It looks like the automakers will get that bailout they were looking for after all.
The Bush Administration approved $17.4 billion for the automakers today which, according to Treasury Secretary Henry Paulson, will exhaust the first half of the $700 billion financial bailout money that Congress passed in October.
Citing danger to the national economy, the Bush administration approved an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans in exchange for concessions from the deeply troubled carmakers and their workers.
The government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry.
At the same time, Treasury Secretary Henry Paulson said Congress should release the second $350 billion from the financial rescue fund that it approved in October to bail out huge financial institutions. Tapping the fund for the auto industry basically exhausts the first half of the $700 billion total, he said.
While the obvious story here is the automakers getting billions from the government, the side story is the fact that we have exhausted $350 billion in bailout money in only two months. Do we know where any of that money went? Probably not.
This was necessary. It was obvious that Congress wasn't going to be able to get anything through because of Senate Republicans. Having the administration act became necessary.
In a press release, Chrysler thanked the administration for their "confidence."
Chrysler LLC Chairman and CEO Bob Nardelli said on behalf of the men and women of Chrysler and its extended enterprise, that he would like to thank the Administration and Treasury for their confidence in the Company.
"A letter of intent was signed which outlines the specific requirements that must be achieved," said Nardelli. "These requirements will require consideration from all constituents, requiring commitment first in principal, leading to implementation this coming year. Chrysler is committed to meeting these requirements."
Nardelli said the Company would remain focused on its challenge and this initial injection of working capital would help bridge the liquidity crisis the industry is facing and assist in helping return Chrysler to profitability.
There are flaws with this plan, but nothing is perfect. In all, $13.4 billion will be available right away with General Motors reciving $9.4 billion and Chrysler received $4 billion. The remaining $4 billion will be available if Congress passes the second half of the financial bailout package.
I have a hard time believing these negotiations are really dead and, as commenter Dan Jacoby suggests, there may still be a way to use the TARP bail-out money to help out the Big Three, but here's where things stand right now:
A frantic, last-ditch attempt to forge an emergency-relief package for the Big Three auto makers collapsed in the U.S. Senate, amid a sharp partisan dispute over the wages paid to workers at the troubled manufacturing giants.
After a marathon day of negotiations, top Democrats, including Senate Banking Chairman Christopher Dodd of Connecticut, appeared close to a deal that would toughen the $14 billion bailout package, in a bid to raise Republican support. The focus of talks was on seeking commitments of a to restructure the industry's debt load and bring labor costs in line with wages paid by Toyota Motor Corp. and Nissan Motor Co. in the U.S., among other things.
But those talks fell apart after Republicans insisted that wages reach parity in 2009. Sen. Bob Corker (R-Tenn.Nissan), who emerged a pivotal player this week in negotiations over the industry's future, said negotiators were "three words away" from striking a bipartisan compromise.
For a summary of the breakdown, 205 Democrats voted in favor of the measure and were joined by 32 Republicans who also supported it. Those who voted against the bill included 150 Republicans and 20 Democrats.
The prospects of a $14 billion government rescue of the American auto industry seemed to vaporize Thursday morning as the Senate Republican leader, Mitch McConnell of Kentucky, spoke out forcefully against the bill, effectively dooming its chances despite the urgings of the White House.
In a speech on the Senate floor, Mr. McConnell said he and other Republicans had drawn a clear distinction between the Treasury's $700 billion economic stabilization, which they helped pass in October, and the proposal to aid the American automakers, which he said raised questions about which industries or individuals deserve help.
"A lot of struggling Americans are wondering where their bailout is," Mr. McConnell declared. Although Mr. McConnell voiced support of an alternative plan that was developed by Senator Bob Corker, Republican of Tennessee, it seemed unlikely that there was any possibility of compromise at this late point in the year, although some Congressional aides still expressed hope and said talks would continue.
Here is what I find interesting about the Senate Republicans stand. Remember the bank bailout that saved a lot of the Republicans' buddies? The Senate GOP had no problem voting for that. In fact, 34 Senate Republicans voted for the bank bailout. The list of Senate Republicans who supported the bank bailout included McConnell and Corker, the two big critics of the automaker bailout.
So what message is the Senate Republicans sending here? That they are for the banks and not for a critical industry of America? That sure seems to be the case.
After some initial hesitation (and continued hesitation), it looks like the White House and congressional Democrats are nearing an agreement on a bailout for automakers totaling $15 billion.
Congressional aides and a senior administration official say the White House and congressional Democrats have reached an agreement in principle to speed $15 billion in government loans to struggling U.S. automakers.
The plan could see a vote as early as Wednesday. It creates a government "car czar," to be named by President George W. Bush, to oversee the bailout billions and an auto industry restructuring. The czar would have to yank back the federal money if carmakers didn't do enough to reinvent themselves.
The measure is not final and could still face obstacles from congressional Republicans, who have not approved it.
Essentially, the Republicans want to do two things: Get rid of the environmental provisions in the bailout AND they would like to force at least one of the automakers into bankruptcy. Chances are one of those automakers won't be Ford, who has said that they don't need a bailout just yet.
I support a bailout for automakers. The automobile industry in America is one of, if not the last manufacturing industry we have here. It provides many jobs throughout the country, especially here in Western New York.
While I do have issues with the executives that run the Big Three, bailing out the banks without questions and questioning the automotive industry seems wrong and unfair. Both should have faced the same tough questions. The only difference? You had Henry Paulson and Ben Bernanke doing the bank's begging and bidding on Capitol Hill. The automotive industry came to Washington D.C. (the first time in their private jets and the second time in some of their own cars) and issued a plea for a bailout.
I'm not saying the banks aren't important, but there seemed to be a double standard. We still might not have an agreement or a true bailout for the automakers in place, but the banks got their money without any oversight. Now the automakers want money and we are going to appoint a "car czar." Oversight for the Big Three, but no oversight for Henry Paulson and Wall Street.
Phillip has said it all below... although, I must admit, I have a hard time processing the enormity of the changes. Plus, as stated below, there is no transparency, so, who really knows for sure?
This video, "Vikram Pandit of Citigroup Uses Indian Begging Trick on USA to get 306 Billion DOLLARS!" is more of an impressionistic take... the description on YouTube reads: "Historical 1st! Beggar Financially Wipes Out Giver!"
Meanwhile, back at the real NY Times... reports show the current administration still has absolutely no idea what it is doing, or, if it does, it is keeping same classified.
Treasury Secretary Henry M. Paulson Jr. said Wednesday that the $700 billion government rescue program would not be used to purchase troubled assets as originally planned.
Some inchoate muttering about "non-bank financial entities" and "homeowners"-- hey, that's me! Where's the line forming? I already told you how I feel about this. At the very least, NYS should get some. Well, the NY Times says:
A friend who is much, much smarter than I writes in an email:
"This is a new epoch, until now the Fed sanitized inflation, and Congress and the President were free to spend. The deficits came at the price of higher interest rates, but we allowed some interest rates to be subsidized, namely housing. Housing was over-developed because it was under priced. Now the Fed is going to have to have interest rates pegged low, because of interest on the deficit, the need to keep housing propped up, the need to directly loan, and the need to provide such stimulus as can be had. Therefore, the fiscal authority will have to control inflation. One reason that politics had been so polarized is that those who controlled the treasury could rob everyone, to pay their constituencies with pork. When this decade we both spent, and had low interest rates, it gave out. Not in the ways that perhaps people expected, but a credit bubble leading to a panic is a perfectly 19th century thing to do. If Krugman joked that 2001 was "your grandfather's recession" then this is great-great grand pappy from 1873's "Panic".
The time when politicians could spend irresponsibly and allow the Fed to clean it up is over. This doesn't mean budget cutting per se, we are going to be running deficits. The question is what we are going to be buying with those deficits. Presently we are buying a war in Iraq, happy billionaires that get tax breaks that we then pay for by borrowing the money from them.
Everyone is a liberal now. The question is who is going to be a smart and honest liberal, and who is going to try and pretend that there is another round of Reaganomics for us all."
If the talking heads on CNBC this morning are to be believed, it happens right about now. The Dow has lost over 17% in the four trading days so far this week. The Asian markets tanked hard overnight and the European markets followed suit. Trading was suspended in Indonesia, Vienna and Moscow and bailout plans are being put together in Iceland, Japan and the Netherlands.
European stock markets slumped in early trading Friday following massive sell-offs on Wall Street and Asia as lending rates between banks continue to rise despite this week's efforts by central banks to break the logjam in credit markets.
At mid-morning London time, the FTSE 100 index of leading British shares was down 233.84, or 5.4 percent, at 4,079.96, having fallen below the 4,000 mark earlier for the first time in five years. Germany's DAX was 383.70, or 7.9 percent, at 4,503.30, and France's CAC-40 was 209.67, or 6.1 percent lower at 3,233.03.
In Vienna, the stock exchange has been suspended until midday after stocks tumbled 10 percent at the opening bell, and in Russia representatives of the MICEX and RTS exchanges said they suspended regular trading until further notice under orders from financial regulators.
...
The Dow's seven-day decline of 20.9 percent is the largest since the seven-day plunge ending Oct. 26, 1987, when the Dow lost 23.8 percent. That sell-off included Black Monday, the Oct. 19, 1987 market crash that saw the Dow fall nearly 23 percent in a single day.
In Japan, the benchmark Nikkei 225 index in Japan 881.06 points, or 9.6 percent, to 8,276.43, its lowest closing level since May 2003. It was its biggest one-day percentage loss since the stock market crash of October 1987 and meant that the Nikkei lost nearly a quarter of its value during the week.
...
Few places escaped the deepening gloom. In Australia, where the S&P/ASX200 plummeted a record 8.3 percent, market watchers were calling it "Black Friday." Key indices in Hong Kong, Singapore, the Philippines and India were all down about 8 percent. South Korea's Kospi closed down 4.1 percent, while the Shanghai Composite Index posted a more moderate decline of 2.8 percent.
And in Indonesia, authorities suspended trading indefinitely on the Jakarta Stock Exchange after they had halted trading Wednesday after the index plunged more than 10 percent.
If you had invested $100K in a Dow index fund at the beginning if the year, you'd now have about $63K. That hurts.
And John McCain spends his days telling people about how Barack Obama is black. No wonder he's tanking as fast as the market.
Wall Street tumbled Monday, joining a selloff around the world as fears grew that the financial crisis will cascade through economies globally despite bailout efforts by the U.S. and other governments. The Dow Jones industrials skidded more than 300 points and fell below 10,000 for the first time in four years, while the credit markets remained under strain.
The markets have come to the sobering realization that the Bush administration's $700 billion rescue plan won't work quickly to unfreeze the credit markets, and that many banks are still having difficulty gaining access to cash. That's caused investors to exit stocks and move money into the relative safety of government debt.
I continue to believe that voting for or against the bailout plan won't help or hurt Congressional candidates very much in November. A new Democracy Corps poll shows a small plurality in of voters in key districts favoring the bailout. An earlier ABC poll showed a small plurality of voters opposing it.
On the other hand, the financial crisis is a huge issue. Polls have shifted by about five points in favor of Democrats across the board -- in House, Senate, and presidential races -- since the crisis became apparent a few weeks ago.
So to make this simple: voters blame Republicans for causing the crisis but not necessarily for their reaction to it.
Randy Kuhl's sponsorship of an amendment that would have allowed hedge funds to take larger positions in pensions is typical of the kind of willy-nilly deregulation that helped lead to this disaster. If the DCCC has any sense, they will run ads against Kuhl about this.
We can expect McCain's role as one of the so-called Keating Five (the five Senators who were said to have been improperly influenced by Keating) to become an important issue in the last few weeks of this campaign. It certainly should. A new documentary about this will reportedly appear at the site Keating Economics tomorrow. Here's a trailer for it.
Republican Opponent's Position: Less Action, More Attack Ads
One of the last things retiring Representative Mike McNulty did as Congressman was to vote "yea" on both $700 billion bailout packages meant to address the econominc crisis. McNulty voted for the first measure that failed in the House last week and remained firm in his support for the revised bill first passed in the Senate, then the House, and now set to be signed into law by President Bush.
Voters in the 21st Congressional District deserve to know how their future Congressman feels about this, and today Democractic candidate Paul Tonko let them know exactly how he feels. The following press release has a headline that reads Tonko Supports Bill, But With Reservations:
"I support the action taken by the House of Representatives yesterday to pass the Economic Stability Act. Although I strongly disagree with several aspects of this legislation, these actions are necessary to ensure the continued flow of credit that allows families to buy homes and send their children to college. I believe the threat to the well-being of working families caused by not acting far outweighs the reservations I have about this legislation.
"This bill does not go far enough to help people who are in danger of losing their homes. More foreclosures will mean more instability for the housing and financial markets. I believe that bankruptcy judges must be allowed to change the terms of distressed mortgages to prevent more foreclosures. This bill also includes questionable add-ons, including more tax breaks for oil companies, which certainly are not struggling.
"Another part of this bill that I find very troubling is what I believe are serious conflicts of interest in the administration of this plan. The bailout will be orchestrated by five Bush administration officials, including Treasury Secretary Henry Paulson who is the former CEO of Goldman Sachs, one of the firms that will benefit significantly from this plan. The Congressional oversight committee must watch very closely to ensure that no conflicts of interest affect the disbursements of taxpayer dollars.
"The bill does include protections for taxpayers, including provisions that will allow taxpayers recover their investment when the financial industry returns to profitability. The bill is also an improvement from the Bush Administration's original plan
"There is more work to be done. Despite this rescue plan, we will still face serious economic challenges in the months ahead. Leaders in Washington need to address the factors that led to the failure of the markets and take steps to provide responsible and effective regulation that will make sure this crisis never happens again.
"There are more immediate issues that Washington failed to address, like the record home heating prices facing families this winter. These record prices, combined with record gasoline and food prices, will leave many Capital Region families struggling. Congress must act to increase funding for the Low Income Home Energy Assistance Plan (LIHEAP). In Congress, I pledge to work in a bipartisan manner to increase LIHEAP funding so people on low and fixed incomes don't have to make the choice between feeding their families and heating their homes."
Washington Mutual employees are likely to lose their current pensions and they might not find out for another two months whether they have a job, according to a JPMorgan Chase executive who spoke to employees from both companies in a frank, hourlong conference call Thursday.
The chief executive of the failed savings and loan Washington Mutual Inc could get $13.65 million for the 18 days he was on the job, a regulatory filing shows.
So fine, my position has changed. I was previously "skeptical" of the Paulson plan. Now I want it to die a hot, flaming death. I want its ashes to be fed to goats, and the goats fed to sharks, and the sharks put on a rocket and fired into the sun. I want the whole premise to be made Unspeakable, so that future generations shun anyone who even threatens to mention it.
I have two questions, neither of which the article particularly answers:
What happens to the $20 billion Governor Paterson let them borrow from subsidiaries? (Maybe it was never actually borrowed? Or just addressed elsewhere?)
Is this a model worth considering for the future bailouts it seems likely we're going to need? Or was it just a one-off we should avoid from here on out?
A day after we learned that Treasury officials were on the phone to the wizards of Wall St on Sunday afternoon and telling them not to worry about the cosmetic concessions on things like CEO pay and whatnot because they were completely toothless BS thrown in to attract Dem votes, we learn that the RNC had already cut and distributed an attack ad on the bailout before the deal even fell apart.
The Republican National Committee's new advertisement critical of the the Wall Street "bailout" was produced and sent to television stations in key states before the package failed, officials at two stations said.
"Wall Street Squanders our money. And Washington is forced to bail them out with -- you guessed it -- our money. Can it get any worse?" asks the ad's narrator, as the words "BAILOUT WITH OUR MONEY" cross the screen. (The answer: Obama's plans would make it worse.)
The ad, however, seems to assume that it can safely attack a successful plan. And the reason may be the timing: Though it started airing this morning, the spot was released to stations yesterday morning, ad executives at stations in Michigan and Pennsylvania said.
Kae Buck of WLNS in Lansing said her station received the at at 7:55 a.m. Monday. Luanne Russell of Pittsburgh's WTAE said her station received it at 10:49 Monday morning.
The ad taps into deep resentment of the plan, but it comes at a time when the candidate it supports, John McCain, is urging its package, and asking that it not be referred to as a "bailout," but a "rescue."
That, my friends, is bad faith bargaining we can believe in.
Yesterday's 777 point drop in the DJIA was the 18th steepest percentage decline in history, nestled between the drops on July 20, 1933 and July 30, 1914. The drop on October 26, 1987 was worse, as was the drop on October 27, 1997. Eventually, we rebounded from all the drops, and we'll rebound from this one too. (Stocks are headed higher at the opening.)
But it wouldn't hurt for our government to do something to make things easier.
I was pleased that the "Paulson plan," modified as it was, still failed yesterday. My fear is that Congressional leaders won't make the substantial changes the plan needs in order to be a good one. One place they might turn is to Rep. Jim Marshall (GA-8). Contrary to what is becoming conventional wisdom, that people in "safe" distrcits voted yes yesterday while those in tough races voted no, Marshall voted yes despite being in a tough race.
Then he wrote an op-ed piece that is available on CNN's website. I think his ideas could be exactly the right way for government to go, and would also be politically feasible.
I first heard that the subprime crisis was coming and that Lehman and Bear were 50-50 to go under about two years ago from a friend of mine who's a senior member of a hedge fund (with no with no stock or other ownership in US investment banks). I decided to ask him his thoughts on the bailout plan, what a credit freeze means, and how much timing matters here. Here's what he had to say. In what follows, I'm "EE" and he's "DRC". I will try to solicit thoughts of others whose financial opinion I respect over the next few days.
EE. People are saying that the credit markets are already frozen. What does that mean, in practical terms?
DRC. It's a lot simpler than people think. "Credit Markets" in this case merely means the ability to get a loan. The difference is that we aren't talking about consumers, although that is pretty horrible as well, but mainly about banks and companies. No one trusts anyone so no one is giving anyone a loan because no one knows who might go bankrupt.
An over-simplified example. Suppose that GM just made a big new factory purchase and shipped a bunch of cash to a construction company. Well, that might leave GM a bit cash strapped right now on the 29th. They might have been expecting a flood of cash on the 30th (end of month), but for some reason a lot of recent sales still haven't made it back from the dealership so to make payroll, GM needs to get a five day loan until those extra receipts roll in. Not a big deal usually. Getting this loan is what is known as the "commercial paper" market. Short term loans to companies. However, because the credit markets have dried up GM can't get that five day loan and so misses payroll.
Missing payroll is actually a possible senario without the CP (commercial paper) market, so what do all of the CFO's of companies end up doing? Well, they stop making big purchases and start to keep lots of cash in reserves. Investments in factories and other things dry up, and the economy starts to undergoe radical slowdown. Just think of what would happen to the housing market if banks stopped trusting all consumers and stopped making house loans. Everyone just freezes in their current housing situation and it all just stops. That's why they say the credit markets are "frozen".
This credit slowdown started last year, I remember being in meetings where the thought of all this commercial paper coming due with no ability to refinance it because of the markets was a serious, serious scare. Now it has gotten so frozen that even bank won't lend to other banks, which is why you see these investment banks leaping into bed with retail banks - investment banks need the big deposits in a retail bank to take loans against.
EE. What are the consequences of not acting quickly? Will waiting a few days make any difference? How about a week? How about a month? How about til after the election?
Credit where credit is due and all. Here's Kirsten Gillibrand's statement on why she was one of the precious few members of the NY dlegation to vot "Nay."
"While I am fully aware of the seriousness of the financial problems in the market, I do not believe the bill Congress voted on today was the right approach. The bill has insufficient oversight and protections and does not address the root causes of the crisis or the poor economy.
"While the bill is better than the three page document the Bush Administration tried to ram through Congress last week, Secretary Paulson's plan is fundamentally flawed. Moreover, I do not believe Upstate New York taxpayers should pay for the excesses of Wall Street....
We need to help firms recapitalize, and this should be done without solely using taxpayer money. The federal government should work with firms to accurately write down the values of these assets in order to restore confidence in the system and allow investors to begin buying and selling again. Firms should be required to raise their capital standards, and if the federal government needs to intervene, then they should receive a fair equity stake in the company in order to protect the taxpayer. If taxpayer funds are invested, then we would need much stricter executive compensation limits, so that Wall Street executives are not financially rewarded for the crisis they have created. To calm fears, we should raise the FDIC insured limits. Furthermore, we need to put in place regulatory measures that will prevent this type of economic meltdown in the future, so that the middle class' savings will not be threatened again because of Wall Street mismanagement and greed."
