Felix Salmon

Last year, I put together an interactive feature for Portfolio.com entitled “Watch Out Below”; it listed nine vulnerable “tall poppies” who were liable to be cut down to size over the coming year. There were three CEOs on the list: Shelly Adelson, Ken Lewis, and Wendelin Wiedeking. Maybe it’s to his credit that Wiedeking managed to hang on longer than the other two. But now he’s been fired, while the other two still have their jobs, even if their reputations are in tatters.

The weird thing is that although Wiedeking’s now gone, the jury’s still out on what he achieved. After all, the tiny sports-car company he transformed over the past 16 years is now being bought for €8 billion on sales of about €6 billion a year. As a hedge-fund manager — which is what he most resembled of late — Wiedeking came spectacularly unstuck, thanks to a liquidity crunch he couldn’t get out of. But the brand he leaves behind him is a strong one, and even with €10 billion in debt it still has significant equity value.

Wiedeking was a classic product of the boom years, and the saga of VW and Porsche will make for many gripping books. There’s no doubt that today’s a low day for him. But I suspect that history will be much less harsh on Wiedeking than it will be on, say, Lewis.

Dealbook is making a big deal out of the fact that Chrysler Financial has repaid its TARP loan. But read down to the bottom of the press release, and you find this:

Funds used to make the repayment of TARP were obtained through the completion of a AAA-rated automotive asset-backed securitization (ABS) through the Term Asset-Backed Securities Loan Facility (TALF).

So, yay, the government got its TARP money back. Because some other arm of the government (the Fed) was willing to lend the same amount of money even cheaper, through TALF. This is an improvement how?

China is likely to block the acquisition of Hummer by Sichuan Tengzhong:

Hummer, as an expensive, gas-guzzling sports utility vehicle, would not fit in with the government’s policy of encouraging energy-efficient vehicles, the radio said.

Could this be the beginning of the end of China importing carbon emissions from the US?

The Detroit News today bellyaches about how the Chrysler bankruptcy deal “may make raising cash more difficult for companies”. I have no idea where they got this idea, but it’s ludicrous. As the WSJ story on gadfly lawyer Thomas Lauria notes, Chrysler’s secured creditors are getting significantly more out of the existing bankruptcy deal than they would without the government throwing in its billions.

The fact that unsecured creditors (the UAW) are getting some recovery from the Chrysler bankruptcy even though secured creditors are taking a haircut is actually good for the secured creditors: it means they’re getting more than they otherwise would be able to salvage out of a liquidation. And when recoveries go up, raising cash becomes easier, not more difficult.

The Indiana pension funds who hired Lauria and brought the complaint are making very little sense:

“As I’ve said countless times, it wasn’t the investment that was made by our Hoosier pension funds that put Chrysler in bankruptcy,” says Indiana State Treasurer Richard Mourdock. “It’s been the egregious actions of the U.S. government.”

Actually, Chrysler went into bankruptcy because it ran out of money. The overwhelming majority of Chrysler’s secured creditors, knowing a good thing when they saw one, signed on to a plan which allowed Chrysler to come out of bankruptcy. The alternative would be to try to sell off Chrysler’s plants and other infrastructure — assets for which there’s not exactly a lot of bids out there.

Now, depressingly, Lauria has his eyes set on the GM bankruptcy — even though there are no issues surrounding senior creditors at all in that case: GM’s secured creditors are getting paid out in full. The fact is that the government has spent tens of billions of dollars bailing out both Chrysler and GM; bondholders of both companies are much better off as a result. They have nothing to complain about, and it’s ridiculous that anybody is willing to pay Lauria $900 an hour to try to throw a spanner in the bankruptcy works.

Mark Wolfinger asks a great question:

How can GM expect to sell ANY cars now when they are promising better cars soon?

It’s a bit like living in a country with deflation: no one buys anything because it’s going to be cheaper tomorrow. And yes this is going to be a hard circle for GM’s communications people to square: how to get across a message of a company building fabulous cars for tomorrow, without implicitly denigrating the product line they’ve been bequeathed today.

“They’ve got the capital to invest in more efficient vehicles, which is what’s necessary to grow the brand.”

-Nick Richards, a spokesman for Hummer, on the upcoming sale of the marque to the Sichuan Tengzhong Heavy Industrial Machinery Company. He can’t be talking about the Hummer bicycle, ‘cos that’s another company, which has already rebranded itself as SwissBike.

No, this is not a parody. It’s real. If you thought a nationalized manufacturer had any hope of being inventive or avoiding the easy and obvious path, maybe it’s time to think again.

(Via Jones)

Robert Reich has come over all faux-naive about the GM bankruptcy and bailout:

Why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up…

It cannot be to preserve GM jobs, because the US Treasury has signaled GM must slim to get the cash. The company has only slightly more than 60,000 Americans today (83,000 around the world), and plans to shut half-a-dozen factories and sack at least 20,000 more U.S. workers this year. It has already culled its dealership network. Plans call for laying off another 18,000 U.S. workers by the end of 2010…

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganization under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars…

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60 billion than to buy GM? …

GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

The key bit of misdirection here is where Reich talks about “what a reorganization under bankruptcy would do” as an alternative to the government spending $60 billion on GM. But a reorganization under bankruptcy is exactly what is going on right now — and exactly what wouldn’t be going on were it not for the government providing debtor-in-possession financing.

The alternative to the $60 billion bailout-with-bankruptcy would be outright liquidiation — and outright liquidation would cost the government even more. Remember the NYT story on Brian Deese?

A month ago, when the administration was divided over whether to support Fiat’s bid to take over much of Chrysler, it was Mr. Deese who spoke out strongly against simply letting the company go into liquidation, according to several people who were present for the debate…

Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate.

If GM were to be liquidated, there would be a domino-line of supplier bankruptcies which might well have fatal repercussions even for the last bits of the US car-manufacturing industry which are reasonably healthy: the Japanese-owned car factories in the south. The wave of defaults and bankruptcies would not only set back the US auto industry and networks by decades, but would certainly spill over into municipal finance and a huge number of other areas of the US economy. The recession would get much worse, and any economic recovery would be significantly delayed.

So the point of the $60 billion isn’t to buy GM, or to provide jobs to some subset of its workers. It’s to avoid the catastrophe that would be a GM liquidation.

Ryan Avent — whom I’m sure has driven much more than I have — has an interesting take on the psychology of the automobile:

I think the psychological result of getting into a car is often unappreciated. A driver — myself included — immediately feels entitled to deference on the road, to that point that they may become actually angry with other drivers, and with the pedestrians and cyclists who insist on making drivers travel somewhat more slowly, or wait to turn right, or generally make the process of commuting less than an unimpeded sprint from point A to point B.

This reminds me of the time when I was riding my bike crosstown on a narrow Manhattan street, and an angry yellow cab started honking aggressively at me from behind. I had nowhere to pull over to, and he got increasingly irate, until I reached the red light and he screeched to a halt beside me. He then proceeded to tell me in no uncertain terms that I had no right to be on the road at all. When I pointed out that for all his rushing he would only have wound up at exactly the same red light a few seconds earlier, and wouldn’t have saved any time, he replied that in fact he had the right to run red lights if he wanted to, and I was depriving him of that right.

OK, New York cab drivers can get a bit extreme. But I think that Ryan’s on to something here — despite the fact that I’m actually the opposite way around: I hate driving, precisely because I’m so fearful about the damage I might do to someone else. That said, when I’m on foot or on my bike I hate it when people get in my way: I might not suffer from road rage when I’m in a car, but I certainly do when I’m on a bike. Get out of my bike lane!

I’m no expert on road rage, but I do think that the feeling of invincibility when you’re in a car does increase with the size of that car. Certainly from the point of view of a pedestrian I feel much more intimidated by a huge black Escalade than I do by a Mini, even though they both would do me pretty much the same amount of harm if they hit me at speed. Just sitting above the street life, rather than on the same level as the street life, makes a big — and deleterious — difference. Drive around a city low down in a Lamborghini, and pedestrians will be attracted to you, rather than repulsed from you.

Could it be that as cars get smaller the number of nasty car-on-person accidents will be reduced? One can but hope.

Many thanks to PeakVT, in the comments, who links to this particularly ugly chart which does do what I wanted and show how the number of cars per 1,000 population has evolved over time. The lines are sales figures; the darker line shows that we’ve dropped from selling almost 60 cars per 1,000 population per year to selling about 35 of late. The black squares show that we now have about 780 vehicles per 1,000 population, up from about 750 ten years ago.

In other words, for most of the past decade, every group of 1,000 people bought about 60 cars a year and ended up with about 3 more vehicles at the end of the year than they had at the beginning. So what happens when they’re only buying 35 cars a year? Even if they manage to hold on to their old clunkers for a bit longer than they otherwise might have done, the total number of cars per 1,000 people is likely to fall quite dramatically: a year or two of this and we could be back where we were ten years ago.

Still, check out this league table: the US has vastly more cars per 1,000 people than any other major nation. Canada, for instance, has only 563 vehicles per 1,000 people — less than three-quarters of the US figure. For America to even approach that level would be unprecedented in living memory, but there’s really no particular reason why the average American needs 36% more cars than the average Canadian. If you’re losing say 15 cars per 1,000 people per year, it would take over 14 years to get down to Canadian levels of car ownership.

Hugo Lindgren, in this week’s New York magazine, quotes the NBER’s Robert Gordon saying that auto-sales rates are bound to pick up:

It’s hard to imagine any good news out of Detroit at this point, but Gordon says it’s coming. Before the recession, annual U.S. automobile sales were about 18 million vehicles. They’ve dropped to half that, an insanely low—and unsustainable—level. At this rate, the average car would have to last 25 years. A typical replacement rate would boost auto sales up to around 15 million a year, and Gordon expects that we’ll start working our way back to that figure this year, buoying the stronger auto companies and putting workers back on the line.

If we’ve learned anything over the past decade, it’s that things can stay at unsustainable levels for much longer than anybody might imagine. And over the medium term, it’s far from obvious that auto sales in the 9-10 million range are really as unsustainable as all that. Not only don’t we need to get back to “a typical replacement rate”; it’s actually very unlikely we will ever again see the rates of car ownership that prevailed before the crash. That was a world of 3-car garages in exurban McMansions; we’re moving into a more sustainable way of living, which involves fewer cars and higher urban density. Those black squares in the graph above are going to start marching downwards for many years to come. Which means that the wiggly lines aren’t ever going to regain their prior peaks.

The NYT has an interesting chart showing light-vehicle sales, on a seasonally-adjusted annual basis, every month since 1976. The chart would seem to imply that a large uptick in vehicle sales is in the offing. But there’s one other chart I would like to see total cars per household (or per person) in the US. Was there a significant increase in cars per household as America suburbanized and moved into bigger homes with bigger garages? And if we’ve reached a far-too-high number of cars per household, how long will new-car sales have to remain near current levels before we get back down to a “new normal”?

I think that when auto financing becomes broadly available once again, the number of new-car sales is bound to rise. But those new cars might well be smaller and less profitable than the SUVs of the past decade. I suspect that much of the boom in SUV sales was a function of everybody else buying SUVs: it’s much more pleasant to drive a small car in Europe, surrounded by other small cars, than it is to drive a small car in the US, surrounded by SUVs which you can’t see around and which tower menacingly over you.

What happens to car sales when the getting-bigger trend comes to an end — as it must — and starts to reverse course? For one thing, the desire to upgrade to a bigger car starts to dissipate. And if you’re not going to upgrade to a bigger car, why buy a new car at all?

I’m fascinated that after roundly rejecting GM’s offer to swap their bonds for equity in the existing company, GM’s bondholders seem to have embraced with alacrity GM’s new offer to swap their bonds for equity in a new, post-bankruptcy company. It’s increasingly obvious, it if wasn’t clear all along, that the old exchange offer was in neither GM’s interest nor in that of the bondholders, and that bankruptcy is necessary to allow GM to shed certain obligations — especially obligations to its dealerships — which would otherwise hobble it for the foreseeable future.

The new plan essentially constitutes the nationalization of GM: the US government will own 72.5% of the common equity, plus another $2.5 billion in preferred stock. I can see why bondholders like it: the US will be extremely hesitant to let any state-owned company default, and it won’t sell off its stake until GM’s future viability is assured.

Everybody was worried that a GM bankruptcy would be vastly more complicated and fraught than the Chrysler bankruptcy, given that it has orders of magnitude as many creditors as the private Chrysler. But today’s news gives me some hope that both bankruptcies might go relatively smoothly, as planned and hoped. Although I still have no idea why GM’s shares are trading at over a buck apiece, valuing the existing common equity — which will be wiped out — at more than half a billion dollars.

If you invest a large chunk of your 401(k) in the stock of just one company, your actions are fraught with peril. If that stock performs badly — which is always possible — then you could end up with a significantly diminished standard of living in retirement. But at least there’s a possible upside: if the stock does spectacularly well, you can end up in clover.

By contrast, there’s no reason whatsoever to invest a large chunk of your 401(k) in the bonds of just one company. You still have the same downside — the company can default on its debt — but there’s no upside at all: the best-case scenario is just that you muddle through getting your coupon payments until the bonds mature.

The WSJ editorial page today features a complaint from one Dennis Buchholtz, however — a man who did just that:

I am an American retiree. Like many small investors, I am relying on “safe” investments…

I purchased GM bonds in 2005 and own $91,000 worth. These bonds account for a very sizeable portion of my retirement income, and so it is absolutely devastating to watch GM’s problems bring the once venerable company to the brink of failure. My standard of living is truly in jeopardy.

It’s not easy, as a retail investor in America, to purchase individual series of corporate bonds. It’s possible, of course, and GM did make an attempt to target such investors. But thankfully most stockbrokers and financial advisors will tell you that if you want credit risk in your 401(k) then by far the best way of doing that is to buy a bond fund, which minimizes your exposure to any one credit. As a result, there are — happily — precious few people in Buchholtz’s situation. Most bond investors are large institutions which watch their portfolios carefully and make sure they’re diversified at all times.

Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure. As such, if you’re worried about the well-being of retirees, it makes perfect sense to treat the UAW’s retirees better than those who either have a small amount of exposure via their bond funds, or those who actively sought out GM exposure by buying its bonds. “The government’s proposed restructuring plans benefit one class of retirees at the expense of another,” complains Buchholtz — and it’s entirely proper that they do so. Buchholtz has no one to blame for his current predicament but himself: caveat emptor, and all that. That can’t be said of the UAW retirees.

Amid all the noise about the government doing unspeakable things to Detroit bondholders, it looks very much to me as though in fact we’re shamelessly bailing them out:

The Treasury Department is preparing to announce as early as today that it will invest an additional $7.5 billion in GMAC LLC…

The Treasury and Federal Reserve Board this month announced GMAC needs $11.5 billion in additional capital reserves as the result of government stress tests. The additional assistance to be announced this week is likely not the end of government support for GMAC.

Credit default swaps on GMAC are trading at 900bp these days, and its bonds are trading at yields in the 50% range*. GMAC’s bond investors mark to market: they’ve already taken their losses. So let’s take advantage of that fact, and convert their debt to equity, before pouring billions of fresh dollars into this particular black hole.

Update: There is one possible reason for this: GMAC needs cash — and a debt-for-equity swap doesn’t provide cash.

*As for the bond yields, my commenters are right, I made a mistake reading my Reuters screen. The most near-dated bonds come up first, and the annualized yields on bonds maturing in June and July are over 50%, but that doesn’t mean very much. Still, if you look at say the 8.4% bond maturing in April 2010, it’s trading at 79.5 cents on the dollar, which is a yield of 36.1%.

Scott Sperling has some home truths for Chrysler bondholders whining about how they’re being treated unfairly:

The plan demands that Chrysler’s current and future retirees take equity in lieu of guaranteed benefits. Fiat must agree to take only stock in payment for billions of dollars worth of needed technology. And the unions must accept lower wages alongside significant plant closures and job losses. These policies inflict pain across the board. Unfortunately, this situation requires it.

Interestingly, only the debtholders are being given the opportunity to take significant cash out of Chrysler. For all the other stakeholders, any return depends upon the difficult work and investment necessary for long-term success. This is hard, but this is capitalism.

I like this way of looking at things: if the bondholders would really rather have equity than cash, I’m sure they can come to some deal with the UAW, or even with the US government, to do a swap — basically buying a stake in the post-bankruptcy carmaker. But they won’t, because they don’t really want equity at all — they just want more cash, despite the fact that nobody else is getting any cash at all.