Bloomberg reports that Fed Chairman Ben Bernanke has ruled out any Fed loan to automakers. In a letter to Senate Banking Committee chair Chris Dodd, Bernanke questions whether automakers have “unencumbered assets of sufficient amount and quality” to qualify even for emergency aid. “Even if the companies have sufficient collateral,” continues Bernanke, “lending to an auto manufacturing company would represent a marked departure from that policy, and would take us into distinctly new realms of policymaking. In particular, it would raise the question as to whether the Federal Reserve should be involved in industrial policy, which has traditionally been outside the range of our responsibilities.” Bernanke identifies the “critical unknown” in the automakers’ plans as “their ability to develop and produce vehicles that the public wants to buy.” Even more tellingly, Bernanke says the Fed is “not able to verify” the assesments that GM and Chrysler can even survive on the $14b the say they need. Congress should consider a “range of possible policy actions” besides direct aid, including a government-assisted “orderly bankruptcy reorganization” according to the letter. While we scurry around looking for a full copy of this letter, consider this Bloomberg article titled “Democrats Tone Down Prediction of Automaker Bailout Approval.” It looks like we may have just taken another turn on this crazy roller-coaster ride, away from consensus on a $15b plan.
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Thank you, Ben!
I hear on Fox radio that calls to Congress are running somewhere between 10 to 50 to 1 AGAINST the bailout. And a plunging stock market ain’t gonna sort that out.
Oh my, there is a God. I must congratulate Mr. Bernake for being insightful and truthful on this matter. All the Phds in economics were saying all along that C11 is the ONLY course of action, and that Governmnet does not have a dog in this fight. Can we know put a fork in the big 2.8?
Hallelujah, if true.
Do people really think consumers will buy the $40k Volt?! My prediction: The Volt will be stillborn, because it can’t be sold and serviced at a profit, and any business model GM has in 2009/10 cannot include unprofitable vehicles. (Assuming there is a GM in 2009/10).
Obama, the President-elect, promised to save Detroit. I think there’s going to be a bailout.
Ben isn’t even an elected official. I doubt he’s going to get in the way of this whole process.
Quit crying you big baby.
If you and your buddies on Wall St. hadn’t Effed the system so much, there may be some money to lend and we wouldn’t be in this mess.
1-20-09 the End of an Error!!!
The problem is the economy is not what the real problem the D2.8 have. It is their internal structure, strife and inability to do anything. Giving these companies money only rewards this inefficient behavior and makes them even more beyond reproach.
I do not want GM to disappear – I want GM to be a better company that is better run.
Dr. Jekyll (Island) and Mr. Hide (the TARP)
Boy, the hypocracy gets better all the time.
I’m not sure where I stand on the bailout/bankruptcy thing but this smells of playing favourites.
Hey Ben, how were AIG’s assets versus liabilities before you sent them over $100 billion?
Did you assess Citicorp’s long-term viability before you threw them a $25 billion “loan”?
I wonder where Ben’s getting a job after his term is up?
“Obama, the President-elect, promised to save Detroit. I think there’s going to be a bailout.”
Perhaps not. When Obama said that, he couldn’t possibly know how screwed up the big 2.8 were. If his advisers don’t lie to him, I hope he realizes it’s waste of money and that the people at large are against a bailout by at least 7 out of 10. I already read at another site that people won’t by a “bailout car.” So the stigma is already there. Talk about income redistribution. . From us to a private company, I don’t think that is even legal. I know, AIG and such too. What a scam.
I wonder where Ben’s getting a job after his term is up?
Probably Goldman Sachs.
The public was overwhelmingly against the banking bailout also…
Congress responded by adding $150 billion to it and passing it.
Detroit will get their money, with a web of strings attached to it. If it doesn’t happen this week, expect a complete shutdown of GM and Chrysler next week, lasting through the inauguration, which will give us a taste of how the economy will be impacted.
I wonder where Ben’s getting a job after his term is up?
Probably Goldman Sachs.
Ben is the Fed chairman until Jan. 31, 2010 when his appointment ends he doesn’t need to look for a new job just yet, not that he’s very good at his money manipulator job right now.
CSJohnston has it right on. They talk about buying up junk assets off banks books….yet it was never explained how they would price these junk assets. If they’re junk, aren’t they worthless? Yet the gov was gonna put a value on them? Boy that doesn’t seem ripe for a rip-off.
And they really did a lot of research, and checked into recover plans for the banks before they GAVE them that disgusting amount of money.
I’ve said it before. No bailouts for anyone. But the hypocrisy here is what really gets me worked up. If its going to happen, why do the banks get blank checks just for saying please while roadblock after road block is thrown to Detroit just to get a LOAN?!
Maybe they’re all waking up to the testimony and advice.
Prof Edward Altman: A GM Ch11 is do-able and should be done (as per Richard Tilton’s example yesterday).
Mark Zandi: $1 on auto makers might get you $1.50 of economic activity but at huge risk of failure, while $1 on infrastructure will get you a near guaranteed $1.80. Plus once you start, it might top out at $125b.
Obama will want to pursue the valuable infrastructure rebuilding, and he won’t want to be broke before starting!
“If its going to happen, why do the banks get blank checks just for saying please while roadblock after road block is thrown to Detroit just to get a LOAN?!”
Because it’s a “loan” only in name and inference. That money will NEVER be repaid. It’s like when I was 6 years old and I’d ask my dad. .”Can I borrow $5. .” And he’d laugh and say. .”what do you mean “borrow”. . .” And he’d laugh and laugh. . .
Bernanke identifies the “critical unknown” in the automakers’ plans as “their ability to develop and produce vehicles that the public wants to buy.”
read correct:
Bernanke identifies the “critical well known” in the automakers’ plans as “their inability to develop and produce vehicles that the public wants to buy.”
Why in the world should any producer of un-sellable crap (besides – in private investor hands – with pockets full of cash) benefit from taxpayers purse and successful working winners e.g. competitors hard earned cash (no matter local or from abroad – we live in a globalized open business environment) only because he is a big, fat, incompetent & outdated loser?
Doesn’t even considering such a idea as bailout of a proven multiple-recurring sucker in the USA “the shining mother-ship and world head-mast for all capitalistic states” – even that discussion represent a solid stinker miles against the wind, a lot like old soviet habits?
Cerberus’s chairman is former Treasury Secretary John Snow. Chrysler is refusing to disclose it’s financial statements and at the same time seeking bailout money all the while predicting dire results should a bailout not be forthcoming.
http://www.bloomberg.com/apps/news?pid=20601039&sid=aM9JonE2oivk&refer=home
Talk about chutzpah!
Being against the bailout is one thing. Gifting billions to wall street to bail out their undervalued assets and then calling out the big 3 for not having enough assets is just unscrupulous. Where were the big wall street CEOs receiving $1 salaries and huge oversight boards. Most of those banks were insolvent. Why give them a billions and get nothing out of it? There’s no way bankrupcy would solve GM’s problems. Bernake is just looking to help his cronies win more business.
Juniper:
You and others with similar comments have to leave this imaginary world where “Wall Street” screwed everything up. Only in fantasyland are the big-3 victims of “Wall Street”.
If it was not for “Wall Street” the US automakers would have gone bankrupt in 2002, if not earlier.
It is the loose lending practices of “Wall Street” and of GMAC and Ford and Chyrsler’s captive finance arms that allowed people that shouldn’t get loans to get loans, dealerships that shouldn’t get loans get loans, and carmakers that shouldn’t get loans get loans
The house of cards has fallen apart; now the artificial lending environment that kept GM, Ford and Chrysler alive is gone.
Anyone who thinks this is a special situation and car buying will return to the highs of the 2000s is deluded. American incomes have not gone up since the mid-90s; now that the loose financial market is gone automobile sales are going to reflect that.
There is no “liquidity crisis”.
Thanks to the much maligned (and admittedly flawed) financial bailout banks have money to lend to companies and individuals with good credit.
However, in sharp contrast to the rest of the 2000s, but in line with what is required for the profitable operation of a financial institution, companies and individuals without good credit cannot obtain cheap loans.
This is reality, not a “liquidity crisis”. Investors have been burned badly enough by incorrectly rated packaged sub-prime debt that we are going to be in reality for a very long time.
Between the big-3’s reduced market share and the recent (but here to stay) phenomenon of only those who can afford cars being able to buy them the big-3 have no future as their present selfs.
They will be money loosing companies until they are finally allowed to reorganize with a real Chapter 11, or until the government gets sick of them and sells them off to a BRIC country (i.e. British Leyland).
While I may not agree that the Fed should even be involved in bailing out financial institutions, the buying of high risk debt at inflated prices seems to be not much more than sending them money through the setting of the fed funds rate. However, giving money to a troubled manufacturer is certainly outside the realm of the Fed Reserve. Second the “melt down” of the credit industry is not the reason that GM et.al. are in their current position. Ben got that absolutely right. Until they can make products people want throwing money at them won’t help. GM’s problems are their own, they were not caused by some Wall St. buddies who “Effed the system.”
Will people not get loans from banks that took a bailout?
How about we start that movement? Then when they’re going to go out of business from lack of customers, we can bail them out again?
What you say?
compy386: It’s been said before, but as much of a screw up as the financial bailout is, it’s impossible to imagine a world with finance institutions around the globe in flames.
“Nuclear Winter” would not describe it.
Mark Zandi: $1 on auto makers might get you $1.50 of economic activity but at huge risk of failure, while $1 on infrastructure will get you a near guaranteed $1.80. Plus once you start, it might top out at $125b.
That return on infrastructure is a bit optimistic, at least according to the libertarian Reason Foundation:
Moreover, like most of the literature, they found that the net social rate of return on highway capital investment was about 35% in the 1950s and 1960s, when the Interstate system was being constructed, but declined to around 10% in the 1980s and since then (up to the mid-1990s, when they were writing this) has converged to about the long-term rate of interest.
In particular, it would raise the question as to whether the Federal Reserve should be involved in industrial policy, which has traditionally been outside the range of our responsibilities.
It’s funny that Bernanke says this because during the congressional hearings, all of the experts who testified, including Altman and Sachs, said that the administration already had the tools to help the Detroit automakers, including direct aid from the Fed.
One might say that giving hundreds of billions of dollars in direct aid to banks is also outside of the traditional range of the Fed’s responsibilities.
Bottom line is the bottom line: Bernanke and Paulson are Wall Streeters. Some insolvent businesses are more equal than others.
Ronnie: Hmmmm… That’s a bit depressing. Zandi did clarify it a little by saying “in this climate”. I wonder if the results are different while in, or before diving into Depression? Obama seems to be suggesting he will be relying on it.
Taking Ben Bernanke’s counsel regarding any economic matter is like asking Stevie Wonder for advice on target practice.
If Ben Bernanke is against it, it is invariably the right thing to do.
no_slushbox : There is no “liquidity crisis”.
LOL – today’s goverment auction for $30 Billion in 1-month T-Bill’s was over subcribed. It closed today with a yield of 0.0%. At one time during the auction the interest rate was actually trading negative. Big banks are not loaning money. They would rather take 0.0% than loan it out.
Thank you losthope.
It seems funny to me that some people’s argument for bailing out the Dead Three is that already freebie money was given to the banks.
This is our taxes we are talking about. Just because one mistake was already made, it does not follow that we must carry on making mistakes.
Let the Dead Three figure it out on their own. They will emerge more healthy and with a better product mix.
If we insist on bringing them under government management, expect Trabant quality and DMV-like waiting lines and service.
@losthope:
Banks loaned money to people that shouldn’t have qualified for the loans (as did GMAC and others for trucks and cars). The banks then get taxpayer money for free, are told to lend the money, just not to the super high risk people. Banks then do that, and are hammered for not loaning more money out.
If you’ve got good credit, you can refi your house, buy a car, buy a new house etc. If you have marginal or poor credit, you can’t.
What part am I missing?
Bernake is an ASS.
I guess the perks from his banker buddies far surpasses any of those from Detroit.
jkross22: If you’ve got good credit, you can refi your house, buy a car, buy a new house etc. If you have marginal or poor credit, you can’t.
I agree with your point as far as loaning to a consumer.
However the credit market is still frozen to companies. A lot of the TARP money that banks and other have received is now sitting in T-bills. Kind of like a cat chasing its tail. Banks get TARP money and park it in T-bills instead of loaning it.
It was a goverment auction of around $30 billion worth of notes that had close to $126 billion bid. It is all about capital preservation and avoiding risk of any kind (ie loans).
Bernacke will go down as one of the worst Fed Reserve chiefs, second only to Greenspan, if nothing else because he is really, really bad at masking who he is really working for. (Hint, it is not the average American)
The guy is as crooked as a dog’s hind leg.
This from the guy who told us we had to pump $700 billion into the banks, OR ELSE! The government has taken full control of Fannie, Freddie and AIG. How is running mortgage companies and insurance companies not “industrial policy”?
This reminds me of the situation in Chicago with the ex-worker’s strike. The Feds handed $15B to Bank of America in “preferred stock” purchases, then BofA turns around and shuts off the credit line of it’s long time customer without warning and puts said company out of business.
Guess what Banker Jerks. You can’t feed off the taxpayers with impunity one minute and then turn around and play Uncle Stern No Nonsense Cold Hearted Banker Dude.
+1 no-slushbox.
Otherwise I find the article somewhat misleading.
I read Bernanke at work today and he prefaced his statement to the effect, “If Congress does not act” …then the Fed should not step in of its own accord like it did to save the entire financial services industry without which your ATM and credit cards won’t work and you can’t cash your checks. Economic mass extinction. Well I am stretching it a bit but this I think is direction where things were headed AND we are not out of the woods yet.
Saving D2.8 is industrial policy question.
Congress should set industrial policy hand in hand with presidential administration. Not the Fed. He is right.
This has nothing to do with – “are they worth saving”?
Bernanke is way way smart. Harvard, MIT, Stanford, NYU, LSE, Princeton, Whitehouse, Federal Reserve. One in 1,000,000 IQ I imagine. He could do fine on lecture circuit or back in academia wherever he wants. Won’t ever have to really look for work again. I do not distrust him like I distrust the two political oil millionaires that ran the presidency.
@losthope:
Do you know what bank loan numbers look like pre and post credit crunch? I’m very curious to get a look at the real dollar delta from where we were last year to where we are now.
I heard the same thing you did today about banks parking cash in T-Bills at 0%. Incredible.
If the perceived risk of business loans from big banking is simply too high for the rate of return they can get now, what ROR do they need to see? Seems like they no longer have confidence in how to assess that risk.
Why is GM putting so much hope in the Volt and other leading-edge technology? Why not just produce an economical, affordable and high quality vehicle which uses existing technology.
The Fed was never part of a bailout package. The issue is whether the money comes from the DoE loan package or TARP (run by treasury).
“The feds” are the same as “the fed.” The feds don’t even own the fed, that is the scary part. We just get to appoint managers.
Even given that, Ben is supremely hypocritical given that the Fed is wiling to buy my unsecured credit card debt at this point. Sure GM doesn’t have a plan. Does Citi? AIG? Did Bear? Come on. GMAC car loans have at least some residual value — at least more than 15 cents on the dollar.
Chris Inns :
December 9th, 2008 at 9:39 pm
Why is GM putting so much hope in the Volt and other leading-edge technology? Why not just produce an economical, affordable and high quality vehicle which uses existing technology.
Done, Chevy Malibu. 2008 Car of the Year. Highest EPA mileage in its class. Available with a 4 cylinder, 6 cylinder, and a hybrid. You can buy one for $20k. Next question.
In the article: “Bernanke questions whether automakers have “unencumbered assets of sufficient amount and quality.” But in the title we’re slammed with: “Bernanke: No Freaking Way…” on the likelihood of a bridge loan.
Hyperbole isn’t doing anyone any good here.
Bernanke asks the questions everyone wants answers to. He may not get them to his satisfaction. But in a reputable article published today, it’s becoming clear that a bridge loan will COST LESS than a C11. And I hope Bernanke, in the end, will be pragmatic and acknowledge this.
@97escort,
What the hey?
The President Elect hasn’t coughed up the Birth Certificate that would prove he is a natural-born ‘merican.
Wha chu gonna do?
Bernanke is a pretty bright guy. If he hadn’t let the money fly – if he had tightened the money supply – as they did in 1929 – we’d be in a depression. If there is money being lent, viable businesses have a chance to move forward. Were Chrysler viable, I am sure Cerberus would give them cash. It is telling that they haven’t. GM, clearly is non-viable. Ford should be all set…especially if they can sell Volvo.
Dr. No: That “reputable article” does not address any of the concerns raised in Richard Tilton’s excellent “100-Day Pre-Negotiated Chapter 11”.
Nor are Andersen/BBK are doing their numbers on a potential blow-out to a $125b black hole. They’re working GM’s sale analysis which seems already to be pie-in-the-sky.
It also does not address certainty, even mentioning that potential customers have written GM off already. Bankrupt or not, the customer isn’t interested.
Redbarchetta: “not that he’s very good at his money manipulator job right now.”
Well, to be fair to Bernanke, the Fed is much more effective as a brake than as an accelerator. The challenge in the current environment is like pushing on a string.
Cronyism played its part, as Ben used to work at GSCO.
And I’d advocate no bailouts for the 5 firms that asked for Leverage Variances from the Fed (going from 2/1 to 50/1); let them fall where they may.
Nobody forced AIG to write CDS Insurance. They took the bet and that’s the game. If your bluff gets called, too bad.
One of the things that makes me worry is that the Asset-Backed-Securities that can include different instruments don’t (?) have a “Nutrition Info” equivalent on the outside of the box.
What does this ABS contain? What’s the average + detailed credit score of each element? -Can we jettison/repackage the crappy stuff?
What elements have been leveraged to what extent?
THOSE are the things that the Fed should be Regulating to prevent this type of thing from happening.
I agree that Strings are Very Important and that Bad Behavior should not be rewarded.
-Which is a hard thing to ask of the ~basically Professional Thieves/Moneychangers on Wall Street.
But aside from a ~Justified Bailout of the firms that were Strictly victims of circumstance, without at least some type of help, the whole financial system freezes up.
-Just ask the Retail Banking customers of places like WaMu.
It would be like trying to run a Marathon without any Oxygen to breathe.
->And then you have an even worse Recession than we’re facing; something more like a Depression or a Great-ish Depression.
+I think in a way, the USG is punishing where it can punish easily as an Example. Critiques should be leveled at ‘The Street’ just as well.
Edward Niedermeyer: Where does that photo of Bernanke come from? They still have photo journalism awards don’t they? It should be made into a portrait study for future generations that will have to write the history of this decade.
losthope:
jkross22 said “If you’ve got good credit, you can refi your house, buy a car, buy a new house etc. If you have marginal or poor credit, you can’t.”
you replied “I agree with your point as far as loaning to a consumer. However the credit market is still frozen to companies.”
If you agree that consumer loans are available to those with credit then the reduced auto sales really are a return to normalcy; there is no consumer “liquidity crisis”.
The big-3 are arguing for the bailout based on the made up assertion that there is a consumer liquidity crisis – people really, really love their cars but just can’t buy them. That is not true.
I agree that there are liquidity issues in commercial lending; some highly rated companies, like GE, are having trouble getting loans. However, the big-3 are not highly rated companies. They are all rated so low in the junk bond spectrum that they are just above “in default”.
Their massive corporate bond debt, supplier debt, UAW obligations and dealer obligations have finally caught up with them; they are sub-subprime.
Even if commercial lending was functioning completely normal the big-3 would not be able to get loans. They are simply not viable without what only Chapter 11 can accomplish.
++ This guy had a pretty good breakdown the last time I looked: http://www.youtube.com/watch?v=NU6fuFrdCJY
-Especially about the Fed Reg under Clinton that mandated Banks loan to low-score mortgages, which increased demand, thus spawning the acceleration in housing prices, whose mortgage base with untenable terms for high-risk debtors, which got securitized, which got leveraged 50/1, which got CDSd at AIG because of Greenspan’s Loophole, causing the crash when any economic volatility hit -like an Oil Shock, flushing a lot of people, but making Billions for smart CDS speculators who knew of the impossible loan terms 2 years+ ago.
—
Otherwise,
This was kinda neat too: http://www.vanityfair.com/magazine/2009/01/wall_street200901?printable=true¤tPage=all
Ronnie Schreiber
wrote:
Bottom line is the bottom line: Bernanke and Paulson are Wall Streeters. Some insolvent businesses are more equal than others.
It is indeed true.
Only the other way round.
For the financial market and attached services, as lousy as they may work in the US (compared to in financial services far more developed countries) there is huge demand.
Still.
Therefore the business as a whole has a chance and is a business indeed worth saving.
Logic.
The US car industry can not shuffle their lousy product to the customer by any means – so they try to get money without product or service by state forced rectoskopy on the taxpayer.
That business has proven to the market is a genetical loser.
PLEASE!
Let evolution have its way. Let them go c11 to be replaced
in their niche by firmer, elegant and more clever one.
Dont force feed a big dead horse – with my money!
Some insolvent businesses are more different then others
Help me out here – what should get priority?
The enemy is at the gate, and the threat is a total collapse of value assignment, without which the foundation for a lot of assets goes deep six.
Behind the gate, at a healthy distance from the immediate onslaught, are a collection of car companies. Some doing well, though not as well as when credit was easily attained; some doing terribly, but they were doing disastrously before.
Do you channel money towards propping up the perceived value set on capital transactions, in an attempt to salvage the wall — or do you channel money into the hinterlands, where a trio of clueless automakers have been burning money for over a decade, while dissing the automakers who have been making money for “not getting it”?
Just wondering.
You can’t compare the money going to AIG with the money going to Detroit. If AIG’s insurances go belly-up, then your house (anyone’s house) is worth 1/20 the next day, if we’re lucky.
If GM goes belly-up, that doesn’t affect my housing value in the same way, unless I live in Michigan – where a house on a plot of land costs USD9.000-20.000 today.
I’ve personally been against any bail out for anything since the bail-out mania began back in September. However, bailing out the financials versus the auto companies are different critters.
Saving the financials isn’t about salvaging these individual firms, though that is the reality on the ground. This economy runs on credit and debt, not cash and savings. Its a defect but it is what it is. The American consumer was tapped out on debt two and even three years ago, but with the housing bubble there was always a new “asset” for a homeowner to borrow against so the party went on. Once that bubble popped, everyone realized that indeed, they WERE tapped out on debt.
“Saving” the financial system is really more about trying to get Americans to assume more debt to keep the party going. That’s why there’s all the talk about politicians getting mad at the bailed-banks because they are not lending money “fast enough.” The pols don’t realize that maybe people are just tapped out and don’t want more debt, but that means a recession…no way around it. But that’s the gist with “saving the financial system.”
The D2.5 are there to save their own skins. As many people have noted, the collapse of the D2.5 does not mean a collapse of any strategic import relative to the United States. If Michigan sank in the lake tomorrow, America would still make cars, and America would still have the most sophisticated manufacturing base in the world. If southern Manhattan fell in the ocean tomorrow, there would be no more financial system in this country. The differences between the two are stark.
So taking a bunch of toxic mortgages, bundling them together and slapping a Triple-A rating on them is different from badge engineering, how?
There are financial regulations because everyone knows: people get reckless with other peoples’ money. Unfortunately, those regulations were allowed to slip, thanks to Greenspan and his stupid belief that bankers worry about their reputations, not their incomes.
The only way to turn this around is for executives to keep hurting until their companies are back on the right path.
That applies to Wall Street, Main Street, and Detroit.