Bob Dylan and American Cars.

I had to chuckle at Bob Dylan's nauseating super bowl commercial about Chrysler which gushed with American pride.  Clearly Bob ignores the fact that Chrysler is wholly owned by Fiat, and that of the top 10 American made cars, only one is a Chrysler product.

Why is Chrysler filing for an IPO?

A strange situation has developed at Chrysler, where the company has reported that it is filing for an IPO, even though its majority owner, Fiat, is in opposition to the filing.

So what's going on?   Back in 2007, the big 3 automakers created something called VEBA -a trust that allowed the firms to transfer their retiree healthcare benefit obligations to the UAW.   All was well, until the financial crisis "carpocalypse" and the UAW had to take shares in GM and Chrysler instead of cash because these automakers were broke.   Now the UAW wants to cash out, but is unhappy with the price being offered by Fiat - hence the IPO (the VEBA arrangement allows the UAW to push for an IPO).   The UAW is hoping that the IPO will result in a higher price than what Fiat is offering.  

Fiat isn't happy because a higher valuation will mean that it has to pay more to buy out Chrysler's share of the VEBA fund.  But, the UAW could lose out though if the valuation comes in lower.

Either way, Fiat and the UAW are playing chicken.  This should be interesting, but there's a good chance this IPO will never happen.

GM times the market

It's looking like GM's IPO is going to be pretty successful.  Whether by luck or skill, GM has managed to time the market pretty well.  Stock prices are at their highest for quite a while and GM just reported some healthy profits.

Of course we'll have to see whether GM shares turn out to be a good buy in the long run.

So what happened to that TARP money?

My colleague, Steve Allen, blogs that the $700bn paid out for TARP has mostly been paid back.  It looks like we won't see much of the $300 bn paid to Fannie and Freddie though.  

We're also waiting to see how much the GM IPO will raise.  Recent reports indicate that it might not go as well as had been hoped...

Cash for clunkers...

Reposted from my colleague, Steve Allen's blog.

Cash for clunkers was a dud.

That is unless you were one of the folks who actually traded in a clunker. In that case you got a nice chunk of cash off a car you were probably going to buy anyway.

From the U.S. tax payers: You're welcome.

Valuing the GM IPO

Around $110 - $130 per share?

A few interesting posts from the blogosphere

Rolf Winkler talks about last night's frontline documentary on for profit education.
http://blogs.reuters.com/rolfe-winkler/2010/05/05/frontline-exposes-for-profit-education/
The frontline documentary is well worth a look.

Greg Mankiw posts a graphic of what the federal budget will look like in 2020.
http://gregmankiw.blogspot.com/2010/05/federal-budget-in-one-picture.html
Bottom line, after you take out defense, social security, medicare, medicaid and interest expense you're left with 23% that goes to "other". The clear reality, that perhaps the tea party crowd have not appreciated is that if you want to cut the government debt you need to make cuts in these four areas.

Mankiw also talks about price gouging. http://gregmankiw.blogspot.com/2010/05/in-defense-of-price-gouging.html
Apparently there has been a water shortage in New England leading to spikes in the prices of bottled water. Politicians are crying foul and accusing vendors of price gouging. Further evidence of how clueless politicians are when it comes to Econ 101.

Finally, Steve Allen talks about how GM paid back its TARP to the government by borrowing money from the government. Ultimately tax payers are likely to take a $30bn hit on GM. http://stevenallenblog.blogspot.com/2010/05/truth-about-gm-repaying-its-tarp-loan.html

The new auto industry breakdown

Just in case you weren't keeping up on all the changes to the US auto industry, here's a handy graphic to bring you up to speed.

Where are cars made?

With all the talk about helping US automakers it is worth noting which vehicles are actually made in the US. This graphic provides some interesting information.

For example, the Toyota Sienna is assembled in Indiana using a US made engine and a US made transmission, whereas the Ford Mustang is assembled in Michigan with a V6 engine from Germany and a transmission from France or Mexico.

Jon Stewart on GM

This one is a little old (june 3) but well worth watching if you haven't seen it.

Saab - a negative NPV project.

I'm wrapping up teaching financial management of corporations to MBAs - the last class is tonight (my Monday and Thursday nights will be so empty!).

In class we have talked a lot about NPV as a decision rule for evaluating projects and the recent news of GM's sale of Saab made me wonder what GM's original 2000 NPV analysis of Saab looked like (assuming that there was one). I'm guessing that there wasn't one. But I bet that if there was, they used GM's cost of capital and not a far higher one that a risky division like Saab would merit. Rick Wagoner stated in 2000 that ''The brand attracts a very different consumer than we normally see in General Motors showrooms ..... We want to keep that brand very distinctive and very unique.'' Sounds risky to me.

But by 2002 things looked pretty grim. Indeed, GM admitted that Saab never made money and Rick Wagoner said of Saab "you have to play the cards you're dealt". Wow, what a lame excuse when considering that GM picked the cards it was dealt.

Unfortunately, the US tax payer is now playing those cards.

How accurate is the Dow?

The Dow Jones Industrial average has been reworked again to reflect the bankruptcy of GM. Both the Dow and the S&P 500 are periodically changed when something happens to one of their constituents. The selection process for the new stocks that are added to the indices is a bit of a black box, but one thing appears to be true - both indices may inadvertently engage in a buy high sell low strategy. In effect the stocks that are deleted are ones that have been beaten down, while the stocks that are added are often stars in their sector. Evidence for this is explained here in a nice article on seeking alpha

I blogged about this before, and more I think about it, I think there must be a market for a pure buy and hold mutual fund.

GM and Ch 11. What a surprise.

Is anyone really surprised that GM is about to file Ch.11. I'm not, back in December I thought it was inevitable. The time has come to pull the life support.

Violating APR part 2

As I said a couple of days back, the Government was wrong to violate the priority rules of bankruptcy and favor Chrysler's union over its creditors. In doing so, the administration created the credible threat that they would do this again, and thus also created a disincentive for lenders to lend to unionized firms that are in financial difficulty.

My prediction has come true. George Schultze, manager of Schultze Asset Management LLC says:

Don’t lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.

Violating APR

The Government is stepping in to rig the Chrysler bankruptcy in a manner that, in effect, violates the absolute priority rule (APR). Article here. This rule dictates who gets paid, and in what order, when a company files Ch11.

Deviations from APR are in fact common when a lower ranked claimant is able to extract a concession from a higher claimant, but usually these are matters that occur between two private groups. By dictating the deviation in favor of the auto workers union, the Government is, in effective authorizing a wealth transfer from the bond holders to the union. Had the bond holders known that this was likely, they would have probably not lent money on the terms they did.

Going forward, this is bad policy, because any rational bond holder will be reluctant to lend to a large unionized company because of the risk that their claim will get trashed by the Government in the event of bankruptcy. For example, who is going to lend to GM in the future?

HT: My friend Jeff.

GM bankruptcy debate

Portfolio.com blogger Felix Salmon takes issue with some of GM's arguments against bankruptcy. As Salmon correctly states, chapter 11 is really just a court arranged change of ownership.

Of course it should be no surprise that the management of GM is fighting Ch11. Chapter 11 would result in shareholder's being wiped out and probably a fair amount of the management being replaced. In most cases a firm's management would try to avoid Ch 11 until it becomes impossible because of pressure from debt holders. But GM is in a unique position in that it can keep trying to hit up the Federal Government for more cash.

A reorganized GM would emerge leaner and better able to compete in the future. In the long run, Ch 11 is the best option, regardless of what GM says.

Ch 11 and the auto industry

A really nice piece by Joe Stiglitz on why Ch11 is the way to go for the auto industry.

I particularly liked the final paragraph which basically sums it up...

Even if Congress does now give carmakers $15bn as a “stay of execution,” postponing the hard decisions, before the next multi-billon dollar dose of medicine we need to think more carefully about who we are really bailing out and why. This should not end up as just another rescue package for bondholders and shareholders.

I think its pretty obvious that any loan from the Government is just going to delay the inevitable. Furthermore a Car-Czar will have no real power except to pull the financing. Using a medical analogy, this is like a doctor saying that he'll pull the life support plug if the patient doesn't take all the bad tasting medicine. It ain't gonna happen. 6 months from now the big 3 (or 2) will be back, cap in hand, driving their hybrids and begging for more.

On a related note, the Wall Street Journal reviews the Cadillac Escalade Hybrid. To quote the reviewer...

Not in my lifetime has a car company come up with anything as absurd as the 2009 Cadillac Escalade Hybrid, the latest example of hybrid greenwashing

Which reminds me of this "ad" recently posted by Craig Newmark.




Ok, remind me again why we are wanting to bail out these idiots?

HT: Mankiw's Blog