First off, thanks to everyone who reads my blog and particularly to those who take their time to write in with comments.    As you can see from the comments section, I post all that come in - both positive and negative - so long as they don’t contain offensive language.

The stories going on today in America generate passion on both sides.   Many of my entires on the automakers, government, taxes etc have compelled you to write in with your thoughts, both thanking me and telling me that I am an out of touch idiot.    To be honest, I’m fine with both because I know these are tough times and in this business you have to have a thick skin.

Many of you have written in with your stories.    It’s wonderful to hear from all parts of America.   As such, I would though like to take a minute to tell you something of my history.  It’s far from a tale of the “media elite.”

I was born in Gardena, California.   It’s a downtown, working class section of Los Angeles.    My mother left a difficult home situation in St Louis as a teenager, moving to California on her own to find a job, eventually finding work as a telephone operator for AT&T.   My father joined the Navy out of high school and was in the service for the 9 years.  After getting out of the Navy he stayed in California and found work at defense contractor TRW.     We moved when I was 3 to a small house in Torrance, California and my father went to college at night.   My mother worked for AT&T (and its subsidary, Pacific Telesis) for 30 years.    My dad ended up owning a gas station in La Habra, California during the gas crunch and I enjoyed working there with him when I was a kid (for no pay, of course).   Clint Eastwood came by to fill up once, which was cool.   We eventually moved to San Diego county just in time to see the economy slow and the real estate market tumble.

That difficult California economy compelled us to leave California  when I was a teenager and move to Virginia, where my father is from originally.    It was a good move, though a forced one.    As many of you may have seen in our “My Hometown” series, my parents remain in our small Virginia town to this day.   Though they suffered economically over the next few years, they made it through and are doing well today.  My dad is 67 years old and is at his desk every morning by 7am.  He also volunteers at a Civil War battlefield memorial on many weekends.  My mother is 70 and still works hard, taking classes and doing taxes for a tax preparation company from January to April.   I am incredibly proud and humbled by the sacrifices they made over the years and how hard they continue to work.

My wife’s story is also one for the books.  Her father died of a heart attack when she was a junior in college and her mother passed away from breast cancer when she was just 21.    Though her parents were divorced and she has step-parents, she and her younger sister in many ways raised themselves.    They were far too young to lose both parents.   My wife today has a successful career, built in part because she moved five times to five cities in five years for her employer.    She is a role model for me and everyone who knows her.

I attended public school my entire life.   I am the first person in my family to go to college out of high school, and chose Virginia Tech in part because it was an inexpensive state school that we could afford.    My parents did without nice cars to make sure I didn’t have to take loans.   Once in New York I ended up putting myself through law school at night while trying to build a career in journalism.   Through some luck, and a lot of hard work and many sleepless nights things have gone well.   My parents remind me every time we talk to remember where I came from, what they went through, and to keep working hard.  I take nothing for granted.

The point of this is merely to dispel some of the myths about those in my seat.    Many of the stories we talk about every day - real estate bubbles, job losses, tough times - have been lived through by many of us.   Perhaps I write about California more than other places because it will always be, in some ways, home.  It’s sad to see it going through tough times.   Wherever the fault may ultimately lie good journalists know that at the beginning and end of every story is you; the people who are living through the headlines.  If we ever forget that please remind us.

Thanks again for writing in and Happy New Year.

Cheap and easy credit helped get the American economy into this mess, but apparently cheap and easy credit is going to get us out.   At least that’s what General Motors is hoping, but the government-backed easy money may create more headaches than it cures.

Today the government agreed to give GM financing arm G.M.A.C an additional $6 billion dollars.  It’s a move to help GM provide financing for consumer car purchases and comes on top of the $174 billion dollar loan provided to GM and Chrysler.  The market likes this news and GM shares are on the rise, but will this meaningfully change the game for the company?

Tougher credit has been a part of the downward spiral of General Motors.    As the Journal article notes:

GMAC finances about 80% the wholesale purchases of GM’s cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom.  The car company said last month that a 45% sales skid for October was fueled by GMAC’s restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago.

Credit is blamed for some of the pain, but it doesn’t mean that more easy credit will provide the solution either.   There are some telling numbers that give a different view, one that mitigates some of the optimism around the GMAC announcement today.  Let’s start with the size and scope of the numbers.

The $6 billion dollars GMAC received today certainly will not all go toward financing GM cars, but to make a point about what the money may mean let’s say that it does (and with GM’s announcement today that it is now offering 0% financing for up to 60 months on many cars the company is clearly covering more and more of the cost). $6 billion dollars used entirely for financing would pay for 200,000 vehicles selling at $30,000 each.    While GM would love to sell an additional 200,000 cars and trucks, this is actually a fairly small number.   Remember, even with November’s 41% drop in sales GM still sold 153,404 vehicles in the U.S that month.    Clearly GM won’t finance 100% of the cost of a car, but even at lower percentages it is difficult to see how this additional $6 billion will meaningfully move the GM sales needle.    $6 billion is real money, but for a company with hundreds of billions in revenue per year it is actually a drop in the financing bucket.

There are two other potential negatives here as well; more delinquent car loans and the continued destruction of the value of cars on the road by flooding the used car market.

With everyone fixated on home foreclosures few are looking at the auto-related problem: delinquent car loans and repossessions.    According to lender Capital One Financial, nearly 10% of its car loans were late, with more than $100 million dollars being deemed uncollectable.   Other articles note this trend is national, with more and more consumers unable to pay their car loans on time, if at all.    Credit agency Experian notes that loans at least 60 days late have risen by 12.7% in November from last year’s same period.

Still, GM announced today that it will lower the required credit score of car buyers eligible for GMAC financing from 700 to 621.   Credit scores, known as a FICO score, run from 850 down to about 350.   850 is considered perfect credit and anything below 620 is considered subprime.    This is presumably how GM arrived at the 621 credit score figure for lending cut off.   Credit has been available for people with credit score above 700 (about 55% of the population) but apparently those consumers haven’t been biting.   So GM’s answer is to give credit - using government money - to the 25% or so of the population with credit scores just above subprime.

Second, the car market is already saturated with cars for sale.  Prices are weak as both new and used car dealers try to do what they can to move cars off the lot.    Repossessed cars and cars coming off lease add even more inventory.    Yet GM is doing its best to push new cars out the doors to borrowers who may end up becoming delinquent on the loan, sending more cars to auctions and onto used car dealers’ lots.    This pushes prices down further, and the cycle begins again.

General Motors and its 6,000-plus car dealers need to sell cars to support an infrastructure built in large part on the 16 million cars sold as early as two years ago.    They seem unwilling to accept the new reality that it may be difficult to sell 11 million cars in 2008, with Nissan predicting a similar sales figure for next year.    Even if the lower credit score borrowers GM is tempting with taxpayer funded dollars buy a new car, the data from Capital One and other shows that about 1 in 10 are likely to pay that loan late or not at all.

We have too many foreclosed homes, we don’t need more repossessed cars in their driveways.

Interesting interview with Grant Thorton Partner Kim Rodriguez today.  She has been working in and around the auto industry for 20 years and few know more about the industry from a financial perspective than she does.

We discussed the big issue few seem to be talking about - the pension obligations.  It is an incredibly difficult situation.   On one hand the men and women of the industry worked for a bargained benefit; the pension.   This was part of their deal and many count on this money as their lifeline and primary retirement income.

On the other hand the pension costs - estimated at $13 per worker per hour more than the non-domestic auto companies in America that have little to no defined benefits - are the primary reason the cost structure is so much higher for GM, Ford and Chrysler.    Higher costs, lower selling prices.   It’s a trend that has in large part gotten these companies to where they are today.

So how to solve the problem?  We asked Kim.

Scary story of the day: California may be broke in two months.

According to the AP:

California’s chief financial officer warned Monday that the state would run out of money in about two months as hopes of a Christmas budget compromise melted into political finger-pointing by the end of the day.   Republican Gov. Arnold Schwarzenegger began the day on a cheerful note, suggesting that negotiations with Democratic leaders could lead to a budget deal as early as this week to help close the $42 billion shortfall that is projected through June 2010.Let’s repeat that: $42 billion dollar budget shortfall.   That is about 2.5 times the loan just provided to GM and Chrysler.    And one wonders if the outcome - begging for a federal bailout - will be the same as with the automakers.   As much lobbying power as the automakers have, can any group have more lobbying power than the government itself?

If the Federal government has to step in to help with jobs, payroll and pensions it will be a tall and expensive task.   According to the State Controller’s Office, California has 238,816 employees on the payroll.    The monthly payroll disbursement in October was $1.595 billion dollars.   Simple math tells you that the average payroll check = $1.595 billion / 238,816, or about $80,000 per year for each California state employee.    That is the average, indicating many in the state make much more.   And the generous state pensions guarantee much of that income is going to be paid for life.

The billion dollar question then is: if California does go broke, will the U.S. taxpayer be on the hook for those salaries and pensions?

Let’s hope not, because the burden is substantial.   The Golden State has a leaden problem in payroll, especially as many of the biggest departments in terms of number of workers are those that are related to public costs and tax collection and disbursement.    Tax money being used as payroll for those who figure out how to collect and spend more tax money.   Circuitious at best, frustrating at worst.

The 11 biggest departments in the State by total number of employees are as follows, listed by number of employees as of October 2008:

• Transportation (across 12 districts & administration) 20,675
• Higway Patrol 10,805
• Motor Vehicles 9,514
• State Insurance Fund 8,068
• Employment Agency 7,772
• Franchise Tax Board 6,484
• Forestry & Fire Protection 5,750
• Corrections Administration 5,532
• Justice 5,222
• Parks & Recreation 4,730
• Board of Equalization 3,950

The oddly-named Board of Equalization is the department that collects sales and use taxes and helps disburses the money.   Taxes propogating more jobs related to taxes.

By the way, the California Alternative Energy Senior Financial Authority is a department of just one, and the Commission on Aging emplys just three persons, despite that fact that dealing with energy and demographic trends are some of our biggest challenges.

While I don’t have the link embedded, be sure to go to our video page and check out my interview this afternoon with State Controller John Chiang.

On a side note, here’s a marketing tip to the UAW: Instead of complaining that foreign automakers got “unfair” tax breaks by the U.S. southern states to build plants there as the primary response to public anger over the $17.4 billion dollar rescue loan, a better public relations move might be to discuss the pay scales of government employees.   At least the UAW is making cars.

With all the negative news this year it’s nice to find a headline to smile out.   Thanks to the smart folks at The Onion for this “story.”

Here’s the scenario: The roof of your house is on fire.   At the same time a tree falls in your yard, smashing your neighbors fence.   The neighbor comes out and you begin discussing the broken fence, how to fix it and who should cover the cost.   You spend lots of time talking about this, reach a deal and feel good about it.    All while your roof keeps burning and eventually the entire home burns down.   The fence deal doesn’t look so good after that.  Neither does the recently-approved auto loan package in that it does not address the “fire” of the massive UAW pension obligations.

The Wall Street Journal describes the primary terms around the $17.4 billion dollar loan as:

The deal’s ambitious targets for the companies include replacing two-thirds of their debt with stock; using more stock instead of cash to fund retiree health-care obligations; eliminating much-criticized union “jobs banks” that pay laid-off auto workers; and establishing wage structures and workplace rules that are more competitive with foreign rivals.

Notice the pension costs faced by GM and Chrysler are not even discussed.   They are obvious in their absence.   It is clear that the pensions are sacrosanct, the cow so sacred that it dare not even be discussed.   Sadly, that cow is also the one kicking the lamp over in the barn and setting off the inferno.

Reference again the New York Times story a week ago laying out the cost differences between the domestic and foreign auto companies.   According to the article, on average GM, Ford and Chrysler pay $3 per hour more in actual wages, $5 per hour more in vacation and overtime, just $1 per more in current benefits, but a whopping $13 per hour more in legacy costs such as pensions.  Put another way, the legacy costs per worker per hour are more than all the other higher costs combined.   Yet the UAW, automakers and the government only continue to discuss the wages and health care issues and leave the real problem of pension reform presumably to the imagination.

The problem is growing worse by the year, as the UAW workforce continues to age and place an increased burden on the companies.  Check out this page from the UAW’s own website, written back in 2003.   It notes that the average age of a GM/Delphi worker was 48.9 that year with the average length of service at 23.3.   30 years of service is the primary retirement figure.   This means that in less than 7 years (2010, as this article was written in 2003) most GM/Delphi workers would be eligible to retire with full benefits.   All the the ripe old age of 56.

56 years old.  Today, that is basically middle age.  The average lifespan of an American is now nearly 80 years.     It is very likely that many workers will be getting benefits for longer than they actually worked at a given company.

If the domestics were more profitable than their foreign counterparts the problem may not be so severe.    Yet they are less profitable, indeed not profitable at all.   The Times article also notes that the Detroit 3 sell their cars for an average of $2,500 less than Toyota, Honda and others.  Higher costs, lower margins and selling prices.   It doesn’t a PhD in economics to understand the problem.

The reality is simple: until the domestic auto companies can figure out a way to deal with their crippling legacy and pension costs, they will continue to be at a significant cost disadvantage to their non-union competitors.   The union and its members no doubt consider the pension untouchable.   Understandable, given that more than a million retirees count on it.    Yet the pension is also the problem, and the thing that will likely permanently prevent them from ever being truly cost competitive.

Which brings us to the decision no one wants to address: find a way to wind down the pensions or find a way to wind down GM, Ford and Chrysler.    Years of fiddling with other aspects of the problem have delayed the need to get to this hard conclusion, but nearly everyone knew it was coming.    The downturn in the economy and credit markets is a problem, but not the problem.   It is merely the “black swan” event that exposed the structural flaw.   It’s like having $10,000 in credit card debt on a $100,000 per year salary, having your salary cut to $50,000 and then blaming your bankruptcy on the pay cut.   Yes, the pay cut hurt, but the real problem was the initial debt load.

If the pension plan is not addressed and altered in a serious manner soon, the only option will be bankruptcy and a breaking of the plan regardless.   The cow may be sacred, but it’s not immortal.

This just crossing … the UAW is unhappy with some terms of the auto loan and will ask President-Elect Barack Obama to change some of the terms it views as ‘unfair.’

The union demanded the loan - got it  less than 2 hours ago - and now wants it changed.  You can’t make this stuff up, folks.

Below is the official UAW release.   It’s clear they believe the incoming administration will help them change what they view as ‘unfair’ terms.

INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE & AGRICULTURAL IMPLEMENT WORKERS OF AMERICA – UAW
RON GETTELFINGER, President ELIZABETH BUNN, Secretary-Treasurer
VICE PRESIDENTS: GENERAL HOLIEFIELD • BOB KING • CAL RAPSON • JIMMY SETTLES • TERRY THURMAN
IN REPLY REFER TO
1757 N STREET, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: (202) 828-8500
FAX (202) 293-3457

For immediate release December 19, 2008 UAW applauds auto loans, but says workers must not be singled out for unfair conditions DETROIT – “We’re pleased that the Bush administration has acted today to provide urgently needed emergency bridge loans to America’s auto companies and to pursue a process for restructuring outside of bankruptcy,” said UAW President Ron Gettelfinger. “This will keep the doors of America’s factories open, keep Americans working and prevent the devastating economic consequences for millions of Americans and thousands of businesses that would have resulted from a liquidation of operations by one or more auto companies.” The UAW, Gettelfinger said, is reviewing the documents released today. “All stakeholders – management, directors, bondholders, suppliers, dealers, workers – will have to participate in shared sacrifices to help the industry move forward,” he said, noting that UAW members have already made substantial sacrifices to help make the domestic auto companies more competitive. “While we appreciate that President Bush has taken the emergency action needed to help America’s auto companies weather the current financial crisis, we are disappointed that he has added unfair conditions singling out workers,” said Gettelfinger. “These conditions were not included in the bipartisan legislation endorsed by the White House, which passed the House of Representatives and which won support from a majority of senators.” “We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,” said Gettelfinger, “as we join in the coming months with all stakeholders to create a viable future for the U.S. auto industry.”

Quick thoughts on the auto rescue loan news…

GM and Chrysler received their loans from the U.S. government today.   Ford is not participating in the program.    General Motors and Chrysler will get $13.4 billion now, with GM to receive another $4 billion in February.    The loan requires the automakers to become “viable” by the end of March, 2009.    As I wrote last week, “viability” in three months is a tall order.

The fundamental issue is quite simple: the companies spend more than they make.    They are working on the spending part.   GM announced today after the loan was approved that it will continue to cut costs, particularly in payroll, and it hopes to cut hourly labor costs to a total of $4.8 billlion by $8 billion.    That’s a 60% reduction in total pay, so it is clear more job and pay cuts are coming.

The problem is that there are two sides to any balance sheet: costs and assets.  GM can work to cut costs but it has little control over the revenue side of the story.    The point is, very simply, GM and the Chrysler must sell more cars and make money on the cars they sell.   And with the economy in the tank and credit harder to come by, car sales are falling.    And the Detroit 3 have very little control over  the economy and consumer.

The government wants all this and wants it wthin three months.    I would like to believe the car companies can do it, but since they only have control over half of their problem I am skeptical.   Look for more financial need ahead.

Denmark-based Saxo Bank each year comes out with a list of “outrageous” predictions for the next 12 months.    According to the firm they are an “attempt to predict rare but high impact ‘black swan’ events that are beyond the realm of normal market expectations. Compiled as part of the bank’s 2009 Outlook, the thought exercise this year present a dismal view of the global financial landscape.”

Here are a few of Saxo Bank’s “outrageous” predictions for 2009:

1. There will be severe social unrest in Iran as lower oil prices mean that the government will not be able to uphold the supply of basic necessities.
2. Crude will trade at $25 as demand slows due to the worst global economic contraction since the great Depression.
3. S&P 500 will hit 500 in 2009 because of falling earnings, vaporizing housing equity and increased cost of funds in the corporate sector.
4. Chinese GDP growth drops to zero. The export driven sectors in the Chinese economy will be hurt significantly by the free-fall economic activity in the Global Trade and especially of the US.
5. Reuters/ Jefferies CRB Index to drop to 30% to 150. The Commodity bubble is bursting, with speculative excesses so large they have skewed the demand and supply statistics.

David Karsbol, Chief Economist at Saxo Bank says “it is not even outrageous to call this the worst economic crisis ever. We have, regrettably, been rather precise in almost all predictions from last year. What used to be outrageous now seems to be the norm.

What are some of your predictions for next year?

Despite being widely hated, ridiculed and otherwise smacked down by the public, the $700 billion dollar TARP program may turn out to be the best investment the taxpayer made all year.

The folks over at Bianco Research (run by Jim Bianco, one of the smartest and most respected bond analysts in America) published a note today called “Tracking the Trust Cost of the TARP.”  This is their conclusion:

The Treasury infused $247.26 billion into 184 companies over the span of the credit crisis. In exchange for these bailouts, the Treasury received securities that are currently valued at $255.10 billion.  This means the TARP bailouts have actually turned a profit for U.S. taxpayers as of this writing. After factoring in the current value of the securities the Treasury received in exchange for its bailout money, the Treasury has turned a net profit of $7.84 billion for a 3.17% return on investment over the period.

There’s a phrase we don’t hear much these days, “turned a profit.”

The primary reason, Bianco argues, has to do with the nature of the preferred share investments the government made:

Every recipient of TARP funds, AIG and Citigroup excepted, had to agree to the same terms. In return for a capital infusion, the Treasury would receive 100% of the infusion value in the form of preferred shares of that company. This preferred pays a 5% dividend in the first three years and a 9% dividend after that. In addition, each company also would have to give the Treasury warrants equal to 15% of the infusion value.

This follows a story earlier this week that government money-receiving insurance firm AIG sold some mortgage related assets to the government.   From the story:

In the deal announced Monday, the Federal Reserve Bank of New York made a senior loan to Maiden Lane II to buy the residential mortgage-backed securities for an initial purchase price of $19.8 billion. The six-year loan is secured by the $39.3 billion face amount of the securities and bears interest at one-month LIBOR plus 1%.

Notice the sale price to the government is about 50% of the face value of the securities.   Granted, that face value may be less today than it was when the loans were made, but it is highly unlikely the value of those assets has dropped by half.   Additionally the government loaned the money to AIG and is making a few percentage points in interest.   If the value of these assets rises, the government will be holding them on the books at more than it paid.      Buying low, hopefully selling high.

We are still in the early innings of the TARP game, but the very early score indicates that the much-maligned $700 billion dollar rescue program may actually give a little back for the use of your money and, at the minimum, we get to hear a bit of all-too-rare good news.