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| Friday, November 20, 2009 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 14, 2008 2:06 PM ET
A bail-out for the automobile industry being pushed by Democrats would assist companies that shouldn’t be getting aid, open the door to other undeserving applicants and stretch the limits of government, according to several prominent economists and financial experts. The federal government should stick to rescuing large, interconnected financial institutions whose collapse could reverberate throughout the economy, these observers told Financial Week. The impact of the failure of General Motors and other car manufacturers, they explained, would be less far-reaching than that of big financial institutions. Struggling auto makers should instead consider filing for Chapter 11 bankruptcy reorganization, as airlines such as United and Continental have done. “I’m a very strong left-leaning Democrat, but I can’t support what they’re trying to do,” said Peter Bernstein, a financial consultant, economic historian and editor of the Economics & Portfolio Strategy newsletter. “Bailing out the auto industry would be a turning point that would send the message, ‘If you’re running a company that’s in trouble, take a shot at getting federal aid.’” William Isaac, former chairman of the Federal Deposit Insurance Corp. under President Reagan, expressed similar concerns. “I don’t know where it stops,” said Mr. Isaac, chairman of consultancy Secura Group. “If you help GM, do you help Ford? If you help Ford, what about a large retailer like Wal-Mart? What about the phone companies?” “Sounds like it’s a slippery slope, doesn’t it?” added Yale University economist Robert Shiller. However, another prominent economist expressed a contrary view, arguing that the auto industry is a special case. “Chapter 11 bankruptcy would be more devastating to car manufacturers than to airlines because owning a car is a multiyear thing, and consumers might not want to take a chance on the warranty,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology. Lending support to Mr. Johnson’s view, a CNW Marketing Research survey of new car buyers earlier this year found that 80% would avoid a bankrupt auto maker. Mr. Johnson, who was chief economist at the International Monetary Fund, acknowledged that aiding the auto industry “could open the door to everyone, and that is a danger.” After assisting car manufacturers, the government should try to draw the line, while remaining open-minded to the special circumstances of other applicants, he said. While Mr. Johnson said he wasn’t sure to what extent a GM collapse would threaten the rest of the economy, a Deutsche Bank analyst said it would pose a significant risk. Without federal assistance, “we believe that GM’s collapse would be inevitable, and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers and sectors of the U.S. economy,” analyst Rod Lache wrote in a note to clients, according to the Wall Street Journal. But Mr. Isaac, the former FDIC chairman, said he believed a Chapter 11 bankruptcy would actually make GM “more viable by forcing a day of reckoning” that would involve concessions among workers, creditors, shareholders and others. Without it, GM “will be back again” for more aid six months after a bailout, he said. The House is due to vote this week on a plan pushed by Democratic leaders to give the auto industry $25 billion in loans, in addition to the $25 billion in low-interest loans already approved by Congress. The initial aid was to retool factories to make more fuel-efficient vehicles. The legislation would give the government authority to use the $700 billion rescue fund for car makers and not just financial institutions. President-elect Barack Obama pressed President George W. Bush last week for more funding for the auto industry. Republicans, including the president, have reacted coolly to the notion of an auto industry rescue, and Treasury Secretary Henry Paulson said last week that the bail-out legislation should be limited to financial institutions. GM reported last week that October sales fell to their lowest seasonally adjusted rate since 1982 and that it is going through $2.3 billion a month in cash, up from $1 billion earlier this year. Last Tuesday, GM shares sank to their lowest level in 65 years. Among the financial companies that may be eligible for federal assistance are large insurers, the lending arms of car manufacturers and bond insurers. American Express, which last week got federal approval to become a bank holding company, is seeking $3.5 billion in aid, according to the Wall Street Journal. Treasury Secretary Henry Paulson said last week that the government may also try to ease strains in the markets for student loans, credit card debt and auto purchases. Many bankers are watching warily as the rescue spreads. “Our members are concerned that there might not be enough money available for financial institutions who need it,” said Peter Garuccio, a spokesman for the American Bankers Association, which represents thousands of banks of various types. Congress split its $700 billion allotment into two equal parts. Treasury has set aside $250 billion of the first half to buy stakes in banks and committed last week to insurer American International Group. The deadline to apply for federal aid was Nov. 14. The long line of companies seeking aid now includes even boat dealers, whose trade group is asking whether boat-financing companies are eligible for federal aid to help dealers stock their showrooms. “Should lending continue to contract for the marine sector, the U.S. boating industry will face severe short- and long-term challenges,” the National Marine Manufacturers Association said in a Nov. 12 letter to Mr. Paulson.
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