Mon, 17 Nov 2008 06:13:51 -0600 Economic Stabilization, bailout, Strategy, Management, Economics, Bailout Plan, Automotive Last week we posed a simple question to readers of some of the new discussion boards on LinkedIn:
Do you think funds from TARP (Troubled Asset Relief Program) should be used to help the U.S. automotive industry? How about other troubled industries, like retail?
If we really believe business is about innovation, then having businesses "too big to fail" is likely incompatible with future success. Plus, as a U.S. taxpayer, this is starting to get maddeningly expensive. Break them up, or let them fail.
Jorge Buhler-Vidal added a few populist licks:
I am generally not sympathetic to a bailout to an industry led by people that have consistently ignored trends towards better quality, higher fuel efficiency and safety, while collecting high bonuses and keeping their golden parachutes.
Some cited the high cost of U.S. health care and the generous U.S. auto industry benefits packages as factors that reduced American competitiveness.
The US does not have "socialized" health care, the costs are directly in the vehicles. For Europe and Japan, the health care costs are a bit removed and spread out in the form of higher taxes for their national health care. - Bryan Gavini
The cost structure of health in the U.S. is strangling the nation's ability to compete. Once we lose a few vital industries, corporate executives will be crying out for some form of social net that doesn't sit on their balance sheets. - Eric Garland
Until the Big 3 can at least shed the legacy costs saddling them from the UAW, I don't see why they should get relief from us. - Anders Bjork
Responses to the University of Michigan Alumni board tended to show greater concern for the welfare of workers and pay less head to free market thinking.
I would support a bailout if the funds were used to lessen/deplete the legacy costs (retiree benefits) alone. We're going to pay to support the retirees if the companies go under anyway. We're also going to pay a ton to support the 3 million unemployed. If we could remove the legacy costs from the balance sheets, re-negotiate the UAW contracts and fix our trade agreements, maybe we could pull out of it. -Jennifer Ray
The financial bailout has done nothing to help credit markets as of now. No credit markets have been thawed and the banks are being admonished for not lending the money. This has led to the further spiral of the auto industry because customers with good credit are being turned away because they cannot qualify for a loan. I am disturbed by anyone who invokes the "free market" as if we are a purely capitalistic society. We are not. There is no such thing as a pure capitalistic society because each and every system has some sort of government control to either prevent catastrophic success (i.e., a monopoly) or catastrophic failure (what is going on now). The US did not emerge from the Great Depression by letting the free market have its way. -Jon Liu
Guy Powell on the Executive Decision board wondered how best to manage our way out of the crisis.
If the auto industry goes bankrupt, then it takes money out of the banks. Will this then ripple over to the banking market again causing another higher bailout of the banks. It would seem that 'in for a penny, in for a pound.'
The longer term fix is to retool that work in Michigan to cars that fit a better vision of low energy usage and elimination of emissions. -Rudy Westervelt
Consolidation appears inevitable, given the ferocious international competition and sustained overcapacity in the industry -- so why not have two (or even all three) of the Big Three merge together as part of the bailout? -Ben Petree
What if GM & Ford could "draft" assets from Chrysler--would they take any? How about people? -Joe McKinney
The US auto industry (as distinct from the auto industry in the US) reminds me of the UK situation 40 years ago. Government bailouts failed. The lesson learned is that the best government involvement is that which greases the skids of change, and not that which just delays the change. Tax policy can be used as an incentive for value-added entrepreneur progress, and for humane retraining. -Robert Munro
A collection of posts about the US Economy is maintained here.
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We put this question to the new Discussion Forum for A Management Consultant @ Large on LinkedIn:
Do you think funds from TARP (Troubled Asset Relief Program) should be used to help the U.S. automotive industry? How about other troubled industries, like retail?
Follow this link to join the lively discussion. (Joining LinkedIn is free.)
Fri, 31 Oct 2008 15:15:15 -0500 Economic Stabilization, NPR, Financial Bailout, CDS, AIG, JP Farrell, Economics, Bailout Plan, Credit default swaps, Financial, NPR, CDS National Public Radio In a previous post I mentioned, without much explanation, that credit default swaps (CDS) were instrumental in creating the 2008 credit crisis. As it happens, Alex Blumberg has done some of the clearest reporting on CDS for a National Public Radio (NPR) program, "This American Life." (A timeline with active links to recent NPR stories on the credit crisis appears below.)
Credit default swaps, which have become featured players in the troubled asset drama, are over-the-counter contracts that have been widely used to hedge investors against the risk of mortgage-backed securities. Unlike insurance policies, however, they do not require that either party actually own the assets being protected. As one of their inventors, Gregg Berman, explains:It is exactly like buying insurance for a house you don't own.And that is the very definition of moral hazard. Speculators can enter the market to bet against houses they consider at risk, thereby creating a market for arson. And bet they did.Berman and Satyajit Das, a risk consultant, were interviewed for the story below, How Credit Default Swaps Spread Financial Rot.
Das says that during his time in the industry, the amount of credit default swaps that were speculative grew to dwarf the amount that were used for insurance...There are $5 trillion worth of bonds issued in the world, but the total amount that people have bet on those bonds is $60 trillion.
Because they were traded over-the-counter, CDS have been unregulated and are nearly invisible to investors. We now know that many of the obligations to cover mortgage-backed securities are held by AIG, an insurance firm. On 16-Sept-08 the U.S. Treasury seized control of AIG and has now invested about $122 billionto prop it up.
This week I received a letter from AIG offering me an Essential Health insurance plan. The envelope exclaimed:
You Can help get greater control of your medical expenses. (And for less than you think.)
Imagine my excitement as I raced to read the fine print.
A collection of posts about the US Economy is maintained here.
To learn more about our work in consulting, please download a brochure about our Practice or check out our Case Studies. Recent NPR stories on credit default swaps
Wed, 29 Oct 2008 06:47:41 -0500 Henry Paulson, Christopher Carroll, Economic Stabilization, Paulson, JP Farrell, Economics, Bailout Plan, TARP, Financial Tarpeian Rock, Rome
Economists, bloggers and amateur historians will read with interest the rich exchange of ideas on the Paulson bailout plan instigated by Christopher Carroll, the economist from Johns Hopkins University, on the Economists' Forum blog of the Financial Times, TARP and the Ruin of Pompeii: An Analogy.
Professor Carroll poses a simple model of a financial system in crisis that results when an under-capitalized bank holding mortgages of the citizens of Pompeii learns that its balance sheet has been compromised by an unforeseen event, the eruption of Mount Vesuvius. Writing during the critical days immediately following passage of the Emergency Economic Stabilization Act of 2008, Carroll and a cast of contributors try out a number of policy alternatives as they enrich the model, in the process making it ever more analogous to the present situation.
Mr. Carroll takes the question directly to Secretary Paulson, wondering rhetorically why the classical, free-market solution--let the banks fail--would not be more sensible than the approach initially suggested by Paulson, by which agents of the U.S. Treasury would inject capital into financial institutions by purchasing troubled assets at prices to be set by auction on exchanges to be named later. Carroll doubts that any auction can establish the real value of these securities and thus suggests that policy-makers consider direct investments in bank equity.
The contributors poke at Carroll's model and his history, variously:
Defending TARP (Troubled Asset Relief Program) as a mechanism for creating liquidity in the short term
Introducing complexity (e.g., suppose Pompeii's mortgage had been insured by entrepreneurs at Vandelsbank)
Considering the fallout of market failure ("it will trigger a run on all the other banks in the Empire, putting millions of potential tourists to the new Pompeian ruins out of work and unable to afford the trip") and
Noting that Titus and not the despised Nero was Emperor at the time of the Eruption
One commentator remarked:
How strange to call this plan “TARP” when the old Romans used to say “The Tarpeian Rock is not far from the Capitol.”(Editor: Following his link, one finds that the Tarpeian Rock is the precipice from which ancient Romans flung traitors, murderers, and those "cursed by the gods.")
Within days of Carroll's article the finance ministers of the G7, led by the UK, announced plans to battle the world liquidity crisis by directly injecting capital into their respective banks. Secretary Paulson, in what seemed a remarkable turnabout, shifted his policy focus from purchase of troubled assets to direct investment in financial institutions. Calling a meeting of the leaders of the nine largest U.S. banks, Paulson called on each of them to contract immediately with the US government for a direct infusion of federal cash in the form of escalating loans, along with warrants for preferred stock and limits on executive pay. In dramatic reporting for the The New York Times, Mark Landler and Eric Dash wrote:
In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.
All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks.
Carroll and his contributors have provided a masters class in political economy, open to the public. In it we read the thinking behind policy as it is crafted and revised in real time. More than that, we are witness to the development of economic theory. Hypotheses are set out. Models are postulated, tested and examined for implications. (One commentator, Professor Perry Mehrling of Columbia University, interprets the technical balance sheet entries of the U.S. Federal Reserve Bank on October 1, 2008 to conclude that the Fed had run out of ammunition to battle the crisis.) Consequences of policy provisions, with their inevitable compromises and disappointments, are weighed against the risks of doing nothing.
For the moment, the consensus view that banks should be forced to recapitalize despite concerns about damage to free market principles, seems to be carrying the day. And it should.
Direct investment in bank reserves is considerably more efficient than purchase of troubled assets in producing liquidity because such action dramatically improves banks' reserve ratios.
Under the latest plan banks remain responsible for their balance sheets.
The government has agreed to charge a fair price for the required capital investment and has provided banks incentives for banks to buy back the the government's stake through privately financed equity. (The Treasury will purchase preferred stock paying 5% dividends initially, but rising to 9% on shares held beyond five years. Treasury will also get warrants to purchase common shares equivalent to 15% of its initial investment.)
Compulsory action against the largest banks provides cover for others to volunteer for the program without suffering the financial taint of appearing weak. Without compulsion, which bank would have been first to appear at the government's lending window? Which executives would have volunteered to cap their own pay?
The crisis is not over and the full implications are not well known. Governments around the world will need to act responsibly and in coordination to bring the world economy to a soft landing.
Our thanks go out to bloggers like economists Christopher Carroll, Paul Krugman, Greg Mankiw and Peter Orszag for raising the level of discussion above that achieved by the mainstream media.
Thu, 23 Oct 2008 10:32:35 -0500 Music industry, Charity, 'Our Veterans, Veterans, Foundation, Our Heroes' Our Veterans, Our Heroes Dog Tag Necklace
Some of the most creative producers in the music industry have launched a foundation to help the veterans of the U.S. Armed Forces and their families with the medical, emotional and financial problems they face.
You will be hearing a lot in the coming months about the concerts the foundation will be sponsoring in 2009, but you can help now. The foundation is offering an attractive collection of gift items, including dog tag jewelry, watches, and pins, just in time for holiday giving.
Of course, direct contributions to the foundation are also welcome. Please visit them at www.OurVeteransOurHeroes.com.
Sun, 26 Oct 2008 10:43:38 -0500 bailout, HR3997, JP Farrell, TARP, Congress, Economic Stabilization, Paulson, Bernanke, Business, Mark-to-market, Economics, HR1424, Troubled asset, Financial, TARP The Library of Congress
The U.S. House is expected to vote today on the Senate version of the bailout plan, HR1424, the Emergency Economic Stabilization Act of 2008. Following two weeks of intense scrutiny, debate, political wrangling and even some soul searching, Congress seems ready to pass a bill that offers hope of cutting the Gordian knot strangling credit markets. Action could not come too soon.
The bill, summarized here, has undergone some important changes over the past two weeks and its scope and intent have been clarified. Initially dubbed the "bailout plan" or the "Troubled Asset Rescue Plan," the bill's original intent was to grant sufficient authority to the U.S. Treasury to take steps that would avert panic in the credit markets. The most controversial portion of the plan, would create a:
Troubled Assets Relief Program (TARP), under which the Secretary of the Treasury would be authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages issued prior to March 14, 2008 - CBO Director Peter Orszag
As Joe Nocera reported Oct. 1 in the New York Times, large investors fearing imminent bank failures were cashing out even very liquid assets and moving them between institutions. Witnessing what appeared to be the first stages of a full-blown run on the banks, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke sounded the alarm, outlined emergency measures, and began to rally the political forces required. The name of the rescue plan was impolitic (why should the Public be troubled about bank assets?), details of the actions required were sketchy, estimates of the cost were imprecise, and oversight measures were missing entirely, but the critical first steps had been taken. The body politic was in motion.
On Monday, 29-Sept-08 the first bill sculpted from the plan, HR3997 (summarized here), failed to pass the House of Representatives, despite the incorporation into the bill of substantial improvements and clarifications to the plan, particularly in the area of oversight. Then, with unusual speed the Senate crafted the new bill, HR1424, adding two unrelated divisions designed to bring more Members of Congress on board. The new Division B, The Energy Improvement and Extension Act of 2008, and Division C, Tax Extensions and Alternative Minimum Tax Relief, would add approximately $112 billion to deficits over the next ten years. More importantly, they provide political cover to Members of Congress who will have to explain to constituents in this month before the election how they could enact an expensive and unpopular bailout plan.
It now seems clear that passage of the bill is necessary, but not sufficient to avoid a major recession. By insuring bank deposits and money market funds up to $250,000 per account, the measure substantially reduces the risk of runs on banks by depositors and will forestall a substantial amount of unproductive movement of deposits from bank to bank and account to account. This insurance provision will also calm investors in those banks.
TARP provides a mechanism for the Treasury to inject capital into financial institutions, transforming unproductive, illiquid assets at participating institutions into cash that can then support new loans.
Investors should watch closely the provisions of the bill relating to "mark-to-market" accounting requirements, which were instituted earlier this year to provide more transparency to financial reports. The bill would authorize the SEC to restate those requirements and require the Commission to reconsider them and report its findings back to Congress. The practical effect of these provisions will be to improve the balance sheets of financial institutions holding devalued assets, such as mortgage-backed securities, thereby allowing them to make more loans against those assets.
In combination, these provisions are designed to calm investors, create liquidity, and buy time for Treasury to help troubled institutions recapitalize.
The next Administration will have to preside over a period of further consolidation of financial institutions as it tries to keep mounting federal debt from further slowing the economy. It must also address the accounting rules that have confused investors and regulators alike about the underlying values of American assets and corporations.
A detailed analysis of the legal implications of the Act has been provided by the firm of Davis, Polk & Wardwell (available here).
Mon, 29 Sep 2008 16:17:00 +0000 Business terms, Terminology, Dictionary, Content management, JP Farrell, Consulting, Terms, Glossary, TARP, CDS, SOA Talking with the logistics director of a Fortune 50 Company, he related their conversion to SAP. He described it as “Ruthless Standardization.” Immediately, images come to my mind of a group of IT geeks on horseback, armed with axes and swords, riding through the ranks of Operations people – indiscriminately slaying them.
While my imagination may be a little far fetched, Operations do appear to be the victims in standardization. In this instance, Operations loses its ability to:
Increase load size using optimization technology
Move orders. For example – a full load of product made in Atlanta must ship to a Seattle customer from the local warehouse rather than direct from the plant
How is it that the complexities of the US market are ignored in the quest for standardization? Why are small countries, like my native land of New Zealand – with 4 million people – and one DC treated the same as the great US market? I have a conspiracy theory. My belief is that the IT folks believe that the millions of dollars spent in the operations area is hidden. At the end of the project, they can point to IT head-count reductions and “hard savings.” Operations expense, after all, is often confused by the various “world” changes. Operations costs increase but it is all blamed on fuel or insurance… not paucity of systems. In the case of the Fortune 50 Company, the cost will be many millions in one division alone.
I am not sure if it is possible to convince the IT folks that “keep it simple” (KIS) is stupid. If this were me, I’d add a line to my budget – “the cost of ruthless standardization” – and track all the cost to that.
The bottom line: IT rules the world – resistance is futile!
Tue, 09 Sep 2008 15:02:00 +0000 Business terms, Terminology, Dictionary, Content management, JP Farrell, Consulting, Terms, Glossary, TARP, CDS, SOA
We all know that the infrastructure is under pressure.Congested roads, bridges that are in urgent need of repair, and roads that should have been ripped up years ago are everywhere.Yet both presidential candidates are talking about a stimulus package – giving money to consumers who will buy flat panel TV’s made in China.Here is an idea:invest the same amount of money in the roads and bridges we use every day.While we don’t need or envision anything on the scale of the “New Deal”, a focus on bridges, for example, will create good jobs for construction workers, steel manufacturers and equipment manufacturers.The value to industry is huge.The trickle-down impact will be great – and the country gets lasting benefits from stimulus.Can somebody please tell Mr. McCain & Mr. Obama?
The bottom line:Consumers and the economy will benefit from investment in infrastructure
Fri, 08 Aug 2008 15:54:00 +0000 Business terms, Terminology, Dictionary, Content management, JP Farrell, Consulting, Terms, Glossary, TARP, CDS, SOA
A July 11 article in CFO magazine entitled “What Keeps CFOs Up at Night?” - http://www.cfo.com/article.cfm/11731286/c_3805465 - has senior writer Kate O’Sullivan politely pointing out that with oil at $140 a barrel, the cost of fuel has officially registered on finance executives radar screens.About time!The impact that $4.70/gallon diesel will have on the economy, and each company, is large.Consider the fact that most consumer product companies provide free freight to their customers, when they order a truckload of product.This means that the only way they can recoup the additional cost is to increase the prices of their products.If product costs go up – you and I are the ones that pay at the store.Hello inflation!Hello higher interest rates!Hello a big slow down!
CFO’s should be kept awake at night by fuel costs as their companies’ margins are under fire.Some how they need to support their operations team’s efforts to reign in the fuel monster. What is this somehow?Since IT normally works in the finance side of the house, the CFO needs to influence his IT people into providing genuine support – not, as I heard from a client, “we are getting SAP in 5 years, that will solve all your operational problems.” You could not make this kind of stuff up!Who can wait that long?How many gallons of diesel will need to be wasted before we stem the flow?
Thu, 17 Jul 2008 21:03:00 +0000 Business terms, Terminology, Dictionary, Content management, JP Farrell, Consulting, Terms, Glossary, TARP, CDS, SOA When you talk to many car drivers, they complain of “nearly being run off the road” by speeding trucks. Many of us have cut our speed but a wide range of owner operators and small fleets don’t seem to have got the message:
“SLOW DOWN – SAVE FUEL”
Time must be – to them at least – more valuable than money.
During the oil embargo of the 1970’s, speed limits were dropped to 55 mph. The concept of doing this is totally repugnant to us all… but the simple fact remains, we are, as a nation, spending too much on oil. The balance of payments can’t afford this huge spike in imports.
The bottom line:Truckers need to slow down before they are forced to slow down
