True That!

Cool Profile of Brooksley Born

From Stanford Magazine:

Shortly after she was named to head the Commodity Futures Trading Commission in 1996, Brooksley E. Born was invited to lunch by Federal Reserve chairman Alan Greenspan.

The influential Greenspan was an ardent proponent of unfettered markets. Born was a powerful Washington lawyer with a track record for activist causes. Over lunch, in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences.

“Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.

“What is there not to agree on?” Born says she replied.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself.

Smoking the Crack!

The New Yorker's James Surowiecki bought himself some awesome crack, smoked it, then wrote this:

Oddly, this simple explanation—that Barack Obama, Tim Geithner, and Ben Bernanke have adopted their strategy because they think it has the best chance of getting the economy back on track while taking the least systemic risk, rather than because they’re stupid, or corrupt, or “cognitively captured”—is one you rarely hear floated these days, even though it is, I think, almost certainly true.

Really?

Janet Tavakoli on C-Span Q&A

Stiglitz Tears The Obama Economic Team a New One!

From Bloomberg:

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent."

Or both!

"A Most Unusual Agreement"

From Salon:

Apr 17th, 2009 | SALT LAKE CITY -- In a highly unusual bankruptcy outcome, the developer of a luxury golf community near Park City bought it back for pennies on the dollar Friday because the leading creditor was unable to scrap together a bid and nobody else was interested.

Promontory, valued at $560 million before the recession took hold a year ago, was sold for just $30 million to a developer who walked away from $350 million in loans packaged by Credit Suisse and sold to hedge funds and other investors.

A Credit Suisse spokesman didn't dispute the loss but wouldn't comment. Dallas-based Highland Capital Management, a hedge fund that owns about 40 percent of the loans, didn't return calls from The Associated Press.

[snip]

"It was a most unusual agreement," said Richard Aaron, a retired University of Utah bankruptcy-law professor and Promontory's auctioneer.

Why is Obama Acting Like Such a Dumbsh*t?

From Bloomberg:

Now that we have a rough idea how President Barack Obama and his lieutenants plan to prop up insolvent financial institutions using taxpayers’ money, we’re left with a more difficult question: Why?

Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the “why” that’s so vexing. The who, what, when, and how are mere details, by comparison.

More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.

Regarding Asset Bubbles

Excellent article from Harpers back in February 2008, talking about the Dot Com and real estate bubbles, and predicting the coming cluster-f*ck. Here's a quick history of how FIRE (Finance, Insurance, and Real Estate) came to dominate the US economy:

The crash, the Great Depression, and World War II were a brutal education for government, academia, corporate America, Wall Street, and the press. For the next sixty years, that chastened generation managed to keep the fog of false hopes and bad credit at bay. Economist John Maynard Keynes emerged as the pied piper of a new school of economics that promised continuous economic growth without end. Keynes’s doctrine: When a business cycle peaks and starts its downward slide, one must increase federal spending, cut taxes, and lower short-term interest rates to increase the money supply and expand credit. The demand stimulated by deficit spending and cheap money will thereby prevent a recession. In 1932 this set of economic gambits was dubbed “reflation.”

The first Keynesian reflation was botched. To be fair, it was perhaps impractical under the gold standard, for by the time the Federal Reserve made its attempt to ameliorate matters, debt was already out of control. Banks failed, credit contracted, and GDP shrank. The economy was running in reverse and refused to respond to Keynesian inducements. In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not.

A few weeks after D-Day, the allies met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to determine the future of the international monetary system. It wasn’t much of a negotiation. Western economies were in ruins, and the international monetary system had been in disarray since the start of the Great Depression. The United States, now the dominant economic and military power, successfully pushed to peg the currencies of member nations to the dollar and to make dollars redeemable in American gold.

Americans could now spend as wisely or foolishly as our government policy decreed and, regardless of the needs of other nations holding dollars as reserves, print as many dollars as desired. But by the second quarter of 1971, the U.S. balance of merchandise trade had run up a deficit of $3.8 billion (adjusted for inflation)—an admittedly tiny sum compared with the deficit of $204 billion in the second quarter of 2007, but until that time the United States had run only surpluses. Members of the Bretton Woods system, most famously French President General Charles de Gaulle, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars. Opposed to the exercise of such “exorbitant privilege,” de Gaulle demanded payment in gold. With the balance of payments so greatly out of balance, newly elected President Richard Nixon faced a run on the U.S. gold supply, and his solution was novel: unilaterally end the U.S. legal obligation to redeem dollars with gold; in other words, default.

More than a decade of economic and financial-market chaos followed, as the dollar remained the international currency but traded without an absolute measure of value. Inflation rose not just in the United States but around the world, grinding down the worth of many securities and brokerage firms. The Federal Reserve pushed interest rates into double digits, setting off two global recessions, and new international standards and methods for measuring inflation and floating exchange rates were established to replace the gold standard. After 1975, the United States would never again post an annual merchandise trade surplus. Such high-value, finished-goods-producing industries as steel and automobiles were no longer dominant. The new economy belonged to finance, insurance, and real estate—FIRE.

David Seaton on Pakistan

David Seaton on what should be done with Pakistan:

The first thing to remember is that the Pakistan army, which basically runs the country still considers - and will always consider - India, not Afghanistan the major threat. Therefore if Pakistan's cooperation is desired don't let Afghanistan be a pawn in the struggle between India and Pakistan. Any India-weighted shift in America's foreign policy dooms any Af-Pak strategy to failure.

Settle the Kashmir question. Pressure India to allow the inhabitants of Kashmir to decide their future in a UN supervised referendum. Support the results.

America's efforts should not be directed toward the internal social questions of Pakistan, but should be directed toward bringing peaceful relations between the India and Pakistan

The US should not make any speculative alliances against any of the countries in the region and should not attempt to play India against Pakistan or China or any of them against Iran.

The object should be to defuse the entire area. Getting involved in local religious, geopolitical and social disputes is constantly re-lighting the fuse.

And of course, in order to make any progress at all in dealing with extremist Islam anywhere in the world, it is essential that the United States be more evenhanded in dealing with Israel and the Palestinians so that Muslims anywhere in the world who might be well disposed to the USA are not made to feel like damn fools or quislings. The United States should not allow Israel to drag it off a geopolitical cliff... if it hasn't been permanently dragged off it already.

More Change You Can Stick in Your Crack Pipe and Smoke it! Pt. 3

From Friday's New York Times:

The Obama administration said Friday that it would appeal a district court ruling that granted some military prisoners in Afghanistan the right to file lawsuits seeking their release. The decision signaled that the administration was not backing down in its effort to maintain the power to imprison terrorism suspects for extended periods without judicial oversight.

Stiglitz on the PPIP

Obviously, he doesn't like it, and nicely explains why:

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

[snip]

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Good Question...

At the end of an article about how the recession is affecting businesses in Berkeley, comes this very pertinent question:

Why is President Obama going along with all these Wall Street bailout fiascoes? Want to know my own personal theory? The guy is either the Hamlet of the 21st century -- or else its Dr. Faustus.

Is Obama like Hamlet, unable to step up to the plate and act in the face of obvious injustice? Or is he more like Dr. Faustus, having made a deal with the devil in order to get elected and then discovering too late that he doesn't particularly like having his soul owned by Mephistopheles -- but knowing that in order to get out of his contract with America's economic mafia, he would probably be dooming himself to becoming the next JFK.

Surprise! The Banks Are Fine!

Yves Smith from Naked Capitalism fisks today's overly credulous NYT article about the Treasury Department's bank stress tests. I've reprinted Yves' posting in full, because it bears reading:

Quelle Surprise! Bank Stress Tests Producing Expected Results!

Should this even qualify as news? From the New York Times:

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

The whole point of this charade exercise was to show the big banks weren't terminal but still needed dough, and I am sure it will prove to be lots of dough before we are done. But they now have the Good Housekeeping seal, so the chump taxpayer can breathe easy that the authorities are taking prudent measures to make sure his money is being shepherded wisely.

If you believe that, I have a bridge I'd like to sell you.

We said from the beginning the stress tests were a complete sham. Just look at the numbers. 200 examiners for 19 banks? When Citi nearly went under in the early 1990s, it took 160 examiners to go over its US commercial real estate portfolio (and even then then the bodies were deployed against dodgy deals in Texas and the Southwest). This is a garbage in, garbage out exercise. The banks used their own risk models to make the assessment, for instance, the very same risk models that caused this mess. And there was no examination of the underlying loan files.

The Times story does slip in some shreds of doubt, but a casual reader is likely to read past them. Consider these statements:

Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it...

Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

Yves here. So did you get that? They all will be declared to pass in some form, no matter how dreadful they really are (if the remedy is putting in more Federal dollars, rather than a receivership, then the fiction that the money is not being wasted must be preserved). But so as to look sufficiently tough, some banks will be treated harshly. If it winds up being, say, Fifth Third (which I am told by John Hempton is a very well run bank, publishes much more honest financials than its peers, but is in simply terrible geographies, Michigan, Ohio. Florida) and not Citi, then we know the process is not just hopelessly politicized, but shamelessly so. Back to the article:

The state of the industry will come into sharper focus next week, when big banks like Citigroup and JPMorgan Chase start reporting first-quarter results. Many analysts predict the reports will show banks are on the mend, with help from low interest rates, fat lending margins, dwindling competition and profits from trading in the financial markets in January and February. In the last six weeks, financial shares have soared on hopes that the worst for the industry is over.

But some analysts say investors’ hopes are misplaced. With the recession, banks are likely to record further large losses on credit cards, corporate loans and real estate.

“Nothing has changed with the fundamentals,” said Meredith A. Whitney, a prominent banking analyst who has been bearish on most financial institutions.

Yves here, Note the failure to point out that Whitney has been the most accurate in calling bank performance during this downturn. No, she is instead a mere bear. And the article also fails to mention that Leon Black, a distressed investor who has long been active in the real estate industry, is forecasting $2 trillion in real estate losses. I doubt the stress tests have that factored in. Consider the worst case scenario:

The tests, led by the Federal Reserve, rely on a series of computer-generated “what-if” projections in the event the economy deteriorates. Those include unemployment rising to 10.3 percent by next year, home prices falling an additional 22 percent this year, and the economy contracting by 3.3 percent this year and staying flat in 2010.

Based on the work of Carmen Reinhart and Kenneth Rogoff on financial crises, the expected trajectory for this crisis is for unemployment to peak in the 11-12% range, a fall in GDP of 5%, with it taking three years after the bottom for growth to return to normal levels, and housing takes over five years to bottom. And that is the typical trajectory for crisis countries, none of whom faced a backdrop of a global contraction. Whitney is calling for real estate prices to fall another 30%. So the worst case falls short of even likely outcomes, let alone a real disaster.

And the theater continues:

At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting.

Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs.

How does one parse tripe like this? First, the public private partnership program, aka cash for trash, is voluntary. Banks are not being compelled to sell. The idea that the banks "have to sell" is a canard. Second, the gaming of the program has already started (notice no lecture from Geithner about that?), so there is pretty much no risk that anyone will take a loss on the values they have in their books. The best summation of how bad this will get is from Rortybomb, who expects all the old Enron tricks to be employed (notice the terms of the PPIP prohibit the fund managers from gaming the process, not the banks trading among themselves. You can drive a truck through this oversight. And the Treasury has remained silent as the banks themselves have been loading up their balance sheets with toxic sludge, paying more than private investors are willing to bid).

I'm sure all the bankers understand full well the massive disconnect between talk and action, and are dutifully following Treasury's lead in maintaining appearances.

What The Heck Is Going On?

The New York Post reported two weeks ago that the big banks are buying up lots of legacy assets in the secondary markets, for much more than other investors are willing to pay for them:

One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The questions is: are the big banks buying these assets to keep the prices high on their balance sheets, or are they buying them to sell them at a huge profit via the PPIP? As has been widely reported in the right-thinking financial blogs, the PPIP has huge, on-purpose loopholes which make it easy to the big banks to form shell companies which will then buy these legacy assets from the big banks with a non-recourse loan 93% financed by the government. For example, let's say Citi Bank forms a shell company, called Shitty Bank, and capitalizes it with $70 million, which likely came from TARP funds. Shitty Bank can then borrow $1 billion from the PPIP with the $70 million as collateral, and then buy $1 billion worth of legacy assets, at 100% face value, from Citi Bank. Shitty Bank can then file for bankruptcy at any time, and default on the loan, leaving the taxpayer holding a $930 million PPIP bag in addition to the $70 million TARP bag. This scenario can be repeated over and over, until the taxpayer is on the hook for most of the estimated $4 trillion of toxic assets on the banks' balance sheets. There is no reason for anyone but the banks to invest in these assets, as neither the government or the banks have done the forensic accounting analysis necessary to inform serious investors as to what the underlying MBS assets are actually worth. We'll have to see how this all plays out over the next few months...

Ridiculously Good Article About the Crash

Two economists ask, in The Wall Street Journal, why the Dot Com bubble, which wiped out $10 trillion dollars in equity, did not crash the economy, while the housing bubble, which wiped out $3 trillion in equity, did crash the economy:

In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.

There's other interesting tidbits in the article, such as how the government underestimated the rate of inflation by miscalculating the consumer price index (CPI), keeping interest rates too low for too long:

In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.

With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off. As measured by the Case-Shiller 10 city index, the accumulated inflation in home-ownership costs between January 1999 and June 2006 was 151%, but the CPI measured a mere 23% increase. As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued. Even after the Fed began to slowly raise the fed-funds rate in May 2004, the average rate remained low and the bubble continued to inflate for two more years.

Comparing the US Financial Crisis to Those of Emerging Markets

Simon Johnson, IMF chief economist from 2007 to 2008, writes in The Atlantic that the US government is in bed with the financial elites that precipitated the crisis, just like in a banana republic:

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

Makes Me Want to Vomit Into My Own Mouth!

Glenn Greenwald discusses the government/private sector revolving door as it applies to the financial crisis:

Last night, former Reagan-era S&L regulator and current University of Missouri Professor Bill Black was on Bill Moyers' Journal and detailed the magnitude of what he called the on-going massive fraud, the role Tim Geithner played in it before being promoted to Treasury Secretary (where he continues to abet it), and -- most amazingly of all -- the crusade led by Alan Greenspan, former Goldman CEO Robert Rubin (Geithner's mentor) and Larry Summers in the late 1990s to block the efforts of top regulators (especially Brooksley Born, head of the Commodities Futures Trading Commission) to regulate the exact financial derivatives market that became the principal cause of the global financial crisis. To get a sense for how deep and massive is the on-going fraud and the key role played in it by key Obama officials, I highly recommend watching that Black interview (it can be seen here and the transcript is here).

[snip]

Rubin, Summers and Greenspan succeeded in inducing Congress -- funded, of course, by these same financial firms -- to enact legislation blocking the CFTC (Commodities Futures Trading Commission - Jose) from regulating these derivative markets. More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent -- and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity -- that it is mystifying that it is not provoking more mass public rage.

China to Best the US Again!

From Naked Capitalism:

A New York Times article tonight reports that China intends to become a world leader in electric and hybrid cars:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today....

To some extent, China is making a virtue of a liability. It is behind the United States, Japan and other countries when it comes to making gas-powered vehicles, but by skipping the current technology, China hopes to get a jump on the next.

The article then goes on to discuss the advantages (cleaner air) and difficulties (lack of public recharging centers, consumer worries about the safety of lithium ion batteries, disincentive of current cheap oil prices).

However, it fails to mention Detroit was once a leader in this technology.

Big GM Bondholders to Screw the Taxpayer?

This is pretty crazy:

Back on Monday I wrote about the Automakers and said this in closing:

And then there's the nearly $1 trillion in CDS that will trigger. There is no accurate way to know what the net exposure is on those, but I'd take the "over" on $100 billion, focused in you-know-where.

Here's the problem - I'm willing to bet that a huge percentage of those were written by AIG.

The government has provided a history now that says that if you are a holder of CDS written by AIG, you will get 100 cents on the dollar, even if the notes don't default. In addition that 100 cents is above what you would normally get even if there IS a default, because normally you have to tender the defaulted bond or the payout is limited by the recovery, and recovery on a defaulted bond is almost never zero.

So in this case the winning play, if you're a big bondholder, is to tell GM to suck eggs; you'll get paid 100 cents on your CDS even though AIG has no money, because the taxpayer will make you whole on those CDS, even if the bonds have a recovery in bankruptcy.

In other words you could conceivably get more than 100 cents if you hold those bonds - so long as you also hold a CDS as a hedge.

It must be nice to be able to screw the taxpayer for more than a 100% payout, right?

The bondholders "committee" is all made up of big players who presumably are hedged, ergo, this has to be assumed to be part of their "thought process" - if not the controlling factor.

Small bondholders on the other hand (who have no hedge, unless they were smart enough to buy lots of PUTs a few months ago) are just going to get plain old-fashioned screwed.

Since the only way GM survives is for it to get the bondholder committee to agree to restructuring it therefore follows that the only way this can happen is if the administration (and Fed!) makes very clear that all funding to AIG has been cut off and therefore no further "pass through" payments will (or can) occur.

That is, The Obama Administration has to bankrupt AIG to save GM, or we will instead see the banks again rip off the American Taxpayer through yet another "passthrough" CDS payout stream AND GM will go bankrupt.

Get ready America - you're about to get it in BOTH holes this time.

This is analysis and deduction based on the available and public facts - I have no proof - but I'll bet this is exactly how this deal will go down, and why.

PS: Every firm in America that has a significant amount of CDS outstanding is potentially subject to this same attack. It's all very nice that our government is permitting banks to rob the citizens like this, isn't it?