The Next Two Big Questions

[Guest]

It's almost a certainty that within days or at most a couple of weeks the news of the day will be...
Without more money from the government, GM and Chrysler will be bankrupt, taking several large auto suppliers and Ford with them as the result. What should we do?

The banks, particularly the big ones, have huge amounts of unrecognized losses on their books. If the new Treasury Secretary's "comprehensive stress test" reveals these illusory assets, as such an analysis almost certainly will, such assets qould have to be written off,almost certainly causing a large number of well-known banks to be insolvent--Citibank is one that heads the list. The Bank of America isn't in much better shape. What should the government do about this problem?
Before you answer "nothing...let 'em fail", consider the consequences. Consider everything from the resulting unemployment to the void that would occur in the financial system so important to our economy as well as that of the rest of the world. Without the big banks, there is no means to finance companies such as the Fortune 500. With the equity markets so weakened by the crisis and the void in the debt markets that would result from the failure of one or two large U.S. banks, our economy would likely grind to an even slower pace than currently exists, if that is even imaginable. Protectionism would run rampant. Countries would make sure that their banks served their national interests and no one else's. Foreign trade would slow precipitously. As the world's largest exporter by far, the U.S. would be hurt the worst. The extent of the results are almost unimaginable.

Should the U.S. government finally admit that they have nationalized the banking system and the auto industry--we have, you know, with the massive amounts of money already injected into the banks, insurance companies, GM and Chrysler as the result of the original TARP. These companies owe the government amounts that are multiples greater than their market capitalization and would take many, many years to repay, maybe decades. The same is true of AIG, the country's largest insurance company and Freddie and Fannie, who between them own or guarantee more than half the home mortgage loans in the country. In fact, the government has taken over Freddie and Fannie, placing their management people in those companies to replace those fired when the TARP funds were injected.

Not that it's a certainty that we could even borrow enough to finish the job of nationalizing the banking system, auto companies, insurance companies and home mortgage providers, but is that the direction we're headed? Do we have any alternatives? What are they?

[Guest]

Some would say we have been somewhat nationalized for years, look at the CCP program in the 30's. While most seniors ,such as the vast majority of us here in The Villages, await the righting of the stock market so that our fixed income investments can once again provide for us there looms a gigantic tsunami out there called "Big Government." Certainly for our children and grand children the United States will not be what we knew it to be in our lifetime, changes are inevitable some good, some not so good. The major worry for us, as I see it, is that the checks and balances we once had in our government are now not able to work. The Executive and Congressional have the majority and are not impressed with the minority opinion. This to me is dangerous. The third, which is the Judicial may swing with the moderate view, but remember the President appoints these Supreme Court Justices for life. We are definitely at a crossroad in America's history. All any of us can hope for is God Bless America, and keep the Republic alive.

[Guest]

And just how many times and how many trillions should we consider as they will always come back for more. My personal belief is ZERO. We should never have given them money in the first place, let the problems happen, correction and a return to normal would happen much quicker. Free markets will correct themselves and work well if left alone. It was intervention in the free market process that created the problems in the first place. Unions making the auto companies non competitive and bad loans forced on the banks by congress causing the mess with the sub prime markets. Government involvement almost always causes more problems then it solves. They should protect, not regulate, monitor, not control, audit, not manage.

[Guest]

And just how many times and how many trillions should we consider as they will always come back for more. My personal belief is ZERO. We should never have given them money in the first place, let the problems happen, correction and a return to normal would happen much quicker. Free markets will correct themselves and work well if left alone. It was intervention in the free market process that created the problems in the first place. Unions making the auto companies non competitive and bad loans forced on the banks by congress causing the mess with the sub prime markets. Government involvement almost always causes more problems then it solves. They should protect, not regulate, monitor, not control, audit, not manage.



GOOD POST. I agree with you totally. If the Barney Frank's of the world has listened a few years ago, we probably are not facing this situation and of course he and the Dodd's are now the hero or WASH.

[Guest]

It's almost a certainty that within days or at most a couple of weeks the news of the day will be...
Without more money from the government, GM and Chrysler will be bankrupt, taking several large auto suppliers and Ford with them as the result. What should we do?

The banks, particularly the big ones, have huge amounts of unrecognized losses on their books. If the new Treasury Secretary's "comprehensive stress test" reveals these illusory assets, as such an analysis almost certainly will, such assets qould have to be written off,almost certainly causing a large number of well-known banks to be insolvent--Citibank is one that heads the list. The Bank of America isn't in much better shape. What should the government do about this problem?
Before you answer "nothing...let 'em fail", consider the consequences. Consider everything from the resulting unemployment to the void that would occur in the financial system so important to our economy as well as that of the rest of the world. Without the big banks, there is no means to finance companies such as the Fortune 500. With the equity markets so weakened by the crisis and the void in the debt markets that would result from the failure of one or two large U.S. banks, our economy would likely grind to an even slower pace than currently exists, if that is even imaginable. Protectionism would run rampant. Countries would make sure that their banks served their national interests and no one else's. Foreign trade would slow precipitously. As the world's largest exporter by far, the U.S. would be hurt the worst. The extent of the results are almost unimaginable.

Should the U.S. government finally admit that they have nationalized the banking system and the auto industry--we have, you know, with the massive amounts of money already injected into the banks, insurance companies, GM and Chrysler as the result of the original TARP. These companies owe the government amounts that are multiples greater than their market capitalization and would take many, many years to repay, maybe decades. The same is true of AIG, the country's largest insurance company and Freddie and Fannie, who between them own or guarantee more than half the home mortgage loans in the country. In fact, the government has taken over Freddie and Fannie, placing their management people in those companies to replace those fired when the TARP funds were injected.

Not that it's a certainty that we could even borrow enough to finish the job of nationalizing the banking system, auto companies, insurance companies and home mortgage providers, but is that the direction we're headed? Do we have any alternatives? What are they?

This is easy:

For Question 1: The only solution is that cars need to be purchased - by the private sector or the government. Throwing money into the companies to continue to bloat the already-immense stockpiled inventory is asinine. The problem has always been one of sales, not manufacturing. If the product isn't purchased, the company stalls. So, rather than give them money, purchase the inventory and if all else fails, use the cars/trucks for target practice at Fort Sill, Fort Knox, Twenty-Nine Palms, Nellis AFB and Fort Irwin. Until cars are purchased -at any price - the problem continues unchecked.

For Question 2: For the "toxic waste" loans, Xin Loi (Vietnamese slang for "Sorry About that"). If the banks get a sufficient tax break for bad debts, what else do they need? If the net worth of the bank was computed based on toxic waste loans as accounts-receivables, then the bank's net worth dips. So what? If the bank believes that it acquired these toxic loans so that it could sell them to someone else for a higher price, and the daisy chain upwards is now at an end, Shades of Ponzi! As did Chevrolet, Dodge, Jeep, Mercury, Nash, Buick and a host of other separate auto makers who were acquired when they became commercially vulnerable (that's what made the Big Three from what was the "Little 30") they will just be bought up by bigger fish - all brokered by FDIC, which is one of the reasons FDIC exists.

Banks are not special. They are only merchants who deal in the buying and selling of money. They are regulated as most every industry is regulated to some degree unique with the product or service. If they can't succeed, they close, and someone else acquires the facilities, work-in-process and finished goods (however they are categorized). It's not really that complicated - we just try to envision it being it as more than that.

And let us not kid ourselves - those who receive the greatest amount of the bailout bonanza just also happen to be the ones who shell out the most in campaign contributions and K Street lobbyist activities. Coincidence? Ha!

[Guest]

It's almost a certainty that within days or at most a couple of weeks the news of the day will be...[LIST]
Without more money from the government, GM and Chrysler will be bankrupt, taking several large auto suppliers and Ford with them as the result. What should we do?



First, we must accept that GM and Chrysler are bankrupt and help them through Chapter 11 bankruptcy. Management, the UAW, the retirees, the shareholders, the note holders, etc will all have to take significant hits. The only group we should protect are the designers and engineers who will create the next generation of cars and the methods to produce them. These people we need to reward highly.

As for the rest - except for real management talent; assembly line workers, accountants, lawyers, hr professionals, etc are a dime a dozen. We need to insist as a part of the restructuring that the pay for these people come down in an amount equivalent to that proposed for the CEO's of Wall Street Firms. This applies equally to the people employeed by the firm and those whose services are done by contract. No two to five thousand per day payments for consultants and/or lawyers.

For the banks we need to do two things out of the box - (1) reestablish the requirement that short sales may only take place after an uptick in the stock price. This is an idea shared by both Steve Forbes and President Clinton who observed that the absence of this rule let speculators drive the price of the stock into the ground; (2) eliminate the 'mark to market' rules that now are destroying most of our financial institutions.

This is a very difficult, at least for me, concept to explain. Mark-to-market is essentially requiring banks and other investment organizations to put the assets on the books at the current value as of today. This seems sensible but has proven to be anything but that. To provide an idea, let's say that we have 5 home owner's who have purchased $250,000 homes and put 20% or $50,000 down. The market has fallen sharply and the homes are now worth only $150,000. Although all of the people who have taken out mortgages to purchase their homes are making the payments on-time each and every month, the MTM rule requires that the bank now value these five mortgages at $750,000 rather than the $1,000,000 that they are receiving payments upon.

Our banks, as a whole, do not suffer from a lack of liquid assets to lend, but rather from a shortage of capital resulting from the MTM rule. With the value of their loans going down, the need for additional capital to meet the secure levels required by the FDIC, etc. continues to rise resulting in the banks being unable to lend despite having cash on hand.

I apologize for getting too detailed, but the cause of our current problems lies with these two rule changes together with the irresponsible purchasing of high-risk mortgages by Freddie-Mac and Fanny-May. Had we have those two new rules not present and the insane actions of the two FM's, we would not have today's problems.