Coyote Blog

In any number of posts, I warned that, based on past precedent, Presidents almost never roll back executive power, even if they promised to do so in the election campaign.  For example, I wrote on innauguration day this year:

...thoughtful people already on day 1 should have evidence that things are the same as they ever were, just with better PR.   For God sakes, as his first expenditure of political capital, Obama is pushing for a trillion dollar government spending bill that is basically one big pork-fest that might make even Ted Stevens blush, a hodge-podge of every wish-list of leftish lobbyists that has been building up for eight years.  I will be suitably thrilled if the Obama administration renounces some of the creeping executive power grabs of the last 16 years, but he has been oddly silent about this.  It seems that creeping executive power is a lot more worrisome when someone else is in power.

Radley Balko writes:

My own hunch is that presidents try to keep campaign promises that expand the government and their own power, and either back down from or are unwilling to expend much capital on promises that make government smaller and more accountable, thus limiting their own power.

Looking over PolitiFact's report card on Obama's campaign promises, that seems to be about right thus far. By my count (and some of this is certainly subjective) of the of the 31 promises the site says Obama has kept thus far, 20 in some way grow or expand the federal government. Just six make the government smaller, more transparent, or more accountable. The remaining five have no effect, or amount to a wash.

Of the six campaign promises PolitiFact says Obama has unquestionably broken, five would have limited his own power, provided tax breaks, or provided more accountability and transparency to the federal government. One was mostly symbolic (recognizing the Armenian genocide). So far, he hasn't broken a single promise that would grow or expand the government, though he has compromised on a few, and many have been stalled.

1.  I have observed before that many Nanny-state initiatives are driven by politician's own personal experience and weaknesses.  Mike Huckabee started a kids obesity program because he had trouble with his weight, and now Barack Obama regulates tobacco because he has had trouble quitting smoking:

Obama, who has spoken of his own struggle to quit smoking, praised the bill, saying it "will make history by giving the scientists and medical experts at the FDA the power to take sensible steps."

Couldn't politicians just focus on their own behavior without projecting their personal weaknesses on me?  Let's just be glad that we avoided whatever regulatory regime that would have occurred had these guys had a male enhancement issue.

2.  I know zero about smoking and cigarettes.  However, it is my understanding that while the nicotine is the addictive part, it is other components of combustion that cause the health risk.  If this is the case, then doesn't regulated reduction in nicotine content of cigarettes actually pose a health risk?  Won't folks suck on more cigarettes with reduced nicotine, trying to get back to their preferred nicotine dose, and thereby consume more rather than less cancer causing substances?

3.  There is nothing that regulators hate more than free market alternatives to themselves for solving problems.  It is clear they are going to mandate reduced tar and other components in cigarettes, but they want those mandates to come from them, not emerge on their own from the market.  Thus:

[the new FDA rules will] prohibit use of words such as "mild" or "light" that give the impression that the brand is safer

Yep -- wouldn't want private folks getting credit for exactly what the regulators intend to mandate.

4.  I have often observed that regulation tends to favor incumbent companies.   Regulations tend to raise barriers to new entrants, and it imposes costs that are more easily born by larger players in the market.  Further, incumbents often have the political muscle to influence regulation in their favor  (and in fact potential future new market entrants don't even exist today, so they certainly have no lobbying voice).  And, we see this same effect here:

Altria Group, parent company of Philip Morris USA, the nation's largest tobacco company, issued a statement Thursday supporting the legislation and saying it approved "tough but reasonable federal regulation of tobacco products" by the FDA. Rival companies have voiced opposition, saying FDA limits on new tobacco products could lock in market shares for Philip Morris, maker of Marlboro cigarettes.

No surprise there.  Despite all the fighting words about the evils of big Tobacco around the Tobacco settlement a decade or so ago, the result was big gains for the major tobacco companies.

Big tobacco was supposed to come under harsh punishment for decades of deception when it acceded to a tort settlement seven years ago. Philip Morris, R.J.Reynolds, Lorillard and Brown & Williamson agreed to pay 46 states $206 billion over 25 years. This was their punishment for burying evidence of cigarettes' health risks.

But the much-maligned tobacco giants have subtly and shrewdly turned their penance into a windfall. Using that tort settlement, the big brands have hampered tiny cut-rate rivals and raised prices with near impunity. Since the case was settled, the big four have nearly doubled wholesale cigarette prices from a national average of $1.25 a pack (not counting excise taxes) in 1998 to $2.10 now. And they have a potent partner in this scheme: state governments, which have become addicted to tort-settlement payments, now running at $6 billion a year. A key feature of the Big Tobacco-and-state-government cartel: rules that levy tort-settlement costs on upstart cigarette companies, companies that were not even in existence when the tort was being committed.

One of the things I had never noticed before was just how prevalent George Washington's image is around the capital.  The city is named after him, there are statues of him all over the place, the capital and the White House are full of paintings of him, and of course there's that big phallic symbol out on the mall.   I found it a bit off-putting, something I would expect more of Napoleon or a Roman Emperor than a US President.  The oddest site of all was the mural on the dome of the capital, which actually shows the deification of George Washington, a leitmotif taken from Roman emperors and tyrants like Julius Caesar, who were often deified by Senate proclamation after their deaths.

Which brings me to our current president.  The cult of personality around Obama as seen in the Washington area is just startling, and horribly troubling for those concerned about the power of the state and individual liberty.  Pictures of him and his family are seemingly on every wall, with whole souvenir shops dedicated to everything Obama.  Searching for some kind of analog, I actually found two:

• Princess Diana -- Little of what Princess Diana said or did bore up under much scrutiny, but it didn't matter.  For some reason, huge numbers of people totally invested themselves in her personality cult.   In fact, the more screwed up she was, and the more mistakes and weakness she admitted to, the more people rushed to support her.   I was in London a few days after her funeral, and it was the only occasion I had ever seen as much merchandise sales for a government figure as I did this week for Obama.
• Augustus Caesar.   Gaius Julius Caesar Octavianus, or Augustus, had the problem of wanting all the power of a tyrant, but he knew the dangers because his [adoptive] father Julius Caesar had been killed for being a tyrant.  So he brilliantly built over time a personal loyalty among those in the state to himself, and exercised power with good PR.  He was more powerful and more autocratic than Julius Caesar, but cleverly disguised the fact.  He gave the people the illusion of freedom without the reality, and they ate it up.

Bruce McQuain points out this statement by Obama that is just staggering in its mendaciousness (emphasis added)

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money."

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.

WTF?  The current deficit is because of health care decisions?  What happened to TARP and that crazy-large trillion dollar "stimulus" package and Chrysler and AIG and GM and all those other bailouts?  Sure, there is a looming Medicare bankruptcy, but that has little to do with the deficit numbers quoted.

We libertarians have always warned that the modus operandi of government is the following:  The government creates a problem.  Then the government uses that problem as justification for more government action.  Repeat.  Is there any clearer evidence than this from Obama?  He wastes a couple of trillion dollars in his first months in office propping up the constituent groups who got him elected, and then blames the spending on health care, which gives him an entree to ... spend more money on health care.

I couldn't be more depressed about the state of our country than I am right now.

I have not blogged much in the last week on the Obama takeover of GM, but you can take all my old Chrysler posts and just substitute "GM" for "Chrysler" and you will have it pretty much straight.   Having gotten away with hammering secured creditors in favor of the UAW at Chrysler, Obama is setting the same course at GM.  Via Q&O:

The United Auto Workers retiree health fund is set to own as much as 39 percent of the restructured GM, in exchange for giving up its claim to at least $10 billion that the company owes it....

The chief obstacle to an out-of-court settlement for GM remains: There has been no agreement between the company and the investors who hold $27 billion worth of GM bonds.

Under orders from the Obama administration, GM has offered to give the bondholders a 10 percent equity stake in the restructured company in exchange for giving up their bonds.

Hmmm...  let's give unsecured creditor the UAW a 10x better deal than the secured creditors.  No wonder Obama wants to keep this out of bankruptcy court -- laws and contracts and stuff actually would have to be applied there.   But the company will be set for the future -- the US and Canadian governments will control a majority of the board seats, with the rest presumably controlled by the UAW.  Does everybody believe me now when I say we are heading toward a European-style corporate state?

The only thing standing in the way, of course, is those pesky secured creditors, who are actually holding out for what they are legally and contractually due.   Obama's got a bit more difficulty here at GM than at Chrysler because a smaller percentage of the secured creditors are TARP recipients, and therefore he has less leverage to make them give up their rights  (at Chrysler, the TARP majority was pressured successfully into selling out their non-TARP brethren among the creditors).

Of course, Obama has the advantage of Chrysler as a precedent, which makes it pretty clear why he set Chrysler up as the first to be intimidated, as he had the most leverage over them with TARP recipients in the creditor group.  Interestingly, this is very similar to how the UAW has always dealt with the Big 3, targeting the most vulnerable for pressure in contract talks, and then using that settlement as a precedent in the rest of industry.  One wonders if the UAW hasn't been whispering in his ear through this whole process.

In 1933 and 1934, America was on a trajectory to recover from the Depression.  But, before recovering, the economy was to nose dive again, and never really did recover until the next decade.  Historians and economists argue endlessly about this, but I am convinced that the arbitrary and capricious meddling in the economy by the Roosevelt administration caused many folks who would have started investing and bargain hunting with their capital to sit on the sidelines.  The National Industrial Recovery Act (thankfully killed by a mercifully non-packed Supreme Court) was just the most egregious example of the US government making it impossible to evaluate long-term business proposals because the basic foundations of the rule of law were shifting so much.

I fear we are facing a similar danger.   Everything continues to tell me that had we taken our medicine late last year, we would be entering a recovery over the next few months.  However, the Obama administrations economic interventions have gotten so egregious that there is a real danger investors are going to sit on the sidelines with their capital.  Who knows when your industry will get targeted with compensation restrictions, or higher taxes, or even forced changes in ownership?  Who could possibly feel comfortable making 20-year investments in this environment?  Dale Franks quotes Thomas Cooley:

Many investors are sitting on the sidelines, as is much money. Why? Because it is impossible to know what the rules of the game are. And that's because the administration and the Congress keep changing the rules in capricious ways in pursuit of larger political objectives.

Postscript: There is legislation pending in Congress to restrict the ability of lenders  (e.g. credit card issuers) from changing rates on existing debt.  They ask if it is fair for someone who took on a debt thinking it would be at 15% to suddenly find it is at 25%.  But how are tax increases any different.  I make 10-20 year investments in my company, and the expected tax rate is a hugely important assumption in whether it makes any sense for me to put my capital in a particular venture.   How is a large increase in taxes on returns from my past investments any different than changing the interest rate on an existing debt?

I can't even believe he can say this with a straight face:

President Barack Obama, calling current deficit spending "unsustainable," warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

"We can't keep on just borrowing from China," Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. "We have to pay interest on that debt, and that means we are mortgaging our children's future with more and more debt."

Holders of U.S. debt will eventually "get tired" of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. "It will have a dampening effect on our economy."

No duh.   And whose name is scribbled on the bottom of the stimulus bill?  Isn't this the type of concern one expresses before spending a couple of trillion dollars?  Obama reminds me exactly of the young students he lectured at ASU the other day about not getting into too much debt.  He already sounds like kids calling their dad -- it wasn't my fault!  I didn't know!  The only difference is there is no one left out there to bail out the US - no dad, no friendly government, nobody.

By the way, if you are worried about current deficits, read this post Q&O calls "fun" with charts -- there is absolutely nothing fun about it.  A sample:

From a reader, via Bloomberg

GM's offer is "grossly unfair to the point of abusive," Glenn Reynolds, chief executive officer of CreditSights Inc. in New York, wrote in a report this week. "Politics remains an overriding factor in the equation and has been decidedly unfriendly to the interest of bondholders in a contest with the disproportionately outsized power of organized labor and other Washington-heavy constituencies and interest groups."...

"The attack on institutional investors by the administration in this process is a very strange approach and borders on demagoguery," CreditSights' Reynolds wrote in the report. "The bondholders are being painted into a corner and will have no chance but to stand and fight. You can call them names as long as they get treated fairly. Offer them virtually nothing and then call them names? Now that's just cold."

And here is Cliff Asness, a hedge fund manager not involved with Chrysler:

• "Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients' money to share in the "sacrifice", they are stealing."
• "The President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along."
• "The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power."

Finem Respice has a great post on the Administration's bare-knuckle tactics in trying to enforce its will (against the dictates of bankruptcy law) on Chrysler:

It should be obvious to most observers that, recent allegations of strong-arm tactics in negotiations with Chrysler creditors notwithstanding, given the current situation the White House shouldn't need to resort to anything so openly thuggish as naked threats issued by the likes of Steven Rattner. Assuming for a moment, and for the purposes of conversation, that the allegations are substantially true (and I believe they are), the fact that a bit of Chicago-style thuggery seems to have been required- and seems to have failed- says a lot about this White House. It also says quite a bit about the wild overconfidence intrinsic in the administration and how entirely unused to being denied their will are the senior members thereof. A more deft executive need not have pushed so hard, or rattled the saber of class warfare so loudly, but then a more deft executive would not have expected so much....

There are three things that are scarier than the actual resort to common thuggery. The ease with which it comes to this administration. The ubiquitous and rank ineptitude that makes a resort to thuggery necessary in the first place- and promises it will become a common tactic in the days to come. And the forgiveness the population regularly affords the administration after one or another of these episodes is, yet again, made public.

The tantrums that follow missed targets sketch an interesting family portrait of a class of politically spoiled children, think Hillary Clinton meets Paris Hilton- totally devoid of real executive experience but somehow still used to getting their way no matter what some silly law book says. I believe I'll take my chances with the "speculators" over these alternatives any day, particularly when the spoiled children have the 82nd Airborne Division in their toy chest.

When Obama, who has no real experience with bankruptcy or really with any business enterprise, attempts to substitute for a bankruptcy judge, we have to ask ourselves why.  He certainly does not have as much experience or expertise.  He has no particular unique knowledge of the business.  The only unique "quality" Obama has that a bankruptcy judge does not is that Obama does not feel bound by bankruptcy law.   The only possible reason for his involvement is to substitute his desired outcome for the one that would result from the normal application of contract law and bankruptcy precedents.  Since this is an inherently political process, it should not be surprising that at its core, Obama's actions are meant to promote the interests of a politically important Democratic constituency at the expense of a group of bondholders he is confident he can portray to the public as unsympathetic.

Megan McArdle said it quite well:

For the record, I have no problem with whatever cramdown those debtholders--or any others--get in bankruptcy court.  If the judge thinks that the reorganization can't be done without making the UAW basically whole, fine.  I just think that the reorganization should be done under the well-established procedures of the bankruptcy court, not at the behest of an administration trying to reward its supporters.

It's all very well to say that most of the senior lenders are going along, but of course, the leading senior lenders are doing this because the administration has them over a barrel.  I think most of the people enthusing about this actually recognize that in other countries, when the government uses the banking system as a slush fund to reward its constituencies, this generally turns out badly--and makes the banking system a lot more frail.

Nor will it fly to claim that the administration's threats--and note that Perella Weinberg has most carefully not denied that they were threatened--are just standard jawboning.  Standard jawboning does not involve the White House bloody press corps.  It is true that DIP financiers often get to demand serious concessions from creditors, but those creditors are limited by what those creditors would get out of a recession, and are aimed at either maximizing enterprise value, or maximizing the likelihood that the loan will be repaid.  This deal does neither.

Perhaps it's idealistic of me, but the American bankruptcy system actually works very, very well.  I think we should be very cautious about mucking with it, particularly when there's no reason to.  The administration didn't need to beat up the creditors in order to reorganize the company--or at least, they wouldn't have needed to do so, if they weren't trying to make the creditors take less than they'd get in a liquidation.  Nor did it need to do so to keep the UAW at the table--unlike capital, the UAW isn't going anywhere.  The administration is beating up the creditors because a) it wants to give the UAW a much better deal than they'd get in liquidation and b) they'd like someone else to pay for it.

Update: More of the same coming out (as I predicted here):

Although the focus has so been on allegations that the White House threatened Perella Weinberg, sources familiar with the matter say that other firms felt they were threatened as well. None of the sources would agree to speak except on the condition of anonymity, citing fear of political repercussions.

The sources, who represent creditors to Chrysler, say they were taken aback by the hardball tactics that the Obama administration employed to cajole them into acquiescing to plans to restructure Chrysler. One person described the administration as the most shocking "end justifies the means" group they have ever encountered. Another characterized Obama was "the most dangerous smooth talker on the planet- and I knew Kissinger." Both were voters for Obama in the last election.

One participant in negotiations said that the administration's tactic was to present what one described as a "madman theory of the presidency" in which the President is someone to be feared because he was willing to do anything to get his way. The person said this threat was taken very seriously by his firm.

The White House has denied the allegation that it threatened Perella Weinberg.

I am trying to figure out what kind of thinking this post from Kevin Drum represents:

According to people "familiar with the talks," several of Chrysler's bondholders have rejected the government's deal, which amounted to paying them off a little more than 30 cents on the dollar.  So that means it's probably Chapter 11 time.  Blecch.  I hope the holdouts all end up getting less from the judge than they would have gotten from Obama.

There is only one possible reason** for Obama's attempt to avert a Chrysler bankruptcy -- he is trying to divert value from one group who would get it under a bankruptcy to another group.  There can be no other explanation for what he is trying to do, and in fact evidence is pretty strong that he has been trying to get creditors to take less so unions, who supported his election, can get more.

What has happened is that creditors have refused to get bullied by this near-unprecedented intervention by a US President in a bankruptcy case and are holding out for what they feel is the best way to recover as much as possible of what they are owed (no one is coming out whole).  In this context, Drum's pique really seems petty.  Rather than press for the money they are legitimately owed, the creditors should have bowed down, I guess, to the King's wishes and given up their money to those courtiers who were smart enough to back the King's coronation.

What Drum is probably most upset about is that it is now clear that both Bush and his guy Obama have spent tens of billions of dollars of taxpayer money to absolutely no end, just delaying a bankruptcy that would have been better for economic recovery if it had happened six months ago.

** There is one other explanation -- Obama may feel like he is better able to mediate a bankruptcy than a bankruptcy court and judge with decades of experience in the field.  I hope this kind of hubris is not the case, but for this administration it is very possible.  Obama is every bit as unaware of his inability to achieve his goals through shear force of will in domestic policy as GWB was in foreign policy.

We really couldn't be more screwed when it is up to an NPR reporter to make the argument for free enterprise:

EPA Administrator Lisa Jackson told NPR's Michelle Norris yesterday: "The President has said, and I couldn't agree more, that what this country needs is a one single national road map that tells automakers who are trying to become solvent again what kind of car it is they need to be designing and building for the American people." Norris then asked: "Is that the role of Government though? That doesn't sound like free enterprise." Jackson responded: "Well it is free enterprise in a way."

via Maggies Farm.

Update: Q&O has a great post deconstructing Obama's view of government as health care planner.  Very frightening.

I like TJIC's analogy for explaining the staggering depths to which the Obama administration is going to look for budget cuts:

Lots of folks are having fun pointing out that Obama's "$100 million budget cut" on a $3.69 trillion budget is pretty small potatoes.

Speaking of small potatoes, here's my analogy:

A Big Mac has 540 calories.

A small McDonalds French Fries has 230. Looking at the picture at the McDonalds website, I could believe that there are maybe 42 fries in there, so call it perhaps 5.4 calories per individual fry.

So, Obama's budget is like saying

"Please give me 370 Big Macs "¦ and one french fry. No, not "a small order of fries." Just a single, lone french fry.

Wait.

Actually, I'm trying to lose weight.Cancel that french fry - I'll just have the 370 Big Macs.

I have predicted it a number of times vis a vis Chrysler, including back in February:

It is criminal that this [restructuring plan] is going to Congress, not a bankruptcy judge.  This is a conspiracy of management (looking to hold onto their jobs and equity), equity holders, and employees to usurp value from the senior debt holders, who would normally be first in line in a bankruptcy.

or in March:

there is a clear set of winners and losers in a bankruptcy "” and there is enough case law on it that all the players at GM know it and they know into which category they fall.  Those who are lower down the food chain are hoping that putting the restructuring in Obama's hands rather than those of the bankruptcy process will improve their outcomes.

Oh, gee, you say, the Anointed One would not be so crass as to used this way, would he?  From Megan McArdle

The government is trying to play hardball with the Chrysler creditors, asking them to accept 15 cents on the dollar when they're likely to get more in a liquidation.  That's not a haircut; it's more like what they do to you the first day of boot camp.

I see a lot of news stories about Obama supporters scratching their heads at why Obama did not get more respect from other nations.  Why do these countries continue to heap scorn on the US as the US contributes more and more to international efforts?

Here is a hint:

1. These other countries share President Obama's attitudes about the rich
2. As far as the rest of the world is concerned, the US is rich

The rich in this country pay for most of the programs Obama takes credit for.  When folks say that Obama "cares", he does so with the money of America's rich.  In return, he heaps nothing but scorn on the rich, blaming them for any economic problems that may exist and criticizing them for not paying enough taxes.

Mr. President, the other countries of the world treat you and this country exactly like you treat the rich, and for the same reasons.  If that frustrates you, look to your own values first.

I very seldom include really long excerpts from articles, but this is perhaps the most telling article I have read to really give you a feel for what the new government ownership of the automakers really means.

It sounds crazy: Just a week after the White House scolded Chrysler LLC for relying too much on gas guzzlers, the company is heading to a marquee auto show Wednesday to unveil a new SUV.

Chrysler insists the Jeep Grand Cherokee, which clocks in at 20 mpg in its two-wheel-drive version and 19 in four-wheel-drive, is a crowd favorite and a crucial part of its lineup.

"This is a very important vehicle for us. It's one of the primary legs of the Chrysler stool," Chrysler spokesman Rick Deneau said. "Customers have told us they want this vehicle and that it's the right size."...

The White House slammed Chrysler for having a product lineup so heavily weighted with trucks and SUVs. It added that the automaker does not have enough products in the pipeline to meet an expected increase in demand for small cars.

But Chrysler is standing by the Grand Cherokee. It's profitable, recognizable and the No. 2-selling vehicle in the Jeep lineup. Grand Cherokee sales fell by almost half during the first three months of the year, but its market share has remained steady, according to Autodata Corp....

Karl Brauer, editor in chief of the automotive Web site Edmunds.com, said it may be hard for Chrysler to please both the government, which is demanding greater fuel efficiency from the Big Three, and its customers, many of whom still demand big cars.

"It would be far more foolish for Chrysler to abandon its core competencies in the Jeep brand lineup than it is to come out with a new" Grand Cherokee, Brauer said.

I hardly know where to start with this.  Some thoughts:

• As expected, the administration does not really care about the near-term recovery of GM and Chrysler, or, if they care, they are totally ignorant as to the realities of the US car market and the sources of Chrysler's profitability.   They care about enforcing a particular political agenda that has little to do with, and may actually conflict with, the health of the company.
• We have hit a new low when the President of the United States has a strong opinion on and reaction to what car a private company chooses to feature at an auto show.
• We REALLY have hit a new low when my newspaper thinks its "crazy" that a private company would follow its own marketing intuition rather than the dictates of the US President as to what car they should feature at an auto show.  The AZ Republic just assumes the company should do whatever Obama tells them to.
• "Expected increase in demand for small cars"  -- Expected, by whom?  Hybrids are currently losing market share.
• It takes years to develop a new car, so this particular variation of the Cherokee has been in the pipeline for a while, and millions of dollars have likely been invested in it.  And the product line makes money, unlike many other Chrysler cars.  But the Administration wants them NOT to sell it?  It takes years to change a company's auto portfolio, but Obama is going to throw a hissy fit because they have not done it in two months?  Don't they know who he is?
• The article even gives the data one needs to understand why buyers don't share Obama's need to downsize their car.  Based on numbers in the article, this SUV uses $235 more gas a year than the Camry (which I guess is a more politically correct car choice).  That is $19.60 a month.  Assuming a car payment of $450 per month, that is about 4% of the car payment.  In other words, the difference in gas use is a TRIVIAL expense for the person who can afford to buy the car in the first place.  Over 5 years, the cumulative extra gas to fuel the SUV costs about the same as the 16" alloy wheel option on the Camry.

Every day, I have an increasing sense that we are creating a dictatorship run by a grad school public policy seminar.

I am sure that Obama really believes, in his heart, that Americans really want smaller cars rather than SUVs.  So what?  By acting on his own preferences, he is breaking what I call marketing rule #1:  Never assume ones own personal preferences are shared by the marketplace.

I wrote the following in the comments to this post where a good Bay Area greenie had expressed similar views (that automakers are hurting because they are producing the wrong cars that Americans don't want):

I have been a marketer all my life. As such, one of the first rules of survival I learned was to never overlay my own personal preferences on the marketplace. GM has had this problem for years, with insular design teams locked in some weird 1970s design world.

But you and others are simply repeating the mistake, with a different set of perspectives -- you assume your personal preferences in cars represent that of the majority of buyers, and you wish to use the fiat power of government to enforce those preferences. It is a recipe for fiscal disaster. I promise you what people buy, for example, in rural Arizona is not the same thing that people buy in SF, no matter how much those on the coasts want to forget that flyover country exists.

I actually think there is decent evidence that a lot of people do want what GM is offering, given their market share. Why do people always say they make cars that no one wants to buy, when they sell 10 million of them each year? I will confess the GM product line does nothing for me, but so what? Others seem to like it, and, unlike many, I don't look down my nose at them for doing so.

The problem is not necessarily their product line, but their cost position. The average price of new cars has not risen for 15 years. Much like in computers, consumers now expect ever better cars for the same or lower price each year. GM is still producing cars with a mindset built in an era of a three-company domestic monopoly, where 4% annual price increases were routine. Their competition is producing like they are Dell or Toshiba, recognizing that they are never going to get price increases and ruthlessly driving down costs.

Update: This is relevent, even if not directed specifically at autos:

Er, industry also knew how to make low-flow toilets, which is why every toilet in my recently renovated rental house clogs at least once a week.  They knew how to make more energy efficient dryers, which is why even on high, I have to run every load through the dryer in said house twice.  And they knew how to make inexpensive compact flourescent bulbs, which is why my head hurts from the glare emitting from my bedroom lamp.    They also knew how to make asthma inhalers without CFCs, which is why I am hoarding old albuterol inhalers that, unlike the new ones, a) significantly improve my breathing and b) do not make me gag.  Etc.

In fact, when I look back at almost every "environmentally friendly" alternative product I've seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at "industry" who don't care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version.  In some cases, the problem could be overcome by buying a top-of-the-line model that costs, at the very least, several times what the basic models do.  In other cases, as with my asthma inhalers, we were just stuck.

Often "industry reluctance" to offer green products is actually industry understanding of customer reluctance to buy them.

Unchecked executive power seems to be a bad thing only when weilded by the other guy:

The Obama administration is again invoking government secrecy in defending the Bush administration's wiretapping program, this time against a lawsuit by AT&T customers who claim federal agents illegally intercepted their phone calls and gained access to their records.

Disclosure of the information sought by the customers, "which concerns how the United States seeks to detect and prevent terrorist attacks, would cause exceptionally grave harm to national security," Justice Department lawyers said in papers filed Friday in San Francisco.

Kevin Bankston of the Electronic Frontier Foundation, a lawyer for the customers, said Monday the filing was disappointing in light of the Obama presidential campaign's "unceasing criticism of Bush-era secrecy and promise for more transparency."

"Trust Me" is not supposed to be the defining principle in the Constitution for the excercise of power.

More, via Cory Doctorow:

Every defining attribute of Bush's radical secrecy powers -- every one -- is found here, and in exactly the same tone and with the exact same mindset. Thus: how the U.S. government eavesdrops on its citizens is too secret to allow a court to determine its legality. We must just blindly accept the claims from the President's DNI that we will all be endangered if we allow courts to determine the legality of the President's actions. Even confirming or denying already publicly known facts -- such as the involvement of the telecoms and the massive data-mining programs -- would be too damaging to national security. Why? Because the DNI says so. It is not merely specific documents, but entire lawsuits, that must be dismissed in advance as soon as the privilege is asserted because "its very subject matter would inherently risk or require the disclosure of state secrets."

What's being asserted here by the Obama DOJ is the virtually absolute power of presidential secrecy, the right to break the law with no consequences, and immunity from surveillance lawsuits so sweeping that one can hardly believe that it's being claimed with a straight face. It is simply inexcusable for those who spent the last several years screaming when the Bush administration did exactly this to remain silent now or, worse, to search for excuses to justify this behavior. As EFF's Bankston put it: "President Obama promised the American people a new era of transparency, accountability, and respect for civil liberties. But with the Obama Justice Department continuing the Bush administration's cover-up of the National Security Agency's dragnet surveillance of millions of Americans, and insisting that the much-publicized warrantless wiretapping program is still a "secret" that cannot be reviewed by the courts, it feels like deja vu all over again."

This is an update to these two posts on the Geithner toxic asset / bank bailout plan.  In those posts, we looked at a hypothetical investment with a 50/50 chance of being worth 0 or 200.  From this, we said that the expected value was 100, and looked at payout scenarios under the Geithner plan.

A number of folks wrote me that I had missed part of the point of the Geithner plan.  The original assumption of the plan was that the banking system is in a liquidity crisis, and fire sales of assets are reducing the pricing of such assets well below their expected hold-to-maturity value.  According to the Treasury white paper:

Troubled real estate-related assets, comprised of legacy loans and securities, are at the center of the problems currently impacting the U.S. financial system...The resulting need to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. While fundamentals have surely deteriorated over the past 18-24 months, there is evidence that current prices for some legacy assets embed substantial liquidity discounts...This program should facilitate price discovery and should help, over time, to reduce the excessive liquidity discounts embedded in current legacy asset prices.

Their point is, in our example, that the asset worth 100 is only trading at, say, 50 due to a liquidity discount and the point of the plan is to make this discount go away.

This does make it clearer to me how these guys are justifying this program.   If we look at the program on the original analysis, based on expected values of assets held to maturity, we got this profile of returns:

The bank returns in the analysis were based on the alternative of hold to maturity.  It is all a zero-sum game - gains at the banks and investors come directly out the the taxpayer's pocket.

If, however, one assumes the asset is trading below expected value, say at 50, due to a liquidity discount, then Geithner can argue the banks get a higher return for the same taxpayer subsidy IF the returns are based on a base case of selling out at the fire-sale market price.

In this case, with these assumptions, we get some "free value" or a multiplier effect of the taxpayer subsidy equal to the liquidity discount.

Is this a valid way of looking at it?  Well, the first problem is that this seems like an awful lot of money to spend of taxpayer money just to eliminate a fleeting (in the grand scheme of things) liquidity discount.  Banks have a zero-subsidy alternative to achieving the same end, which is simply to hold the investments to maturity, or until the market eliminates the liquidity discount.  Those of you who own a home know that you are going to take a hit on value if you have to sell now, while the market is a flooded with homes for sale, vs. two or three years from now.  Anybody proposed lately to bail ordinary folks out of this liquidity discount?

But perhaps the more telling criticism of Geithner's assumptions come from a recent paper by a group of Harvard Business School and Princeton professors who have looked at the current market pricing of these toxic assets, and have found little or no liquidity discount.

"The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals. A structural framework confirms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased. The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing."

Three conclusions are drawn:

• Many banks are now insolvent. "...many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities."

• Supporting markets in toxic assets has no purpose other than transfering money from taxpayers to banks. "...any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities."

• We're making it worse. "...policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay "“ and perhaps even worsen "“ the day of reckoning."

Update: Critics of the study argue the authors only looked at the most liquid portions of the toxic asset portfolios, thus missing the problem they claim to be studying.  From this brief critique, they seem to have a point.

Michael Rozeff looks at the paper's findings in the context of Austrian economics, and concludes that in fact, Geithner and company are delaying a recovery in lending, as bankers are frozen in a game of chicken, hoping to make things bad enough to attract government subsidies without making them so bad the institution fails before subsidies arrive.

By contrast, the Austrians, as well as other financial analysts, have argued from the outset that the basic problem is not liquidity of the financial system. The argument on the Austrian side is that the banks and other financial institutions have not been in trouble because there is not enough liquidity to buy their loans. They are in trouble because they made bad loans that are worth far less than their values as carried on the banks' books. The banks are often insolvent. Furthermore, these banks do not want to and refuse to sell these loans at the low values to get the liquid funds they want. They are playing politics. They are getting a better deal (a) by shifting some of these loans to the FED in return for Treasury securities, and (b) getting bailed out by taxpayer funds.

In the Austrian interpretation, the banks have waited while the government came up with various devices to bail them out with other people's money. The latest is the Geithner PPIP that uses an FDIC guarantee to private parties to buy the bank loans at prices above market value. In the same vein, the accounting regulatory authority known as FASB has just allowed the banks leeway not to carry these bad loans at their market value by voiding the mark-to-market rule.

Kevin Drum quotes the Financial Times:

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn (£680bn) plan to revive the financial system.

....Wall Street executives argue that banks' asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets.  But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

Wow, no one could have predicted this.  Except for anyone who spent 5 minutes with the numbers:

There is an interesting incentive to collude [in the Geithner plan] between banks and investors.  The best outcome for both is for investors to pay a high price to banks and then have the bank kick back some portion to the investor.

I will confess that I did not take the next logical step and consider that the ultimate collusion would be for banks themselves to be the investors, but the incentives for doing so were dead clear (part 1, part 2).

I will stick by my original conclusion -- Taxpayers are hosed at any price.

By the way, can anyone tell me what the evidence has been for the contention Barack Obama is "really smart," because I sure don't see it.  Yeah, he went to an Ivy League School, but so did I and there were plenty of people there I wouldn't trust to run a lemonade stand.  Sure, he gives a nice prepared speech and seems to have invested in that vocabulary building course Rush Limbaugh used to peddle on his show, but what else?  All I see is a typical Ivy League denizen of some NGO who thinks he/she can change the world if only someone will listen to them, who just comes off as puerile if you really spend any time with them.  I will go back to what I wrote on inauguration day:

Folks are excited about Obama because, in essence, they don't know what he stands for, and thus can read into him anything they want.  Not since the breathless coverage of Geraldo Rivera opening Al Capone's vault has there been so much attention to something where we had no idea of what was inside.  My bet is that the result with Obama will be the same as with the vault.

I had someone ask me whether the results in this post on the economics of Geithner's latest brainstorm were an artifact of the selected purchase price for the distressed asset of 150.  The answer is no.  Investors are willing to buy this asset on these terms at any price under 175, and banks are willing to sell for any price over 100.  Here is the graph of expected values as a function of the purchase price

Note the taxpayer gets hosed at any price  (kind of the Obama-Geithner update on "unsafe at any speed")  Two things I had not realized before:

• Without competition among investors to drive up the price, a very large percentage of the taxpayer subsidy goes to the investors rather than the banks.
• There is an interesting incentive to collude here between banks and investors.  The best outcome for both is for investors to pay a high price to banks and then have the bank kick back some portion to the investor.

Nobel Laureate Joseph Stiglitz has a great deconstruction of the Geithner toxic asset plan in the NY Times.  If you want to see how the new corporate state works, where the government works with a small group of powerful insiders to the benefit of those insiders and the detriment of everyone else, this is a great example.

Stiglitz walks through how the Geithner plan will operate, and I want to do so as well.  I have added a few tables to help illustrate his example a bit better.

Let's begin with a financial asset that was originally worth $200.    To make things simpler, we'll assume that with the current economy there are now two outcomes for this asset -- a 50% chance it recovers and eventually pays off its full value of $200, and a 50% chance it becomes effectively worthless  (more realistically, there is a range of outcomes, but this does not really effect the following analysis).

The average "value" of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is "worth."

This is a classic expected value analysis.  At business school, you spend a lot of your time doing these (trust me).  Expected value is just the percentage chance of each outcome times the value of the outcome, on in this case 50% x $0 + 50% x $200 = $100.

So Stiglitz hypothesizes a situation under the new Geithner plan where a private entity might be willing to pay $150 for this $100 asset.  That's certainly a windfall for the financial institution that owns the asset currently, since the asset is only worth $100 on the open market.  But why would someone pay $150?  Well, it starts with this:

Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses

The actual percentages are 8% from the private purchasers, 8% "equity" from the government, and 84% in a government-guaranteed loan  (Equity is in scare quotes because most investors learned long ago that if you provide 80%+ of the capital in a risky venture, you can call the investment "debt" all day long but what you have really done is made an equity investment).

So let's look at how the purchase cost is divvied up based based on a $150 purchase cost:

But we have already posited how this will come out:  a 50/50 chance of $0 and $200 for the final asset value.  So we can compute the outcomes.

So there is a huge built-in subsidy here.   Now, I don't personally think the government needs to be injecting equity in banks.  But  I understand there are a lot of people who support it.  So perhaps the $50 subsidy of the banks in the above example is warranted.  But why the $6.5 subsidy of Geithner's old pals in the investment world?  This is a pure windfall for them, like finding money laying on the street.   Even Vegas does not tip the odds so far in favor of the house.

I agree with Stiglitz's analysis:

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a "partnership" in which one partner robs the other. And such partnerships "” with the private sector in control "” have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it's the kind of Rube Goldberg device that Wall Street loves "” clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

Update: I posted an update on the plan and these numbers here.

Russel Roberts deconstructs Obama's auto speech.  Well worth the read.

I have worked with folks in the government for years.  One of the common syndromes I see in government officials of all levels is something I call "arrogant ignorance."  I see a lot of it in this administration.

Critics of high executive pay on the soft-core / moderate left (as opposed to the hard-core socialist left) often argue that they are not against large incomes per se.  However, they argue that high executive pay is often the result of a failure in the structure of corporate governance, where a group of cozy insiders on the board and management hand each other compensation packages to which the rank and file of shareholders would be opposed  (a subset of the agency cost problem).

I am somewhat sympathetic to this argument, as I have personally observed instances where I thought boards and management were too cozy by far.  However, no one has really succeeded at proving this hypothesis on executive pay, and in fact shareholders when they have had a chance to vote on such packages have never really made a meaningful dent in them, and one can find a number of private companies where such governance issues presumably don't exist but high executive compensation packages can exist.

Just as an aside, a classic example of this can be found in the fabulous book "Barbarians at the Gate" about the RJR Nabisco takeover fight.  The book does a great job of portraying a company with horrible corporate governance issues that seemed to be used to enrich managers with both salaries and perks, but then observed that the new private owners of the company gave their new CEO a compensation package that might have made the previous executives blush.

Anyway, I am yet again off the point.  My point was to observe that the mainstream left seems to believe that there are corporate governance issues at large corporations that disenfranchise the majority of shareholders vis a vis key decisions involving the company executives.  So I have to ask myself, if this is a real fear, then how does one justify having the President of the United States effectively fire the GM CEO, without any vote or substantial input from shareholders?

Postscript: It is all well and good to be cognizant of agency costs.  Everyone should understand when an employee (or contractor or whatever) has different incentives than they themselves possess.  For example, on my recent backyard renovation, I always kept in mind that my architect wanted to create a showplace that would advance his business and possible get into a magazine.  In general, this alligns our interests, but there were times he pressed for things I did not value and I had to be insistent we were not going to do those things.

However, many folks seem to want to run off to government to do something about agency costs whenever or wherever they are found.  This is hugely dangerous, as Congress tends to have the highest agency costs one will ever be likely to find.

The answer to all of Obama's spending in trillion dollar chunks is obvious.  All we have to do is make our currency work just like that of Zimbabwe, and we will be fine.  We could pay off a trillion dollars with 10 bank notes (I bought just one the other day on eBay for $30 or so).

The problem, of course, is that this is what the Obama administration actually appears to be doing.

After giving tens of billions of dollars of our money to the auto makers, Obama has now figured out what I and many others knew years ago:

Obama, responding to a question during an online town hall meeting, said the current business model for U.S. carmakers was unsustainable and the Big Three would need to change their ways.

From the article, however, it is still clear that Obama has no intention of allowing GM to go into chapter 11, as they should have 6 months ago.   There is a good political reason for this -- remember what I explained before.   Obama is working to equate chapter 11 with the disappearance of the American auto industry, clearly an untrue and facile proposition.  Many large companies, from airlines to energy companies to equipment manufacturers, have gone bankrupt over the last several decades and continued operations or at least had their productive assets taken over by other companies.  GM's assets are not just going to go poof.

However, there is a clear set of winners and losers in a bankruptcy -- and there is enough case law on it that all the players at GM know it and they know into which category they fall.  Those who are lower down the food chain are hoping that putting the restructuring in Obama's hands rather than those of the bankruptcy process will improve their outcomes.  And, to get those higher on the food chain (ie senior debt holders) to accept this they need the government to bring taxpayer money to the table.  The whole point of an Obama-led restructuring, then, is not to somehow preserve the US auto industry but to improve the financial position of certain GM stakeholders at the expense of US taxpayers  (and probably consumers, and some sort of protectionism is likely to be part of this deal).

But here is the most interesting point that was really hammered into me in reading this article.  If you were to rank Obama as to where he stood vis a vis all American adults in terms of his knowledge of business and what it takes for a company to be successful, where would you rank him?  I don't think very many would put him in the top half.  In fact, given that he has never, to my knowledge, had any real job in business of any sort (not even a high school job at McDonald's or something similar), I am not sure I would put him above the 10th percentile.  Anyway, put your own number to this question, and then read these quotes from the linked article

The president said he planned to announce decisions on the future of the industry in the coming days.

"But my job is to measure the costs of allowing these auto companies just to collapse versus us figuring out - can they come up with a viable plan?" he said.

White House spokesman Robert Gibbs said Obama will announce his strategy for the auto industry before he leaves for Europe on Tuesday.

Seriously, would you hand over your business or your stock portfolio for Obama to manage?  I didn't think so.  It takes years of experience to be able to read a business plan skeptically.  And even people who are experienced at it fail a lot.

By the way, for those who suspect that decisions will not be based on actual market realities but satisfaction of pet political goals, you are probably correct:

The president said even as the economy bounces back, Detroit can't focus on "trying to build more and more SUVs and counting on gas prices being low."...

Gibbs said Obama still thinks U.S. automakers build cars that Americans want to buy. Both he and the president own Ford Escape hybrids. "It's a nice car," Gibbs said. "It really is."

So, for example, one can assume its likely the Obama strategy for GM success will include lots of hybrids.  Of course, the market reality is this:

the slowdown has been particularly brutal for hybrids, which use electricity and gasoline as power sources. They were the industry's darling just last summer,  but sales have collapsed as consumers refuse to pay a premium for a fuel-efficient vehicle now that the average price of a gallon of gasoline nationally has slipped below $2.

"When gas prices came down, the priority of buying a hybrid fell off quite quickly," said Wes Brown, a partner at Los Angeles-based market research firm Iceology.

I personally believe that a meer restructuring of GM is unlikely to create a turnaround, as I discussed here.

Postscript- It is a bit apples and oranges for me to say that Obama is evaluating business plans here.  In fact, he is not.  Though he calls them that, if the Chrysler retructuring plan they put on the web is any guide, these are political plans, not business plans.  No real business plan, for example, seeking to attract private capital would prioritize the goals "Commitment to Energy Security and Environmental Sustainability", "Compliance with Fuel Economy Regulations," and "Compliance with Emissions Regulations" ahead of "Achieving a Competitive Product Mix and Cost Structure."  In fact, the section about costs and competitive products comes dead last in the Chrysler plan, almost as an afterthought.

Update: This sad story about athletes and their difficulty in managing their money seems relevent.  These guys, who have spent their whole life getting really good at one thing, don't even have the basic financial vocabulary to understand money management, and absolutely no ability to parse a business plan:

It began in the winter of 1991 when he sank $300,000 into the Rock N' Roll Café, a theme restaurant in New England designed to ride the wave of the Hard Rock Cafe and Planet Hollywood franchises. One of his advisers pitched the idea as "fail-proof, with no downsides," Ismail recalls. He never recouped his money and has no idea what became of the restaurant.

Lesson learned? If only. After that Ismail squandered a fortune funding not only that inspirational movie but also the music label COZ Records ("The guy was a real good talker," says Rocket); a cosmetics procedure whereby oxygen was absorbed into the skin ("We were not prepared for the sharks in the beauty industry"); a plan to create nationwide phone-card dispensers ("When I was in college, phone cards were a big deal"); and, recently, three shops dubbed It's in the Name, where tourists could buy framed calligraphy of names or proverbs of their choice ("The main store opened up in New Orleans, but doggone Hurricane Katrina came two months later"). The shops no longer exist.

You might say Ismail had a run of terrible luck, but the odds were never close to being in his favor. Industry experts estimate that only one in 30 of the highest-caliber private investment deals works out as advertised. "Chronic overallocation into real estate and bad private equity is the Number 1 problem [for athletes] in terms of a financial meltdown," Butowsky says. "And I've never seen more people come to me about raising money for those kinds of deals than athletes."

Doesn't this sound like the current administration in microcosm?  Does Obama have any better chance with his GM investment?