By William Patalon III
Money Morning/The Money Map Report
This week is shaping up to be another active one on the bailout-and-financing front.
First and foremost, Congress returns to work this week to consider a once-unthinkable proposal: Put up billions in taxpayer-backed loans so that Detroit's "Big Three" can be saved. Expect a fight, however, as the bailout debate finally moves past banks to focus on General Motors Corp. (GM), Ford Motor Co. (F), and Chrysler Corp.
The situation is dire. GM is burning through cash at a pace that could mean bankruptcy, and all three players are struggling with high costs, weak vehicle sales, frozen credit lines and dwindling cash reserves calling into question whether they can survive much longer without government help. The answer, of course, is that they probably can't.
But it's here that, the Detroit Free Press reports. Congressional Democrats are pushing for some form of auto-sector bailout – even an extension of the deal U.S. banks received as part of the $700 billion rescue plan crafted by the U.S. Treasury Department. But Republican lawmakers claim their Democratic counterparts are "pandering" to their own voter base, which includes widespread support of American unions.
Expect the debate to become heated and emotional as some lawmakers and other policymakers spotlight the massive job losses that a failure of one – or all three – of the carmakers would cause. And there would be massive ramifications beyond the Big Three themselves. As Money Morning has reported, the three automakers – all told –, and support millions of additional indirect workers employed by suppliers and dealerships.
The collapse of the automakers could ultimately cost the economy more than 2 million jobs. And the pain that would cause doesn't even factor in the additional estimated 1 million Americans who rely on the U.S. auto companies for pension and healthcare benefits – chiefly retired autoworkers and their families.
Reaching a bailout agreement probably would require automakers and their supporters depends on the automakers and their supporters convincing skittish lawmakers that such a deal is critical for the health of the overall economy and that the U.S. government won't be throwing good money after bad, the Free Press reported.
GM spokesman Tony Cervone even tried to spin it that way: "It's a loan, it's a bridge loan," he said. "The fact is we're looking at a short-term liquidity crisis that needs a bridge loan."
Second, Freddie Mac (FRE), seized by the government two months ago, asked the Treasury for $13.8 billion, after a record quarterly loss caused its net worth to fall below zero. More on this momentarily.
And third, the struggles also continue abroad. Foundering Asian economies came away from a weekend Group of 20 meeting in Washington on the worldwide financial crisis with the promise they'd have expanded access to financing programs from such sources as the International Monetary Fund (IMF).
Exporters throughout Asia that depend on credit to pay for raw materials and to finance shipments say business has plunged as access to needed credit has dried up, the International Herald Tribune reports. Access to IMF loans could help governments in South Korea, India, Indonesia and other economies where investor anxiety about a possible scarcity of foreign currency has driven down exchange rates, said Citigroup Inc. (C) economist Yiping Huang.
Leaders of the world's top industrialized nations also pledged to give developing countries a bigger role in global financial bodies — a move long sought by China's leadership. And while Beijing welcomed the step, China's leaders gave no indication whether the country might respond by using its $2 trillion in reserves to help expand a global bailout fund. China last Sunday unveiled a $586 billion stimulus, some of which will come from that foreign-reserve fund.
Target Corp. (TGT), Home Depot Inc. (HD), and AnnTaylor Stores Corp. (ANN) (among others) report earnings, though poor results are already forgone conclusions. A hectic economic calendar will be highlighted by the widely anticipated inflation data as falling energy prices work through the economy. (Just a few months ago, such releases were feared…How quickly things can change.)
Looks like the Feds could use a mulligan (do-over). When the $700 billion bailout plan was first announced, one of its primary goals was to resurrect the balance sheets of ailing banks by buying underwater assets. Additionally, direct government investments were supposed to encourage bank-lending activity that would help thaw out the frozen credit markets.
Well, just a few weeks after its creation, U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. announced that the government will not buy troubled assets (that no one seems to know how to value), meaning the plan will instead focus on enhancing consumer lending. Meanwhile, as a Money Morning investigative report demonstrated, some healthy institutions have received direct investments, but used the proceeds to purchase struggling competitors and have not increased lending in a way that would stimulate economic growth. Non-banks also have been recipients of the government's generosity, as insurance giant American International Group Inc. (AIG) received $40 billion in new capital from this package, under the terms of its newly structured bailout. All told the deal's worth more than $150 billion.
American Express Co. (AXP) applied for (and received) approval to become a commercial bank in order to tap into the government resources. While certain tweaks should have been expected to ensure that the bailout effectively achieves its goals of repairing the financial system, the actions this week did little to generate any investor confidence. President-elect Barack Obama is asking a Congressional lame-duck session to approve $25 billion to $50 billion in rescue aid for Detroit's crumbling auto industry. He also wants to appoint a czar or board to oversee the auto industry's rescue and reconstruction, both Money Morning and Bloomberg News reported.
With foreclosures soaring by a full 25% in October from last year's level, Fannie Mae (FNM) and Freddie Mac (FRE) [now literally part of "the government" – somewhat ironic given that it was the pressure from foreign-government bondholders that forced the federal government to put the two mortgage giants into conservatorship, a Money Morning investigative story demonstrated] announced plans to modify hundreds of thousand of loans by reducing mortgage rates or even forgiving a portion of the outstanding principal.
Freddie, the mortgage-finance giant that had a negative net worth of $13.7 billion at the end of the third quarter, asked the Treasury Department for $13.8 billion and says it expects to receive the money by Nov. 29. The net loss widened to $25.3 billion after the company wrote down tax assets and providing for bad mortgages and securities, Bloomberg News reported Friday.
As the government tries to avert a financial-market collapse spurred by the worst housing slump since the Great Depression, Freddie's demand adds to the government's growing burden as it tries to avert a collapse in financial markets, Bloomberg said. The U.S. pledged $100 billion each to Freddie and larger rival Fannie Mae when it placed them into conservatorship in September. Fannie said this week it may need more money at the end of the year.
"You could very well get losses north of $100 billion on both of these companies," Paul Miller, an analyst at FBR Capital Markets (FBR) in Arlington, Va.
Freddie Chief Executive Officer David M. Moffett, 56, named in September when the government seized control of the company, increased write-downs for bad mortgages and securities and took a charge against most of Freddie's so-called deferred tax credits. Fannie CEO Herbert M. Allison Jr., 65, took similar steps earlier this week, causing the Washington-based company to record a $29 billion loss.
Like Fannie and Freddie, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC) have increased their efforts to stem foreclosures by aiding struggling borrowers by streamlining and modifying its loans. Speaking of Citi, its CEO announced plans to slash total compensation expenses by 25%, or up to 60,000 jobs. And rumors have its chairman among those to be given his walking papers (A Reuters report Saturday stated that Citi would cut 10% of its 352,000-person work force). Not to be outdone, Morgan Stanley (MS) will be cutting close to 10% of its institutional securities and asset management units. In non-financial news, Sun Microsystems Inc. (JAVA) plans to reduce its workforce more than 5,000 jobs; Intel Corp. (INTC) and Best Buy Co. Inc. (BBY) offered pessimistic outlooks; Circuit City Stores Inc. (CC) filed for bankruptcy protection (just in time for the holidays), and retailers J.C. Penney Co. Inc. (JCP) and Macy's Inc. (M) issued weak earnings reports.
In fact, after posting a $44 million loss for the third quarter, Macy's may be looking to consolidate down to two divisions from its current four, Womens Wear Daily reported Friday. Sources told the trade journal that plans were calling for Macy's Florida in Miami and Macy's Central in Atlanta into the New York-based Macy's East and San Francisco-based Macy's West division, the industry trade journal reported.
Wal-Mart Stores Inc. (WMT) fared better than many competitors, the company also warned of a challenging quarter ahead.
Early last week, as was reported in this column a week ago today (Monday), China announced a $586 billion economic stimulus package that served to give a jumpstart to the global markets. Unfortunately, the euphoria was short-lived (so what else is new?) as investors focused on the weak earnings reports, the uncertainty about the domestic automakers, and the restructured bailout plan. Three days of intense selling meant $1 trillion of lost shareholder wealth. With the Dow Jones Industrial Average plunging below the 8,000 level, bottom-fishers re-emerged late Thursday, propelling the index to a 900-point swing and its third-largest point gain ever. Volatility continued Friday as investors worried about the weak retail numbers (see below) and sold positions heading into the weekend (especially late in the session). Oil prices fell below $60 a barrel to a 20-month low; gasoline pushed closer to a national average of $2 a gallon with consumers in Des Moines, Iowa (of all places) paying as low as $1.75. At least, that's good news for those "gloom-and-doom" retailers. (Maybe they should tap into the bailout fund as well?)
Year Close (2007)
Qtr Close (09/30/08)
Dow Jones Industrial
10 yr Treasury (Yield)
How quickly things can change. In June, the Organization for Economic Cooperation and Development (OECD) projected global economic growth to increase by 1.7% in 2009, as the agency believed the financial crisis had all but ended. Remember, last summer, most U.S. Federal Reserve watchers also expected the next rate move to be higher as Federal Reserve Chairman Ben S. Bernanke and friends seemed more concerned about threats of inflation (with oil at a record of $145 a barrel) than any domestic (or global) recession. Fast-forward to the present, the OECD now claims the developed nations of the world have slipped into a collective recession, and 2009 will bring a consolidated decline of 0.3% in GDP for its 30-member countries (with the U.S. suffering a 0.9% contraction).
By contrast, in a recent Wall Street Journal survey, the 54 participating economists believe that the domestic economy will begin to rebound by mid-2009 and slight growth will emerge by the fourth quarter. (No shortage of contradictory predictions from "experts" these days.) These same economists overwhelmingly believe that President Obama should reappoint Bernanke as the central bank chairman in 2010. Late in the week, Bernanke stated that the world's central bankers have pledged to work together to resolve the global financial crisis and even opened the door to another rate cut (below the current 1.0% target level for the benchmark Federal Funds rate). U.S. President George W. Bush welcomed world leaders to the G20 economic summit by praising the benefits of capitalism (that some may be doubting these days) and warned against excessive government regulations (despite the ever-expanding global bailout plans).
[Editor's Note: For Money Morning's take on the U.S. economy, U.S. stock market and such other key 2009 topics as the state of economies in China, Latin America and Japan, and the outlooks for the prices of gold, oil and food, check out our "Money Morning Outlook 2009" series, which is just under way. We'll also be looking at sovereign wealth funds, retail sales, alternative energy, IPOs, mergers and acquisitions, and more.]
A light week in the economic calendar brought little stress relief to investors (not to mention retailers). Friday's retail sales release was reported as a 2.8% decrease in October, the largest percentage decline on record. While U.S. auto lots have been transformed into veritable ghost towns these days, the complete and utter lack of consumer confidence these days also resulted in lower sales of furniture, clothing, and virtually everything else.
However, a few eternal optimists remain who point out the reduced prices at the pumps should serve as an economic stimulus package of its own over the next few months. Further, the plans to renegotiate mortgage terms will help many borrowers get a better handle of their cash-flow positions (without suffering foreclosure).
Weekly Economic Calendar
Initial Jobless Claims (11/08/08)
Worst showing since immediate aftermath of 9-11
Balance of Trade (09/08)
Overall deficit shrank, though shortfall with China grew
Retail Sales (10/08)
Largest monthly decline on record
The Week Ahead
Industrial Production (10/08)
Housing Starts (10/08)
Fed Policy Meeting Minutes
Initial Jobless Claims (11/15/08)
Leading Eco. Indicators (10/08)
[Editor's Note: Money Morning continues to track the global financial crisis, chronicling the key news stories emanating from the global financial crisis. With the U.S. financial markets in such disarray, we're using our affiliated monthly newsletter, The Money Map Report, to spotlight the very best profit opportunities we're discovering in markets throughout the world. In our newest report, we've discovered a corporate gem that's riding the profit wave of the most-powerful global trend we're following right now. If you act immediately – as an added bonus – you'll also receive a free copy of CNBC analyst Peter D. Schiff's New York Times best seller, "Crash Proof: How to Profit from the Coming Economic Collapse.]
News and Related Story Links:
- Freep.com (Detroit Free Press):
- The International Herald Tribune:
Asia looks to summit loan pledge to help exporters.
- Bloomberg News:
Freddie Asks Treasury for $13.8 Billion After Loss.
Citigroup to Cut 10% of its Jobs: Source.
- Money Morning Investigative Report:
Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout.
- Money Morning News Analysis:
Federal Government Grants AIG a New Bailout Package.
- Money Morning News:
Government Rolls Out Long-Sought-After Anti-Foreclosure Program.
- Women's Wear Daily:
Macy's Said Considering Consolidation.
Group of 20.
- Money Morning News Analysis:
October Retail Sales Drop Fastest Pace Ever Heading into Holiday Shopping Season.
- Money Morning News:
Circuit City Files for Bankruptcy After a Year of Falling Sales and Corporate Cutbacks.
- The Associated Press:
- Money Morning Week to Come Column:
China Stimulus, Troublesome Retail Earnings Point to Escalating Global Economic Woes.
- Money Morning News Analysis:
Massive China Stimulus is Viewed as an Attempt to Help the West.
- Money Morning News:
American Express Now a Commercial Bank.
- Money Morning News Analysis:
Obama Wants to Appoint Auto Czar, Seeks Billions in Detroit Aid.
- Bloomberg News:
Obama Pushes for $50 Billion for Automakers, Oversight Czar.
OECD forecasts a protracted economic slowdown in US, Japan and Euro area.
- Money Morning 2009 Economic Outlook Series (Part I):
Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year.
Money Morning 2009 Economic Outlook Series (Part II):
For the U.S. Economy in the New Year, the Pain Will Precede the Promise.
- Money Morning 2009 Economic Outlook Series (Part III):
Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009.
- Money Morning 2009 Economic Outlook Series (Part IV):
If Japan Bounces Back in the New Year, Investors Will, Too.
Citigroup to cut 10 percent of jobs: source.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.