Even with the bailout of Citi on the books now, it doesn’t appear that the auto-makers are any closer to getting their due share, which seems odd to me.  I hope this proves to simply be posturing by the government as this to me still seems bigger and more important than the likes of AIG.  The only difference, of course, being that most politicians don’t care who is in Detroit, but their buddies on Wall Street are a whole different story.

In other good news, President Elect Barack Obama appointed New York Fed President Timothy Geithner as Treasury secretary and Lawrence Summers, who has previously held the Treasury post, as director of the National Economic Council.  The reason that I personally consider this good news is that it represents an early decision which gives the markets time to accept and adapt to these decisions.  Thus, everyone knows what to expect.

At the same time, leaving mixed feelings, Obama has promised to jolt the faltering economy with a new stimulus package.  Another purchase, spending today for our children to repay in the future and ultimately creating new opportunities for India and China to increase their global financial strength relative to the United States.  If it doesn’t work, the additional millions of people that will be out of work may turn this recession into one of the longest yet, although at this time I think that another depression is nearly impossible.

So there are my market thoughts for today – more in a bit as I try to make sense of so much muck in the media today.

Ranter

The biggest problem here today is that Citigroup has both a liquidity and solvency issue.  Thy’re working to calm their investors, but the market is already so shell-shocked from the other failures to date that these reassurances are falling on deaf ears.  In retrospect, it’s easy to see how big a blow losing the bid for Wachovia was and following that with an announcement announcing the elimaination of 52,000 jobs worldwide compounded the problem from a public relations standpoint.

The good news is that Citi is trying to control costs.  They are reducing expenses.  They are making the changes necessary.  They have people willing to invest in them and idiots analysts willing to give them a buy rating even now.  The bad news is that, like so many others, there is a considerable unknown as to the extent of Citi’s losses and damages from their derivatives portfolio.  Add to that the job losses which will ultimately reduce consumer’s ability to pay their Citicard debts and you have what are likely too many unknowns for even a company of this size.

Finally, though, you’re going to hear what I think is wrong with Paulsen’s plan and the way that he has been using Tarp funds.  Forget about AIG.  Forget about the Big 3.  Think back to what the original funds were approved for – to prop up the financial sector.  Citigroup is a cornerstone of what most consumers see as the financial market – Paulsen should be making every effort to shore up their perceived value and their ability to prevail in these tough times.  Show America, without splashing it across the media, that Citigroup deserves to survive as much as AIG.

Can you imagine what it would do to consumer confidence if all of a sudden their Citibank card was declined in the market because the government was unwilling to pitch in and lend a hand when Citigroup and the country needed it most?  It’s unimagineable for me and I can’t see a scenario where this isn’t followed by the failure of bank after bank after bank.

Ranter

AIG's $85 billion bailout package quickly becomes $150 billion. Will it ever end?

Most of us can clearly remember the day – way back in September – when they woke up to hear that they were loaning AIG $85 billion to keep it from failing.  There was a tremendous amount of debate as analysts went back and forth about whether or not this would be good for the American people or not.  Apparently AIG was too big to fail, and apparently that remains true today, but now the terms are a little different and the potential benefit to the American consumer is significantly less than it was before, and if you think that’s bad, keep reading, it gets worse.

So the original terms were pretty good – assuming that AIG could repay – but with very little fanfare the original $85 billion line of credit was supplemented by another $38 billion which was then added to additionally when AIG was allowed to sell another $21 billion of commercial paper to the US Government.  These are big numbers, we’re talking about nearly $150 billion in since September, and some economists are questioning if this will be enough!  But this is where it gets really good…

According the Edward M. Liddy, the insurance executive brought in to lead AIG through the crisis, the original terms of the agreement are not sustainable.  He was of course referring to the 10% interest that had originally been agreed to, which has subsequently been reduced.  Adding insult to injury they completely restructured the loan resulting in an added layer of confusion to the point that most Americans should just bury their head in the sand when it comes to AIG because in my opinion, that money is gone.

Where this gets even more frustrating is when you look at the counterparties to AIG – the other financial institutions and banks in the United States and Europe.  These companies are not bearing any of the loses on their investments in AIG – we, as taxpayers, are essentially bailing them out, too.  As if they weren’t rich enough and the American people weren’t suffering enough.  Liddy even went on to say that “it’s not exactly a bailout” because AIG is being asked to pay interest on the money that they’re loaned.  I guess he didn’t recognize that without that “bailout” AIG would have joined Enron.

Finally, AIG decided that a little salt on the wounds of the American public might be in order, and continued with hosting a $340,000 conference for independent financial planners at the Pointe Hilton Squaw Peak resort in Pheonix.  AIG says that sponsors coverd most of that investment, but it stills opens AIG up to questions about why?  It’s like someone borrowing money to throw their bankruptcy party – just doesn’t make sense.

“AIG is coming to the government claiming to be in critical condition and asking to be placed under intensive care, but they are still going out and partying and acting as healthy as ever,” U.S. Rep. Elijah Cummings, D-Md., a member of the House Oversight and Government Reform Committee, said in a statement. “It is even harder to sympathize when this company’s executives continue to wade by luxury pools while the everyday American whose taxpayer dollars are being used to save the company are hard at work.”

Just to drive their point home – AIG also reported a $24.47 billion, or $9.05 per share loss in the third quarter.  Based on the bailout play – 79.9% of that loss goes to the American publics bottom line.  Thanks guys.

Ranter

Some of you still remember the internet bubble and subsequent popping of that bubble almost a decade ago.  My own company closed its doors after some of our “new economy” customers lost their funding, resulting in non-payment on millions of dollars already spent on web development.  We paid our employees and vendors the old fashioned way – we sold assets, clients, and took second jobs to make sure that we paid every dime owed.  Ultimately, we closed our doors, but not one vendor was left without payment or a guarantee of payment.  That’s how business used to be done.  It never once occurred to us to ask the government to bail us out of our problems, and I don’t remember any other company getting a bailout either.

In 2008, everything seems to have changed.  At what point is a company too big to fail?  Enron was huge, they failed, and the world continued to spin.  This year so far we’ve seen a $350 billion stimulus package, $130 billion going to AIG, $25 billion to the auto industry, $850 billion going to banks, financial institutions and who knows what else, and untold billions going out in backhand deals that most of us will never completely understand.  That’s a lot of money, and the way it looks today – we’re not even close to done bailing out big business with taxpayer’s hard earned money.

To be fair, these disbursements are really being sold as investments/loans and if you believe in a short-lived recession they could potentially be very, very lucrative.  Even in the case of a long-term recession, some of these deals could pay out quite well if the borrowing companies survive and prosper.  If not, these deals will prove to be enormous failures and American taxpayers will be left footing the bill.  If you’re a betting person, you’d have to play the odds and assume that some of these already failing companies will continue their path and ultimately fail in spite of the massive amount of money being put into them.  Even if you are not a betting person, you should be asking yourself, what makes the government feel that these companies can succeed now in what is being called an ever more difficult economy?

AIG was loaned almost $130 billon and recent articles have them saying that it’s pretty much gone and in order to continue their operations they may need more.  Who is asking the question – where did that first $130 billion go?  If your friend is borrowing money while quitting their job and buying new cars, at some point you stop loaning that friend money, regardless of the fact that he lets you borrow the cool cars every now and again.  At some point, it has to be the same thing for AIG – at some point the American economy has to cut AIG off and let the chips fall where they may.  A lot of people are going to lose a lot of money, and that’s unfortunate, but it’s better than the entire nation losing a lot of money so that some investors can sustain their riches.

Survival of the fittest, and ultimately some of these companies need to fail.  The strongest will survive and thrive.  Right now it’s like we’re slowly pulling the band-aid off, extending the pain, when we should really just rip it off quickly, take the pain, and move on.

A great example has to be the auto-industry.  Times are tight – no doubt – but if companies like GM, Ford and Chrysler need tens of billions just to survive, it’s time to ask out loud – can America continue to sustain three mediocre car companies?  It wasn’t too many years ago that Chrysler needed only $1.3 billion to survive (which resulted in $300 million in interest paid back the treasury), and now they’re back in line for another government loan – this one much larger than before.  Isn’t it time to ask, does America need Chrysler?  If they were as good at making cars as, say Toyota, wouldn’t they be profitable like Toyota?

These companies obviously provide millions of jobs – even conservative estimates are over 300 million people that would be impacted by the failure of one of the big three.  That’s a lot of people – but is it really?

Hypothetically, if Chrysler disappeared tomorrow, would 300 million people really lose their jobs?  Obviously not, because Americans will continue to need and buy cars.  Those would be Chrysler car buyers aren’t suddenly going to start riding their bikes – they’re going to buy another car.  Sure, it might be a Toyota or Nissan, which could be made in the US or anywhere around the world, but they are going to continue buying cars at the same volume that they might have bought Chrysler cars.  And, the companies that are capturing those sales might be more efficient, but they are still going to need some of the people, facilities, parts and mechanics that would have gone to Chrysler.  So yes, there would be a lot of pain, but in reality it’s not nearly as much as politicians and economists would leave you to believe.

It’s time to decide – do we keep handing out loans on a hope and a prayer that things will get better in the short-term and we won’t lose our shorts, or do we take our pain and move to the inevitible upswing that follows every loss?  I believe Darwin.

Ranter