Government Motors....oops I mean General Motors

The last number of months has seen that cornerstone of American capitalism, General Motors spiral downward and almost disappear as a corporation. Without the financial backing of the US, Canadian and Ontario governments, the company that was too big to fail would have failed. Not long ago our neighbours to the south used to say "What is Good for GM is good for America". That was when American designed cars ruled the road.

Now GM has gone through bankruptcy and a new General Motors has been created from its best assets with its other so-called assets part of a "Motors Liquidation Company". A friend forwarded me an interesting article from the New York Times about the restructuring of GM.

GM is now a public company, owned by the 3 governments and by the United Auto Workers. The plan is for governments to slowly exit the company over the next 5 years or so. In the meantime, there are some in Canada who are calling for increased transparency from this publicly backed company. I guess all Canadian citizens are now shareholders of GM and that those of us who live in Ontario are doubly lucky as we are also shareholders. Should we expect that GM adhere to the same rules on transparency and accountability that other government funded enterprises (eg: LCBO, Lottery Corp) must follow? This is an interesting question but there are substantial differences between a "government enterprise" and the financial backing that governments have given GM. The biggest is that the government enterprises will remain in the public sphere for policy and regulatory reasons (control of the sale of alcohol or games of chance), whereas governments' foray into the automobile sector is only (hopefully) temporary to salvage important manufacturing jobs and research & development capacity.

Another thought that comes to mind is whether those who have espoused the proposition that "government is the problem" (enunciated famously by Ronald Reagan) have changed their minds as now it seems that "government is the solution" to the financial crisis - just look at the various bank and brokerage house bailouts by government as well as the GM and Chrysler supports plus all the stimulus spending that governments around the world are engaged in. I wait to see what they say!

'Twas the night before Christmas

A friend sent me the following "modernized" version of the old classic. I don't know who wrote it, but is very apropos given the economy, politics and the markets in the last little while....

Twas the night before Christmas, when all through the House
Not a creature was stirring, not even a mouse.
The MPs had scattered – some thrilled beyond doubt,
That vacation came early with the G-G's timeout.

In the halls of Finance, a few souls still did toil.
Christmas Eve? Bah – they will burn midnight oil!
All parties' ideas must get thrown in the mix,
There's a budget to write, an economy to fix.

When out on the lawn there arose such a clatter, I sprang to the window to see what was the matter.
There were Layton & Harper, looking madder than spit,
And the PM was yelling, "You want what deficit?!?"

"GM got $4-billion (with the Chrysler boys, too),
And there'll be billions more before it's all through.
I'm paying the most – not that whining McGuinty,
So don't you accuse me of being too flinty."

And the bald man – who's quick with a zinger or two –
Said: "You've got all the vision of Mr. Magoo,
Your budget will flop, at the end of the day.
You'd better start packing for old Stornoway!"

On Bay Street that night, you could hear not a peep,
The bankers went home. (To rest? Or to weep?)
When out popped a man – this was no jolly fellow,
And at the top of his lungs, oh my, did he bellow!

"Forget Dasher & Dancer, & Prancer & Vixen,
I call Clark, & Waugh, & McCaughey & Nixon!
I demand you lend money, and nearly for free!"
Santa Claus? Nope – it was Gov'nor Carney.

Everyone's got a wish at this time of the year,
Especially now, when the gloom is severe.
For bankers worldwide, just one gift will suffice:
An end to declines in the average home price.

Sprott wants more gold, more commodities stuff,
But Santa says no: "I think you've got enough."
But here's the wee secret poor Eric doesn't know:
Saint Nick lost 10 grand on the Sprott IPO!

For Potash's Doyle, Christmas presents are moot,
For the elves just can't top all that stock-options loot.
Some gifts would require intervention from heaven,
Like Mike Z's request to avoid Chapter 11.

Some folks like carols – a-wassailing they'll go,
But not grumpy Balsillie – that'd be RIM's CEO.
Even after the crash, he still has lots of green,
But he never stops asking to have his own team.

EnCana's big cheese doesn't like Christmas tunes.
(Country & western is what Eresman croons.)
But since oil fell hard, the man can't shake the blues,
And he sings about how breaking up's hard to do.

For Conrad the jailbird, at least it's not cold,
But it burns him to see Radler out on parole.
And who's that poor man on the steps of BCE,
Who cries over & over: "But we have solvency!"

When he opens his stocking, Don Lindsay, from Teck,
Hopes not to see coal
(it's how he got in this wreck).
Dominic's list, to no one's surprise,
Has only one item: "Please make equities rise."
"Can't help you," said Santa. "Though I sure wish I could.

A turn in the markets would do all of us good.
When my journey is done, I look forward with dread,
To informing the elves their pension fund's in the red."
He sprang to his sleigh, to his team gave a whistle,
And away they all flew like the down of a thistle.

And I heard him exclaim, from beneath his white locks,
"Merry Christmas to all – & to all some good stocks!"

Another Fine Mess!

I’ve been thinking about the subprime mortgage debacle in the USA and its impact not only there but around the world.

For those who have not heard about this latest financial “scandal” in the US, where have you been hiding??!! To sum up what has happened….in the US, as you may know, a certain portion of mortgage interest is tax deductable (the interest payable on up to $ 1 million of principle) for your primary residence and even for secondary residences. Unlike Canada, this means that there is no incentive to pay off your mortgage as this tax deduction can be quite substantive. In addition, this tax policy incents people to buy bigger and bigger homes. That is just one part of the back-drop. The next part was the unscrupulous mortgage brokers whose incentive structure was based purely on commissions not on the integrity of the mortgage. They peddled subprime mortgages that started at a low interest rate and then a few years later reset at a substantially higher rate to individuals who would not have qualified for a normal mortgage. This was all based on the presumption that housing prices would continue to increase and that the asset value of the property would increase. In many instances, there was little or no down payment required. In other cases, people who wanted to renovate their home or needed money for health care costs took out these subprime mortgages. I have heard these loans called NINJA loans, which stands for "No Income, No Job or Assets"!!

At the same time some of those smart Wall Street types (the same ones who have brought you the Savings & Loans scandal of the late 70’s/early 80’s and the Enron/Worldcom, etc fiasco) dreamed up a way of packaging this portfolio of mortgages and selling them on the market as grade A commercial paper. They basically bundled solid grade mortgages with these NINJA ones into Asset Backed Commercial Paper and solid them as investment vehicles to banks, pension funds, governments, etc. I guess no one looked under the hood and analyzed the precarious nature of some of these “assets”. Where were those guardians of fiscal probity – the credit rating agencies?? What’s the outcome of all this – record high foreclosures in the USA, a drop in the price of housing, a Wall Street investment firm sold at a fire sale price, housing prices dropping in the US and a recession in the US that is threatening not only Canada but other parts of the world as well.

Here is a video on the subprime mess http://www.youtube.com/watch?v=SJ_qK4g6ntM .

I have also added a good PowerPoint presentation that explains this mess.....enjoy

Download the slideshow