Turns out you can issue either ultimata or ultimatums...at least according to dictionary.com.  So, in keeping with my day of poetry (wrote two today), I go with the old fashioned, somewhat rhyming, Obama's Auto Ultimata.

With that bit of tivia out of the way, a bit of background for those not keeping score at home.  We (the U.S. Taxpayer) provided bailout money for two of our Big Three automobile manufacturers: Chrysler Motors and GM.  Despite flying in with his two counterparts, Ford's CEO Alan Mullaly has declined bailout funds.

As part of the deal to provide bailout funds ($19.3 billion to GM; $5.5 billion to Chrysler), the automobile companies were required to come up with a plan as to how they were going to become viable enterprises and to submit that plan to the government--in this case, to the Obama administration's Auto Task Force.

The Auto Task Force was composed primarily of adminstration officials, including Treasury Secretary Timothy Geithner and Economic Council Chair, Lawrence Summers, along with economists and professors, a UAW representative and numerous administration aides for background work.  After reviewing the proposed changes to the way GM and Chrysler do business, the task force and the President decided that neither plan would be able to ensure that we didn't need a second and a third...maybe even a fourth bailout for these companies.

In GM's case, President Obama and his task force determined that with more work to pare unprofitable product lines, the company had the flexible manufacturing infrastructure and enough of a global purchasing strength to turn itself around.  Part of the deal to give GM what amounts to a 60 day working capital loan was the ouster of GM President Rick Wagoner.

There's been a HUGE hullaballoo by Rush and the dittoheads about how asking for better, more specific, more future oriented plans (and the resignation of Wagoner) amounts to government meddling and hubris.  But for those who take the time to read the summary reports by the Auto Task Force, the moves make a lot of sense. 

As to Wagoner, my personal opinion is that he was tone deaf and slow to adapt his company (although, ironically...he was better than Chrysler's head who gets to stay) and he gets a $23 million retirement package.  I think he'll be just fine.

In the meantime, GM has 60 days to amend its plan; prove that its marketing schemes are working and if it doesn't work, the option of bankruptcy--a stick Obama was quite comfortable wielding in his speech on Monday.

For Chrysler, the news was not so good.  The report indicated that their plan was much weaker than GM's.  In addition, they do not have the flexible plants capable of quickly adapting to build new models, nor the global purchasing power that GM has.  In effect, the Obama administration told them they need a white knight (putting Fiat forward as the potential savior of the company via a merger) and that otherwise, they would not be considered a viable company.  Chrysler was given 30 days to come up with a deal with Fiat, along with 30 days worth of operating funds.

Much has been made by conservatives (especially Limbaugh) about how these ultimata are driven by Obama's green obssession.  They claim (erroneously as it turns out) that the SUV's, trucks and behemoths that the Big 3 had pushed were the most successful lines of autos and that consumers don't want little gas sippers, they want big gas guzzlers.

The data do not support Rush's assertion (despite his claim that he's 100% right).  Midsize and large SUV sales are down 57.9% and 58.5% respectively with regard to American car makers.  Small cars, by comparison, were down only 32.3%  And the auto manufacturer impacted the least in car sales to Americans?  Hyundai...with its dependable, small, gas sipping car line.

My opinion overall?  I think Obama's absolutely right when he says we need to have a vibrant, future oriented, innovative car industry in the United States.  I don't believe any of the big 3 are going to get us there without the pain of a reorganizing bankruptcy, although Ford might eke it out.  It's certainly wouldn't be reasonable for us to provide more money to these companies at this point. 

I realize this is in contradiction to my original opinion on bailing out the Big 3.  I thought the problems were less dire and the organizations were more capable of nimble reorganization.  We've saved some jobs in the short term...and if GM comes up with a more achievable plan and Chrysler gets married, we may save some of those jobs for the long term.

But the real source of jobs for the long term is for American car companies to come up with innovative solutions to American travel needs.  Otherwise, they will just be consigning us to oil dependence, wars and aggression over oil rich countries, and an endless stream of bailouts.

While chugging through the LA Times this afternoon, I came across an excellent article by David Lazarus addressing an upcoming State Senate Bill in California.  SB 35, sponsored by State Senator from Long Beach, Jenny Oropeze is a watered down version of an earlier bill that was rejected after heavy negative campaigning by the California Restaurant Association.

What would the CRA be against?  A law requiring that individuals and businesses be informed that it is their right to ask that leftover food from their events be donated to a local Food Bank or Food Pantry.  As Lazarus points out, in a state where 1.3 million children go to bed hungry each night, it's nigh on criminal for 1.5 million tons of food to go into landfills each year from caterers, hotels and restaurants.

(Let's fill bellies, not land.)

At the Santa Clarita Valley Food Pantry, where I was President of the board for a few years and volunteer for a few more, I was firsthand witness to how an effective partnership between restaurants and caterers can be easily and efficiently built.  We even received a grant from the City of Santa Clarita to help us buy needed equipment for proper food handling and I believe they sponsored our training as well.

Lazarus's column inspired me to write Senator Oropeza, encouraging her to put some bite back into this second bill.  If anyone should feel pressure in today's economic climate, it should be an industry that would prefer to waste food than find ways to use it to help those in need.

If you want to be an activist on this issue, too...write to Senator Oropeza (and your local Senator too for good measure).  Here's what I wrote:

Honorable Ms. Oropeza:

I know I am writing from outside your district, but I am compelled to add my voice to that of David Lazarus at the LA Times regarding your developing legislation, SB 35.

As former president of the Santa Clarita Food Pantry, I have firsthand experience with the necessity and value of partnerships between restaurants and food pantries/food banks.  We worked with several local businesses and the City of Santa Clarita to turn what would have been landfill into “tummy fill” for local children who made up over 50% of our client base.
 
The process to educate employees at the restaurants and caterers was easy.  Food handoffs were scheduled cooperatively.  Hungry children, seniors and adults benefited by being fed more nutritious and fresh foods.

Since I moved to Orange County, I’ve kept in touch with the folks at the SCV Food Pantry.  This economic crisis has nearly tripled their client base over the past 18 months.  Enhancing the public/non-profit partnership to feed hungry people during this time makes sense on every level.

 Please do not bow to the pressure of the California Restaurant Association.  If anything, in this public climate, they should be on the defensive if they try to undermine your timely, compassionate and foresighted bill.

Feel free to use any part of the letter in writing yours...except the part about being President of the Food Pantry.  That would likely confuse the issue!

As a side note, it feels great to be an advocate on this issue again!

I've been chatting with a few friends (including my best friend, Dan) about the request by Detroit's Big 3 (GM, Ford and Chrysler) for a bailout.  This is one of those issues where research leads to more research, questions lead to more questions, and the complexity of the problem (and the many iterations of its solutions) hurts the brain.

Dan shaped the bailout question in broad terms, "Is there value to having a vibrant, U.S. based automobile manufacturing sector?"

Given that just under 2% of our work force is employed by either the auto manufacturers or their suppliers, and that the profitability (or not) of the D3 (as I will affectionately refer to GM, Ford and Chrysler in the balance of this blog) is capable of moving our GDP in statistically significant increments, my answer is yes.  There is significant value to having the aforementioned sector in our economy. 

Which, as I mentioned, begs a new question.  Is a bailout the most effective and efficient way of achieving that goal?

Answering that question is where things start to get really sticky and complex.  Here's what I know so far:

1.  According to the Center for Automotive Research, if the D3 fail completely, the country will lose 3 million jobs in the first year.  Only 240,000 of those jobs will be auto workers, per se.  The rest of the job losses will come from "supplier shock" in a ripple effect across parts manufacturers, auto industry suppliers and the businesses that supply their raw materials.

2.  According to CAR's same report, the economic cost to the government in terms of lost revenue (tax, Social Security contributions) and expenditure (unemployment benefits) would be $156 billion over three years.

A partial failure, reducing the D3 by 50% would be less catastrophic, resulting in job losses of 2.5 million and government costs of $108 billion.

3.  The causes of the current crises involve a complex interaction of (at minimum) the following situations:

a)  The current economic crisis (high unemployment, wealth lost in the stock market, tight credit markets) left car sales at their lowest levels in two decades last quarter.

b)  The D3 was content to ride an SUV/Truck demand bubble, appearing to believe that Americans would always want their vehicles super-sized.  In this way, they were much like those who believed that real estate prices would always rise.

c)  The United Auto Worker's union--a powerful beast indeed--has not budged on compensation issues to any significant degree; essentially bleeding their parent companies with a highly paid workforce that is resistant to change.  (Auto workers at Chrysler and Ford make about $63,000 per year in cash.  Tool and Die workers are closer to $72,000.  Retirement benefits average about half that compensation level.)

d)  Increasing fuel prices and a growing awareness of both environmental concerns and the negatives of our dependence on foreign oil have contributed to the shift in demand from gas guzzlers to gas sippers.

I'm still grappling with the pros and cons of a D3 bailout.  Here's what I've got so far:

Pro:

1.  Bailing out these guys should save the major portion of 3 million jobs in the short term.

2.  The cost of the bailout (taking Obama's proposed $50 billion as the figure rather than congress or Bush's $25 billion figure) is likely to be less than the cost to government if the D3 fail.

3.  The 1980 Chrysler bailout "worked," saving 2/3 of workers' jobs at the time and eventually returning a profit of $311 million to the government on a $1.2 billion investment/bailout.

4.  In an economy already headed for a deep recession, we don't need another huge hit to employment, consumer confidence and production.  (The niggling fear in the back of my mind is that the failure of the D3 would change the "r-word" to the "d-word," tipping the scales into depression.

Con:

1.  The D3, their leadership and the UAW got into this mess through a lack of foresight about changing demand trends, by not investing in flexible plants that could switch more easily with shifts in demand, by being greedy and protectionist about wages and benefits, and by being tone deaf about environmental concerns.  Such a catastrophic lack of leadership among management and the union should not be rewarded (or perpetuated) by a bailout.  The bailout proposals as they stand have not requirements for making sure that substantive changes are made to the way the D3 conduct their business.

2.  Failing business models should be allowed to fail unless by their failure they will create a systemic failure.  This will be a hard hit, but it's not on the same scale as the (hopefully) averted financial sector meltdown.

3.  We've got too much on our bailout plate already with the $700 billion already pledged to shore up financial institutions and restore credit markets.

4.  There's no guarantee that $25 billion or even $50 billion will be enough.  GM's monthly "burn rate" is $2 billion.  Ford's is in the neighborhood of $2.5 billion.  At that rate, they'd have to entirely retool in under a year. 

Bottom line?  I'm still on the fence on this one.  In order for me to be for any bailout, there would have to be substantial strings attached.  In the interest of some semblance of blog brevity, I'll get into details on what I think those should be on Monday.

In the meantime, I'm looking forward to folks pointing out pros and cons I might have missed.  And I'm glad I'm not Obama right now.

for taking a day off yesterday, I decided to bone up on Treasury Secretary Paulson's announcement of his "did I say we'd buy troubled investments?" about face to our $700 billion bailout/investment in the nation's financial system.

When you're already sick and tired from being actually sick and tired, nothing says "sleep, my little one" like a Paulson press conference.

Nonetheless, I slogged on and actually formed an opinion of the new strategy, despite the (ahem) less-than-polished presentation skills of the guy who's in charge of all that moola.

First, some background. 

As you recall, in September the U.S. financial sector came down with a giant case of the financial flu, due in most part to the decisive bursting of our housing bubble and aided by the iffy-nature of (unregulated) asset backed securities used to create liquidity in the mortgage and consumer credit markets.

Paulson asked for a blank $700 billion check to stop the flu from turning into Ebola and congress balked.  One week later, having put in place several necessary caveats about executive compensation and taxpayer participation in potential profits, Paulson took charge of what we now lovingly refer to as TARP.  TARP stands for "Troubled Asset Relief Program."

What Paulson announced on Wednesday makes that name moot.  Rather than purchasing troubled assets from banks in order to provide them with greater liquidity, Paulson decided to invest directly in 8 major banks so far(representing 55% of the U.S. banking system according to Paulson) by purchasing preferred stock.

Paulson took most of the press conference to get to his reason for the change of plans which is, in a nutshell, that buying up troubled assets would not have provided enough liquidity in a timely enough fashion to ease credit markets quickly.

One of the fundamental issues with the original request, as I recall, was that there didn't seem to be a reliable way to value these assets, which are essentially similar mortgages compressed into bundles of credit risk  and sold as securities.  It was a concern I shared, but I was somewhat reassured by Paulson's positive assertions that it would be possible to assess, correctly price and acquire these assets.

Turns out, we were both wrong.  Paulson in his belief that such a gargantuan task could be done, and done by the government, and me in believing smarter people than me could get that job done.

So in an odd way, I'm relieved by this development.  It's cleaner to invest in banks directly than it is to take on their drek and try to make sense of it.  It fulfills the same goal--getting banks stable by increasing their capital, thus freeing them up to begin lending once again.

What it doesn't do is account for a worse downslide to these troubled assets than we currently project.  That's of concern.

And there also doesn't appear to be any direct requirement of the banks receiving the capital that they actually use their newfound liquidity to lend money.  While it's true that banking regulators issued a statement saying that all banks have benefited from this program and thus all have responsibility to lend, to provide dividends, to manage compensation and to mitigate foreclosures...well, let's just say that I'm not sure strongly worded lectures on responsibility carry as much weight as contractual obligations.

Paulson also declared that he is on a "time out" with the balance of the TARP funds ($350 billion), waiting for incoming President Obama to have his say with the rest (and with congress's approval required).  At least, that's his plan for now and one that I think makes sense.

To sum up?  I think the about face is a good decision that leaves me more uneasy with Paulson's leadership of these programs than I was before.  Unfortunately, it appears Wall Street agreed with me.

One benefit of flying long distances and vacationing in your in-laws' house is that you get plenty of time for reading.  So that's what I've been doing, today focusing for the main part on articles about the Bush Bail-out Plan for Wall Street.

I'd been studiously avoiding commentary until I had a better handle on what was being proposed, what Congress was doing with the proposal and what the long-term implications of such a large intervention might be.

I must disclose that my reading has only partially answered the first and second questions...and not provided much illumination at all about the last.  Lacking a degree in economics or a long-term professional background in finance, I'm not capable of providing an expert opinion.  But I am capable of providing a reasonably well-informed opinion (which is all I ever claim to do anyway).  So here goes.

My instinct, after watching last week's gut-twisting, roller coaster ride on Wall Street, is that Treasury Secretary Paulson's plan to prevent wide-spread financial sector failures with a buy-out of bad debt is exactly the right bitter medicine to stabilize a seriously ill economy.

Some on the left (and on the far right) have characterized the plan as a bail-out of Wall Street at the expense of Main Street.  They question why everyone should pay to stabilize (and redeem) greedy companies that got themselves into this mess.

It's a rare thing for me to agree with Bush, but a quote from his speech yesterday summarizes my gut reaction:  "With the situation becoming more precarious by the day, I faced a choice, to step in with dramatic government action or to stand back and allow the irresponsible actions of some to undermine the financial security of all."  (As a minor aside, I think his speech writer would have made a better choice if the government action was described as "drastic" rather than "dramatic," but that's another topic.)

Simply put, we need intervention or the whole financial sector would impolde a-la the Depression.  It's a storm we could weather in the long term.  But the short term would be brutish indeed.  And while it may be that a deep recession or depression would have a deeper psychological impact on our American addiction to easy credit and religious fervor for consumerism, I find it more palatable to consider an intervention and rehab than a cold-turkey withdrawal.

There's also an underlying fallacy to the Wall Street versus Main Street argument.  Populists are arguing that Wall Street reaped all of the reward of our recent housing binge while homeowners (and taxpayers) are left holding the bag.

Andrew Foster, a Law professor at Duke University, puts it this way.  "Certainly some of these consumers might have been irresponsible in taking on more debt than they could handle.  The vast majority, however, were simply trying to buy a piece of the American Dream.  Instead of building wealth and enjoying the security of homeownership, they now find themselves trapped in a nightmare of predatory debt and foreclosure."

What Foster fails to note is that the "vast majority" who were "simply" (read innocently) trying to buy their piece of this particular American Dream...well, many of them were doing so by taking on more debt than they could handle.  An act that is, according to Foster's own reasoning, irresponsible.  There's granularity here in terms of responsibility. 

Yes, financial institutions are responsible for not properly vetting borrowers as credit worthy and able to repay.  Yes, government is responsible for not providing effective oversight in an excessively laissez faire market.  And yes, individuals are responsible for betting on the come--for expecting housing prices to ever rise, thus guaranteeing their decision to buy a bit more house than they needed...or even to buy at all.

I am glad that congress is adding some balance to Bush's original proposal.  We should restrict the compensation for failed executives who will benefit from taxpayer-supplied bailouts.  We should reap the future profits of the risk taxpayers are ponying up to today.  And there should be limited relief for homeowners who are genuinely struggling to pay mortgages due to adjustable rates...but not for those who, despite being able to pay, want the government to mark down their debt to current market values.

Bush also indicated in his speech that there would be time later to assess blame.  I suppose he's hoping for after January 2009.  In this, I disagree with him entirely, regardless of his motive.  Yes, we need to craft a plan to absorb the bad debt and protect financial markets.

But if we don't start parsing the causes of our current crisis now, the solutions are likely to be poorly aimed and only partially effective.   As I said above, there is plenty of blame to go around.

One concept we need to seriously reconsider is the sacred American Dream itself.  Not everyone can, or should, be a homeowner.  And certainly not everyone can, or should, borrow huge amounts of money at exorbitant interest rates in order to fulfill a dream that can, on a down market, turn into a nightmare.

I used to be vaguely amused by the customers who came into my bank to complain about a twenty-five cent service charge.  I would muse that they were survivors of the Depression and so they wanted to hold onto every penny.

In today's market, they look pretty astute.  I am positive that not a single one of them is defaulting on a predatory mortgage.