Tag Archives: Financial Meltdown

R.I.P., President Obama’s Honeymoon

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minus-2 - obama_index_june_22_2009It’s been a while since I’ve updated the Honeymoon-Over Watch.  According to David J. Rothkopf at Foreign Policy, this should be the last update needed:

Mark it on your calendars.  It was in June 2009 that Barack Obama’s honeymoon officially ended.  And to be more specific, it was this past week.  Through some mysterious alchemy, this was the week that Bush’s economy became Obama’s, Bush’s wars became Obama’s, and the ups and downs of a real workaday relationship with the press also introduced Obama to a more accurate sense of what life was like for Bush and for all his other modern predecessors.

Last week was when Obama’s Presidential Approval Index, as measured by Rasmussen Reports, slipped into negative territory, although it has since recovered to +1 as of today’s report.  Rasmussen focuses on “strongly approve” vs. “strongly disapprove.”  I’m not sure whether this is more significant than measuring total approval vs. total disapproval, but it works against Obama, who in every poll (including Rasmussen’s) is firmly in positive territory on a total approval basis.  (Near the end of the Bush Presidency, GWB logged in at -30 on Rasmussen’s strong-opinion index.)

I’m no Obama-hater, nor do I want him to “fail,” but I’ve been rooting for the end of the honeymoon since before the inauguration.  The media’s near-deification of “The One” has been, at its worst, nothing less than appalling.  Open-minded skepticism (as opposed to cynicism) is generally the right starting point for a journalist, and more of them are getting there, as seen in additional “honeymoon-over” coverage from around the web.

In Newsweek — among the worst Obama up-suckers, as parodied by National Review — Howard Fineman focuses this week on Obama’s evolving relationship with the White House press corps:

Bottom line: things are getting a little testy and are about to get more so. … [T]he problem is that they are too cute by half. They assume they can manipulate, manage and guide the media flawlessly. They think they can ride the wave all the way every time. And why shouldn’t they? Obama’s presidential campaign, after all, was perhaps the shrewdest, most disciplined message machine ever assembled in modern electoral politics. And the coverage, overall, was often close to hagiographic. The presidency is a harder course, and the risk is that, by over-managing, the president and his aides will damage their own credibility with the press and, more important, with the public.

Europeans famously preferred Obama to McCain last fall, but the honeymoon may be over on the other side of the pond as well.  According to Der Spiegel, which James Lileks aptly called the world’s most German-sounding newspaper, America has gone from the “war president” to the “debt president”.  The newspaper predicts a day of reckoning soon:

It is often said that the Chinese and the Japanese will buy [U.S.] government bonds. But the truth of the matter is that trust in the gravitas and reliability of the United States has suffered to such a great degree that fewer and fewer foreigners are purchasing its government bonds. That’s why the Federal Reserve is now buying securities that it has printed itself. The Fed’s balance sheet has more than doubled since 2007, making the US central bank one of the world’s fastest-growing companies. The purpose of this company, though, is to create money out of thin air. …

The German response to the excesses of the Bush era was refusal and obstinacy. Gerhard Schröder refused to go to war in Iraq with America and he organized a European resistance front the reached from Moscow to Paris.

Germany still hasn’t provided its response to the Obama administration’s fiscal policy excesses. Perhaps its time for Merkel to take her cue from Schröder.

Professor Julian Zelizer of Princeton’s Woodrow Wilson School:

If there is any new dip in the economy, the public will blame President Obama rather than President Bush. This is exactly what happened with the recession in 1937, which FDR’s opponents called the “Roosevelt Recession,” using the downturn to diminish the number of New Deal liberals in the House and Senate in 1938.

Quoting Jonah Goldberg, who’s quoting others:

Thanks to a few pointed questions from the press corps at a White House news conference, the long Obama captivity of the media is at an end. The Hotline, an inside-the-Beltway tip sheet, proclaimed June 23 “The Day the Love Ended.”

The New York Daily News’s Michael Goodwin celebrates the press corps’s ability to channel the mood of the country: “By peppering the President with forceful questions . . . and by challenging some of his slippery answers, reporters captured the changing tone in the country. Like the end of a real honeymoon, blind infatuation is giving way to a more accurate view of reality.”

“The press corps gets it,” Goodwin writes. “For Obama, the hard part begins now.”

I’ll end with two more passages from the Rothkopf essay I started with, which is titled “The definitive, final, once and for all, Obama’s honeymoon-is-over story.” He helpfully includes a mini-roundup of other publications and websites that have declared this week that the honeymoon is over:

Of course, people have been writing about the end of Obama’s honeymoon since the day he arrived in office. [Pikers! My Honeymoon-Over Watch started January 15! – KP.] But let me offer 10 solid pieces of evidence that it was over by this week.  And I say this despite the unnerving fact that the Daily Kos seems to agree with my assessment…and shored up by the fact that NBC’s Chuck Todd, CNN’s Jack Cafferty, CQ, the Huffington Post, the New York Daily News, and a host of other media outlets all seem to agree by having grappled with the issue…or, depending on how you look at it, succumbed to the conventional wisdom…in the past week or 10 days.  Just goes to show: even the conventional wisdom is right every once in a while. …

[details snipped]

The honeymoon is done. Time for a real life marriage. For better or for worse.

And for richer or poorer.  Fortunately, America doesn’t marry its leaders “until death do us part.” And no, dammit, I’m not wishing anybody dead.  I’m celebrating the fact that in three-plus years, our system will give us an opportunity for a course correction under new leadership, if enough Americans come to believe one is needed. In the meantime, Mr. Obama is my president, and on some level at least I wish him well.

Better Pass It Quickly — Someone Might Read It!

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slow_d16Once again the Democrats in Congress are trying to push through a hugely expensive and controversial bill that nobody — literally nobody — has read.

In February, as Congressional leaders and the Obama Administration were twisting arms to gather the votes they needed for the $800 zillion porkulus bill, I wrote this:

When listening to President Obama’s dire predictions of “catastrophe” if a stimulus bill is not passed now now now now now, is anyone else reminded of the global warming debate?

Now that comparison has come full circle, as the House yesterday passed a bill that not only had not been read by anybody — it hadn’t even been collated after 300 pages of amendments were added at 3:09 a.m.

In both episodes, House Minority Leader John Boehner stood in the well of the House and denounced the rush and the process.  Take 36 seconds to watch the clip from the porkulus fight:

And here’s 1:26 of Boehner v. Waxman yesterday on the climate-change bill:

And for old time’s sake, here’s candidate Obama promising greater transparency in government:

Here’s hoping the Senate takes a closer look at cap-and-trade.

Wanna Buy GM Stock? Better Hurry, the Price is Rising!

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gm_stock_6-7-09_-_2

As you may have heard, General Motors, once the world’s largest company by market capitalization,  is bankrupt. You and I, along with 300 million of our closest friends, are going to end up owning about 70% of a much-smaller General Motors.  Congratulations.

In this morning’s Washington Post, George Will has a good column worrying about all the different ways the government bailout could go badly, now that GM will be benefiting from the same ownership that has made Amtrak such a paragon of efficiency for nearly four decades.  The most obvious problem is that GM needs to close hundreds of dealerships — every one of which is in somebody’s Congressional district.

At the end of the column he mocks the idea that General Motors is “too big to fail”:

Big? GM’s market capitalization, $375.8 million on Wednesday, is about the size of California Pizza Kitchen’s ($340 million) — is it too big to fail? — and one-eleventh that of Harley-Davidson ($4.3 billion). Fail? If GM has not already failed, New Coke was a success.

California Pizza Kitchen is a nice parallel — they make mango tandoori chicken pizzas, GM makes the Chevy Cobalt.  But I was more interested in the fact he was quoting Wednesday’s market cap in Sunday’s paper.

I went looking for fresher stock prices, and found that GM had been delisted by the New York Stock Exchange, but was still trading over the counter, in the so-called “pink sheets.”  And looky there, the stock price was up almost 16% on Friday alone! More than 100 million shares traded hands Friday, with the day’s last trade at 86.5 cents, driving the market cap up to $528 million.

Now, investing can be a risky business, but some things are risk-free.  Here’s one: there is no risk that GM stock will not go to zero.  And yet on Friday, people collectively spent tens of millions of dollars purchasing GM stock at a price above zero.  This kind of trading happens in most major bankruptcies, and I’ve never understood it.  If you still have the 100 shares of GM that your grandparents gave you as a kid, I could see wanting to get whatever you can at this point.  But why the heck would anyone take the other side of that trade?  The rules of bankruptcy are well defined, and stockholders get nothing unless bondholders, creditors, employees and everyone else with a stake has been paid first.

Except… about those “well-defined” bankruptcy rules…

One of These Things Is Not Like the Others

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not-the-great-depression1Think of this chart (from Donald Marron, via Greg Mankiw) the next time you hear someone say that we are in the worst economic downturn since the Great Depression.  Based on GDP, it appears we’re in the worst downturn since 1958 — and since I was born that year, I reject the idea that it was a long time ago.  If GDP declines by another 20 basis points or so, it then may be technically accurate to talk of the worst decline since the Depression — but the comparison will be no less misleading.

Back in March I highlighted unemployment data showing that the jobless rate was not (yet) as bad as 1982.  With three more months of job losses, we’re getting closer –  the May rate of 9.4% is closing in on 1982’s full-year rate of 9.7%.  But while many economists expect the rate to climb to over 10%, the rate of increase in joblessness has declined for four months in a row, and the job losses announced today were lower than expected. The Great Depression? 25% unemployment.

While we’re on the subject of productivity, if what you’ve just read makes sense to you, consider the possbility that I might be able to help you or your organization meet your communications needs.

Obama’s Intimidation Trumps Fiduciary Duty

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The group of secured lenders who were holding out for fair treatment in the Chrysler bankruptcy has disbanded, after two more defections in the face of pressure from the Arm-Twister in Chief.

“After a great deal of soul-searching and quite frankly agony, Chrysler’s non-TARP lenders concluded they just don’t have the critical mass to withstand the enormous pressure and machinery of the US government,” [said] Thomas E. Lauria, … the lead lawyer for the group. “As a result, they have collectively withdrawn their participation in the court case.”

Welcome to our new, nationalized banking industry.  Think twice before relying on contractual guarantees or the rule of law, especially if you’re doing business with a Democratic constituency like the UAW.

When Obama Says “Hedge Fund,” Think “Widows and Orphans”

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chrysler-winged-badgeAt least one of Chrysler’s “secured” lenders is vowing to stand fast against President Obama’s efforts to bully the lenders into abdicating their fiduciary responsibility.

NEW YORK (Reuters) – Plans for a quick sale of Chrysler to a new company majority-owned by a union-aligned trust is “patently illegal” and will be fought in bankruptcy court, one of the holders of the automaker’s secured debt said on Thursday.

“We don’t succumb to pressure and don’t agree to unfair and illegal payment schemes,” said George J. Schultze, the managing member of Schultze Asset Management. “We’re not conflicted by TARP money or active stress tests.”

Good for him.  I just hope he has bodyguards.

Obama is all too willing to stir populist anger in support of his favored constituencies.  It’s important to understand just how perversely Obama is framing the debate — and why his cram-down tactics make it less likely that future troubled borrowers will be able to raise the capital they need.

In criticizing the “hedge funds” that refused the terms that might temporarily have kept Chrysler out of bankruptcy court,  he said:

I don’t stand with them.  I stand with Chrysler’s employees and their families and communities.  I stand with Chrysler’s management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.  I don’t stand with those who held out when everybody else is making sacrifices.

OK, Mr. President, I got it: hedge funds = bad, families and communities = good.  But at Pajamas Media, Tom Blumer reminds us that hedge funds manage money not just on behalf of rich people, but also on behalf of retirement funds, pensioners, college endowments and other constituencies that are every bit as much a part of the fabric of America as the UAW is.

He also describes the legal duty these secured lenders owe to the ultimate owners of the securities.

The Employee Retirement Income Security Act (ERISA), passed in 1974 with strong bipartisan support, subjects retirement plans to a very strict standard of fiduciary duty, specifically:

(1) … a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and —

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan

There is nothing ambiguous about this requirement and nothing about the word “solely” or the term “exclusive purpose” to misunderstand.

Mr. Schultze and the secured lenders are trying to protect their investors by enforcing the agreement that was made when the capital was supplied to Chrysler.  In a bankruptcy, secured creditors are entitled to recover 100% of their money before unsecured creditors receive a penny.  That’s the deal they signed up for, and that “security” is why they were willing to supply capital to a basket-case company.  That protection was baked into the terms of the funding agreements.

In Chrysler’s case, as in many bankruptcies, the secured lenders were willing to settle for less than 100%, even while letting the unsecured lenders share in the settlement, for the purpose of trying to nurse the company back to health.  Blumer explains:

In a normal bankruptcy, first-lien creditors get paid what they are owed before anyone else. Since assets rarely fetch their ongoing-use value in liquidation, it appears reasonable that Lauria’s group [the secured creditors] would have come down in negotiations from 100% to 65%, and then to 50%, in the interest of avoiding bankruptcy. Presumably, 50% is a reasonable estimate of what might be realized in liquidation.

But if the secured creditors think they can recover more money for their investors by forcing a liquidation, they have a fiduciary duty to do so.  If they don’t get a higher payout than the unsecured creditors, they are betraying their investors, and making it less likely that troubled companies will be able to raise capital in the future.   That’s what Obama is trying to force by demonizing the holdout creditors.

The big TARP-program banks that agreed to the Chrysler deal had already had their turn at being beaten into submission less than a month earlier, when Obama told their CEOs “my administration is the only thing between you and the pitchforks.”   In the face of that fairly explicit threat from the most powerful man in the world, it’s unsurprising that they would fall into line the next time push came to shove.  I’m just glad that at least one smaller, less conficted creditor is willing to stand up for the rule of law.

Why Would Anyone Invest In Chrysler Now?

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President Obama’s ham-handed ultimatum to Chrysler’s “secured” creditors promises to have adverse consequences beyond just rewarding the UAW for helping to drive the company into the ground.   At Real Clear Markets, Bill Frezza asks some excellent questions:

Why would anyone lend money to heavily unionized companies knowing that if things went wrong, the president and his men could trash their security interests by executive decree, hold them up to public vilification, and subject them to future retribution by regulators?

Why would anyone buy the shares of TARP-backed banks or invest alongside them knowing that their executives have proven their willingness to sacrifice shareholders’ interests and throw co-investors under the bus any time the president snaps his fingers?

Why would foreigners buy the distressed debt of American companies knowing that this debt cannot be secured by law but only by political clout? …

The fate of Chrysler and its workers pale in comparison to the wrecking ball that would be taken to economic order if bankruptcy judge Arthur Gonzalez approves the administration’s plan to give Chrysler’s secured creditors the shaft. And what prize will we-the-people get in return? A doomed third-rate car company majority owned by its militant union run by Italian management building congressionally designed “green” cars no one wants to buy financed by taxpayers into perpetuity because no private investor in their right mind will touch the company with a ten foot pole. Is this supposed to be economic policy or comic opera?

Hat tip: Neo.

Chrysler’s New Majority Owner Will Be The UAW. Yeah, That’ll Work.

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I’ve been arguing for months that the government should not throw more bailout money at GM and Chrysler, but rather let them work out their problems in bankruptcy court.  Filing for Chapter 11 bankruptcy protection would give the companies more leverage to modify gold-plated benefits and ruinous work rules that add approximately $2,000 in costs per car, compared with foreign automakers.

chrysler-logoChrysler filed for Chapter 11 today.  The government apparently has worked out a deal where the eventual result will be the UAW owns 55%, Fiat owns 35%, with the remaining 10% owned by some combination of the U.S. government and “secured” lenders.  Neither the UAW nor Fiat are putting any new capital into the deal, but the U.S. government is committing up to $8 billion in additional financing, on top of the $4 billion the U.S. already has loaned Chrysler.

So for up to $12 billion, some of which theoretically may be repaid, the government gets some portion of 10% of America’s least healthy automaker.  The eventual value of the government stake is anybody’s guess, but since it’s easy to mix up million-billion-trillion-zillion, let’s do an order of magnitude comparison. As of mid-day today, the stock market values Ford — America’s healthiest automaker, far larger than Chrysler, and the only one of the Big Three that has not taken government bailout money — at about $14 billion, for 100% of the company.

Meanwhile, the UAW, whose members have enjoyed unsustainably high wages and benefits for decades, will own 55% of the reorganized Chrysler.  Chrysler effectively will be a subsidiary of the UAW, which will sit on both sides of the table during future contract negotiations.

Mickey Kaus argues that this may be a good thing (he’s talking about GM, but the principal holds for Chrysler as well):

The union’s ownership so does not seem a problem. It seems a virtue. Let the UAW, as new owner of GM, pay the price for the overgrown work rules of its locals. Let the UAW demand above-market raises from itself. Let the UAW try to raise money from new lenders after the previous round of lenders has been royally screwed (thanks, in part, to the UAW). And then let the UAW try to sell the cars that result.

The most efficient way to balance competing interests, as Michael Kinsley noted years ago, isn’t an adverserial system where various singleminded interests duke it out–either in court or on picket lines–but in the head of a decisionmaker who will feel the relevant consequences. As long as the government steps out of the financing picture, the UAW will feel the consequences of its own excesses. Just don’t bail them out again!

That last sentence is where Mickey’s theory breaks down, I’m afraid.  (I call him Mickey because he linked to me once.) He mocks a column by the Wall Street Journal‘s Holman Jenkins, but I think Jenkins (who has never linked to me) has the better argument:

In a real bankruptcy, which is the natural fate of companies unable to meet their obligations, Chrysler and GM would be run (or liquidated) for the benefit of their creditors, not their workers. But, here, “pattern bargaining” will remain the law of the Detroit jungle. The UAW will continue to use its unnaturally augmented clout to extract uncompetitive pay and benefits (it can do no other given its internal incentives). As it has for 40 years, Washington will pitch in with one improvisation after another, disguised as energy policy, trade policy, health-care policy or environmental policy, to stop the rivets from popping off. Politics, especially Democratic electoral politics, will play a more dominant role than ever.

What about those creditors, who would be first in line in a “real bankruptcy”?  The big bondholders were all on  board, but some of Chrysler’s smaller “secured” creditors refused to accept a deal that would have kept the automaker out of bankruptcy court.   Theoretically, the “secured” creditors could hold out for a liquidation of Chrysler, which might be a better deal for those creditors.  The Automaker-in-Chief is aware of this, and Obama had this to say today:

While Obama voiced his support for Chrysler and the deal with Fiat, he was pointed in his criticism of the investors who did not agree to this deal.

“I don’t stand with them. I stand with Chrysler’s employees and their families and communities,” the president said. “I don’t stand with those who held out when everybody else is making sacrifices. That’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations.”

Gulp.  This is why I use scare quotes around “secured” creditors.  Somehow I think the reluctant creditors will come around to seeing things Obama’s way.

Obama’s Not-So-Invisible Hand

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Now that the Automaker-in-Chief has fired the CEO of General Motors and instructed Chrysler to sell itself to Fiat by the end of April,  he’s turning his attention to a variety of other essential American industries, from blue jeans (“Levis yes; Wrangler no”) to toothpaste to ballpoint pens.  President Obama also graciously acknowledged the important consultative role played by former President Clinton.

(Ed. note: alas, the Saturday Night Live video clip originally displayed here is no longer posted anywhere I can find.  But here’s a transcript of the skit.)

Here’s hoping that the president’s next step will be to instruct corporate America to make greater use of independent consulting services.

Slouching Towards Europe: Obama’s Domestic Agenda Undercuts American Exceptionalism

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obama-flagI’ve been pleasantly surprised by President Obama’s steadfastness regarding national security issues.  After winning his party’s nomination by promising to surrender in Iraq more quickly than the other Democrats would, Obama has:

  • retained his predecessor’s defense secretary;
  • adopted his predecessor’s timetable for responsible disengagement in Iraq;
  • supported his own rhetoric about the importance of Afghanistan by sending more troops; and
  • continued, as recently as Saturday, his predecessor’s policy of pilotless drone missile strikes at Taliban and al Qaeda fighters in Pakistan.

Credit where credit is due: Thank you, President Obama.

But in the long run, America’s national security depends as much on our economy as it does on our military prowess. And on that score, my Obama-inspired surprises have been less pleasant.

Senator Tom Coburn of Oklahoma sums it up:

I believe President Obama has proposed the most significant shift toward collectivism and away from capitalism in the history of our republic. I believe his budget aspires to not merely promote economic recovery but to lay the groundwork for sweeping expansions of government authority in areas like health care, energy and even daily commerce. If handled poorly, I’m concerned this budget could turn our government into the world’s largest health care provider, mortgage bank or car dealership, among other things.

In short, the goal seems to be to make America more like Europe.  And while there is much to admire in Europe’s history, to emulate the Europe of today is to risk compromising the self-sufficiency and sense of personal empowerment that have made America the strongest country in the world, both militarily and economically.  Charles Murray:

If we ask what are the institutions through which human beings achieve deep satisfactions in life, the answer is that there are just four: family, community, vocation, and faith. Two clarifications: “Community” can embrace people who are scattered geographically. “Vocation” can include avocations or causes. …

Seen in this light, the goal of social policy is to ensure that those institutions are robust and vital. And that’s what’s wrong with the European model. It doesn’t do that. It enfeebles every single one of them. …

The problem is this: Every time the government takes some of the trouble out of performing the functions of family, community, vocation, and faith, it also strips those institutions of some of their vitality–it drains some of the life from them. It’s inevitable. Families are not vital because the day-to-day tasks of raising children and being a good spouse are so much fun, but because the family has responsibility for doing important things that won’t get done unless the family does them. Communities are not vital because it’s so much fun to respond to our neighbors’ needs, but because the community has the responsibility for doing important things that won’t get done unless the community does them. Once that imperative has been met–family and community really do have the action–then an elaborate web of social norms, expectations, rewards, and punishments evolves over time that supports families and communities in performing their functions. When the government says it will take some of the trouble out of doing the things that families and communities evolved to do, it inevitably takes some of the action away from families and communities, and the web frays, and eventually disintegrates.

Murray’s lengthy speech is worth reading in its entirety, but here’s another key excerpt:

American exceptionalism is not just something that Americans claim for themselves. Historically, Americans have been different as a people, even peculiar, and everyone around the world has recognized it. I’m thinking of qualities such as American optimism even when there doesn’t seem to be any good reason for it. That’s quite uncommon among the peoples of the world. There is the striking lack of class envy in America–by and large, Americans celebrate others’ success instead of resenting it. That’s just about unique, certainly compared to European countries, and something that drives European intellectuals crazy. And then there is perhaps the most important symptom of all, the signature of American exceptionalism–the assumption by most Americans that they are in control of their own destinies. It is hard to think of a more inspiriting quality for a population to possess, and the American population still possesses it to an astonishing degree. No other country comes close. …

The exceptionalism has not been a figment of anyone’s imagination, and it has been wonderful. But it isn’t something in the water that has made us that way. It comes from the cultural capital generated by the system that the Founders laid down, a system that says people must be free to live life as they see fit and to be responsible for the consequences of their actions; that it is not the government’s job to protect people from themselves; that it is not the government’s job to stage-manage how people interact with each other. Discard the system that created the cultural capital, and the qualities we love about Americans can go away. In some circles, they are going away.

Some level of increased government intervention is necessary to avoid catastrophic damage to the global economy.  But the Obama administration, having decided not to let a good crisis go to waste, has set off on a course that will vastly increase the scope of government power.  This needs to be resisted.