC its partner in crime also got I believe it was over 40 billion in Government funds to continue its financing arrangement.  This was conveniently done under TARP when GMAC during the holidays of ’08 was converted into a “financial” institution with a bank charter from the Feds.  

The power brokers and czars in Washington must think we really have a short attention span or they are contemptuous of our ability to reason.   Speaking of czars, you have surely noticed that Mr. Rattner who lead the government team doing all the negotiating with creditors of GM has run into his own buzz saw of accusations recently.  Really nice to know we had such an honorable fellow carefully selected by the White House to run that show and ram through the Chapter 11 of GM.   This entire situation is another example of the danger of the too big to fail syndrome that has consumed Washington since the fall of ’08.  The financial regulations being proposed by Dodd, of Countrywide fame, does not solve this problem but only exacerbates it.  Please read it for yourself.  The fine print gives authority to bureaucrats appointed and funded by the politicians  the say to determine who is a systemic risk and what should be done.  It allows them to determine who will be paid and how.  Worst of all it allows for unlimited government backing of the credit of a failing company.  If it quacks like a bailout, walks like a bailout, it is a bailout regardless of the headline news and the disclaimers of Dodd.   Geithner defends it so you know it must be a really bad idea. 

Every time you buy a GM car or part you are supporting the gang in Washington.  It is not a private company but a captive of government and in turn the auto unions which were the real raison d’etre behind the bailout of GM in the first place.  I hate it that I can’t support them anymore.  Years ago I loved my Suburban.  Unfortunately they have become part of the problem with our economy and government and not any contribution to the solution or a better path for the country.  The Democrats got themselves even more loyal ground troops for the political wars.  They already had the overwhelming majority anyway but now they have tens of thousands of cadre to send out on the political warpath.  Even better for them every GM car sold is nothing more than a political contribution for the largest political PAC supporting Democratic candidates there ever was.

The great pyramids in Egypt are quite something to behold.  More remarkable is the preciseness of the engineering that was employed with only the most rudimentary of tools. They had no GPS or laser  controlled measuring or surveying devices.  Line of sight, plumb bobs and string and knowledge of basic geometry is what they worked with.  The Great Pyramid near Assuan was about 150 yards high and was about 250 yards wide on each side of its base.  Those blocks weighed a lot.  There were 7 yards long and hand to be man-handled to the top.  Amazingly, the engineers were so good with their limited tools that the mean error of the base line was only 6/10’s of an inch in length and 12 seconds in angle from a perfect square.  I wonder if we could do that well today.   http://www.olcranky.wordpress.com

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Who Picks The Fox That Guards The Henhouse?

The rhetoric is picking up regarding the Financial Regulation reform bill that is currently being promoted in Congress.   I have the feeling that the cow is already out of the barn and that the gang that can’t shoot straight is on another’s fool’s errand or using the financial crisis as an excuse to expand again the powers of Washington.  I have no connection to the big banks or investment bankers and no particular love for them.  But I appreciate logis anytime it can be found and honesty over political hypocrisy.   I must confess that I find it both disheartening  and confusing that the administration would trot out Treasury Sec. Geithner for the talk show the last few days as a cheerleader on the issue. 

He knows too much or knows too little.  Firstly, it is disconcerting to be lectured about prudent business and accounting matters by someone who made a $40,000.00 “mistake” on his personal income tax.   If he can’t understand his own tax return why should we have any confidence that he understands the market operations of CDS’s, CBO’s or any other complicated instrument sold on Wall Street?  That is both a serious question and tongue in cheek–take your pick or choose both.  He was there at the New York Fed when all the problems arose and was up to his neck in the decisions to bailout the major banks.  They did NOT have to be bailed out.  That was a decision made by Government, Inc.  The powers that be decided it was an emergency and they decided that had to be bailed out.  How the heck do we know if they were right? 

It is not as though we don’t have enough regulations and regulators already.  For the banks we have the FDIC, the Comptroller of the Currency, the Fed, the Treasury, OTS.  Plus many of the banks are also subject to supervision by State regulators and all States have supervision of public companies and the securities offered to their residents.  Cuomo has been in the news often as was Spitzer before him in these matters.  In addition to that we have the reporting and disclosure requirements of Sarbanes/Oxley and the SEC supervision.   Lying and not making a required material disclosure regarding actions of public companies and the issuance of securities to the public are fraudulent and have been for decades.  Remedies and punishment for abusers of the financial and market system have been available for many, many years.  Do we really need something new and even more cumbersome?

This new proposal will create that special agency to determine when a concern or bank is a systemic risk and will have the power to shut it down, sometimes after court approval but not always.   Is this new bunch of whiz-bang kids fresh out of graduate school and law school going to magically make us all safe from the vagaries of the market?  Will there just be new turf wars that are notorious in bureaucracies between this group and all the others that will still be in place?  Supposedly, the bill provides that a special fund of 50 billion will be created from new taxes placed on the big banks to fund the wind down of any future failure.  Well, there goes another 50 billion out of the private market place that who knows might have been loaned to create a new company and create new jobs.   But I don’t think the current gang in control in Washington really cares about new jobs unless they are government-dependent jobs.  Secondly, you know human nature.  That special fund will be sitting there like a new toy for those bureaucrats just waiting to try it out.  Doctors like to try their new remedies, lawyers like to try new legal theories, scientists like to try the latest technological advance.  That is things work, you have a “tool’ in place for technocrats to use and you can be assured it will be used.  They want to show off how well they can give it a spin around the block.

We are told that the fund will only be used to “wind down” the villain in the piece.  But check the latitude they have in the wind down.   The language also provides that in an “emergency” that additional sums can be taken from the Treasury to avoid a systemic risk to the financial system.  But who is making this determination that there is an emergency?  No one you and me have any control over.  One man’s emergency might be another man’s passing problem and even no problem at all.   Furthermore, there is no time limit on anything.  Once a company goes into this process what if the bureaucrats let it take 20 years to be resolved.  Don’t laugh.  Many complicated Chapter 11’s last for 5 years.  FERC was supposedly a temporary bureaucracy to deal with the emergency of the oil embargoes of the Carter ’70’s and we still live with it today.  How many years will Government Motors and Chrysler be under the thumb of government control? 

All we need for new regulation is a simple statute that says if a company becomes insolvent that no government funds from any source, direct or indirect, will be used to buy equity in the company or make any loans to it.  We can let the existing agencies go through the liquidation process by Chapter 11 or the bank regulators or insurance regulators.  Just say too big to fail is not  the law of the land and that any company that fails will be dealt with under existing laws–period.  It was the actions of government that created that fallacious notion in the first place.  Restrict that notion and all is well. 

Many traveled throughout most of the known world using “dead reckoning” for navigation.  That is merely making an educated guess about speed,direction  and distance from a last known position.  They used various methods for calculating speed.  Often it was simply watching a floating device as it receded behind the ship.  The stars and Sun were the only steady beacon most of the time. They did pretty well with our GPS when you think about it.  www.olcranky.wordpress.com

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Deja Vu And Topsy-Turvy

Keeping up with some of the financial and environmental issues of the day makes me feel like Rip Van Winkle sometimes.  I wake up and hear the same old concerns with a new spin on them.  All the rage today is the size of our banks.  The big ones are the concern.  They are only a concern because some in government decided they were too big to fail.  That was a governmental decision, not an economic or financial decision that was made by the market place yet the market place (Wall Street) garners all the blame for the problems of today.  If those smart gurus in Washington had taken a poll of the so-called Fat Cats on Wall Street they might have found that a majority of them would have felt just like Main Street and that if those banks made bad decisions they should be allowed to fail and go into receivership and their assets sold off to cover their debts as far as they could.  The shareholders and big wigs with those banks would have been left with nothing which is the way the market is supposed to work.  It rewards success and risk taking and punishes dumb moves and rashness.   It also has always provided for those committing crimes to be convicted of same.  That is nothing new.  Those who commit a fraud have been sent to jail for a couple of centuries now without any help from the SEC or the Treasury.

It is hard to fathom that after eighteen plus months we are still having to discuss the too big to fail problem.  If there is new financial regulation on the horizon it should clearly state that banks that become insolvent in either the equitable sense or the balance sheet sense will be liquidated, period.   All the depositors in those banks will have their FDIC protection like they did throughout this financial crisis and the risk taking operations will be punished along with those who gambled with them including their executives and shareholders.   If those 5 or 6 large banks had been allowed to go under we would already be past that problem and on a better road of recovery.   Government, Inc. bailed them out and then raises hell about doing it and wants to punish everyone associated with the bailout.  Geithner, Bernanke, and Paulson and those in Congress like to be perceived as the heros coming to the rescue of all of us, but they weren’t heroes they were the villains in this play.  The banks were just stupid and maybe even greedy but they would have gotten their comeuppance if left to swing from the gibbet alone.

It is hard to believe but only about 30 years ago the alleged problem was that the US banking system did not have enough big banks.  Don’t take my word for it go back and read some of the financial reporting of the late ’70’s and early ’80’s.  All the big banks then were in Japan and Europe.  Our larger banks were making loans to foreign countries as fast as they could because it was considered such a safe loan with a good return and required my less staff to process the loans. They could make one big loan rather than thousands of smaller loans with a much bigger employee base.   The concern was that the big Japanese and European banks were coming to dominant the American market and the global market because they were the only ones able to finance the big deals occurring around the world.   We were losing market share and influence because we didn’t have enough big banks.  Everyone wanted bigger banks in the US to compete in the global market.  We were like China now.  We were the lenders for much of the world with our bigger banks doling out money to Brazil, Mexico and such.  A number of those big international loans went sour and our banks lost.  A few of our big banks indeed went belly up at the time due to these bad foreign loans.  At the same time the large foreign banks were making inroads in the US economy by lending here and even taking positions in US assets like Rockefeller Center and Peeble Beach.   Just as many worry today about the Greek debt there was a time when we didn’t have that concern for foreign debt for our banks.  After all it was owed by a country and they wouldn’t default, right?   After some of that foreign debt did default and our banks went under there was a hue and cry about the banks being so careless by putting too many of their financial eggs in one basket; they were stupid was the mantra and highly criticized in hind sight.  They were being greedy and not thinking about the needs of Main Street here at home was the headline position of most of the media. 

Well we finally got our really big banks like everyone wanted, even  demanded by some.  Some of us are old enough to remember seeing this movie before.  Only the characters in Washington have changed.

It matters who are the advisors in any administration, at least in the wisdom of the Proverbs–“take away the wicked from the presence of the King, and his throne will be established in righteousness”.  If the wicked are there then perdition is the more likely outcome.  http://www.olcranky.wordpress.com

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