Detroit meets its Benedict Arnold(s)

REVENGE... don't get mad, get even
The Senate Republicans are snorting their own past. Mainlining hate. Yep. Diminished in the election and now limping ducks that they are they are preparing to deal a lethal blow to democrats in Detroit who have been funding national democratic candidates that turned Republicans back to the streets. Forget a woman scorned. Hell hath no fury like a politician turned out of office...or his colleagues.

What goes around comes around
Yes the failure to help Detroit is a lot about politics. The workers there are UAW members and the UAW money has gone nearly 100% to fund democrats. So the good republicans want to say 'Thank' you in their own inimitable way. Only the first word isn't 'thank' the second word is 'you'.

Benedict Shelby
Shelby a former democrat is now the ring-leader of the anti-Detroit republicans. His flag is part Confederate, part Japanese, part German and at least 50% a picture of HIMSELF. Shelby of Alabama has his metaphors mixed calling the financing 'a bridge loan' to nowhere but its for companies that make cars that run on that bridge And these are carmakers that have come a long way. It is the international car market that is under pressure. Why adjust it by making sure bankruptcy occurs in America, senator pea-brain? But Shelby has Japanese and German automakers in his state. He knows which side of his sushi they spread the wasabi on or where to stick sauerbratten.

You helped so I say Fiddle dee dee to you!
A story in the Detroit Free Press (link below) chronicles the help the big three automakers gave to Louisiana when the hurricane devastated it. Now its senator, too, wants to vote against help for Detroit. At least the auto companies did not build plants on flood plain below the water line. I wonder if the PEOPLE of LOUISIANA, knowing the facts, would want to say thank you to Detroit? Is Louisiana's Vitter really doing the people's bidding?
http://www.freep.com/article/20081211/COL06/81211068

Ask not what you can do for your country...
Yes, Alabama's Shelby and Louisiana's Vitter are great senators. Mitch McConnell of Kentucky and Bob Corker of Tennessee are others with Japanese automakers in their state and venom for Detroit in their heart. Alabama is home to plants for Mercedes-Benz, Honda, Hyundai and Toyota. Tennessee is getting a new Volkswagen plant; it is home to Nissan's North American headquarters and other manufacturing facilities. Georgetown, Ky., in McConnell's home state, is the site of Toyota's biggest plant outside Japan. These boys are connected. Corker wants Detroit wages cut back to the level paid in the South as a condition for giving the loan. These are the thoughts and demands and understandings of fine statesmen at work. They really think of the needs of nation when they make policy. Everything for me and mine and nothing for you. Oh you helped me when I was down? Thanks, good bye or give me a plan, a detailed plan...

Sweden, a modern day France
And while America fiddles under this great leadership, Sweden is pouring $3.4blillion (equivalent) into helping Volvo and Saab, its local impacted automakers owned by GM and Ford. Apparently Sweden does not have the same reservations as the US Senate in helping US companies.

What's still very wrong in AMERICA
I will use this once again as an excuse to push for an abolition of the Electoral College. That electoral arrangement is the source of strength for this fully corrupted two-party system. The system is ruining America. Shelby is a modern-day economic Benedict Arnold. Shelby, a former democrat turned republican, and with his own auto plants in his backyard to support, wants to punish and degrade the democrats in Michigan. Who needs competition from YOU Detroit? Shelby is a poster child for what's wrong with American politics.

Now the Fed wants credit not just to extend it

TOPIC: Fed issuing its own debt…


It’s kind of like my young daughter getting ‘her own’ credit card…
her credit card helps me, yes, and she is responsible but it's a black hole in my debt outstanding...

Conclusion preview: I don’t like it.

Issues:
Apart from the issues mentioned in the WSJ article I wonder what would happen if the Fed issued debt and it began to trade at an increasing spread to treasury paper? Do we really want the market to put an additional risk rating on our central bank? This is a VERY BAD idea. Better for the Fed to ‘live off of’ the treasury’s own debt rating than to slot a new one into the mix – especially given what is going on with ITS balance sheet lately. Once bond ratings go south they go south fast.


Risks
Does the Fed really want private sector analysts looking at its balance sheet and assessing the value of its bonds and other assets? Or does the Fed assume 100% backing by treasury to keep its rate equal to that of T-bonds and notes?


Its not nice to fool CONGRESS...
If so, the move is a literal end-run around the debt ceiling. Congress WOULD NOT LIKE THAT. The debt ceiling is crap but it is law and Congress uses it for its owe (tawdry) political purposes. Congress would not want the Fed to circumvent it.


Possible or just fantasy?
A second order of business is does the Fed have the authority? Whatever the answer to this question – I do not like the prospect.


Other steps could work better
I Agree with Wrightson’s Crandall (see WSJ story) that the Fed would do better to stimulate the economy using vehicles that essentially dis -intermediate if banks continue to refuse to lend.


CONCLUSION:
I do not like this at all



Seuss Meets Joyce to make a point…



I do not like it
Ben I don’t
I do not like it
… and I won’t


I do not like it on a boat
I do not like your bonds to float

I do not like it no not me
Not bond issues or equity

I do not like the Fed to leverage
Private sectors’ bloody hemorrhage

I do not like it here or there
I do not like it anywhere

Only God can make a tree
And debt was meant for Treasury


ONLY!

STORY:

Fed Weighs Debt Sales of Its Own
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
See link below for full WSJ story…

http://online.wsj.com/article/SB122888021757894023.html?mod=testMod

The age of ethical lapses

Democrats, you gotta love 'em. No, this is not an anti Democrat tirade. But what has happened in Illinois is just too much to let sit...

What you will read below is about the stinkers on both sides of the aisle...and the pot calling the kettle black. It's about the total demise of our two-party system. Because in the end it's just one great big immoral party, isn't it? Pay me! pay me! I want to be RICH! Pay me! Pay me!

Both Sides Now
We are not here because of republican errors there were errors on both sides of the aisle...
This is an attempt to provide balanced coverage after the way democrats blamed every conceivable ill on the republicans in the last election. One thing I will never forgive Obama for is not running against McCain. Instead he said McCain is just like George Bush. But nothing could be farther from the truth. Whatever statistical exercise produced McCain as agreeing with the President 80% of the time it surely misrepresented many other aspects of the man. McCain is and was a War Hero and man who has served MANY YEARS in the Senate with distinction and few embarrassments (the Keating 5 episode being the notable exception, such as it was). McCain would not have done what George Bush did. After-the-fact support of his policies is different from making the decision yourself. Obama knows better but his willingness to play it that way makes me more skeptical of him. He has not yet opted for the high ground, despite his love of soaring rhetoric.

Oversight or an oversight?
Moreover, democrats have headed the key House and Senate 'banking' committees over the past four years. They have had the platform and ability to oversee the financial markets (as overseers of the overseers). They did not do well. And democrats have been defenders of Fannie Mae when republicans had sought to reign it in. Fannie Mae got huge and had its accounting irregularities emerge under Franklin Raines' rule; he was a Clinton appointee, not a republican protege.

For sale, for sale Oops- off the market
But most interesting and proof of my point that the two parties are not different from one-another is the report that is running as a headline everywhere: that the Governor of the great state of Illinois was trying to SELL the senate seat vacated by Obama when he quit to prepare to become the President of the United Sates of America. Sell it. Yo Senate seat for sale. Yo, check it out on eBay...real Senate seat.

Love for sale...or a Senate seat
To the governor goes the ability to appoint a successor when a senator leaves in the middle of his term and this governor decided that it was a plumb assignment that he could squeeze some juice out of. Isn't that special? While you can hate republicans if you want for whatever your special reason may be, there is no scope for condoning this act by a democrat. The FBI stepped right in and arrested him. This really stinks and in the Land of Lincoln, to boot- its like sacrilege. This certiainly one-ups the NY State governor's ouster for his use of a private call girl. Elliot Spitzer, ousted, from his job in NY, has had no charges filed against him. He was embarrassed and threatened with charges but in the end he was just forced out of office by the public revelation of his tawdry act. Who was behind that? Ever wonder? And what of Stevens, Senator in Alaska? Mr Stevens, 84, is the longest-serving Republican senator in history and officially the highest-ranking senator. But he was found guilty on seven federal felony charges for failing to properly report gifts worth more than $250,000. What was that about? The party doesn't matter. The nuttiness does. Spitzer may be a victim. but the others are real problems. And Spitzer is no example of what a leader should be or how he should act - even if he tried to keep it 'private.'

The age of ethical lapses
So when you look up and down Wall Street at everything that has happened -- are you surprised? Bailout funds went into AIG and one of management's first acts was to payout early deferred compensation to protect management's own funds in the event of bankruptcy. Unlike pensions and 401Ks, deferred comp is at risk in a bankruptcy were that to occur. AIG's top guys thought of themselves first, after everything they have done. AIG is under the gun again for paying 'retention monies' to key staffers and some in Congress wonder if it isn't just a bonus in disguise. Hard to imagine that these AIG guys are in strong demand given what they have done and given the state of The Street... But this last week distinguished itself with two more acts of selfishness. John Thain, once a hero for saving Merrill Lynch by proposing a combination with Bank of America, despoiled his own legacy by asking for a $10million bonus. That request, of course, comes in a year so bad the company sold itself looking for safety. John Mack of Morgan Stanley publicly refused to take a bonus. That was one of the nails in the coffin for Thain's request/suggestion. Thain later 'pulled' the 'request or 'proposal' himself. But the damage was done. Mack said a bonus would look bad...

A bonus would LOOK BAD??? What's the POINT of a bonus anyway?
Mack said it would look bad to take a bonus in such times and he is right. But that in and of itself it is a strange remark. Look bad? Duh? Sure it would look bad. But it would also BE WRONG! You ran a firm into the ground and so it would look bad? Wall Street CEOS did nothing to earn bonuses last year- that's the point, Mr Mack. It's not that it would 'look bad' but that it would be WRONG. Wall Street has clearly lost its ethical moorings. Compensation is out of control. And no one seems to know what you pay people or why. Pay is apparently a birthright or a right of office, regardless of performance. In the case of Thain, he actually had been given a 'bonus' payment on the way in, largely because Merrill wanted him and knew that it might take a while to right the ship. He was the highest paid Wall Street exec in 2007... So he wanted 'another $10mln in 2008. Some hero.

Did Robin Hood skim when he took from the rich to give to the poor?

Leader of the pack or just a bunch of overpaid followers?
Where will our ethical leaders come from? With all this Federal money getting into banks the bankers still seem to think they continue to deserve big pay days. I don't see why. They did not avoid the financial mess. They did not do anything different from anyone else. So they have showed no management skill what-so-ever yet they want to be paid as if they saw it coming and ducked. In truth they did not see it coming and were loaded to the gills, like everyone else, with all the wrong stuff. They drank their own Kool-aid. Do we really give bonuses for that? In the movie 'All that Jazz' the character played by Roy Schieder says 'Don't bullshit a bullshitter'. I think that applies here, don't you?

Bridge to nowhere meets road to nowhere

Bridge to nowhere? The road to nowhere is in ethics...

Where the bridge goes depends on how you build it.

Just loaning money to the automakers is the dumbest thing to do.

Henry Ford once said you can have any color car you want as long as it's black. Congress has changed the color to Green. The problem is that so-called 'green' cars are not sold for a profit these days. So it's a curious mandate from Congress to a money-losing industry Congress is trying to 'help'. Thanks for nothin'.

Overall mileage standards (CAFE?) need to be imposed and kept. Congress needs to use the threat of bankruptcy to get the change that can only be had in bankruptcy. GM needs to have a number of it contracts modified- only bankruptcy can do that or negotiation if bankruptcy is really feared. To date auto execs have not had the leverage to deal with their dealers or the UAW.

Just as only a die-hard anti-commie like Nixon could 'open China' maybe only democrats can play hardball with the UAW.

The problem is less of GM and the auto companies than that of it laboring under the old industrial rules. Free trade has undermined their post-war model. Unions, once the champions of improved living standards and with vision of global union alliances have been broken by more-or-less free trade. Only the Teamsters and AFSME (municipal workers union) really have power. Truck drivers have unique monopoly power as do longshoreman. Autoworkers do not - trade undermines it and the right to work shops in the South do too. So when counterparties won't negotiate why do we blame management?

Congress needs to take a step up the learning curve and become a bit more sophisticated. The auto execs are not poster boys for the 'save my industry foundation,' that's true. But they have been laboring under constraints and the legal system and collective bargaining agreements have had them hamstrung. Those are the tables that need to be turned as much as the execs need to be lectured.

But the problem is not just in autos... If this were China we could send those 'lost' CEOs to re-education camps. But we don't do that. Nonetheless you see the actions of the execs at AIG: they got money and immediately paid off early their deferred compensation TO THEIR EXECUTIVES - making sure those monies were not at risk to any bankruptcy proceeding that might arise. Now AIG wants up to 1/2 million dollars in retention bonuses for key staff not a pool of $500Gs, $500Gs apiece for 'key staff'. Why? Where would they go? Moreover, how good are they if they lost so much money? Where is the humility among people who have failed so badly?

The road to nowhere is in ethics. These are not the kind of captains that would go down with their ship. They'd be the first in the life boats. They would not lead the charge up the hill into hostile enemy fire. I blame business schools. It's as if each one has come up with a new theory explaining why the captains of industry should paid like Kings. Why? They are only managers. When Times are bad they reveal their true selves to us... they can't take the blame because they don't see how they did anything wrong. Everybody did it, they say. So if they did what everyone else did, what were they getting the BIG BUCKS for? Playing follow the leader?

What a joke. Automakers, bankers, insurance - industries for morons not for the sophisticates as we thought. Of the three the autos guys actually have done the better job. But because its the only industry anyone in Congress can come close to understanding it is the one where the executives are being hounded in public. Sweet, eh?

Those Congressmen and Congresswomen. Those are our boys/girls. Kind of makes you proud? No? Kind of makes you want to toss your cookies.

Sometimes the devil is in the headlines...

..and the angels hide in the details

Jobs? What are jobs?
It's not exactly like remembering where you were the day the 9/11 attacks occurred or on Pearl Harbor day but to economists the Friday massacre will be remembered. There is a good lesson here about data revision out of the BLUE. We now have three months of job losses at -403K, -320K and at -533K. Who would have forecast -500K jobs on Friday without the revisions in hand? Houdini? or maybe Gary Schilling.

Got Jobs?
Job losses in this recession at the 12month mark are now greater than in any recession since 1960. Even the proportionate drop in jobs is severe. The proportionate drop in the services sector is also a record. MFG jobs have held up better that in most recessions (all but one) but that series is now taking a serious dive lower. The slope is slippery and we are on it. No telling how long this lasts...


The SILVER LINING
It is said that every cloud has a silver lining. But I guess whoever said that never heard of thermonuclear warfare. Fortunately this was only a jobs report. Its silver lining is essentially clarity. The economy is now in recession, it look like it's in recession, and the NBER says it is in recession. So we can now compare it to past recessions. That does not mean that we are limited to that experience, but that we can learn from it. The past long post-war recessions in 1973 and 1981 last 16-months. This one is already 13 months (12 months of job data). That does not mean it can only last three months more, but it suggests that maybe since it is already long there is not that much of it left. The severity of the jobs losses suggests that too. And the good news is that STOCKS tend to rise before the recession ends. Stocks often rise in the midst of the gloom - out of the ashes of pessimism, and in the face of horrific corporate earnings. Does this description of reality sound familiar? That's the silver lining.

SEVERE job losses - a good sign?
The jobs numbers are seriously negative. Indeed this THREE MONTH stretch of job losses is the worst in absolute terms except for two of the three the final months of the extremely severe 1973-75 recession. But as a percentage of job levels at the start of the recession this three month stretch ranks as the THIRD WORST since 1960 - still bad enough. The job losses at the end of the 1973 recession were worse in proportionate terms and so were those at the very end of the 198o recessionette. But in three month loss terms 2007-2008 at its worst is still worse that the worst of 1981-82. What is interesting that the worst of the job losses tends to come at or near the ends of recessions not at the start or at the middle. Of course since this one is not over we can't yet call these the worst losses of the recession. But episodes of losses this severe have not persisted for long in past recessions. So we have some reason either to be very happy or very disturbed with this recent news. Stocks have chosen to take heart, pushing aside the bad news of the moment looking ahead to the grandeur of recovery that lies ahead. Are they premature...again?


SEVERE job losses: the end of the world?
Of course, if you are prone to pessimism the numbers are not only worse but extremely bad. The banks are in trouble. The Fed is pumping in reserves like a drunk downing drinks on dollar night and yet nothing is happening. Stocks are still chaotic and bond yields are lower than the criminal slime in a "B' movie. Surely more bad news lies ahead? Housing, the root of all that is evil, is still crashing with prices lower and activity slower than a factory assembly line in the old USSR where the commies pretended to pay the workers and workers pretended to work.

A Choice: The biggest guessing game in town

So its a choice as to what you think. The facts siding with optimism are reasonable. The facts supporting pessimism require dysfunctionality to take over. I am not convinced of the pessimistic bent but I will admit that it might be a bit early to don that equity party hat. While stocks have been crushed and seem to have a huge upside, there are new factors in the mix that may put a ceiling on prices well short of past highs for some time to come. Not the least of it are the government capital injections. Ironically if you want upside I think THOSE are the stocks to stay away from. . I still think because the recession is now so sharp it will have more of a jackrabbit recovery associated with it. But it may not have lasting power. The tortoise of pessimism is persistent and may come back to reign in a strong recovery and damp the power of expansion fueled by a huge GDP gap (output well below potential). Still, getting back on the growth track of any sort would be good news and I still think that it is where we are headed by around mid year 2009. Enough equity strategists have lost their congenital bullish bent to convince me that we could have a persisting halting rally that bears will continue to sell into and will never create enough push to be the flag that says IT'S OVER! But some day we may look back at the day we leaned over the abyss, looked in, then headed for the light. We might decide that day was last Friday. The beauty of markets is that THIS COULD BE IT. Only hindsight is 20/20. So welcome to the biggest guessing game in town.

How stupid are we? No, this is not a game

No Plan
While other countries have jumped to help their auto industries Congress has dragged its feet and played coy with the possibility of help. In the end the automakers have no real plan and neither does Congress beyond making a public spectacle of the automakers and their dilemma.

More bad advice
I especially like automakers being urged by Congress to make more 'green' cars. When Ford started it all founder Henry Ford said you can have any color car you want as long as its black. Now the mandated color is green. But the kicker is that environmentally friendly cars are more expensive and they are currently being sold at a loss. So Congress wants them to make more of those..Oh that will save them, won't it?

The reason we are here...
This is unfortunate. The automakers have improved their product. Their current dilemma is the result of a spike in oil prices that came so quickly there was no rolling with that punch, but then oil prices fell back. And just as fast a financial tsunami swept across the land - all lands- and that has left potential auto purchasers without credit resulting in a sharp drop in the demand for cars. Congress treats the automakers like all this was all their fault. The Detroit guys are not perfect. They have made mistakes and they have had help making some of them - like when CONGRESS rolled back the CAFE mileage standards for them.

The real issue
The automakers are not stupid. But they are caught in a sort of time-space warp. They are locked up in industrial agreements from years ago in an age when others are not so encumbered. They are at a disadvantage and they have not been able to negotiate their way out. GM is burdened by legacy health care costs, dealer agreements it cannot unilaterally break and a still expensive and restrictive union contract. These are among the arrangements the US automakers need to renegotiate. By declaring bankruptcy they could be unilaterally get relief from a bankruptcy court judge. But the automakers say that the bankruptcy route is too dangerous. So why not have the government offer MONETARY help only if the automakers can restructure their various arrangements with dealers and with the unions. Force them to streamline by reducing the number of nameplates- that will involve a new deal with their dealers. If these things are not done then throwing money at the automakers does not solve their longer term problem. So tell them to make these changes OR IT WILL BE BANKRUPTCY. And maker Chrysler's 80% cash rich owner Cerberus kick in some more money before it gets ANY taxpayer funds at all. Everybody needs to get real.

Time
Time is of the essence so Congress may have to give the automakers some money upfront without strings. But to get what they say they really need, any further dispersal of funds would require changes of the sort mentioned above.

Decision time
The point is that the automakers are not a group of naughty boys. They deserve funds more than the banks that have gotten some despite making clear missteps that WERE their fault. Auto are suffering form the fallout of the banks' mistakes and getting blamed for it. This is farce. The auto industrial is important and it has been making strides. Describing the automakers as dealing with the legal framework in an environment where its counterparties have milked it for all they can and continue to dig their heels in expecting a public bail outs for political reasons gives a very different view of GM's and the other automakers' plight. It's time to empower the auto companies with a real ticking time bomb. Cut deals or go bankrupt. Don't just give them money.


Do the right thing.

A day of blitz

EVENTS buffet markets as stocks drop nearly 680 points
It may have been more than markets could digest.

• The MFG ISM drops to its eleventh lowest level since 1950.
• The NBER finally does call it a recession and says it began in December 2007. So we have just found out its a recession and already its long - 13 months.
• Bernanke spoke and said the economic weakness would not go away soon...

Speech, Speech!
The Fed Chairman in his speech talked of all the measures the Fed has implemented and said the Fed could buy long term bonds to try and reduce long terms rates. On this news- something that has been mentioned in the past - the bond market went nuts and drove 10-Yr note prices up by about 1 1/2 points and the 10-Yr yield down to 2.7%.

Operation TWIST
Bernanke's suggestion has been mentioned before but having the Fed Chairman say this in a speech gives it more credence. Also Bernanke has had a habit of doing some unusual things. But within the economics profession, this is not a tact that is well respected. In the early 1960s the Government tried to do something to impact long term rates and change the shape the yield curve. The attempt was called Operation Twist. It failed. In fact it failed miserably. It produced the exact opposite result from the one desired. So among economists the idea of messing with the yield curve is not something that is well regarded.

Operation Twist and Shout

So the Fed Chairman sort of alluded to this past discredited operation and in response markets drove bond prices up sharply. Well, there's a twist- so to speak. People in markets know you buy the rumor and sell the fact. In that same vein this was a successful 'open mouth' policy by the Chairman. But statistical results, even from those studies that say there is some scope for policy to affect the curve, do not leave room for hope that the Fed can use the policy to affect rates by much. Still we have the bond market rally... Of course it may not have been the impact of those remarks as much stocks falling nearly 700 points in one day.

Connectedness
Before the US MFG ISM was reported out, a highly similar e-Zone measure showed a sharp drop. Over the past year the EMU drop has been more severe than the drop in the US and most of that is the pace of the decline in just the past few months. Europeans are still stunned at the onset of weakness. Just today German Chancellor Merkel was talking disdainfully about other countries being in the competition for having the largest stimulus plan. The ECB and Germans in particular have been wrong. The ECB was worried about inflation far too long even with the strong euro. The Germans simply have been in denial about the weakness their economy is suffering. Those that thought China would be spared- were dead wrong. China is an exporting economy! How could severe weakness in its key export markets not hurt it? Goldman had an investment strategy based on the notion of buying US firms with weighted international sales on just this same idea that foreign growth would not slow as much. The strategy was pulled only relatively recently. Yes, even the best of the best of the best got it wrong. We are all connected. Trade has expanded greatly. Capital flows are an international staple of existence. Economies need it the same way that bodies need calories. Connectedness has its costs and tighter linkages is one of them.