A Big-Three-Bailout argument that just might work...

When they couldn't convince anyone they had a clue what they were doing, the Big Three resorted to doom-and-gloom about all the spillover damage onto poor, innocent workers that would ensue if they failed. But even that isn't working. Maybe it's too abstract? Not enough emotional appeal?

Don't worry, Silas X to the rescue! In this video, I show them how to really win over the hearts and minds of our elected representatives!

"Cynical comment left elsewhere" of the day

I've been pretty fed up with the combined favoritism and outright stupidity in the financial system these days. This has led me to guess that any exchange involving a promise from a large, old (and therefore probably protected at all costs by our Overlords in Washington) corporation is going to, less and less often, be treated as something they have to *sigh* actually honor. With Sears and K-Mart reinstituting layaway (in which you make installment payments and then, after the last, receive the product), I figured this would be just another promise you can't trust anymore.

Well, a former happy customer of layaway services, calling herself "Princess of Swords", didn't seem to notice this trend and so disputed my prediction in a discussion on a Megan McArdle post. (UPDATE: previous link was to the wrong site.) Here, I post my response, in which you'll start to understand the basis for my pessimism:

******

Princess_of_Swords: Thanks for taking the time to detail your experience with the intricacies and standard practices prevailing with respect to layaway at the time you availed yourself of it.

Now I'm going to explain to you how it works in the real world.

In the real world, an obligation no longer means anything.

-GM was obligated to pay pensions. They didn't even bother to internally classify them on the same level as a bond, until forced to by law.

-Insurance companies are obligated to pay when disaster strikes. They fight as hard as they can to avoid paying, even for plain vanilla cases.

-Individual consumers buy things on credit, deferring the first payment for a long while. They are routinely caught not having saved for that big first payment.

-Securities brokers engage in naked short-selling of stocks, which obligates them to produce actual ownership of that stock at a later date. Yet as we've seen recently, they've ended up flooding the market with fake stocks and then casually aver that they "can't locate your stocks" and offer to reverse your purchase as if it were no big deal.

-Gift card issuers are unilaterally stealing money from gift card owners on the grounds that "they need it" because they're in financial trouble, despite having obligated themselves to treat the gift cards as equivalent to cash.

-AIG got a massive bailout from the Fed, but, we were assured, they would be obligated to pay a hefty penalty interest rate and start immediately and orderly unwinding their enterprise. Well, the Fed went back and cut their payments in exchange for nothing, thus debasing the Fed's assets (and thus the dollar). And AIG has done virtually nothing to liquidate its assets.

You get the point. I just don't care how you think things used to work back then. We are in a new world, where only us responsible commoners have to keep our word.

And even *more* GM ROFLcopters!

This is too rich. Daniel Gross of Slate writes in defense of propping up the Big Three automakers. But since Slate recently started putting links in the middle of articles instead of at the end, we see that right in the MIDDLE, they post a link to Gross's previous article from '03 where he REJECTED the claim that the auto industry was doomed. Check out these gems:

"...the Big Three enjoy remarkably large market caps: $21.5 billion for GM [now under a tenth of that -- SB].... Throw in all the money that has been lent to the companies, and you have to come to the conclusion that either there's an awful lot of stupid money invested in the survival of the U.S. auto industry or the declinists are mere alarmists."

"...the Big Three are unlikely to seal their own near-term doom for the sake of short-term labor peace. It's safe to assume that the companies will gain the upper hand in negotiations ..."

Yeah, why would unions shoot themselves in the foot? And why would GM have anything but a long-term perspective?

"Ford, as Moneybox has described it, is a profitable bank lashed to an unprofitable carmaker."

Now, without the profitable part!

"...it's hard to go out of business when you have a great deal of brand equity, ready access to the capital markets, and the potential to print money when you have the right product mix at the right economic climate."

I really have to hand it to Slate: highlighting an author's unflattering earlier work is quite a selfless, helpful act!

(Cross posted at the ever-more-foot-in-mouth Megan McArdle's blog.)

ROFL = rolling on floor laughing
ROFLcopter = internet meme alluding to mechanization of this phenomenon

GM outdoes itself again

Finally, mainstream investors are wising up to the completely ridiculous assumptions you have to make to justify investing in General Motors. A Deutsche Bank analyst has finally set a target price of GM stock at $0. But here's what will really refuel your ROFLcopter:

GM bonds maturing in less than 3 years now yield SEVENTY-****ING-FIVE PERCENT!!!!!!

(Scroll down to "Last Sale" at the bottom. Thanks to rluser at Marginal revolution for pointing me to a free bond price site.)

The time it takes for investors to Set Things Straight is way too long.

GM attempts to boost sales by losing (some of) the weasels

So CNN's Money reports that GM is trying its employee discounts for everyone program again. What this means is that it will give everyone, not just its employees, their cars at n% under the MSRP. More importantly, that in turn means that so long as program exists, everyone gets the same price. The article in fact notes that this converts their retail outlets into "no-haggle" operations of the kind used by GM's own Saturn brand. (Toyota's Scion does the same thing.)

This has long been something I've wanted car manufacturers to do. Not the discount necessarily, but ensuring that everyone pays the same price for the same car. Car salesmen have a well-earned reputation for using every legislative and psychological trick to gore you for as much as they can on any purchase. And it is this fear of being "played" that led me (and undoubtedly lots of othes) to put off buying a car. Who wants to go through that? Half the dealerships I went to left me wanting to vomit at their vileness.

Think about that for a minute. As an automaker, you use advanced technology most can only dream of. You have enormous, well-capitalized facilities for training, for testing, for building. You accomodate thousands (if not millions!) of design constraints. And what do you depend on for your cash flow? What barrier must your ultimate customers bypass to have a chance to give you money?

"So what kind of monthly payment were you looking for? ... Uh huh, up to ...?"
"Now, we're going to see what kind of financing deal we can get for you, okay? If you could just stay for a few minutes, in case the bank wants to talk to you. It'll just be a few minutes, I promise."
"Oh, yeah, those guys just need a few more minutes to look at your car, so we can give you the best deal, it won't be much longer. Now, which option did you want to go with?"
"Oh, just one more thing before you drive off, we'll need you to talk to our finance department about extended warranties, which I never mentioned before today."
"Internet sales department: please call Lisa at ..." (!!!)
"Okay sure, but I've never used SYNC ..."

Who enjoys dealing with that? Not me. While obviously I'm not one of the geniuses currently in charge of a large corporation, I strongly suspect that they would realize greater sales and a more liquid auto market if they could just signal their commitment to fair dealing and ditch some very useless middlemen (who these days usually know less than the customer about the car) by using this sales model. Certainly, there's something to be said for squeezing out the consumer surplus from less savvy buyers. But it kind of defeats the purpose when the real impact is to get most people to just say, "You know what? **** it. I'm just not going to bother." (Discretion like that would have been welcome in the recent real estate bubble.)

(Of course, the real reason such garbage can persist is that the retail car sales lobby has, in every state, been successful at severely restricting retail car sales, including internet sales, thereby killing the kind of competition that would eliminate vile sales tactics. Also, not suprisingly, this doesn't stop people like Malcom Gladwell from using instances of this vileness (like race/sex discrimination) as an indictment of free markets.)

So keep it up, GM: maybe you'll be able to chug along an extra six months, more than enough for your shareholders to dump their take on some idiot.

So why aren't you shorting GM, liar?

With all my doomsaying about GM, all my warnings about the emptiness of their warranties, shouldn't I be taking action based on this certainty? Well, good point. In strategizing about the implications of my pessimism for my next portfolio decisions, I forgot to include GM, mainly because I associate "short-selling" with "risking being screwed by a dead cat bounce.

But you don't have to do it that way. Instead, I can just buy some long-term, far-out-of-the-money puts. Check out this list for GM options expiring in January '08. My eyes are on the $2.50. Bonus: I can dump the options if some news temporarily makes the value surge.

Another bonus from using this method: No ill will from my brother :-P

Profit opportunities for Silas: oil and GM

Back to the two most frequently discussed topics on this blog.

First, let's talk about oil. Though by the end of the day, this may change, the spot price temporarily went below $120. Time to strike when the iron is hot? If I bought the double-oil-return ETF discussed last week (DXO), and it were to return to its previous high, that would be a nice 46% return. (Btw, y'all oil options traders are accurately factoring oil's massive volatility into the implied volatility term in your options pricing, right? Okay, just checking.)

Second, let's talk about GM. I have been claiming, since studying GM's history back in '05, that a bankruptcy was near, and so my brother and I have been discussing an even odds bet that would pay off if bankruptcy happened, or some other even of equivalent lameness, such as: defaulting on any bond, PBGC takeover of legacy obligations, refusal to pay legacy obligations, or government bailout. I'm not sure if we ever agreed to a bet value and a time frame, but a few weeks ago I emailed my brother some news about GM, and he reiterated his position that there would be no bankruptcy, so if we haven't agreed to something, I could still get an even odds bet in.

While I did post some news about GM's lameness last Friday, I have some more. Here's a Reuter's article detailing GM's rising defaulting insurance premiums and falling bond prices. Right now, you must pay 47% of the amount insured, so $47 to insure $100 of debt. And you know what? Most people, facing that much to insure something, just don't buy it, and bear the risk themselves. Heck, that's what hospitals do for their liability insurance, which can get that high.

It also lists the prices of GM bonds, but strangely, Reuters prefers to list the cents on the dollar (click on "first vlog post") price, and never the yields, neither the current yield, nor the yield to maturiy. But my own calculations give about 12% current yields for short term bonds and 18% for long term bonds based on the numbers there

But strangely, the prices of GM bonds that I found on my Scottrade account gave a different story. (I can't seem to find a free no-hassle source for bond prices I can link.) I don't remember the current yield, but it listed GM bonds maturing in December of this year as trading with 9.3% yield-to-maturity, and bonds maturing in 2011 -- 3 years from now! -- as paying, and make sure you're sitting down, 29% YtM. Twenty-nine percent!!! There are banana republics right now that pay lower interest on their debt! There are reckless shoppers right now with lower credit card interest rates!

Why I can't stop laughing at GM

Because they just posted a large quarterly loss.

...greater than their entire market capitalization. (market cap being ~$6.5 billion)

...by more than a factor of two.

...for a second time.

...in under a year. (check the Q3 2007 column)

Did I mention their uncovered obligation to contribute $46 billion (7 times their market cap) to cover legacy costs?

And the steadily high cost of fuel scaring people away from their only profitable line of cars and forcing them to close plants (though this post will NOT get the oil label, since I think we all know they would be f'd even if magic fairies gave everyone free oil)?

And how they're so desperate they may even sell Hummer -- when its value is at a historical low?

And the subprime mortgage crisis ripping up its other formerly-profitable arm, GMAC?

And how they think dumping the brains behind the cars is the way out, since they can't touch unionized factory workers?

HAHAHAHAHAHAHAHAHA!!!!!!!!!!!!!!

Okay, okay, I can breathe again. Ah, that felt good. Now, for part that will scare the hell out of you:

First, given all the costs GM has to cover, there are only two reasons anyone would pay a positive price for GM shares:

a) because they can turn around and sell it to another sucker on its next upswing, and

b) because expect GM to be able to stiff their pensioners -- not have to pay the full legacy costs, courtesy of a lenient bankruptcy court judge (oh, no, no, can't think about bankruptcy of GM, can we now?) and an undercapitalized Pension Benefit Guarantee Corporation.

And second? GM is listed on the bluest-of-blue-chip Dow Jones Industrial Index.

I think I'm going to cry now.

GM Watch: Ve haf vays of making you sell us tires!

Very strange story on CNN's Money today. It looks like GM Daewoo got a court order requiring two tire makers to keep selling tires to Daewoo, a GM owned subsidiary.

Huh? Now, why would GM need a court order to get someone to sell them car parts? Here's the key part of the story:

Hankook Tire Manufacturing (000240.SE) and Kumho Tire (073240.SE) stopped supplying tires to GM Daewoo's main Bupyeong plant at 0400GMT Friday, calling for an additional 12% price hike on top of a 5.5% rise agreed with GM Daewoo in March.

Only having read this article, it's hard to know the full story. Did Hankook and Kumho agree to sell the tires at a certain price and then reneg? Or did the agree that the tires *could* be hiked by at least 5.5%, and upon later reflection realized they couldn't justify selling the tires except at 12% more?

The former seems unlikely, since it would have made more sense for GM to just pay the extortion and sue to get the money back later, rather than take the hit to production described later int the article (without percentages). But then, the latter seems unlikely too, because what is the point of such an agreement?

I guess it all comes down to the intricacies of Korean law, and the tight relationship between businesses, unions, and government.

But having to sue to get your tires? Sorry, it just makes GM look that much worse.

GM cutting dividend, jobs, irresponsibility

Well, it looks like GM is going to finally suspend its dividend.

Gee, you mean we have to pay the wages for labor performed fifty years ago before the enterprise's residual income claimants? Who'da thunk?

This is something I've been demanding for a long time.

They will also be trying to cut jobs. They had some "success" with their buyout program in which they tried to pay all their US workers to go away and shut up about their guaranteed jobby. As the eminent Winterspeak was clever enough to point out, the people most likely to take the buyouts are the competent workers. They get the buyout money, plus the income from their next eager employer. Anyone who refuses to take the buyout -- and you know, is putting together your next car -- knows damn well he can't rook anyone else to pay him for what he does.

And for those of you with GM warrantees needing work? Well, I hope you'll like getting in line behand granny's life support money. I'm sure you'll look real noble.

Setting GM and corporate pensions straight

So apparently GM is back in the news. Mark Thoma does his usual thing of posting a lengthy quote without his own analysis, of a New York Times piece in which Roger Lowenstein discusses the history of GM and the legacy costs that are currently bringing it down.

Many, many people think it is legacy costs or bad management or fuel costs that is causing GM to falter. While I've said this in many posts across the internet, it's time to set things straight on this blog: only the legacy obligations can account for GM's poor health.

Why? It's simple. Even if you were to go in and replace whoever you think is a fool at GM, with whoever you think is capable of doing a superior job, that still wouldn't save them. Because those very same supergeniuses would just get bid away buy someone that doesn't have to dock off the legacy costs from the supergeniuses' pay!

Failure to recognize this insight has led to some monumentally stupid analyses of the issue. For example, the perpetually hate-able Malcom Gladwell blames GM's problems on the magical dependency ratio, ultimately claiming that when a company can do the same tasks with fewer workers, that makes it harder to pay retirees!

What happened in GM's history was this: management convinced the unions to accept lower wages in the present, in return for guaranteed pensions later -- that is, deferred compensation. And where would the money for those pensions come from? "Durr, well GM's always going to be superprofitable, no matter how many people they have to support, right?" Well, that's what the unions had to be thinking in order to accept such a deal, in which they didn't have oversight in the (non-existent) pension fund. (It would have made much more sense just to take the higher wages and divert them to a union-controlled pension fund, but I guess if you think GM can't fail ...)

Today, such practice of having an unfunded pension -- or, in effect, stuffing the pension fund with low-grade GM bonds -- would get management thrown in jail, and only recently are they making them actually, heaven forbid, fund the pension.

The upshot is, GM should have taken the wage savings and invested them in a diversified portfolio. But instead, they saw the cheaper labor as free money and threw it off as dividends. And that, my friends, is what enrages me about the whole thing. As deferred compensation, the pension is effectively a wage and thus should have priority over debt. Yet even up to today with an underfunded pension, GM is (and has long been) throwing off dividends. No dividend should be paid until GM has bought a third-party annuity and health insurance plan for everyone they've promised those things to.

The surest sign GM's going to face bankruptcy? Check out this AP article:

The chief executive of General Motors Corp. dismissed speculation that the largest U.S. automaker might soon seek bankruptcy protection ... Comments in the past week about a potential bankruptcy are "not at all constructive or accurate," Rick Wagoner said Thursday.

That certainly sounds like a weasel! "Not constructive"? Right, because it's our job to help you rook people into trusting that you'll be around for a while. And people thought I was crazy for avoiding GM in fears that the warranty promises are a joke...