Free Markets, Free People

Economy

GM buys into Peugeot, sucks up $400 mil in “junk bonds”

Ed Morrissey sums up the “new” GM:

Americans sunk tens of billions of dollars into General Motors in 2008 and 2009, money which they won’t see any time soon, if at all.  The Obama administration strongarmed senior creditors in an unprecedented politically-engineered bankruptcy to get taxpayers to eat the costs of old pension obligations and boost the UAW.  All of this was done in the name of making GM a stronger company so that they could eventually pay back the bailout and make better decisions in the future. [emphasis mine]

Remember the other day when I talked about corporate cultures and how it was important to change them when a company is going down the tubes because of their present one?  And how bankruptcy – real bankruptcy – has a tendency to help make that corporate culture change a reality.

Yeah, well that didn’t happen at GM with predictable results:

Attention U.S. taxpayers:  You now own a piece of a French car company that is drowning in red ink.

That’s right.  In a move little noticed outside of the business pages, General Motors last week bought more than $400 million in shares of PSA Peugeot Citroen – a 7 percent stake in the company. …

Peugeot can undoubtedly use the cash.  Last year, Peugeot’s auto making division lost $123 million.  And on March 1 – just a day after the deal with GM was announced – Moody’s downgraded Peugeot’s credit rating to junk status with a negative outlook, citing “severe deterioration” of its finances.

In other words, General Motors essentially just dumped more than $400 million of taxpayer assets on junk bonds.

[…]

An analysis by auto industry consultants IHS said it is “somewhat baffling that GM is willing to get involved in an alliance that it frankly does not need for size or complexity, while still avoiding any public plan to rationalise its European production, cut costs, or deal with labour rates.”

Well, the investment in Solyndra was “somewhat baffling” to most analysts, but it didn’t stop the Department of Energy from guaranteeing it, did it?

GM needs a 7% stake in Peugeot like it needs the Chevy Volt.  Don’t forget, it loses money every year in Europe.  And now it owns 7% of another car company posting huge losses.

It hasn’t yet been able to pay the tax payers back for the “investment” they were forced to make in the company although they have found the time to pay bonuses to employees and executives, some of whose accomplishments apparently include this decision.

~McQ

Twitter: @McQandO

The unemployment numbers: good news, but lack context [UPDATE]

Obviously any time you are in a recession and the employment numbers are in positive territory, that’s good news.  And, as Dale reported below, last month we saw jobs grow by 227,000.

But … and you knew there had to be one… what does that mean in relation to the job losses we’ve suffered during this recession?

In the past, the number for this month would have been a good number because it would have reflected a maintenance level of job creation.  Essentially the number of jobs created kept pace with the expansion of the labor market as new workers entered it.

But we’ve lost millions and millions of jobs in the past 39 months.  So what is it going to take just to get back to even (i.e. where we were prior to the recession)?

Here’s an infographic  to graphically present the problem:

16421_MonthlyJobsChart-Feb_01.indd

To actually climb out of the unemployment hole that the recession dug, we need to see 755,000 jobs a month for 7 months to bring us back to pre-recession job levels.  Why 7 months?  Heh … well, you figure it out.

UPDATE: According to James Pethakoukis, the unemployment rate also lacks validity.  He makes a point Dale has made any number of times:

If the size of the U.S. labor force as a share of the total population was the same as it was when Barack Obama took office—65.7% then vs. 63.9% today—the U-3 unemployment rate would be 10.8%.

~McQ

Twitter: @McQandO

Economic Statistics for 9 Mar 12

The following statistics were released today on the state of the US economy:

The Employment Situation: 227,000 net new jobs, unemployment rate at 8.3%, average hourly earning up 0.1%, weekly hours unchanged. Basically, the report is mixed. The labor force participation rate rose by 0.2% to 63.6%, so more people are coming back to the labor force. The number of employed people in the household survey has risen back to the December level, after dropping last month. Non-farm payrolls continue to increase. At the same time, hourly earnings and hours are basically unchanged, so there’s not a lot of hiring pressure. Using the personal methodology I use, that assumes full employment is a 66.2% labor force participation rate, the "real" rate of unemployment declined to 12.08% from last month’s 12.48%.

The Monster Employment Index jumped 10 points in February to 143. Monster says this reflects a normal seasonal bump.

The January trade deficit grew by $2 billion to $52.6 billion, mainly due to rising oil prices.

Wholesale trade inventories grew by 0.4%, but the stock-to-sales ratio is unchanged at 1.15.

~
Dale Franks
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Economic Statistics for 8 Mar 12

The following statistics were released today on the state of the US economy:

Challenger reports that announced layoffs in February were little changed at 51,728, compared to 53,486 in January and 50,702 a year ago.

Initial claims for unemployment  for the the March 3 week rose 8,000 to 362,000 with the previous week revised 3,000 higher to 354,000. The 4-week moving average rose 1,000 to 355,000.

The Bloomberg Consumer Comfort Index rose to -36.7 in the period ended March 4, the highest since April 2008.

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Dale Franks
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Economic Statistics for 7 Mar 12

The following statistics were released today on the state of the US economy:

The Mortgage Bankers Association reports mortgage applications fell -1.2% last week, with purchase apps up 2.1%, but re-fis down -2.0%.

The ADP Employment Report estimates that February net new jobs in Friday’s Employment Situation report will rise by 216,000.

The final revision for 4Q productivity shows a 0.9% increase in productivity for the quarter, but with a 2.8% increase in unit labor costs. Productivity gains are modest, while labor costs are escalating.  This is not good for continued labor growth.

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Dale Franks
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Oh. This can’t be good…

Via Zero Hedge, I’ve acquired this very interesting little chart, that shows the number of margin calls on its credit-extensions to counterparties. Huh. Now, see, I just wrote that, and I have no idea what it means. It’s just lots of economic gobbledy-gook when you write it out in a single sentence like that.  But, here, let’s take a gander at the chart, then I’ll explain, in human terms, what it tells us.

20120306_ECB

So, the European Central Bank (ECB) had this great idea, which was to implement a European version of Quantitative Easing. They called it the Long-Term Refinancing Operation, or LTRO.

It was actually pretty simple. The banks would go to the ECB and get an LTRO loan by providing collateral of some sort—generally A-rated securities. By which, I mean a security that at least one rating agency has rated as "A". Like, you know, Italian bonds. They don’t actually have to give the collateral to the ECB or anything, just let them know that, "Hey, we’ll just keep it safe, and can hand it over if we really have to." On the strength of those assurances, and the sterling quality of the collateral in question, like Spanish bonds, the ECB then gives the banks a huge hunk of cash. The banks then get to keep the money for up to three years, but are only charged the average overnight rate of interest.

Now, as long as the securities you put up for collateral are good, like Irish bonds, it’s a pretty sweet deal. Alas, if the securities turn out not to be so reliable, the ECB will make a "margin call", that is to say, they will demand the banks come up with additional cash or other assets to cover the collateral.

As you can see from the charts, that is exactly what the ECB is is starting to do. That’s troublesome.  You see, the ECB has a €3 trillion balance sheet. But it only has a bit under €11 billion in actual assets. So the ECB has a leverage ratio of a little under 300:1. So, it really does have to go after better assets from the banks if the initial collateral turns, you know, sucky.

The problem then is, as Tyler at Zero Hedge puts it:

The rapid deterioration in collateral asset quality is extremely worrisome(GGBs? European financial sub debt? Papandreou’s Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more ‘precious’ cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets – to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle – especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.

Essentially, the LTRO program is beginning to suck higher quality assets out of the banks to meet the margin calls that are issued when the initial collateral’s value starts to go belly up. Sucking those higher-quality assets into the ECB’s LTRO collateral program, mean that they can no longer be used to finance business and consumer credit, and, thus, spending. The banks essentially become bond storage warehouses, that don’t actually do any business.

That slows the economy, of course. Which means that those original A-Rated securities stand e much better chance of defaulting, in which case, they’re worth nothing. As Seeking Alpha explains:

The real menace comes in the event of a further weakening of the Eurozone economy. If the economy were to contract, the collateral that the banks have pledged to the ECB may cease to be "performing" (seemingly the only hard criterion for collateral for the second round of LTRO). The ECB would be at risk–and ultimately so would the banks that pledged the defaulting securities.

Any defaults, be they of collateral or the banks themselves, would be a serious issue for the ECB. The ECB is supporting its EUR 3 trillion balance sheet with EUR 10.76 billion in capital–leverage of nearly 300 to one. With the fiscal situation of European sovereigns already strained to the breaking point, it’s hard to see where the money to cover the defaults could come from. This issue of a ballooning balance sheet, coupled with shaky collateral and the 3-year tenor of the ECB loans, is precisely why Trichet and Weber would not go the Draghi route. They bristled at the risk.

The odds of a calamity of the sort that would endanger the ECB are not great, but nor are they impossibly long.

Well, that huge jump in margin calls may be an indicator that those not "impossibly long" odds are getting shorter and shorter. And I wonder how much exposure US banks have to an LTRO default through credit/FX swaps. Probably…really a lot.

So, we got that goin’ for us.

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Dale Franks
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Economic Statistics for 6 Mar 12

Weekly retail sales are the only thing on the calendar today. Redbook reports sales suffered a -0.4% drop to a 3.0% year-on-year same-store sales rate for the week due to bad weather. ICSC-Goldman, on the other hand, is reporting that, while weekly store sales rose 1.3%, the year-on-year sales rate is only 1.7%, as higher gas prices put more pressure on consumers’ pocketbooks.

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Dale Franks
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Economic Statistics for 5 Mar 12

The following statistics were released today on the state of the US economy:

Factory orders declined by -0.1% in January, led by weakness in durable goods, which fell -3.8%.

The ISM Non-Manufacturing Index rose five-tenths from last month to a better-than-expected 57.3.

That’s all for today, as we kick off a light week of statistics, with the exception of Friday’s Employment Situation.

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Dale Franks
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Fannie Mae and Freddy Mac continue to suck down taxpayer money

Two of the the institutions most responsible for the housing crisis, despite Barney Frank’s claims to the contrary, are still in crisis themselves (a third is the very institution Frank called home – Congress).

Fannie Mae said Wednesday it lost $2.4 billion during the fourth quarter of 2011 and $16.9 billion for the full year.

It has had worse years, remarkably. Fannie lost about $60 billion in 2008 and $72 billion the following year–two of the 10 largest corporate losses ever. Sibling Freddie Mac is responsible for a third, a $51 billion loss in 2008.

These two institutions, both set up by and working at the behest of the federal government, have a very checkered history. 

For those who have always wondered what “Fannie Mae” stands for, it is the Federal National Mortgage Association, begun in freddie_mac_and_fannie_mae1938 during the Great Depression as a part of New Deal.  So those who argue that it is a “private corporation” are simply uninformed.

Both organizations have a single purpose: “to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on thrifts.”

As it turns out, they got way out on a limb with their purpose, driven by government policy and crony capitalism.

What set off the debacle through which we suffered?  Here’s the short story:

In 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992. The Act amended the charter of Fannie Mae and Freddie Mac to reflect Congress’ view that the GSEs "… have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return;"  For the first time, the GSEs were required to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. The initial annual goal for low-income and moderate-income mortgage purchases for each GSE was 30% of the total number of dwelling units financed by mortgage purchases and increased to 55% by 2007.

In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977.  Additionally, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans.

George H.W. Bush began the slide and Bill Clinton lit the afterburners.  And while the industry attempted to take advantage of the situation it also needed an easing of credit requirements to meet the policy goals of the CRA.  And anyway, the Federal government was guaranteeing this mess.  Crony capitalism at its finest.

The warning signs about the eventual end were everywhere.  And any number of people issued those warnings:

In 1999, The New York Times reported that with the corporation’s move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."

Also in the New York Times, Alex Berenson reported in 2003 that Fannie Mae’s risk was much larger than is commonly held.

The eventual end to such nonsense was almost precisely foretold:

In his 2006 book, America’s Financial Apocalypse, Mike Stathis also warned about the risk of Fannie Mae helping to trigger the financial crisis: “With close to $2 trillion in debt between Freddie Mac and Fannie Mae alone, as well as several trillion held by commercial banks, failure of just one GSE or related entity could create a huge disaster that would easily eclipse the Savings & Loan Crisis of the late 1980s. This would certainly devastate the stock, bond and real estate markets. Most likely, there would also be an even bigger mess in the derivatives market, leading to a global sell-off in the capital markets. Not only would investors get crushed, but taxpayers would have to bail them out since the GSEs are backed by the government. Everyone would feel the effects. At its bottom, I would estimate a 30 to 35 percent correction for the average home. And in ‘hot spots’ such as Las Vegas, selected areas of Northern and Southern California and Florida, home prices could plummet by 55 to 60 percent from peak values.”

Bingo.

And here we are.

The cost to you for this the mess created and driven by government policy and taken advantage of by lenders?  A lot.

Both Freddie and Fannie are supposedly “for profit” corporations. Profits, however, have been in short supply (but bonuses to top cronies haven’t):

During the three years leading up to the house price peak, Fannie reported annual profits of between $4.1 billion and $6.3 billion, and Freddie, $2.1 billion to $2.9 billion. During the five years since, Fannie lost a cumulative $163 billion, and Freddie, which hasn’t yet reported fourth quarter results for 2011, $91 billion.

Both Fannie and Freddie pay dividends to the Treasury Department as a condition of their government sponsorship, but both have regularly requested larger sums than they have paid. For example, Fannie said Wednesday that it paid $2.6 billion in dividends to the Treasury during its fourth quarter, but that it would soon submit a request for $4.6 billion to offset losses.

Fannie says it requested a total of $116 billion from the Treasury since the fourth quarter of 2008 and paid about $20 billion in dividends. Fannie requested $72 billion and paid $15 billion.

Or, as the article breaks it out in the nation of 309 million, the cost is $1,300 for each American household – owner or renter.

This is what happens when government’s decide they know better than markets.  When they let unsound political policies that create perverse financial incentives rule the day.   When they put financial prudence behind political gain. 

Hopefully we’ll learn something out of this.  But we won’t if each side continues to deny its role in this mess.   It was government who set the perverse policy and industry to took advantage of it. However, what should be clear to anyone is that if there had been no policy, there’d have been nothing of which to take advantage.

As usual, the tax payers is left holding the multi-trillion dollar bag for this monumental screw-up.

~McQ

Twitter: @McQandO

Gallup again points out for all the Republicans out there — It’s the economy, stupid!

I’m not sure how much more plainly it has to be said.  Here, let Gallup try:

More than 9 in 10 U.S. registered voters say the economy is extremely (45%) or very important (47%) to their vote in this year’s presidential election. Unemployment, the federal budget deficit, and the 2010 healthcare law also rank near the top of the list of nine issues tested in a Feb. 16-19 USA Today/Gallup poll. Voters rate social issues such as abortion and gay marriage as the least important.

If making the point graphically will help, here it is:

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The top 5 or 6 are your winners.  Any questions?

And in case that didn’t quite sink in and you still want to argue about it, try this one:

0nbo2knqk0q06k_lpb7eew

Are we getting through yet?  Is it starting to get clearer?   Any talk about anything other than the top 5 or 6 topics, and preferably the top 3 or 4, is a distraction, waste of time and will see voters, especially those in the middle column critical to any electoral win, tune you out.

It is the economy, stupid.  That’s what the people are concerned with, what they’re most likely to base their vote on and what they expect you to be talking about.

Take a hint.

~McQ

Twitter: @McQandO