‘Viability’ is key to the White House bailout of the auto industry
By Peter Grier | 12.19.08
If there’s one key word in the White House’s announcement of a $17.4 billion rescue package for Detroit automakers, it may be “viable.”
To get badly needed money now, GM and Chrysler under the terms of the deal have to agree to use the money to become financially viable by March 31, 2009. (Ford has said it does not need immediate help.)
For months, administration officials publicly have admonished troubled auto firms that they must “become viable” or “show viability.” This fall, the White House made sure that regulations for the Department of Energy’s loan program to develop more fuel-efficient vehicles included a whole viability section.
It’s not clear whether the Obama administration’s hands will be tied by its predecessor here. But to the Bush team, “viable” is a synonym for “drastic reform,” which in turn would include big concessions from workers, management, bondholders, and other stakeholders in the industry.
“If a company fails to come up with a viable plan by March 31st, it will be required to repay its federal loans,” said Bush on December 19.
The White House package is the lifeline that the traditional US-headquartered auto industry has sought with increasing desperation for months. Without it, GM and Chrysler likely would have been forced to declare bankruptcy before the end of the year. Ford has enough cash to soldier on, but has warned that it would be gravely hurt by the demise of its domestic competitors.
Extensive holiday shutdowns have shown the depth of the industry’s problems. Plants often close for two weeks at the holidays, but Chrysler has announced that all 30 of its North American plants will be shuttered for at least a month due to low sales. Ford’s North American plants will be closed for an extra week in January. GM will close 20 plants, some for all of January, to trim its stock of unsold cars.
In announcing the auto rescue during a brief morning appearance, President Bush said that it is his belief that during normal times bankruptcy would be the best way for the auto firms to make the changes they need to continue in business. But these are not normal times, he said.
“In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action,” said Bush.
About $9.4 billion will be available for GM immediately, if it signs a contract agreeing to the administration’s viability conditions. Chrysler will get an immediate $4 billion infusion. Further funds, up to the $17.4 billion total, would come after the start of the New Year.
The money will come from the Treasury Department’s $700 billion financial rescue fund, the Troubled Asset Recovery Program (TARP). Secretary of the Treasury Henry Paulson said on December 19 that Congress now must release the second half of the $700 billion, because the first $350 billion has all been committed.
Not everyone in Congress applauded the move. Sen. Judd Gregg (R) of New Hampshire, one of the architects of the TARP bailout plan, said using fund money for auto firms instead of financial institutions is a “troubling” precedent.
“I also question whether General Motors and Chrysler will truly take the painful, yet necessary restructuring measures to ensure that these so-called loans aren’t simply throwing good money after bad,” said Sen. Gregg.
Under terms of the auto bailout, “viability” is defined as showing a positive net present value, taking into account all current and future costs, plus the ability to repay the government’s loans, according to a White House fact sheet. That’s the condition that GM and Chrysler are supposed to meet by March 31.
The bailout also sets targets for auto firm fiscal actions, including a two-thirds reduction in debt, accomplished by swapping debt for equity in the companies; the elimination of the controversial jobs bank, in which union workers awaiting a new assignment were paid for little work; and establishment of work rules and wages competitive with those of “transplant” auto firms run by foreign manufacturers in the US.
Auto firms that take the government’s money don’t have to meet these targets if they can report the reasons why, and make “the business case [that they will] achieve long-term viability in spite of the deviations,” says the fact sheet.
In essence, the Bush administration may just have handed off the problem of the failing auto firms to President-elect Obama, who will be the one determining on March 31 whether GM and Chrysler have met these conditions.
It remains to be seen whether Mr. Obama, who won with strong union support, will push for the United Auto Workers to make deep concessions.
However, on December 19 Obama praised the White House move.
“Today’s actions are a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers,” said Obama from his transition headquarters in Chicago. “With the short-term assistance provided by this package, the auto companies must bring all their stakeholders together ¬– including labor, dealers, creditors, and suppliers – to make the hard choices necessary to achieve long-term viability.”
Associated Press material was used in this report
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Loss of 533,000 US jobs is sharpest in 34 years
By Ron Scherer | 12.05.08
Last month, businesses across the country handed out pink slips at a dizzying pace.
Restaurants, computer manufacturers, plastic producers, and furnituremakers were part of a massive downsizing of the US workforce, the sharpest one-month reduction in working Americans in 34 years. At the same time, those with jobs are seeing their hours reduced and overtime cut back - a bad omen for the rest of the holiday retail season.
On Friday, the Department of Labor reported that the United States lost 533,000 jobs in November and that the unemployment rate rose from 6.5 percent to 6.7 percent. The service sector accounted for 70 percent of the job losses. In addition, the department revised upward the job losses in September and October by a combined 200,000 jobs. In three months, the economy has lost 1.2 million jobs.
“This is stunning - in the sense of a deer caught in the headlights,” says Stuart Hoffman, chief economist for PNC Financial Services in Pittsburgh. “We are seeing a total collapse in consumer confidence in the economy and business is laying people off and not hiring.”
There are major policy implications for the job losses:
- When the Federal Reserve meets on Dec. 15 and 16, economists expect the central bank to drop interest rates by half a percentage point, which will take short-term interest rates to 0.5 percent. Foreign central banks are also likely to cut interest rates.
- Pressure will rise for Congress to enact a massive fiscal stimulus package to try to create jobs.
- The new jobs report is also expected to push Congress to provide a bailout for the auto industry, because any auto company failure could create yet more economic weakness. Executives of the Big Three testified before Congress on Thursday and Friday and Congress is expected to consider helping them this week.
The sharp drop in jobs is also causing economists to scale down their estimates for economic growth for this quarter and into next year. Before the jobs numbers were released, economists had anticipated that the economy would shrink 2 to 3 percent this quarter (when measured in terms of gross domestic product). On Friday, John Silvia, chief economist at Wachovia Economics Group, said he now thinks GDP will contract by 5 percent.
The job losses also are likely to mean that although Americans turned out for Black Friday, the heavy shopping day after Thanksgiving, they will not be hitting the malls in any significant way for the rest of the holiday season. The Labor Department reported the average work week fell to the lowest level since it began tracking the information in 1964.
Using the jobs data, Mr. Silvia estimates disposable income plunged about 8 percent in the third quarter and is flat in the fourth quarter.
“The disposable income numbers are the most devastating, because it looks like that number will be flat to negative in the fourth quarter,” says Silvia. “No matter what people said they were doing on Black Friday, this number says people don’t have money to spend.”
The new jobs numbers also suggest a worsening outlook for the economy next year. Mr. Hoffman has lowered his 2009 estimates from a decline of 1 to 2 percent in real GDP to a decline of 2 to 3 percent. “We are probably a third of the way through a significant decline in GDP,” he says.
The falling GDP is likely to be a topic of conversation when the Federal Reserve meets Dec. 15. “The Fed is going to pull out all the stops,” says Hoffman, who expects the central bank to drop short-term interest rates by half a percentage point. That would bring the federal funds rate to its lowest level since the 1950s. On Friday, panicked investors continued to snap up short-term Treasury bills, considered a safe investment, driving the yields down close to 0 percent.
The jobs numbers will dramatically increase the pressure on Congress to pass a massive fiscal stimulus package as soon as President Bush leaves office, says economist Nigel Gault of IHS Global Insight. “We had assumed a $550 billion package over three years – we will need more than that,” he wrote in a note to clients. The challenge, he says, will be making it effective quickly, since infrastructure projects take time to gear up.
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Cyber Monday: Will online shopping save the economy?
By Peter Grier | 12.01.08
If you get caught shopping online at the office today, here’s your excuse: You’re not goofing off. You’re saving the US economy, one click at a time.
That’s because it’s “Cyber Monday,” the day US retailers promote as the unofficial kickoff of the Internet holiday buying season. Hour by hour, online merchants are trotting out unprecedented deals, trying to boost one of the few retail sectors expected to grow this year.
About half of all employees with Internet connections are expected to shop at work today, or at least browse, according to a survey from Shop.org. Thus, for a few hours at least, the two words most important to America’s fiscal recovery may not be “Ben Bernanke” but “free shipping.”
“As shoppers focus on price this holiday season, online retailers will be extremely competitive to offer the very best deals,” said Scott Silverman, Shop.org executive director, in an analysis released last week.
(BUY A GEL-PEDIC PET BED, GET A FREE COVER!)
Ahem. To continue, Internet holiday shopping will increase at least 10 percent in 2008, measured against last year, according to the Purdue Retail Institute. Total online Christmas spending is predicted to be $35 billion to $40 billion.
That sounds like a lot of money, and it is. But it represents only about 7 to 9 percent of all US holiday shopping.
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Please, please! Sorry about the interruption. Anyway, Black Friday, the first shopping day after Thanksgiving, saw better sales than many bricks-and-mortar stores had expected. Receipts for the day were up 3 percent, year over year, to $10.6 billion, according to ShopperTrak RCT.
Traffic was slower over the weekend, and deep discounts are cutting into store profitability. But strong online sales, coupled with the brighter start to the holiday season, at least might save the US retail sector from the apocalyptic holiday some stores fear.
“It is encouraging to see that Americans seem excited to go shopping again,” said National Retail Federation President Tracy Mullin.
Of course, one can be excited about shopping yet remain averse to hunting for a parking space, not to mention that piped-in, hip-hop remix of “O Tannenbaum.”
That’s where online holiday retail comes in.
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That’s it! I’ve had it! It’s bad enough my e-mail inbox was stuffed this morning with pages of pleading discounts from retailers I didn’t even know existed. Really, how much candy can nougat.com sell? Now they’ve gotten desperate and they’re breaking into serious news, and we in the mainstream media will not stand for it!
Pardon me, the systems administrator appears to be trolling for a deal on new bath towels, and there’s been a breakout from our spam quarantine. Where were we?
Oh yes, participation. About 135 million consumers will buy online this holiday season, according to the Purdue Retail Institute. The peak days for online retail will likely be Dec. 8 through 12, which is the latest time consumers believe they can order on the Internet and get their goods delivered in time for Christmas.
The busiest hours for online shopping are noon to 4 p.m., as workers use high-speed office Web connections to speed their online shopping carts to checkout. Industry groups say that most of this shopping occurs during lunch hours, but they’re probably just being diplomatic.
“No one really knows how many work hours are lost as workers shop online,” according to Richard Feinberg, a professor of retail management with the Purdue Retail Institute.
Seventy-five to 80 percent of online retailers will be offering special holiday inducements for 2008, according to various industry surveys. These include discounts on popular items – Best Buy is offering $10 to $15 off iPods purchased online, for instance – to free monograms, free shipping, and personal delivery on a pillow by a CEO who’s sobbing with gratitude.
Sorry – that last one’s made up.
Mondays are typically the biggest online shopping days. In the early 2000s, retailers began to notice that the first Monday after Black Friday was one of their biggest days of the year. Hence “Cyber Monday,” a phrase coined by the National Retail Federation in 2005 in an attempt to brand the day with an identity and publicize it, so more shoppers would join in.
“Cyber Monday” even has its own website, CyberMonday.com, where retailers can post their promotions and holiday savings.
Thank you. Now it’s time for yours truly to surf the Web to try to find something nice for my wife.
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Whoa, pond bells. She’s always wanted pond bells.
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How to shake the bear market funk
By Ron Scherer and Patrik Jonsson | 10.10.08
New York and Atlanta – Emergency interest-rate cuts. A presidential speech meant to calm the financial markets. New government authority to buy from financial institutions as much as $700 billion worth of bad mortgage-related debt – all designed to reopen the world’s clogged credit markets.
But Wall Street, gripped by a negative and increasingly entrenched psychology, is so far is shrugging off most of these herculean rescue efforts. After the worst week in the history of the stock market – with the Standard & Poor’s 500 down 18.19 percent for the week – what will it take to make the sellers of stocks into confident buyers again?
It’s not a new question. In almost every severe market downturn, investors at some point see only the gloom and doom. Here’s what ultimately dispelled previous dark clouds:
•In August 1982, the Federal Reserve abruptly reversed course and began cutting interest rates. It sparked a bull market that sent S&P 500 stocks soaring 229 percent over five years.
•Immediately after the crash of October 1987, then-Fed Chairman Alan Greenspan threw money at the banking system, resulting in a bull market that pushed stocks up 65 percent over 2-1/2 years.
•In 1990, following a run-up in oil prices and a recession, the Federal Reserve cut interest rates and the S&P 500 jumped 417 percent over the next 9-1/2 years.
•By March 2003, after the bursting of the dotcom bubble, the excesses were finally wrung out of the markets. The resulting market increase ran until 2007, and stocks climbed 101 percent.
What will it take now?
Time, primarily, say some stock market strategists. That’s the view of Sam Stovall of Standard & Poor’s in New York, who notes that the $700 billion bank rescue plan won’t actually be implemented for about another month. “People expect it to be working already,” he says. “It’s like if I plan on losing weight and I joined a health club that won’t be open in November, and people are upset that I haven’t lost weight yet.”
Next week might still be a little dark, Mr. Stovall worries, because many investors will get their brokerage statements over the weekend. “We could have one last wringing of the towel,” he says.
It also might take yet more government action, says Fred Dickson, chief market strategist at D.A. Davidson in Lake Oswego, Ore. He would like to see the Federal Deposit Insurance Corp. guarantee all deposits at all banks. Corporate treasurers and big investors are withdrawing their funds from banks to protect their assets, he says. “There must be a flow of funds back to the banks,” he says. “We need a big enough stick to turn around confidence in the banking system.”
This weekend, when finance ministers from the G-7 industrialized nations meet in Washington, presents an opportunity to reassure the public that there will be no more bank failures, says Bill Stone, chief investment strategist at PNC Financial in Philadelphia. “If they say, ‘If you are otherwise solvent, we will guarantee your bonds,’ that would help,” he says. “Right now there is so much negative outlook, any positive news can be the catalyst.”
Most investors just want the wild stock-market ride of the past two weeks to be over, and professional money managers usually warn them against trying to pick the bottom in bear markets.
One is Bob Markman of Markman Capital Management in Edina, Minn., who does not expect the markets to turn around until people give up in despair. He counsels that there’s no need to rush back in. “When the market turns around, it typically rises 30 to 50 percent, so who cares about missing the first dozen percent,” he says. “You should start buying when things start moving up, not down.”
Investors on Main Street, however, cite other actions that would begin to restore their confidence that the economy will pull through this crisis. Bob Indech of Norcross, Ga., an engineer, would like to see Congress permit the US government to loan money directly to the 4 million or so Americans in danger of foreclosure. The free-falling housing market, he says, has wrecked the ability of financial institutions holding mortgage-related securities to accurately “mark to market” the value of those assets, forcing them to sit on their cash reserves and cinch in lending lines.
Bailing out homeowners directly would not necessarily appease Wall Street, says Mr. Indech, who estimates he has lost about 20 percent of the paper value of his own investment portfolio in the past month. But it would address the fundamental problem of the crisis in a way that the existing rescue plan has not. He estimates it would also be a cheaper solution, costing perhaps $35 billion.
“You can’t have a trickle-down philosophy for a crisis problem. It doesn’t work,” says Indech. “You don’t pay [banks] to influence their behavior in the hopes that they will then behave in the way you want them to behave. The problem is not Wall Street, it’s Main Street. It’s simple, but people who live in ivory towers and have million-dollar salaries just don’t see the problems of the poor people on Main Street. It’s not in their understanding.”
To some others, it doesn’t help that all this financial uncertainty is coinciding with political uncertainty over who will be the next US president. That’s the view of former investment banker Mark Small, now an information technology director at an Atlanta firm. He estimates he’s lost at least 25 percent of his stock value in the past week.
Mr. Small says Sen. Barack Obama’s widening lead in national polls over presidential contender Sen. John McCain has sent a signal to investors that change is coming – to wit, that Democrats are likely to control both Congress and the White House.
“Whenever there’s a political change in Washington, you see people start pulling their money out,” says Small. “The bottom line is people aren’t sure where [the next administration] is going to take us.”
Some of Small’s investor friends are now urging him to buy up stocks at bargain-basement prices, but he so far hasn’t moved. Buttressing the Wall Street meltdown are job concerns, he says.
“There’s a real fear out there that they’ll come in and say, ‘We’re eliminating your department,’ and then you’re out of a job,” says Small. “That makes betting on stocks riskier, since you may be in a situation where you need the money, and now you suddenly have a lot less money if you need to take it out of the market.”
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Bush: World will act to fight market mayhem
By Peter Grier | 10.10.08
Washington – Washington was the temporary headquarters Friday of an ad hoc world effort to produce a coordinated response to the fear that has driven down stock markets and frozen bank lending around the globe.
Financial officials from the G-7 group of industrialized countries were set to confer with President Bush in the White House, in advance of the weekend’s scheduled International Monetary Fund meetings.
With a televised statement from the Rose Garden, Mr. Bush sought to reassure investors that governments are instituting strong measures to combat the financial crisis.
“The world is sending an unmistakable signal that we are in this together, and we will come through it together,” said Bush.
The crisis has grown so quickly – and affected so many nations so deeply – that so far such statements from an array of world leaders have gone for naught. Volatility and selloffs continued to blast through bourses from Tokyo to New York. The week seemed set to go down in history as one of the most stomach-churning periods in the history of modern capitalism.
Asian markets fell heavily on Friday. Japan’s was the most affected, with the Nikkei falling 9.6 percent. Overall, the Nikkei is down by almost 25 percent since Monday.
Britain’s FTSE 100 dropped 8.5 percent Friday. The German DAX 30 went down 7 percent. France’s CAC-40 lost 6.8 percent of value.
Volatility on the New York Stock Exchange was record-setting. The Dow Jones Industrial Average plunged 700 points, or about 8 percent, in the first 10 minutes of trading. It then trampolined up into positive territory, dropped again, and recovered somewhat.
Only days ago, the newly passed $700 billion US financial bailout bill looked like a huge response to credit problems. Now it seems just a start, as the Bush administration plans further moves to jump-start bank lending. Treasury officials on Thursday confirmed that they are considering using some of their bailout funds to inject cash directly into troubled banks.
Furthermore, US officials reportedly are weighing whether to guarantee certain kinds of debt, as a means of lowering lenders’ fears that cash they send out might not come back. Britain, for instance, recently guaranteed all bank debt maturing up to 36 months.
The US might also decide to temporarily insure all US bank deposits. The current cap on Federal Deposit Insurance Corp. guarantees is $250,000 per deposit account.
Bush made no official announcement of new moves in his Rose Garden appearance Friday. He did say the administration’s rescue approach “is flexible enough to adapt as the situation changes.”
Bush also called for patience in the face of the fact that it will take time for rescue plans to work.
“We are a prosperous nation with immense resources and a wide range of tools at our disposal. We’re using those tools aggressively,” said Bush.
Meanwhile, House Speaker Nancy Pelosi (D) said she may push for a postelection special session of Congress to produce a new $150 billion stimulus package to help an economy that most economists see as heading toward or already in recession.
Another dose of government spending could create jobs by investing in public works and could help ease any slowdown in the economy caused by the credit crisis, Speaker Pelosi told reporters.
“We may have to go back into sesson before the next Congress,” she said.
Associated Press material was used in this report.
