Sunday, November 16, 2008

GM is not too big to fail!

There is an effort to say that the U.S. government must save the American automakers from themselves; socialize failure, without consequences.


In the 1970s the price of gas was going up, and the American consumer needed to get a car from Japan for fuel efficiency. They discovered that the imported cars didn't start to fall apart after the 3 year or 60,000 mile barriers that KO'd cars from the 'big three (GM, Ford and Chrysler).' This was the first indication that there was a systemic problem at the 'big three.'

The market, and government, had their first opportunity to restructure GM via the bankruptcy system in 1989/90, and didn't; about five years after the taxpayers had underwritten the restructuring of Chrysler.

Here we are again facing the fact that GM, Chrysler and Ford, like Wall Street, can't find their own backsides with both hands; even while sitting on those very same hands.

Yes, it will be painful to allow GM, Chrysler or Ford to fail, but throwing money at these companies has not been successful, let alone painless.

Friday, November 7, 2008

Solving Wall Street: Step One.

A great many companies in the financial services sector (a.k.a.: Wall Street, the market) are in trouble, because the credit worthiness of their ‘mortgaged backed’ paper, collateralized debt obligations (cdo) and credit default swaps (cds) are being downgraded arbitrarily in a panicked flurry of activity. This devaluation frenzy needs to stop. The aforementioned ‘investment grade’ paper was given an initial rating of AAA by the agencies responsible for said ratings, and those need be frozen as is temporarily.

Pause, to catch a breath, then go back and (figure out?) follow the paper trail.

These investment instruments were created (by geeks hired specifically for that purpose) and sold, with an arbitrary initial debt rating of AAA, to generate immediate cash from long term investments: mortgages. They were very successful, so the call went out for more. The next generation was also very successful, so the market decayed into the irrational exuberance that accompanies any trend, that is successful long enough, on Wall Street.

Time needs to be taken to find all that paper and determine what’s still AAA, what’s junk and what’s somewhere in between. This is not being done because once the paper trail is straightened out it will be obvious that Wall Street caused its own problem.

The market has never accepted any responsibility for failure, and is of no mind to start now.