Marc, Megan and the Chrysler BK

Marc Ambinder asked Megan McArdle about the Chrysler situation, and then adds his own two cents. You can read Megan's blessed response in it's pointed snark here.

I happen to be in agreement with Megan on this issue. From a business perspective, it is really hard to see where a net benefit can be derived from the way the Obama administration handled the situation.

Chrysler now has an "alliance" with Fiat, yet no obligation from Fiat to inject cash into the deal. In fact, Fiat can walk away without forgoing anything other than some good will (good will in a market that wasn't providing anything to Fiat's balance sheet, at that.)

Chrysler's sales are down, there is only so much room for sales growth in a bad economy, retooling to the Fiat models (if that is how the plan is to work) will be expensive, and they still have payroll to meet. They are receiving some loans from the federal government - and billions of dollars seems like a lot - but remember how quickly they ran through the first government loans.

Also, keep in mind that the recent projections from the administration on the economy as a whole, and the auto manufacturers own projections in specific, have been far off the mark. Chrysler could very well be in danger again in early 2010.

If they are in danger again, the only thing they will have to trade for cash is the UAW's equity - which given how the most recent equity and bond holders were treated - would have to be traded with a substantial risk premium (read: discount). So the UAW may get shorted in the end anyways (if you are thinking that Fiat will inject cash, remember: they have no skin in - it would make more sense for them to walk).

It seems from my reading of Marc's statement that he has spoken to people in the administration that acknowledge that Chrysler is likely to fail in the future anyways:

My best sense of the administration's argument is that of a very sick patient who needs, among other things, his gall bladder removed. Better to let that patient recover before the surgery, as it's never a good thing to operate on a guy whose immune system is challenged. Translated: Chrysler's probably gonna fail at some point.

If so, this a looks like an elaborate and costly strategy to kick the can down the road:

• They have spent/will spend over 10 billion taxpayer dollars trying to revive Chrysler.
  
• They have riled the financials to no end (I work in a business where over 90% of transactions are financed, and the financials definitely keep score).
• They have interfered in Bankruptcy law. These cases do not occur in a vacuum, and can be applied as precedent to other cases.
• In anonymous statements to the press, leaders of the financials have made it clear that this sort of activity has hindered the ability of the of the government to recruit for PPIP (and isn't Chrysler really a form of PPIP? Look how that turned out for the private investers).

While the monetary costs are large, the biggest cast may be the discount now being applied against the full faith and credit of the United States Treasury. Remember when PPIP was unvieled, and many said it was too much of a giveaway to investors? The Treasury guarantee's were too broad? Given the level of participation to date, it is clear that investors are discounting the Treasury guarantee's. The guarantee of the United States Treasury used to be the gold standard in the finance world. Now, not so much.

Were these costs really worth what the government accomplished? Now some may say that there would be a multiplier if Chrysler shut down, and we had to save jobs. Not true. People were not going to stop buying cars if Chrysler shut down - they were just going to buy cars that were not Chrysler's. And since the majority of the cars sold in the US share the same suppliers (yes, Honda, Toyota and the little three share the same suppliers), the pieces were just going to be moved around the board, rather than coming off the board.

Ultimately, the UAW gains in the short term. And that is important to Obama and the Democrats. Even in a year where everything broke their way, they would have had a tough time being competitive with out the $400 million + that labor spent on the elections.

But the UAW was going to get a huge chunk of equity anyways (the difference between the end amount the UAW got and a reduced amount of equity that would have made the senior lein holders whole was percentage points). So why would it make sense to roll the senior lein holders?

Gamesmanship.

To show that Obama's getting over.

Obama, Burgers - and diminished standards?

So anyhow, Obama apparently shows up at this "Ray's Hell Burger" (whatever that is), and has a cheese burger with Joe Biden.

This whole thing causes a press kerfluffle with multiple reports about the burgers (Jonathan Martin), how they ordered (Ace), whether Dijon matters (Ed Morrissey), and even a congratulatory post from Ben Smith to Jonathan Martin for breaking the story (but did it help Politico win the hour? And if so, were VanDeHarris happy?).

All over this?

Let me reference the midwestern, working class, Michigan sensibilities of Mrs. cdm, "Jeez o' Petes!"

Any one who thinks that what is shown in the linked photo (here, again) is newsworthy, is a lightweight referencing a lightweight.

Let me put the appropriate perspective to the unenlightened, deprived members of the Washington press corp:

There isn't an In-N-Out east of Arizona or Utah!

And given the sensibilities shown in the various stories referenced above, I'm not sure you deserve one, anyway. You clearly wouldn't know what to do with it.

Standards, people. Standards.

Housing Bottom

So I was reading the Atlantic website, and Conor Clarke had posted a reference to a New York Times article that seemed to be doing a little bottom calling in the housing market. What could be better than a Times article calling the bottom? They tried to back it up with ... wait for it ... wait for it ... chart porn!!!

Now, I happen to be a little skeptical, and I commented back:

Conor,

I am out in California, although in Orange County (ground zero for the sub prime industry) rather than Sacramento.

In terms of volume (number of houses sold) we may be near a bottom, although I am skeptical. The reason I am skeptical is that I think that we are no where near a bottom on price.

I think that there are three factors to look at in declaring a bottom for price (call it cdm's Corollary for the Housing Price Bottom, if you will):

1) The median home price for any designated neighborhood needs to be at 3 x median household income for the same neighborhood (this is a measure of basic affordability).

2) "Distressed" homes need to make up less than 10% of inventory (economists who studied the last big drop in California (mid 90's) seem to think that distressed inventory above ten percent is destabilizing to prices).

3) Unemployment needs to be below 7% (Unemployment has a destabilizing effect on both supply and demand). Why 7%? It is a number that just feels about right.

I do not think we will have a bottom until we see all three in concert.

Right now, I think that we are seeing a little bit of a false bottom, due in part to an anomaly in foreclosure numbers. Late last year, California had established a new waiting period that was intended to ensure that servicers took the time to contact borrowers that were in default. This led to a drastic drop in the number of NOD's (notice of defaults - the first step in foreclosure), and a corresponding drop in subsequent NTS and TS (Notice of Trustee Sale and Trustee Sale - the auction on the courthouse steps - respectively). However, NOD's have not only gone up as the servicers have processed through the new waiting period, they have set a new record! (http://www.dqnews.com/Articles/2009/News/California/CA-Foreclosures/RRFor090422.aspx)

My guess is that we will see in California and most other hard hit areas an over-correction down through and below the affordability factor that I stated, as the foreclosures and the unemployment issues will keep pushing prices lower. Of course, there are some smaller variables at play as well (baby boomers and their predicted future preference for smaller housing, interest rates, etc.), but I do not think these factors will be be determining like the other three will be.

Theme also posted to the IHB.

Arnold may endorse Dem? - CA GOP power limitations

So the NY Times ran this story that Arnold may be open to a Democratic successor.

On the one hand, you could say that it is good politics for any politician to state that they would open a successor from the opposite party, should that eventuality happen. After all, you do not want to look as if you do not respect the will of the electorate if they decide to go in that way.

However, Arnold takes it a step further when asked if he would endorse a Democrat during the race. Arnold's response: "It could happen, yes.”

This comment represents the futility of the California GOP in a nutshell. Since Arnold's election to his second term, he and the party have been at odds quite a bit. His words and actions have often left GOP leaders, and the base in particular, frustrated.

Yet the party has not shown an understanding of the pure power politics involved. They have rarely helped Arnold in the past three years (in fact, they have been pretty disdainful), yet they have also been unable to punish him.

If you can't find a way to reward, and you don't have the power to punish, aren't you irrelevant from a pure power perspective?

My party. ** sigh**

Obama and the Chrysler creditors - refinement of thinking

Conor Clarke had posted on a Washington Post article about the position the Obama administration has taken in regards to the creditors of Chrysler.

I then posted the following comment:

"You know, it's interesting that they would attack the hedge funds. The largest investor class for hedge funds, and Wall St. for that matter is retirement accounts (direct Pension Fund investments, as well as mutual funds held in 401(k), IRA, and other retirement vehicles).

The hedge fund Wall St. fat cats are us!!

Obama really does seem to be pushing his luck in regards to how he treats the people he is counting on in these public private partnerships. If B of A or Citi fails their stress test, and the Treasury wants to unload them on another bank, who will step up to do business with Obama?

In particular, I found interesting his label that creditors are "speculators", when in fact some some of these bondholders were part of the 2003 class to fund..... the UAW pension fund! Given that the reconstituted Chrysler will need cash flow, who will fund them? Absent a guarantee from Bernanke - and lets be honest, it would have to be the Fed (the big money will be highly skeptical of a Treasury guarantee and Treasury's willingness to back it's promises irrespective of politics) - what pound of flesh will creditor's demand in the future to compensate, and what do these demands do to Chryslers ability to survive?

Bigger question: The US Treasury's promise has always been the gold standard; does the position of the Executive in regards to contracts and obligations cause an unintended market dilution of the value of the US Treasury's promise?

Irony: Rattner investigated for claims his hedge fund bribed pension funds."

After I posted the comment, I thought that I might have gotten in front of myself a bit. Yet it turns out that Megan McCardle was thinking along the same lines.

It turns out that this subject had piqued Instapundit's interest as well (while Mrs. cdm and I were waiting for our table at a restaurant, we both ran through our PDA's - I checked Instapundit, and he had linked to Conor's post, and quoted a part of my comment).

I followed with a comment to Megan's post, and another comment to Conor's original post that refined my thinking as to the long term fallout to the attempted Chrysler cram down (italics and bold mine):

"I think that after the BK, it will be really hard for Chrysler to go back to the public well. At that point, the public's good will will have expired. And Fiat has played this just about right in order to minimize their exposure. They have no skin in, so they can threaten to walk away.

From my perspective, the key is to examine the respective end positions in a succeed/fail scenario: If Chrysler succeeds, then the Obama administration, Fiat and the UAW all win; If Chrysler fails, the Obama administration and the UAW loose - but Fiat is nuetral. Fiat has maximum leverage.

Why should Fiat put cash in to finance operations when they can dump it on the UAW (the UAW having the most to loose if Fiat walks)? The UAW will have to spend their equity in order to raise cash, and they will get brutal terms. Who will want to pay dollar for dollar with the risk that the Treasury will stick it to you?

So in the end the UAW may get jammed after all, which could be argued their subordinate lien position justifies.

The problem is that in going through the process of this exercise, the Administration has caused investors to be wary and skeptical as to the motivations, actions, and guarantees of the US Treasury. Look at the problems they are having in receiving serious submittals for PPIP. They are questioning the Treasury's guarantee.

Think of it this way - when was the last time investors questioned a guarantee of the US Treasury? It has been the gold standard in the investment world for years - but at least in regards to PPIP (and the auto companies are really PPIP type projects), not so much."