Commentary From the Mile High City

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Joshua Sharf

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May 26, 2009

Dispelling Myths

Douglas Ross over at Red Alert took a first pass through the political contributions of the Chrysler dealers who are losing their franchises, and noticed that virtually none of them contributed to Obama; that those who did contribute heavily favored Republicans, and that the ones who contributed to Dems at the Presidential level like Hillary.  So he asked if this might constitute some political juice in deciding whom to shut down.

A number of commenters pointed out that he hadn't looked at the contributions of those dealers who'd still be in business, so he posted both lists and asked readers to have at it.

Colorado is a swing state if ever there was one, which should make it especially vulnerable to this sort of political game-playing, if indeed it's going on.

It turns out that in Colorado, to the extent that there's any difference at all, those losing their dealerships are perhaps slightly more likely to have contributed to Democrats than to Republicans.

Of the 27 dealers keeping their businesses, 14 had made contributions at all, with only a little money going to Joan Fitz-Gerald, and the rest going to the NADA PAC, Republican candidates, and Republican PACs and committees.    Of the 11 losing their dealerships, 9 had made contributions, and while these are also heavily Republican donors, about $3500 went to Democratic candidates, the balance going to NADA and Republicans.

Ross found something interesting, asked a question, and made the raw data available, which is what good bloggers should do.  I'm just afraid that the fact that there doesn't seem to be any there there, at least not in Colorado, won't keep some folks from repeating this claim as fact.

May 21, 2009

Conflicts of Interest

The government, having already funnelled $5,000,000,000 to last fall, is now suspending lending rules to benefit its new wards, GM and Chrysler:

The exemptions come as part of a multi-pronged aid package for GMAC that will be laid out early this evening. The Treasury Department is also planning to announce a second bailout for GMAC of $7.5 billion, which is in addition to a $5 billion infusion made in December. More money could be coming soon, the sources said.
Oh, goody.  Now, full disclosure: I own a couple of thousand in 5% GMAC bonds, maturing in September, currently trading at $90 ($100 is par value), for an annualized yield in the 50% range.  This is considered junk, but people are willing to be roughly 1-9 odds that the company won't default.  That said, I would rather take that chance than to see GMAC bailed out time after time.

Chrysler Financial, which has historically provided loans to Chrysler's car buyers and dealerships, is expected to be wound down over time, the sources said. GMAC may need as much as $4 billion more to provide loans to its new base of customers, industry sources said.
Let's see if Chrysler Financial pays any retention bonuses to the workers who stick around to work themselves out of a job.

The FDIC is preparing to announce today that it has given GMAC access to the Temporary Liquidity Guarantee Program that allows companies to borrow money at lower interest rates, the sources said....

GMAC applied to participate in the program shortly after it became a bank holding company. But until now the FDIC had been reluctant to allow GMAC access to the program, given its shaky financial position.

The use of FDIC resources to rescue an auto lender like GMAC would be without precedent. If GMAC is unable to repay the loans guaranteed by the FDIC, the agency could be forced to raise the money through a special assessment on banks

For the Fed to make an exception to its rule separating banks and commercial enterprises would not be unprecedented. The Fed took such a step in its original decision to bring GMAC under the agency's umbrella and it made similar moves involving other financial companies.

So the FDIC will use federal money (i.e. our money, or maybe Beijing's money) to let consumers borrow at a lower interest rate to buy cars made by government car companies. 

If those subsidized loans at lower interest rate fail to perform (now how could that happen?), the government may have to take money from banks - who are now in no position to refuse the favor - in order to cover its losses.  The only precendent it can cite for waiving these rules is for GMAC itself.

Proponents of the auto bailout assured us that the government would never rewrite the rules to benefit itself.  Others of us didn't see how it could be avoided.  And now, GMAC is being used as the IV drip for GM and Chrysler.  Just as the "public option" for medical insurance will favor the government favorites, and drive out private insurance.

So, Scott Sperling, you still think this is capitalism at its best?

May 20, 2009

You Call This Capitalism?

If there's one thing that Ayn Rand and Albert Jay Nock both understood, it's that businessmen will cut deals with the government when they think it's to their advantage.  Economics may be the sea that business swims in, but if you need to buy off Ahab with a couple of the slower-moving whales well, hey, who asked them to be your calves?

The problem comes when business develops a sort of Stockholm Syndrome about the process, convincing itself - or trying to convince itself - that the presence of the whalers is actually a good thing, even as the herd gets thinner and thinner, the calves somehow never call and never write, and the cow down at the other end of the sand bar needs more and more plankton to get her in the mood.

That's the attitude on display by private equity fund mogul Scott Sperling's apologia in yesterday's Wall Street Journal ("Obama's Auto Plan Is Capitalism at Work").  Wrong on both strategy and tactics, is Mr. Sperling.

The Chrysler creditors are not bad or unpatriotic people. They are appropriately acting as good fiduciaries to their investors. But luckily for American citizens, the Obama administration is also acting appropriately by insisting it will only invest taxpayer dollars if the investment has a chance of succeeding. While the government was willing to pay a significant premium to the debtholders to avoid the "friction" costs that occur in a bankruptcy, the administration was not about to do anything stupid with our money.
There's almost nothing right with this paragraph.  In fact, the President did call the bondholders bad and unpatriotic.  Maybe some bondholders did bid up the price hoping for a government bailout of their own.  A nasty lesson in the dangers of arbitrary power may be valuable, but it's hardly, "capitalism."  And what of those who didn't, who merely priced in their place in line, free of public hectoring by the President?

There's nothing "capitalist" about the federal government going into partnership with the ruling party's major constituency.  Barring such partnership, there's no reason for it to care about bankruptcy's "friction" costs.  Sperling has no idea - none - whether the bondholders got a premium or not.   And while the government's new-found fiduciary conscience it touching, it would be more credible if it had shown up sometime before Obama Partners, ULC. contracted to double the national debt in four years.

Means matter.  If they didn't, we wouldn't have a Constitution that theoretically forbids this kind of neo-feudal behavior by Washington.  Even if, every time, the government managed to magically reproduce or improve on what the market or bankruptcy courts would have done, having a deus Obamica show up and bruit things about this way is extremely dangerous.

This is one reason I'm a Burkean conservative.  The bankruptcy laws have evolved over decades both to give order to the system, but also to embody a reasonably good way of sorting out competing interests.  No politician, or set of politicians is going, time after time, to do better than the accumulated wisdom of hundreds of thousands.

The self-deception that believes the lie
I wish I were in love again
Lorenz Hart, "I Wish I Were in Love Again," Babes in Arms
Mr. Sperling is a heavy, heavy Democratic contributor.  He's is in the business of brokering deals.  Why do I suspect the Mr. Sperling (and his partner, Thomas H. Lee) sleep well at night knowing - or at least, hoping - that it's unlikely that government's going to step in and rewrite their terms of their arrangements.  Beware, Mr. Sperling, many others have been rudely disabused of similar notions.

In the past, he and his company have refused to accept modified terms that didn't suit them.  We'd hear a different story if the government were a major investor in his latest fund, and started throwing its weight around to pick and choose his investments.

After all, we know how Tom Lauria reacted.

December 26, 2008

The Other Car Industry

The Japanese one, that is, both here and in Japan. As Japanese auto purchases plummet, Japanese car companies are ratcheting down domestic production.

Production of passenger cars in Japan decreased 20.3 percent in November from the previous year to 737,797 vehicles, while production of trucks here declined 20.9 percent for the month to 106,170.


Auto executives have expressed dismay at the fall in Japanese sales, which have worsened in the last two months.

Japanese plants are being idled to reduce production, and thousands of assembly line workers have lost their jobs in recent weeks.

In the meantime, Japanese companies are also cutting production at their array of plants here in the US, but so far have only cut contract and part-time workers. Despite cuts in Ohio, Indiana and Alabama production, Honda is avoiding layoff. Toyota has avoided them so far, but may be forced into cutting North American workers.

What does this mean? Mostly that American auto workers aren't competing with Japanese workers any more, but with each other. The Japanese labor market is driven by Japanese demand, and the American labor market is being driven by American auto demand. These plants were originally put here to meet domestic US demand, and that's what they're doing.

Secondly, Japanese multinationals are no more loyal to Tokyo than US-based multinationals are loyal to the US. Otherwise, these Japanese companies would be cutting US employment in order to keep their Japanese workers employed, exporting cars to the US.

Finally, beware a currency collapse. Should the dollar decline precipitously against the Yen, and 14% is not precipitous, even operations that are making money here in the US could be endangered. All those dollars that Honda is making only help the parent company if they can be profitably shifted to other markets or other facilities. Otherwise, they're only good here in the US. If those dollars won't buy enough Yen, or Bhat, or whatever, to finance improvements elsewhere, their value to Honda HQ is greatly diminished.

December 11, 2008

More Bailout Follies

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is im-possible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Adam Smith, The Wealth of Nations

Even though the bailout package now seems to be debt-based rather than equity-based, the basic dynamic hasn't changed - the government is going into business with the Big Three.  It isn't merely requiring such meetings, it's participating in them.

What's even weirder is Elisabeth Moss Kanter's discussion of the lack of green planning by the Big Three, as a condition for receiving public funds:

All three of the plans talk about how they're getting better at building cars to [meet] market demand. Pause for a moment and think about that. These are the biggest advertisers probably in the world. And that makes it sound like they're passive recipients of consumer preferences, as opposed to shaping consumer preferences. So I would ask [the car companies] what are you going to do in your advertising and marketing this time to guarantee that the public actually wants green cars?

Implicit in the patronizing notion that people can be bludgeoned by advertising into wanting something they don't want, is the notion that they should be.  By government fiat.  Leave aside the fact that the so-called "green" cars will create an increased demand for electricity that regulators are doing everything to not meet.

People aren't buying green cars because the payback periods (including increased and naturally-rising maintenance costs) extend well past the second century of the Cubs' rebuilding program.  If you pay more that you have to for the same item - in this case, getting from home to your job - you'll have less left over for everything else, including reitrement.  That's called a lower standard of living.

You might try to offset this by buying into one of the rent-seeking green companies, and that'll work until everyone buys in and reduces returns to market rates.  Inefficient investment is no more better for an economy than inefficient purchasing.

So what Prof. Kanter is proposing is that we use our own money to persuade ourselves to live more poorly.  As the Powerline guys put it, lower living standards aren't the solution, they're the problem.

December 10, 2008

Bailout Exit Strategy

Under what conditions would the government liquidate its proposed stake in the car companies?  In short, what's the exit strategy.

Should the companies become profitable again, there may be considerable pressure for the government to stay in the game and collect dividends.  And even if the car companies wanted to buy out the government, it might never be to their financial advantage to do so.  If the shares are over-valued, it's to GM's advantage to let them drop before buying.  If undervalued, GM's move to buy would be interpreted as such, and the government might well choose to them the shares appreciate.

But the real threat here is regulatory.  The Big Three would find themselves with a friend in government, more able than ever - and with a profit motive to boot - to muck around with the rules to the benefit of rent-seeking auto companies, and with a proven disinclination to defer to market discipline.

Our own Diana DeGette, Congressman for Denver, is Chief Deputy Whip, thus a part of leadership.  She's also the outgoing Vice Chairman of the House Energy and Commerce Committee, so will exercise considerable oversight of this monstrosity.

I just placed a call to her office for clarification (1:15 PM Denver time), and am awaiting a reply.


Power, Faith, and Fantasy

Six Days of War

An Army of Davids

Learning to Read Midrash

Size Matters

Deals From Hell

A War Like No Other


A Civil War

Supreme Command

The (Mis)Behavior of Markets

The Wisdom of Crowds

Inventing Money

When Genius Failed

Blink: The Power of Thinking Without Thinking

Back in Action : An American Soldier's Story of Courage, Faith and Fortitude

How Would You Move Mt. Fuji?

Good to Great

Built to Last

Financial Fine Print

The Day the Universe Changed


The Multiple Identities of the Middle-East

The Case for Democracy

A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam

The Italians

Zakhor: Jewish History and Jewish Memory

Beyond the Verse: Talmudic Readings and Lectures

Reading Levinas/Reading Talmud