I ran a story on New Year's Eve about the opportunities and perils that could face struggling newspapers if they end up surviving because of government help. I opened the story with the tale of Connecticut state lawmakers and a state commissioner who are trying to find someone to buy two Journal Register-owned dailies and several weeklies that are going to be shut down in January if they can't be saved. From there, I explored the ramifications of government aid to newspapers.

The story got plenty of attention, though it looks like misinterpretation was rife. Many bloggers and news sources portrayed the Connecticut situation as a bailout, leading to plenty of ire directed at the lawmakers and the story. (Some conservative bloggers hinted that we deliberately omitted the lawmakers' affiliation. For the record -- they are Democrats. Also for the record: I had that in there, then deleted it, intending to put it somewhere else in the story. Then I plum forgot. No hidden agenda.)

So here's what I'm expecting next and here's what I still don't know or understand. I'm eager to hear from folks who care about the future of newspapers in the United States to add their thoughts in the comments section.

• My sources in the journalism world tell me that the U.S. newspaper business won't be pushing federal lawmakers for a bailout like the auto and finance industries. Why? They don't like the idea of having the government as a shareholder when their job is to expose what the government does as a way of keeping it honest. Still, the story might change. If anyone hears about something like that in the works, please tell me. I'm anxious to find out.
• Will the situation in Connecticut be replicated elsewhere around the country? I wonder.
• The politicians whom I spoke to emphasized that this is not a bailout, but an attempt to lure business with tax breaks, the same way other businesses get courted. Still, I wonder: If you award tax breaks as a way to get publishers to keep a newspaper from dying, isn't that shifting the tax burden to others? And if that is so, then how is that different from essentially handing over money? I don't know, but I'm curious.

Folks, this may be a big culling year for U.S. newspapers. Debt is heavy, ad revenue is down and it may be the end of the line for newspaper journalism in this country as we know it. It'll be an often depressing story to cover, but it also will be exciting and strange. If you're an employee of a U.S. newspaper and you hear that something is going on, we want to know about it. Drop us a line. Thanks and "Happy" New Year.

PS - Journal Register has gone stone cold silent about its restructuring, its newspapers and any attempts to survive. And the whole company is still worth less than my little house in Jersey City.

(Photo: Reuters)

The auto industry's Christmas present from the government -- in the form of a $1 billion loan to General Motors and a $5 billion stake in GMAC -- may have left other industries hoping that the giving season isn't over yet.

The steel industry is pressing President-elect Barack Obama to boost the flagging demand for U.S.-made steel by instituting a "buy American" clause in his infrastructure stimulus package, the New York Times reported.

"As steel production goes — and it is now in collapse — so will go the national economy," writes the New York Times, referencing the maxim once applied to The Big Three automakers.

But why stop at manufacturing industries? Rep. Frank Nicastro of Connecticut and some of his fellow legislators want to save two local papers, The Bristol Press and The Herald, which are hanging by a thread after their publisher said it cannot afford to keep them.

Which companies are really too big to fail? If you were writing the check, who would you bail out?

(Pictured above: Workers secure a steel beam at a construction site on 8th Avenue and 42nd Street in New York, April 21, 2008. REUTERS/Shannon Stapleton)

– James Saft is a Reuters columnist. The opinions expressed are his own –

The Citigroup bailout is sure to succeed, but only if you count avoiding making unpleasant but needed decisions as success.

It won’t work if you define success as building confidence and attracting private capital back to the banking system. It fails to work out a clearing price for rotten assets, and though it underwrites $306 billion of them even this huge sum is not enough to suspend disbelief.

It won’t even work if you define success as jump starting Citibank lending to private borrowers. The bankers have every reason to keep their heads down and pray they can slowly rebuild capital rather than lending into the biggest downturn in two or three generations.

At best it buys Citibank some time, though heaven knows what they can do in the next little while to stave off a cascade of writedowns in their housing and consumer loan books, much less their emerging market businesses.

It also, and I think tellingly, avoids taking a credible decision on whether Citigroup, and by extension the U.S. banking industry, can avoid explicit as well as effective nationalization.

We are in a really dangerous moment when is it apparent not only that no one really knows what to do, but that the people making decisions now are not the ones who will be left to sort them out once a new administration takes power in Washington. That provides a ready excuse to simply kick Citigroup’s can along the road.

One thing is very clear; the terms extended to Citigroup were a lot less difficult to bear than other earlier bailouts. I would guess that this is because the government is terrified that they have become the only game in town. The government is in a double bind; they must extend capital to banks or see them fail but every time they do it they make the banks less attractive to private money.

Any more radical solution would be difficult for a lame duck administration to attempt, and given the size of the banks involved, very daunting.

The United States will invest $20 billion in Citi preferred shares which will pay an 8 percent dividend.
The government will get 10-year warrants to buy $2.7 billion of common stock at $10.61 per share, as against Citi’s $3.77 price just before the deal was announced.

The government will guarantee $306 billion of Citi assets, with Citi taking the first $29 billion in pre-tax losses and the government on the hook for 90 percent of the losses after that. These assets will remain on Citi’s balance sheet and it will continue to get any income they generate but Citi will issue $7 billion of preferred stock, which will also pay 8 percent, as a fee. These assets will only be 20 percent risk weighted, which will free up an estimated $16 billion of capital. All in all, it was enough to underwrite a more than 70 percent rally in Citigroup shares.

Crucially, we’ve not yet seen any indication that we will get a full accounting of exactly how that $306 billion was valued, other than it was agreed between Citi and the United States. It is another example of the U.S. saying: “Don’t worry,  we will make it all OK,” without exactly specifying what “it” is.

CIRCLE OF CYNICISM

And of course without being able to see what the assets will actually fetch, especially in a declining economic environment, who would want to buy the pig in the bank’s poke?

That being the case, and in the firm expectation that loan losses will mount as the economy worsens, it’s a fair bet that the vicious cycle of writedowns and capital need will continue. In the absence of some real clearing mechanism for banking assets, and a willingness for government to pick up the pieces for those banks that can’t survive, expect more requests for life support from more banks.

But governments are finding it increasingly frustrating, at least publicly, that they pour money into banks yet see little in the way of lending come out the other end.

“The heart of the fear for all of us that still value free markets is that governments will eventually decide to nationalize whole swathes of the global banking system to ensure that the money they’ve invested in the recapitalization trade filters through into the wider economy,” Deutsche Bank credit strategist Jim Reid wrote in a note to clients.

“Ironically there may be a time when banks have to decide whether they need to make loans that may prove to be loss-making just to avoid governments losing patience and nationalising them.”
It is really a worst of all worlds, a circle of cynicism; governments prop up the good and the bad in the banking system, which in turn makes loans it doesn’t really think make any sense.

It’s a heck of a way to allocate capital, and almost as bad as the old system.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

Mr. Ludwig, a former U.S. Comptroller of the Currency, is founder and CEO of  consulting firm Promontory Financial Group. Any opinions are his own; GMAC Financial Services is one of Promontory’s clients.

The economic upheaval wreaking havoc on the global financial system is threatening to claim another victim: the domestic automobile industry and its financing arms.

General Motors Corp. could run out of cash by January without help. Ford Motor Co. and Chrysler LLC also need fast government intervention to stay solvent. Automakers and the UAW are making their case to Congress this week for emergency help. But even the supporters of a $25 billion aid package for the auto industry are dubious about whether they have the votes to pass it.

This raises the question, why not just let them go bankrupt?  The domestic auto industry is everyone’s favorite whipping boy, and its problems have been growing for decades. Some are of its own making; many are circumstantial. But we cannot blithely accept its failure as somehow inevitable or deserved.

Our economy has been badly battered in recent months, and has become increasingly fragile. The erosion of our industrial base already presents real security risks to our nation. Why would we accelerate this sorry state of affairs at a time of national crisis by sitting on our hands and letting a signature American industry collapse?

The American auto industry is well worth saving, for many reasons.  One reason is that for the past decade Detroit has made heavy investment and steady progress in improving its competitiveness, what it calls “altering the DNA” of American cars.  US automakers spend $22 billion annually on plants, equipment, research and development. Breakthroughs are at hand in developing alternative fuel propulsion systems, and our national well-being and security depend upon seeing them through to completion.

If we allow U.S. automakers to go under out of anger, resignation, or ideology, it will only mean all the work and investment of the last decade will be ceded to our foreign competitors instead of being plowed back into the U.S. economy.

Another reason is the industry’s importance to the job market and the wider economy.  Automobile manufacturing directly employs a quarter of a million workers and indirectly about one in ten U.S. jobs are related to some degree to the automotive sector, according to GM estimates.  So the effects of a collapsed U.S. auto sector would not be limited to Detroit – they would be magnified as the ripples spread to related industries.

If we allow U.S. automakers to fail, millions of retirees depending on auto company pensions will be at risk and auto manufacturing jobs will disappear. The ripple effect won’t end there; millions of jobs in related sectors, such as  U.S. manufacturers of steel, aluminum, iron, copper, plastics, rubber, electronics, and computer chips, will also feel the pain.

Worse yet, the promise of a meaningful future for American manufacturing would fade. As that promise dims, the role played by manufacturing jobs as a passport to the middle class would likewise disappear.

The auto manufacturers did not cause this crisis; they were working hard to reinvent the quintessential American invention when high oil prices and economic upheaval hit, dragging them into the vortex. There is a tendency to think that an example must be made, that someone must be allowed to fail.  But do we really need to cut out of the heart of the real economy? When the patient is in the middle of a full blown coronary, it’s no time to discuss lifestyle changes.

We can and should revisit subjects like executive pay scales and expense controls when the industry isn’t at death’s door.  For now, we should recognize the gravity of the moment, and use the TARP funds and pass necessary auto-related financial stabilization legislation to avoid digging a bigger hole for the national economy.

– Peter Morici, a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission, testified before the Senate Banking Committee on the proposed bailout for the domestic auto industry. The following is his written testimony to the committee. The opinions expressed are his own. —

The domestic automobile industry has two major components—the Detroit Three and the Japanese, Asian and European transplants that also assemble and source components in the United States and Canada. Both contribute importantly to the vitality of our national economy. Ensuring these companies have the means to compete globally is vitally important.

The gradual erosion of the market shares of the Detroit Three over the last several decades stems from higher labor costs—having origins in wages, benefits and work rules–poor management decisions, and less than fully supportive government policies. Although the U.S. government has been sympathetic to the needs of the industry, the industry has fallen victim to currency manipulation and other forms of protectionism in Japan, Korea, India, and China.

The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization. It would be better to let them go through that process and reemerge with new labor agreements, reduced debt and strengthened management that would permit these companies to produce cars at costs comparable to those enjoyed by their Japanese and other foreign competitors assembling vehicles in the United States.

Circumstances are dramatically different today than in 1979 when Chrysler received assistance from the federal government. In those days, the challenge at Chrysler was to become competitive with Ford and GM, and Lee Iacocca had a clear plan to achieve that objective and succeeded. Today, the Detroit Three, though improved in productivity and with lower labor costs thanks to concessions from the United Auto Workers, are still not as competitive as the Japanese transplants.

Margins in automobile manufacturing are thin and there is no such thing as being competitive enough. Either a company is competitive or it is not—either it accomplishes the cost structure enjoyed by Toyota and Honda, operating in the United States, or it will continually cede market share and run into financial difficulties.

By assisting the Detroit Three, Congress can delay one or all of them going through Chapter 11 reorganization but sooner or later one or all will face reorganization. The communities and suppliers dependent on these companies would be better off going through that process now than by delaying it with assistance from the federal government.

Without a new labor agreement that brings wages, benefits and work rules in line with those at the most competitive transplant factories, and without reduced debt and other liabilities, the Detroit Three will continue to lag in product innovation and field too few attractive new vehicles, because their higher costs, debt and other liabilities require them to spend less on new productive development than they should. Also, they are inclined to field products with less desirable content to compensate for higher costs.

As consumers find vehicles made by Japanese and other transplants more attractive, like those imported from Korea and eventually from China, the Detroit Three will cede market share of one or a few percentage points each year.

If Chapter 11 is put off, the successors to GM, Ford and Chrysler that emerge from a bankruptcy reorganization process will be smaller and support fewer jobs than if these companies endure this difficult transition in 2009.

More jobs can be saved among GM, Ford and Chrysler and their suppliers if bankruptcy reorganization is endured now than in the future.

When Americans buy automobiles from the Detroit Three, more is contributed to the vitality of the U.S. economy than when Americans buy vehicles assembled here by transplants or imports. These vehicles have more U.S. content in terms of jobs, engineering and profits than do foreign nameplate vehicles.

The Congress could take steps to improve the attractiveness of making cars and parts in the United States by improving the public policy environment. This would include finally addressing, directly and forthrightly, undervalued currencies in Asia—currencies kept cheap by intervention by foreign monetary authorities in China and elsewhere. In addition, assertive efforts to develop fuel efficient vehicles could strengthen the industry and create export strength.

For example, Congress could offer an incentive for car buyers to trade in their gas guzzlers—the newer and the bigger the clunker, the more the car buyer would receive under the condition the vehicle is destroyed. This would raise the price carmakers receive from selling smaller vehicles.

Congress could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter includes Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at reasonable costs with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.

Congress is taking a hard look at Detroit's autos these days. But what about Detroit's jets?

When the chief executives of Ford and General Motors flew in to Washington yesterday to ask Congress for a $25 billion lifeline, they didn't fly coach.

General Motors CEO Rick Wagoner arrived on his company's cushy Gulfstream IV, ABC News reported. Ford CEO Alan Mulally flew in on a private company jet as well.

It costs about $20,000 to fly one of these jets round trip from Detroit to Chicago -- far more than the $900 cost of a first-class ticket on Northwest Airlines, ABC said.

Wagoner told ABC he took the private jet because he's a busy guy. Mulally declined to comment.

It's not exactly news that corporate fat cats prefer to fly in style. And assuming all eight seats on the G4 were taken, the private jet only cost about $13,000 more than flying commercial.

But it might not be the best move by Big Auto as it tries to convince Congress that a $25 billion bailout would be money well spent. The two have already been criticized for their generous pay packages ($22 million for Mulally in 2007, $15.7 million for Wagoner).

What do you think? Is this a tempest in a teapot, or further evidence of Detroit's poor business practices?

For more Reuters political news, click here.

Photo: REUTERS/Kevin Lamarque (Auto industry leaders testify in Senate on Nov. 18)

As Congress debates legislation to help struggling automakers, many Americans say they are uneasy with the plan, arguing that while it may save jobs, it would reward companies for pursuing bad business practices. Some even question whether automakers will be viable, even with support.

“They need to restructure. If they get bailed out they are not going to do it,” said Eric Smith, a paint contractor interviewed in Chamblee, Georgia, on the outskirts of Atlanta.

U.S. automakers say federal aid is vital to their survival, and there could be devastating ramifications for the broader economy if the sector is not stabilized.

“This is an issue of the whole auto industry, if that becomes under severe pressure, the impact on the whole U.S. economy will be devastating,” GM Chief Executive Rick Wagoner said in an appearance on a NBC-affiliated television station in Detroit.

Retired Gen. Wesley Clark says that a rescue of U.S. automakers is important both economically and for national security. In a New York Times opinion piece, Clark wrote that the U.S. auto industry has played an important role in successive military campaigns, from World War II to today, and its ability to continue to develop new technologies is imperative for national security.

Some are calling for executive shake-ups if it would ensure congressional backing for a bailout. “If it was the difference between getting this kind of support or not, obviously the management should consider resigning,” Carl Levin, a staunch industry ally, said on NBC’s “Meet the Press.”

As Democrats finalize a rescue plan, the question remains: should U.S. automakers be bailed out?

(Pictured above: G. Richard Wagoner (R), chairman and CEO of General Motors, testifies next to Robert Nardelli (2nd R), chairman and CEO of Chrysler, Alan Mulally (2nd L), President and CEO of Ford Motor Company, and Ron Gettelfinger (L), President of the United Auto Workers union, before the Senate Banking, Housing and Urban Affairs in a hearing on “Examining the State of the Domestic Automobile Industry,” on Capitol Hill in Washington, November 18, 2008.  REUTERS/Molly Riley)

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