In our new home.

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Please pardon me as I settle the blog into it’s new home. I will be updating MUCH more frequently now. The old URL http://theautoeconomy.blogspot.com/ will continue to function indefinitely but our new URL is http://www.theautoeconomy.com/

Update: Ok apparently WordPress didn’t import my post from blogger very cleanly so I’m going to have to go back and update all the formatting on them. They didn’t look like that originally…. promise.

We are de-globalizing

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The turmoil happening right now is the explosive unwinding of a business model that cannot be sustained by oil. AIG, bad mortgages, high unemployment, bank failures are not the causes of the unwinding, but the symptoms.

The Saudis, the Russians, the Venezuelans, the Mexicans all have falling output of oil. We have no alternative infrastructure in sight. Energy prices are down right now because factories are idle and not shipping anything. Energy prices are not going to stay down. This is the festering cancer waiting to come out of remission just as soon as the economy starts to turn around.

As a kid I had a favorite National Geographic betamax tape called Love those Trains that I would watch over and over. In part of the story, they follow a box car of lettuce that is picked in Southern California and finally delivered to a PTA luncheon in Boston. While I loved watching the trains, even as a kid I thought it was rather silly to ship lettuce from California to Boston. Even if Massachusetts couldn’t grow their own lettuce, I was sitting in the Garden State of New Jersey…. surely we, or some other close-to-Boston state, could produce enough lettuce to be able to supply Boston with salad instead of it coming from California.

We’re going to be forced to move to a more locally produced model of consumption. This will be a permanent change unless we develop and deploy an alternative fuel right now.

AIG argument

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We’re arguing about AIG v. GM on the Cheers and Gears site. The argument started over an article by the Baltimore Examiner that compares the situation of the two companies.

One member posted this:

In the interest of “keeping it real”:

1) The AIG money has given the US partial ownership. So if you want to pretend the auto loans aren’t a bailout, then I suppose you could do the same thing for the AIG buyout.
2) AIG used to make money and has a good chance of making money again. GM hasn’t made money for a long time and likely will never get out from under their debt.
3) A failure by AIG by all accounts that I have heard would be catastrophic. GM’s failure will be hard but is a much less substantial affair.
4) The eventual cost to save GM will likely be in the 100 Billion range. I have trouble keeping up, but I believe they have already received 14 Billion + 6 Billion to GMAC + future 16 Billion + future retooling money + EREV subsidies. Also they are worth -86 Billion as of the end of 2008. Given the cost/risk as compared to AIG, AIG is where the money should go.

I will agree that the union being blamed for GM’s problems is just silly and the AIG bonuses are horrible. But that is US-capitalism for you.

My response here:

1) We paid $180b to own 80% of a company with a market cap of $3.3b and that has outstanding liabilities of $807b. For comparison, with $180b, the Feds could have purchased the entire liabilities side of GM’s balance sheet and had about $3b in change.

2 a.) AIG has a poor chance at making money again. Their name is permanently tarnished. They’ve had to take down their sign on their NYC headquarters. They have about as much chance of making money again as Enron does. BTW, I also use the term “making money” very loosely. AIG never “made” money……. they “made up” money sure… but most of the money “made” by them was imaginary.
2 b.) If by a “long time” you mean two years… then sure. GM had a quarterly profit of $891 million dollars in 2Q 2007. Net income, excluding one-time items, was $1.4 billion.

3 a.) Catastrophic to whom? DeutcheBank? Royal Bank of Scotland? Barclays UK? That’s where the bailout money went. Of the 15 banks that AIG made payouts to, only 4 were US based. All of which already received TARP funds.
3 b.)General Motors, it’s dealers, suppliers, and affiliates employ millions of people. The hit on employment in this country and others would be catastrophic. Not even Toyota wants to see GM liquidated because in the process it would take out suppliers that Toyota relies on. The quickest way to kill Ford and Chrysler would be through an uncontrolled G.M. bankruptcy. You don’t think that would be catastrophic?

4.) If $180b were to be extended to GM as a long term, low interest loan. The government would get it’s money back, with interest, Iaccoca style. We are getting a grand total of $0 back from AIG… because they weren’t loans.

So sure…. I’m all for “keeping it real”

What I don’t understand is this attitude of “Yeah the AIG bonuses piss me off, but we had to bail out AIG. Let GM die.”

Someone care to explain?

Anger Increasing Greatly

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The government has given $170 billion of your dollars to AIG to stabilize them.

Angry yet?

For that $170 billion, the government owns 80% of a company worth $4.33 billion as of this writing.

Angry yet?

Via the New York Times – Andrew Cuomo sifts through the bonus payouts for AIG employees. From the $165 million in bonuses paid, 73 people received $1 million or more.

Angry yet?

The bonuses were “retention” bonuses designed as incentives for the recipients to remain with the company. Eleven people who received such bonuses over $1 million are no longer with the company. One person was paid $4.6 million as a retention bonus. He/She is gone.

Angry yet?

If not, what’s it gonna take?

Oh yeah…. the CEO suggested that up to half of each bonus be voluntarily given back.

When does the name change?

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Why are we still calling this a recession?

From the Wikipedia and Economic Depression is: A depression is a sustained, long downturn in one or more economies. Considered a rare but extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.

  1. The Commerce department releases that in Q4 2008 the economy contracted at 6.2 percent. Predictions that in 2009 the economy will be the worst since 1946.
  2. The horribly underestimated jobless rate is 7.6 percent. Likely to hit 9 percent.
  3. California’s jobless rate is 10.1 percent in January.
  4. The Dow is at it’s lowest point since 1997 and dropping.
  5. 40% of all subprime mortgages issued from 2005 – 2007 are expected to default
  6. Indicators of price deflation are showing.
  7. Mortgages, credit cards, lines of credit all slashed.
  8. Bankruptcies surge 40%
  9. US exports fall 20%. Japanese exports fall 46%.

That flushing sound

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AIG posted a nearly $62 billion fourth quarter loss. So far, AIG has received $150 billion in taxpayer money and as of a plan announced today will receive and additional $30 billion of your dollars.

But these aren’t loans. These are gifts to AIG meant to help free up lending and spur the financial system. Here’s why it won’t: AIG’s total liabilities as of September 30 2008 were $951 billion. They can’t write new insurance policies because they don’t have the capital to back them up. No more streams of income, no way of paying that debt. The only way to pay their debts is to sell pieces of themselves off at decidedly above market prices.

Watch those dollars swirl round and round as they go down the drain.

To put the size of this in perspective. The government could have purchased 98% of General Motor’s liabilities for the same amount it has given to AIG. At least GM has a chance of surviving.

The Eye of the Storm

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Here is the difference between what has happened and what is about to happen.

In the past 12 months, most of what has failed has been fairly standard, though sub-prime, adjustable rate mortgages. You get a $180k mortgage for a $200k home and get an adjustable interest rate that resets every year after 5 years or so. You paid the standard principle + interest + escrow. What has happened is the first bunch of homeowners who’s mortgages reset could no longer afford the new payments. Some refinanced, but a good many went into foreclosure. The foreclosures put downward pressure on home prices. When this happened, even fewer people could refinance their homes because the values of the home often fell below the amount of the first mortgage. The vicious cycle started and that’s how we got where we are today.

Keep in mind that 12 months of that have brought down the largest investment banks in the country, put Bank of America, CitiGroup, and Wells Fargo on the ropes, and forced mergers of banks that never would have happened in a normal climate.

Here is the fun part.

With an Option ARM loan you have the option to make partial principle and partial interest payments. What you don’t pay gets amortized back into the principle of the loan up to a maximum of 115% or 125% of the original loan value or once 5 years has been reached. Many people pick these types of loans because it was the only way they could afford the monthly payments on their McMansion. In the meantime, property values have fallen across the board making refinancing out of these loans virtually impossible. Once these loans are recast (similar to the resetting of the interest rate in an ARM), the home owner goes from making a minimum payment that doesn’t even cover interest to a fully amortizing payment that covers all interest AND principal. And remember, principal is 15-25% higher than the original loan balance. Most people with these types of loans also put no money down or got a second mortgage to pay for their money down. They owe 25% more than their home was valued at way back at peak housing prices. The payments jump to full amortization anywhere between 80% to 200% of the old house payment.

Now, with all that in mind. Lets look at the numbers.

The end of 2008 was the time period where the highest dollar value of standard ARM loans was due to reset. At the peak, about 36 billion dollars per month in loans reset. There is a lag with standard ARMs because the payment shock is anywhere between 0% and 20% increase in monthly payment. Many families can handle it for a short while before they start falling behind.

May/June 2009 is when the Option ARMs begin to reset. This wave has 3 small dips. The peak of the first wave hits us in December 2009 and reaches $25b per month in recasts. It drops off for a bit then shoots up to $30b a month in recasts around June 2010. Drops back to $20b per month in December 2010 and then surges to $40 billion per month in June 2011. Now when these loans recast, there will be a lot less lag time because the monthly payment will jump anywhere from 80% to 200% of what the homeowner is used to paying. With no way to pay and no ability to refinance, homeowners will throw in the towel much faster.

Are you ready for the punchline brought to us by Dr. Housing Bubble?

As of December of 2008, a stunning 28% of option ARMs were delinquent or in some stage of foreclosure. This is before any recasts have even kicked in!

Remember, the banks have already failed and consolidated from just the first mess. Bank of America, Wells Fargo, and Citigroup are already dangling on the cliff.

Who’s next?