River House, 52nd Street and East River, New York City
Ilargi: I wanted to do more on the GM demise, getting back to when they and GMAC were still umbilically hitched and all that, but that will take some time and research, and frankly, what I need right at this moment is some serious shut-eye. So instead, I thought I’d tell you a story, real life and as I remember it, which for me shows what’s wrong with GM as clearly as anything you can come up with.
Germany closed a deal today with car part maker Magna and a Russian bank, Sverbank, aimed at saving tens of thousands of EU jobs. I don't know, but I think Magna is pretty much dead if no-one buys their parts. However that doesn’t mean it's a good idea to start making cars if you don't know how and why. And Russian banks? Let’s save the rant on that topic for a later date, shall we? How much of it is about looking intently at the books, and how much is about appeasing Putin for gas deliveries? The goal, or so they say, is to produce cars for Russia. Show me the roubles. I have no good feeling there anywhere.
But then there's elections coming up in Germany, and who'll vote to lose jobs? Still, GM's European Opel unit, which is at issue here, has been known locally forever as a producer of clunkers. And European car sales of course plummet too. Germany subsidizes new car purchases for now, but that can't last. So what do you have as producers for the European market alone? Germany: BMW, Mercedes, Audi, Volkswagen, Porsche. France: Peugeot, Citroën, Renault. Italy: Fiat. Most, but not Fiat, have been far more succesful companies than Opel. Better cars, better management. Why not save your billions for them? Oh, right, elections. Save 20.000 jobs. That's what they talk about. And that also happens to be less than the US loses overall every single day, 24/7.
So anyway, my story.
Sometime in the 1980's, well before the wall came down, at a time when I was even younger than today, and I’m younger than that now, a female friend of mine named Irene and me wanted to get some sun. We went to a travel agency in Holland and asked for the cheapest quickest beach flight that same day. A few hours later, we were on our way to the Black Sea coast of Romania. Which in those days was as communist as they came. And poor. It was also the crappiest plane I ever took, and I’ve been on a few. In my memory, I couldn’t even hardly stand up, but that may just be a trick of the mind.
Once on the beachfront, near a town named Constanza, we soon figured out the lay of the land. There was one hotel you'd sleep in, and another one down the road that would serve you dinner. Maybe I should mention that German travel giant Neckermann had purchased the former winter palace of the one-time king, the only nice edifice around. The hotels and restaurants were square concrete 10 story ugly as hell looking ready to collapse at any given time "buildings".
So we get from our rooms, a full mile and change walk, to the "other" place where we're told we'll eat. All the staff in all the hotels wear the same bland uniforms, same name tags, there's no difference, after all the owner is the same: the Ceaucescu government. We sit down at a table, actually met some real nice people, which always happens when you go on the cheapest possible trips, and the waitresses, none of whom spoke a word we knew, handed us menu's. They were cute girls, too, just not with a 100% healthy complexion.
It took about 10 minutes, as I recall, to find out that absolutely nothing on the menu was actually available. It was about the gesture.
What was being prepared in the kitchen, and what was all the choice whether you liked it or not (re: no choice), was really poor for our western European standards, so much so that my friend and our two older table mates (a married and retired Dutch couple) got to wonder about the people who served us the sloppy potatoes, hugely overcooked veggies and comparatively very small pieces of pork, half of which was fat. In the next few days, we somehow managed to get a conversation going with the girls. Irene wound up giving away every single piece of make-up she had on her, and be treated as a goddess, as much as that is possible for people who have no ritual offers to make. The waitresses confided in broken German and English that there was never any meat for them, let alone their families; what there was, was all for the tourists.
The Black Sea beach left something to be desired as well. We were located on a bay, and about 2 miles to the left of us, towards the open sea, there was a coal fired power plant with mighty big plumes of smoke coming from its chimneys. The beach had something like the threat level in Jaws, just with a different enemy. No swimming in either case, though, as you can understand.
Now, before I get to what led me into this memory lane, there’s one other thing that stands out. There was nothing to do around there, as you've gathered by now, except for the German parties at the Winter Palace, and that’s not what we were there for. Though I did get bodily involved with one of the female sports coaches, named Gabi, which almost made me miss my return flight. You’re only -that- young once. But let’s focus here.
Irene and me wound up -don't ask me how- at a local wedding party, in a hall with the charm of a hangar, overkill neon lights and all, which turned out to be the most wonderful and endearing event on the planet. The simplest wooden tables, the simplest -often torn- plastic covers, a 6-piece band, accordion, mandolin, with hardly any amplification, but scores of people having the greatest time ever. Every ten minutes or so they'd play the Bird Dance, or whatever it's called where you’re at, where people flap their arms like chickens, sink through their knees and come up again.
It was humiliating for us "rich" people, who’d gotten the cheapest beach trip from Holland because we had little money, to see people who had definitely, absolutely and undeniably much less than we did, be so happy with so little. They were happy because their people were there. They were happy because they needed to escape. Homemade wine and moon shine helped, but there was much respect, it all went the way the bride would have dreamed of, all the couple could have wanted and needed as long as they were content to stay within their own community. In my memory, to this day, it was simply so extraordinarily beautiful, you’d want to be one of them. But you can’t, ever. The best you can do is to emulate the simplicity.
And that is still not why I started writing this. Remember, we were talking about GM. Well, you weren't really talking, but you know, poetic freedom. What got me here is this:
One day Irene and me, because it was raining buckets, decided to get on a bustrip to the actual town of Constanza, to see, you know, whatever it was, touristy stuff. And now we get to the core. We're in that bus, it’s pouring rain out, and I see that old guy out there, on a sports field, football, soccer, a goal/net on either side and some vague chalk lines. It's pouring with rain, right? And not a few drops, there was a thunderstorm going on. And that hunch-backed-over old guy is standing there, a garden hose in his right hand, getting soaked himself but still watering the sports field. Why? It’s his job.
And that’s not the end of it. A few days later, we were on a bus along that same road, it was raining again, I look towards the same sports field, and I kid you not: the field had been divided in two: there were now two old guys, in the rain, both with hoses, each of them making sure that their half of the field was kept sufficiently wet. In the pouring rain. Just doing their job.
And that's how we get seamlessly back into Detroit. Whether it’s the European workers at Opel, or the Americans in Michigan, all these multi-tens-of-billions of dollars deals serve one purpose only: to keep and set up people in jobs producing things nobody needs or wants. No single thing different there from the old guys with their old hoses.
Compassion is a cool thing. Taking care of your weakest is what makes a society vibrant and viable. But building tens of thousands of cars to achieve that goal is an order of magnitude greater than what didn’t work in the first place in the communist world either, watering fields of grass. It's all the same, just much more of the same. And it’ll all end the same way too. When it’s pouring with rain, you don't need to water a lawn, and when there's a huge car-making overcapacity, you don't need to save failing carmakers. You need to save the laid-off workers.
Jittery Bond Market Threatens President's Agenda
Senior Obama administration officials said Friday that policy adjustments necessary to contain soaring budget deficits would be made once an economic recovery takes hold, in response to growing concerns about a run-up in long-term interest rates. Treasury Secretary Timothy Geithner, National Economic Council chief Lawrence Summers and Office of Management and Budget director Peter Orszag said in separate interviews that the administration was acutely aware that rising interest rates pose a threat to the improving U.S. economy.
Yields on 10-year Treasury notes have risen 1.5 percentage points this year as bond traders pull back amid worries about rising federal debt. Higher yields will leave the government with higher interest costs and still higher deficits. They could also push up other forms of interest rates, making borrowing more expensive for many people. On Thursday, the Treasury Department is expected to announce an auction of roughly $65 billion in three-year, 10-year and 30-year notes and bonds, and the result will be closely watched.
"We're going to do what's necessary," Mr. Geithner said. "That's the only way you're going to get a strong, sustainable recovery." As soon as a recovery takes hold, the administration will reduce the deficit to a sustainable level, he said, adding, "That's difficult, but critically important." Mr. Orszag said the administration's commitment to fiscal rectitude would become clear in coming weeks when President Barack Obama demands that any health-care plan drafted in Congress be fully paid for. That pledge, he said, "is ironclad, no ambiguity, not up for negotiation." Additional steps on the deficit may become necessary, he added, and the administration is committed to turning to Social Security next.
"There is not a day that goes by that the president and the economic team do not focus on the long-term commitment to decrease the deficit," Mr. Summers said. The comments by the administration officials were aimed at calming worries on Wall Street, and indicated concern that rising interest rates might imperil the president's domestic agenda, as they have done to the plans of previous Democratic administrations. Some officials tried to play down market fears about federal borrowing. The jump in long-term interest rates, both in Treasurys and mortgages, is more a product of technical factors, they argue, than a reaction to Washington's borrowing.
Another possible cause is the improving economy. Investors who sought safe harbor in Treasurys are now selling U.S. debt and looking for higher returns. The emerging scenario harks back to the early Clinton White House, when the bond market helped scuttle a stimulus package and forced a focus on deficit reduction. Senior Obama administration officials said the current situation isn't parallel. The recovery isn't as established and business investment isn't being held back by interest rates, they said. But they acknowledged history could repeat itself. "Clearly, the message from the bond market increasingly is [that] structural deficits as far as the eye can see just aren't going to wash without bond yields going up to levels that might keep us in recession," said Ed Yardeni of Yardeni Research Inc.
In March, debt-laden Britain had its first failed debt auction since 1995, and the worst auction in British history, when a sale of £1.75 billion (about $2.8 billion) of 30-year notes attracted just £1.67 billion in bids. Last week, Standard & Poor's warned that Britain could lose its triple-A credit rating if large deficits persist. The nonpartisan Congressional Budget Office estimated that Mr. Obama's budget would leave the deficit above $1 trillion in 2019. Goldman Sachs projected borrowing of $3.25 trillion this fiscal year and a national-debt load of 83% of gross domestic product by the end of the decade -- double the current debt-to-GDP ratio.
The CBO projected the White House plan would cut in half the deficit inherited from the administration of former President George W. Bush by 2012, as Mr. Obama promised, but would still leave $658 billion of red ink. Those numbers rely on some rosy assumptions, including inflation-adjusted economic growth of 3.2% next year and a 2009 unemployment rate of 8.1%. The rate hit 8.9% in April. The Obama forecast anticipates a national health-care plan that could cost well over $1 trillion in its first decade, paid for by tax increases and spending cuts and a climate-change plan that would bring in $646 billion.
"As far as I can tell, their fiscal plan is spending more on health care and hoping somehow that will make us pay less for health care," said Phillip Swagel, a former assistant secretary of the Treasury for economic policy in the Bush administration. "That's the intellectual counterpart of tax cuts pay for themselves." Obama administration officials acknowledge the interest-rate increases this week have raised pressure to get a deal fast on health-care legislation that emphasizes cost containment.
Mr. Orszag posted a message on his blog Friday explaining how a surge in health-care spending now will help lower deficits in the long run. Many are skeptical. "Their talk of a return to fiscal discipline has not really resonated on Wall Street," said Milton Ezrati, a partner and market strategist at Lord Abbett & Co., a money-management firm. Lou Crandall, chief economist at Wrightson ICAP, a Wall Street research firm that specializes in Treasury financing, said short-term spending is necessary, but added, "it would be great for the market to know there is an exit strategy."
After the Bailout
This week we explore what happens after spending hundreds of billions of dollars on bailing out financial institutions. Can we expect any improvement in the credit market or unemployment rate? These week we’ll get alternative views on the possible side effects of the federal governments policy of running ever-larger deficits in the midst of world economic crisis.
Listen to the Full Episode | Download MP3
Paul Craig Roberts
Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal and he’s the author of many books. Most recently, he is the co-author of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice.
Ilargi is the author of the blog, The Automatic Earth, a popular financial blog that puts our economic crisis in historical perspective. It provides an in-depth analysis of the trends behind the numbers of increasing debt and decreasing fossil fuel production.
What's GM worth?
Once the bankruptcy process at General Motors plays itself out, what will the company be worth? It's more than an academic question of interest only to Wall Street traders. It will determine how much money taxpayers can expect to recoup from multiple bailouts of GM. When all is said and done, the Treasury Department is likely to pump more than $50 billion into GM -- including loans made to the automaker last year. It is also key to determining the level of future health insurance benefits for hundreds of thousands of GM retirees and how much money holders of $27 billion on GM bonds, including pension funds and individual investors, will be able to recover.
GM is widely expected to file for Chapter 11 bankruptcy protection on Monday. As a result, the government, bondholders and a trust fund controlled by the United Auto Workers union will wind up owning virtually all the stock in a reorganized GM. (Current GM shareholders will essentially have their holdings wiped out through bankruptcy.) So taxpayers, retirees and bondholders need for shares of a new, leaner GM to start trading for them to stand any chance of benefiting from the company's emergence from bankruptcy. Unfortunately, these new owners probably won't know until at least 2010 just how much money, if any, they will recover.
GM's most efficient plants, dealerships, brands and other assets could exit bankruptcy within two to three months. However, it will take at least 6 to 18 months for the bankruptcy court to wade through the company's unprofitable plants, most of its debts and other liabilities, according to a senior Obama administration official. During that time GM stock is unlikely to be publicly traded. But even once shares of GM do begin trading again, it's highly uncertain what the company could be worth. According to a filing by General Motors late last month, the company estimated the equity value of its common stock would be about $25 billion once it completed a reorganization.
That's substantially higher than the market value of about $450 million that GM was worth based on Friday's closing stock price of just 75 cents a share. But the last time GM was worth as much as $25 billion was late 2007. A new company, with a greatly reduced debt burden, fewer plants and lower labor costs, could end up being an attractive investment. But auto analysts and other experts are reluctant to speculate on exactly what GM's value could be following bankruptcy. Len Blum, managing director of Westwood Capital, an investment bank, said he thinks there's a better chance for taxpayers to recover money from their investment in GM than with insurer AIG.
Taxpayers also have a majority stake in that company, and the government has kicked in more than $180 billion so far to keep AIG afloat. Blum said that given the reduction in GM's debt level and operating costs that are being planned, there could be "some real value" in a new GM, but that there was still great risk for all shareholders. "If it was a slam dunk, the union would have wanted more common equity," he said. The UAW wound up agreeing to a 17.5% stake. Other experts question whether cost cutting and a lower debt load are enough to make the company attractive to investors, even if it they enable GM to earn its first profit on its auto operations since 2004.
"Back in 2007 GM was being valued on its future prospects and its assets, not its profitability," said Chris Jadro, an equity strategist focusing on distressed companies for Jefferies & Co. "But it's just hard to imagine that GM will be worth what it was a year ago coming out of this down cycle." The two biggest shareholders of the new company also expressed doubts about how quickly the stock will recover. A senior Obama administration official speaking to reporters Thursday conceded it is unlikely that the government can get back its entire investment in GM. The official said the government hopes "to recover as many taxpayer dollars as we can," and that it expects to sell the shares as soon as possible.
UAW President Ron Gettelfinger, who also said he would like to sell the union's stake in GM as soon as possible to have money available in the trust fund, downplayed expectations about the company's value going forward. Although he said Friday that the union believes "the stock should be worth a lot more a lot quicker," he added that "right now, we realize the value is zero." Some auto industry experts believe that the changes made by GM could position it for a level of profit it hasn't earned in decades. David Cole, chairman of the Center for Automotive Research, said GM is well-positioned for even a modest rebound in industrywide sales.
Carr said the $25 billion market value estimate "is pretty reasonable and it could even be conservative." He said that profits for GM and the rest of the industry could be robust in the next few years due to reductions in capacity and pent up demand for autos. But a number of experts doubt that GM's market value will get anywhere near the $25 billion figure in the next few years. They point out that GM will face a difficult competitive position compared to cash-rich Toyota Motor and even U.S. rival Ford Motor, both of which could pass it in terms of U.S. sales in the coming years as GM sheds brands and dealers.
Sean Egan, managing director of rating agency Egan-Jones Group, said he's not sure GM can generate a profit even with all the cost concessions they've received from the union. "In almost every competitive front, GM is being beaten. People who see strong profits for GM are being delusional," Egan said. But Susan Helper, an economics professor at Case Western Reserve University in Cleveland and expert on the auto industry, worries that even if GM does return to profitability following bankruptcy, investors could penalize the stock due to the company's previous problems and doubts about its future. "It's tough to see there being a line of investors looking to get into the stock," Helper said.
Germany Picks Magna to Buy Opel; 11,000 Jobs May Go
German Chancellor Angela Merkel’s government chose Magna International Inc. as the buyer for General Motors Corp.’s Opel and confirmed a financing plan aimed at helping the money-losing unit avert insolvency. Magna, the Canadian car-parts maker that’s competing with Fiat SpA in its bid for Opel, will invest in the Russelsheim, Germany-based carmaker, Finance Minister Peer Steinbrueck said at 2:13 a.m. in Berlin after a meeting with leaders including Merkel. Germany will provide a 1.5 billion-euro ($2.1 billion) loan to keep Opel afloat. Officials said as many as 11,000 jobs may be lost across Europe, including 2,600 in Germany.
"You can be sure that we didn’t take the decision lightly. All the federal and state representatives are aware that there are some risks," Steinbrueck told reporters. "We have a high interest in maintaining employment at all four Opel sites." GM is selling a majority stake in Opel, including the Vauxhall brand in the U.K., as part of a global reorganization before a U.S. government-imposed June 1 deadline to restructure. Germany, which led the search for an investor, has a say because of the Detroit carmaker’s request for loan guarantees. Opel will be placed under a trust later today, shielding it from a probable GM bankruptcy next week.
Merkel, facing national elections on Sept. 27, is under pressure from lawmakers and labor unions to save the 25,000 German Opel jobs out of GM Europe’s 55,000 positions. "If an agreement isn’t reached, Opel has no choice but to file for insolvency," Juergen Reinholz, economy minister of Thuringia, said in an interview before the meeting. His is one of the four states where Opel has assembly plants. Reinholz took part in negotiations that stalled earlier this week after Germany balked at GM’s demand for immediate cash assistance. Of the 1.5 billion euros in short-term loans, GM wants an upfront payment of 450 million euros from Germany to keep Opel operating, GM CEO Fritz Henderson said in a May 28 interview. That’s 350 million euros more than the German government had anticipated, he said.
Today’s decision wasn’t unanimous. Economy Minister Karl- Theodor zu Guttenberg, who led the talks and had considered an "orderly" insolvency for Opel, said he would have chosen a different solution because of the financial risks to taxpayers associated with Magna. Merkel said that Opel had to be rescued and blamed "great mismanagement" at GM for the unit’s troubles. She said she spoke with President Barack Obama yesterday and that German-U.S. relations had been put under strain by the Opel situation. "In this crisis, the state has to help more strongly than it normally does," the chancellor said in a statement today. "But we’re only doing this on the premise that the state knows it’s not the better entrepreneur." Remaining issues concerning the agreement with Magna should be resolved by tomorrow, she said.
Aurora, Ontario-based Magna will advance 300 million euros in cash to Opel on June 2, Co-Chief Executive Office Siegfried Wolf said an interview after the announcement. He said that he expects a final contract with GM within four to five weeks. "Opel is rescued for now," GM Europe President Carl-Peter Forster said. German state leaders and labor representatives have said repeatedly since bids were submitted on May 20 that they favor Magna’s offer, which includes as much as 700 million euros in investments in partnership with Russia’s OAO Sberbank. The plan also foresees a linkup with OAO GAZ, which said today it could produce 180,000 Opel cars a year at its main Russian site. Fiat made a non-cash bid that would contribute factories and assets from its own carmaking operations.
IG Metall, Germany’s largest union, plans to begin talks with Magna "as soon as possible" to limit job cuts and keep plants open, Oliver Burkhard, an official of the group, said in a statement. About 2,600 workers may go in Germany, though none of the factories there will close entirely, government officials said today at a briefing in Berlin. Another 7,500 to 8,500 posts are likely to be lost elsewhere in Europe, they said, declining to give details. Opel also operates assembly plants in countries including the U.K., Spain, Poland and Belgium. The plan calls for 4.5 billion euros in loan guarantees to be borne by the German federal and regional governments and valid for up to five years, the officials said.
Magna, founded by Chairman Frank Stronach, has 326 manufacturing sites, engineering centers and sales offices across North America, South America, Asia and Europe that employ about 82,000 people, according to the company’s Web site. About 14 percent of its $23.7 billion in sales last year came from assembling complete cars and trucks. The Canadian company would own 20 percent of Opel and Moscow-based Sberbank, Russia’s biggest lender, would have a 35 percent stake. GM would retain 35 percent and Opel workers would have 10 percent. Sberbank is interested in the deal because it will bring access to new technologies at a "fairly low" price, Chief Executive Officer German Gref said today. "Such an asset will make it possible to restructure the automobile industry in Russia," Gref said in an interview broadcast on Vesti-24 state television.
OAO GAZ, described as an "industrial partner" in the Magna-Sberbank bid, would require up to nine months to retool its plant in Nizhny Novgorod to produce Opel models, Deputy Chief Executive Officer Elena Matveyeva said today in a telephone interview. GAZ is owned by Oleg Deripaska, the Russian billionaire who invested $1.54 billion in Magna in May 2007 before the deal collapsed in October after BNP Paribas SA called in a loan amid tightening credit markets. Building Opel cars would utilize capacity previously intended for Chrysler LLC’s Siber sedan, based on a version of the U.S. automaker’s Sebring.
Fiat CEO Sergio Marchionne decided not to attend the overnight meeting in Berlin, saying he was "perplexed" by Opel’s cash needs. The Italian automaker will focus on completing the purchase of a stake in Chrysler, he said. Financing Opel on an interim basis would lead to "unnecessary risks," Marchionne said in a statement yesterday. He described the negotiations as "complicated" and "uneven." "This process is taking on the air of a Brazilian soap opera," Marchionne said during a conference in Montreal. He left Berlin for North America after the stalled Opel talks.
Turin-based Fiat’s bid, which also includes GM operations in Latin America, is part of Marchionne’s plan to create a global automaker in combination with Chrysler. Fiat still wants to buy Opel and is "very much interested" in its Latin American operations, Marchionne said. A purchase of the U.S. company’s Saab Automobile unit in Sweden, while possible, is less likely if Fiat can’t buy Opel because the two GM brands share many parts, the CEO said. Saab, which received protection from creditors in February, yesterday won a three-month extension to reorganize, giving it more time to complete a sale and reach a debt-reduction agreement with creditors. Germany’s federal government agreed to provide half of the 1.5 billion-euro German backing that GM has sought for Opel, with the remainder split among the four states.
Opel, founded in 1862 by Adam Opel, started out making sewing machines and bicycles before going on to produce cars, including its "Laubfrosch," or tree frog, model. GM purchased 80 percent of Opel in 1929 during the last economic crisis, after asset prices plunged worldwide. Two years later, GM bought the rest of Opel, establishing itself as the biggest carmaker in Europe through the 1930s. GM, the world’s largest automaker until its 77-year reign ended last year, will file for bankruptcy on June 1 and sell most of its assets to a new company, people familiar with its plan said May 28. That makes German workers keen to see a government trust. Employees have a say in Opel’s sale because GM’s business plan calls for $1.2 billion in concessions from European workers.
U.K. Seeks Meeting With Magna on Vauxhall
The U.K. government is seeking an early meeting with Austrian-Canadian auto parts group Magna International Inc. over the future of U.K. General Motors unit Vauxhall, Business Secretary Peter Mandelson said Saturday. Mr. Mandelson had already sat down with Magna officials in recent weeks and said the company had made it clear then they were committed to continued production by Vauxhall in the U.K. "Now I will be seeking a very early, further meeting with them to reinforce that commitment and to make it into a cast-iron guarantee, and I'll be concentrating on that as soon as these initial talks have been completed between them and General Motors USA," Mr. Mandelson said in a statement.
After hours of talks, the German government said early Saturday it had selected Magna as a partner for General Motors Corp.'s German Adam Opel GmbH unit, ahead of a likely bankruptcy filing of Opel's parent GM in the U.S. The new company will take charge of all of GM's European operations. Germany will provide €1.5 billion ($2.09 billion) in bridge financing for Opel, paving the way for a takeover by Magna and its two Russian partners.
Magna has teamed up with Russian auto maker OAO GAZ Group and state- controlled OAO Sberbank in its bid for Opel. Mr. Mandelson said the U.K. government understands it will take time to clarify the future of Vauxhall, which has some 5,000 workers in the U.K.
"We are at the beginning of a process of due diligence, of examination by Magna and their partner, the Russian Savings Bank, of the finances of General Motors in Europe as a whole. Over the coming weeks and months, we will be talking to them about their detailed plans and how those will affect Vauxhall here in the U.K.," he said. Mr. Mandelson reiterated the U.K.'s willingness to provide longer-term funding for the new company which emerged but tied it to the new company's commitment to Vauxhall's future.
"We accept that the new company going forward will need government help from a range of European governments. We have accepted that we will play our fair share in that. But just how much will depend on the needs, the requests of the new owners, and what they're prepared to put or keep in production and employment here in the UK," he said in the statement. In an interview with the British Broadcasting Corp. Saturday, Mr. Mandelson welcomed the progress in the talks in Germany but acknowledged that job losses were likely. "I judge positively that with new owners.. it looks as if GM in Europe can be saved, it can be turned around but of course, it will involve change. There is excess capacity not just in this company but in the car manufacturing industry as a whole, and not just across Europe but across the world," he said.
U.S. Hopes To Recoup GM Outlay In 5 Years
The United States would recover most of its planned $50 billion investment in General Motors within five years, according to a preliminary Treasury Department estimate that foresees the company, now on the brink of bankruptcy, rebounding over that time to become a strapping global competitor. By putting billions of dollars into the ailing automaker, the Obama administration has placed a huge bet on the effort to revive and streamline the company through the elimination of brands, dealerships and factories. Yesterday, the company's union announced that it had approved a cost-cutting contract and GM neared an agreement to shed its Opel brand.
If the government-monitored corporate reorganization fails and GM sputters again, however, the government investment into the company would be lost. Some industry analysts are skeptical that an automaker that has struggled for so long could be so quickly reborn. The preliminary estimate, by contrast, reflects optimism that the iconic American manufacturer can flourish after its restructuring. "I don't know how much we're going to recover," acknowledged an administration official who spoke on condition of anonymity. "I'm not here to tout stock. But we're very excited about this as a company."
After a planned GM bankruptcy, during which the company will seek to shed burdensome debts, the U.S. and Canadian governments will own 72.5 percent of the reorganized automaker. In addition, GM will owe the United States about $8 billion. The United States could recover most of that investment by 2013, when, sources said, a Treasury projection shows the company would reach an equity value of $75 billion. The government share, by then slightly diluted, would be worth about $46 billion. The $8 billion debt would have been repaid, and the government would have reaped billions in preferred-stock payments. Sources said the estimates are constantly being refined.
Brian Bethune, chief U.S. financial economist for IHS Global Insight, called the assumptions "extremely optimistic" given the risks in the economy and the challenges facing the company. "Whenever a company goes through that deep of a restructuring, there are all kinds of risks," Bethune said. "This is not a nip-and-tuck exercise. This is major surgery." Among the key variables in any such forecast is the number of new cars sold annually in the United States as well as the estimate of GM's share of the market. During the boom years, the annualized figure for car sales in the United States hovered around 16 million. Recently, it has fallen to between 9 million and 10 million on an annualized basis.
In regulatory filings, GM has estimated that the car market will rebound to 16 million by 2012. Those filings also assume the GM market share will slump slightly between now and 2012, to 18.4 percent from 19.5 percent, presumably because the company will offer fewer brands. "It's not a completely unreasonable estimate -- if the market recovers and if they really invest in GM's capabilities," said Susan Helper, an economics professor at Case Western Reserve University who specializes in the auto industry. So far, the United States has invested $20 billion to keep GM in business and would contribute about $30 billion as part of a bankruptcy restructuring.
"We hope to recover as many taxpayer dollars as we can," the administration official said. "It would be wonderful to recover more." For now, GM and the Obama administration are working toward streamlining the manufacturer's bloated operations. Toward that end, the United Auto Workers ratified contract changes yesterday that will help General Motors cut more than $1 billion in labor costs. Union President Ron Gettelfinger said 74 percent of GM's production and skilled-trade workers voted in favor of the deal yesterday. Under the deal, the union's cost-of-living increases, performance bonuses and some holiday pay will be suspended to offset health-care costs.
The union, whose contract covers 54,000 workers, has agreed not to strike until 2015. With this contract, "there's no excuse for these companies not to build in this country," Gettelfinger said. He noted that GM announced yesterday that the company would retool an existing U.S. plant to build small cars, which typically have been built overseas because of their low prices. "It's going to stop the imports coming in here from China," he said. "We can build those small cars in this country." Meanwhile, GM's bondholders were weighing a company offer to give up claims to $27 billion in bonds for a 10 percent ownership stake in the company. Their decision is due by 5 p.m. today.
GM was also close to finalizing a deal that would allow it to sell its Opel unit. It would give control of the company's German-based subsidiary to Magna International, a Canadian auto-parts maker, which edged out Fiat in a bidding battle. Opel accounts for a huge chunk of GM's output, with just under 1.5 million cars sold in 2008. Negotiators met in Germany, where 25,000 of Opel's workers are employed. Chancellor Angela Merkel, facing elections this year, hosted all-night talks at her offices that ended at 5:30 a.m. Thursday. A U.S. Treasury official, German Cabinet members and financial advisers took part.
Under the agreement, Magna would inject $300 million into Opel on Tuesday to keep the firm afloat, a source involved in the talks said. GM would retain 35 percent of the company, unions would get 10 percent and Magna would get a controlling stake, the source added. The German government would provide about $2 billion in short-term financing, according to a Bloomberg News report. One key term responds to U.S. concerns that Opel could compete against its erstwhile parent corporation in the United States. The deal would prohibit Opel from selling cars or opening plants in the United States, the source said.
Government Taps Bailout Contractors With Conflicts of Interest
As the Wall Street bailout nears its first anniversary, the controversy over giving public money to private banks has become public knowledge. But an equally risky aspect of the financial rescue has flown largely under the radar: the government’s reliance on private contractors – many with potentially significant conflicts of interest – to help revive the stalled economy. The Treasury Department knows that the law firms and investment managers hired to aid its salvage effort could be influenced by their ties to bailed-out banks; in fact, the department released a rule in January aiming to mitigate the problem.
That rule, however, has raised questions from watchdogs by asking contractors to identify and police their own conflicts of interest. And a careful review of bailout hiring agreements reveals an inconsistent set of rules applied to the types of private deals that contractors can make while serving as agents of the U.S. government. "It’s just a wonderfully closed circle," Simon Johnson, former chief economist at the International Monetary Fund and leading critic of the bailout, said in a recent interview.
"They’ll sell you on this line that there’s a scarcity of talent," so contractors must be plucked from Wall Street and remain part of its culture, Johnson continued. "It’s the same argument they’re using to explain why they’re appointing a Goldman Sachs lobbyist as [Treasury Secretary Tim] Geithner’s chief of staff. That’s part of how the club thinks." Can these contractors guide the bailout with the public interest in mind while simultaneously courting bailout-related business for themselves? It’s tough to say, but imposing greater transparency requirements is crucial, according to more than a dozen financial and legal experts interviewed for this story.
Right now, even as more of these lawyers and financiers are helping with the financial rescue, less is being disclosed about their handling of taxpayer-owned assets. Investment managers are setting values for securities that their companies may also hold privately, while law firms are approving government aid for companies they still represent in certain cases – but the public remains almost completely in the dark. Consider the case of AllianceBernstein. Like many investment management firms, Alliance did not have a good 2008. Assets dropped by more than 40 percent, net income fell by one-third and the company was forced into its first layoffs in 35 years.
Yet things were looking up by late April, thanks to the Treasury. Alliance was one of three firms the department chose to monitor the assets and debt of banks receiving bailout. Its contract involves Alliance in highly sensitive issues, from executive pay limits to the execution of government stock warrants. "We expect this to be an attractive proposition from a profitability point of view," CEO Peter Kraus told analysts as he announced the news. But Alliance executives also told analysts that the firm plans to apply for the Treasury’s Public-Private Investment Program, which could allow the firm to leverage its look at banks’ balance sheets into profits down the road.
If Alliance joins the PPIP, the company could partner with private investors to purchase the same types of mortgage-backed securities that it’s also handling for the government – thus earning a double windfall when the market value of those mortgage-backed securities increases. Neil Barofsky, the special inspector general for the Troubled Assets Relief Program warned of this potential conflict in his most recent report to Congress: "transactions in these frozen markets will have a significant impact on how any particular asset is priced in the market. As a result, the increase in the price of such an asset will greatly benefit anyone who owns or manages the same asset, including the [public-private program] manager who is making the investment decisions…"
Under the Treasury’s conflict-of-interest rule, Alliance and its fellow contractors (FSI Group and Piedmont Investment Advisors) are only required to step aside from managing assets owned by a bailed-out bank if that bank’s assets provided more than 5 percent of the firm’s most recent annual revenue. The contracts signed by Alliance, FSI and Piedmont, posted on the Treasury’s website, acknowledge six potential conflicts of interest and suggest how each can be worked around. Yet Treasury did not reveal which banks’ assets were given to which contractor, or even whether the investment managers are doing anything with the securities they’re being paid to watch. An Alliance spokesman declined to comment when asked how the firm is working out any conflict-of-interest risks it may face.
"The whole idiocy of this," Chris Whalen, co-founder of the banking risk-management firm Institutional Risk Analytics, said during a recent conversation, "is that the administration would even have these firms pretending to manage this stuff, giving them subsidized deals." Alliance is now poised to value assets once held by Merrill Lynch – the same company that paid Alliance CEO Kraus a $25-million bonus for three months of work. Kraus’ bonus, distributed just before Merrill was sold to Bank of America, was part of a $3.6 billion pot that is now under investigation by the New York attorney general and the Securities and Exchange Commission. A Treasury spokesman did not respond to several requests for comment on conflicts of interest, but did point to its January regulation as evidence of the government’s action on the issue and awareness of possible problems.
The risk of conflicts of interest is not limited to asset managers sitting on toxic mortgage-backed assets. Simpson Thacher & Bartlett, the prominent New York law firm chosen in October to be the chief legal adviser to the TARP, has a long history of shepherding mergers and acquisitions in the banking industry, particularly during the housing bubble’s halcyon days. Before the bailout began, Simpson Thacher had advised Washington Mutual on avoiding insolvency and the board of AIG on winning help from the Federal Reserve. Come the crash, however, the law firm was put in charge of setting terms for the government’s investment in major banks – on the opposite side of the table from the banks it once helped make mighty.
Simpson Thacher’s original contract, signed in October, did not mention the need to work around or waive conflicts. When the law firm agreed to expand its bailout work in February, however, that pact stated that Treasury "HAS NOT WAIVED any potential conflicts of interest" – giving the government room to make case-by-case decisions if problems arose. Yet the law firm’s contract, however, appears to allow an inherent conflict of interest: The Treasury cleared Simpson Thacher to continue representing private clients participating in "other programs in support of the [bailout]" – non-TARP initiatives such as the PPIP or the Term Asset-Backed Securities Loan Facility.
In fact, Simpson Thacher senior partner Lee Meyerson, whose pivotal role in the TARP made him American Lawyer’s No. 4 "Dealmaker of the Year," continued to advise private-equity clients on how to snap up failing banks while he worked on the bailout. When Florida’s BankUnited collapsed last month, costing the government $4.9 billion, three private equity firms represented by Meyerson swooped in to take over the property. Simpson Thacher did not respond to repeated requests for comment about the language in its Treasury contract and on its internal mechanisms to prevent conflicts of interest.
"These firms are making up the rules [of the bailout] and advising private clients about the rules," Yale Law School professor Jonathan Macey, a banking specialist and author, said in a recent interview. "The problem is, No. 1, this means we lose the appearance of fairness," he continued. "And, No. 2, there’s a very strong inclination for the people making up the rules to be sympathetic to their own clients as opposed to other people’s clients when they’re writing the rules." Davis Polk & Wardwell, another law firm turned Treasury contractor, was so closely involved in drafting Geithner’s proposal for "resolution authority" to wind down non-bank institutions that when members of Congress received the Obama administration’s draft proposal on the topic, it still bore Davis Polk’s computer signature. Ironically, Davis Polk turned down a chance to apply for Simpson Thacher’s first bailout contract – citing the risk of conflicts of interest.
The Treasury is not the only bailout administrator that has come to lean on contractors. BlackRock, which manages a $1.3 trillion asset portfolio that ranks largest in the world, was hired for three no-bid deals in October by now-Treasury Secretary Geithner, then president of the Federal Reserve Bank of New York. Geithner assigned BlackRock to supervise toxic assets once held by Bear Stearns, as well as those held by AIG – deals worth at least $71.3 million over three years. Yet BlackRock, like Alliance, plans to participate in the Treasury’s PPIP, again offering the firm the possibility of benefits based on its knowledge of AIG and Bear’s exposure.
Lawmakers in both parties have raised concerns about BlackRock’s conflicts, as The New York Times reported earlier this month. But Charles Hallac, a founding partner of BlackRock and the head of its risk-advisory arm, BlackRock Solutions, said such concerns are unfounded. No BlackRock analyst managing the AIG and Bear holdings will take part in the PPIP, or "any kind of program where they’re using government funds to make money for clients, Hallac explained in a telephone interview. BlackRock was selected because of its expertise in separating its investment business from its risk-advisory business, Hallac added. "We didn’t want to show this to anybody who was going to try to make money in the markets with this information. So we created a separate team within BlackRock Solutions to just manage the Fed portfolio."
However, he said some employees in line to work on the PPIP have helped with a separate Fed program that involves buying up mortgage-backed securities. The financial world often uses the anachronistic phrase "Chinese wall" – a phrase that came into wide use after the 1929 stock market crash – to describe an investment firm’s internal efforts to isolate compromising information. To a certain extent, then, the debate over conflicts of interest at BlackRock and other firms depends on whether you believe Chinese walls can survive in the age of BlackBerries and blogs. "Let’s be honest, it’s bullshit. They don’t exist," Barry Ritholtz, the CEO of the independent research firm Fusion IQ and the creator of the Big Picture financial blog, said in an interview. "They’re a theoretical, abstract legal construct that looks and sounds good when you’re developing legal constructs."
One hedge fund manager, who requested anonymity in order to speak candidly, said he is more concerned bailout contractors’ access to Geithner and Federal Reserve Chairman Ben Bernanke. "The public-private cooperation that’s going on – not just in the PPIP – ought to be very unsettling to people," the hedge-fund manager said. "These guys are on the phone with Geithner, Bernanke, with everybody who matters and is setting policy in Washington. And at the same time, they’re trading their own books."
While bias among these government contractors is undeniably problematic, some experts asserted that it is also unavoidable. As this argument goes, if the government ruled out firms that did significant business with a bailed-out bank, there would be no one left to hire. "Because Treasury doesn’t have the in-house expertise, it’s inevitable that they would have to contract out," said Campbell Harvey, a professor of international business at Duke University. "It’s also inevitable that there will be conflicts of interest. If you’re qualified, then almost by definition, there’s a conflict of interest."
William Seidman, former chairman of the Resolution Trust Corporation (RTC), which led the recovery effort after the 1990s savings-and-loan crisis, offered a sharp contrast to Treasury’s current opaque bailout contracts. Seidman said he racked up large auditing bills to ensure that his contractors were complying with conflict-of-interest rules. "Occasionally we had transactions that we didn’t make public for some sort of public-policy reason, but … most we had to report to Congress," he said in an interview shortly before his death on May 13. "It was expensive," Seidman added, "but the program had so much potential for fraud or conflict that we thought it was essential."
Financial Overhaul Raises Questions
Obama administration officials are debating whether to pare some of their more ambitious ideas to revamp oversight of financial markets, in a nod to the political difficulties of pushing through sweeping changes, people familiar with the process say. At issue is whether officials want to reorganize the basic structure of oversight, or whether they will settle for new rules at existing agencies that would accomplish the same goal. Many of the ideas under consideration could trigger a turf war on Capitol Hill and among government agencies. People involved in the process said that as a result, the plan could still break in several different directions.
Among the ideas being actively discussed are a new agency to oversee banks, as well as a merger of the Securities and Exchange Commission and Commodity Futures Trading Commission. House Financial Services Committee Chairman Barney Frank (D., Mass.) has already said he doesn't think such consolidation will happen, and his support would be integral to any major policy shift. White House and Treasury officials are focused first on determining rules in areas such as banks' capital requirements before they choose which battles to fight over which agency does what. A final decision on a plan to present to Congress is expected in several weeks, and Obama administration officials are still hopeful that lawmakers could approve a package by the end of the year.
The administration is under pressure to reorganize the fragmented structure of bank supervision. The Obama administration is expected to call for the Office of Thrift Supervision -- which regulates thrifts and has faced heavy scrutiny for its supervision of American International Group Inc., Washington Mutual Inc. and IndyMac Bancorp Inc. -- to be either abolished or folded into a larger regulator with broader powers. OTS officials have said that all agencies made mistakes during the financial crisis. But John Reich, who stepped down as OTS director several months ago, said, "The reality is in today's time, with the decline in the number of federally chartered thrift institutions, it is going to create in the foreseeable future some resource challenges for the OTS that are going to place a significant strain on its budget in future years."
Other areas are more ticklish. Treasury officials want the Federal Reserve to become a financial-market supercop with powers to oversee broader risks to the economy. Some top lawmakers have suggested that this would be a tough sell politically, because it would centralize too much power in the Fed. To address this, Treasury officials have discussed giving a group of top regulators the power to consult about systemic risks to the economy. The Fed would have power to enforce these policies. It is unclear how the council of regulators and the Fed would share powers.
The administration is also weighing the creation of a financial-products regulator, which could strip power from the SEC. That idea, which became public last week, prompted an immediate rebuke from SEC Chairman Mary Schapiro, who has been battling to preserve her agency's clout. Cognizant of the political difficulties in merging the SEC and CFTC, the administration earlier this month said it wanted to bolster each agency's oversight of over-the-counter derivatives rather than shifting oversight to one agency.
On Capitol Hill, Rep. Frank has clashed with Rep. Collin Peterson (D., Minn.), chairman of the House Agriculture Committee, over which of the agencies should regulate credit-default swaps. The agriculture committees in Congress traditionally oversee the CFTC and fiercely guard that authority. House Democrats are waiting to see what the administration puts forward before drafting legislation. The House Financial Services Committee is planning a series of hearings beginning in June to vet investor and consumer protection issues, as well as the structure of executive compensation plans at financial institutions.
U.S. Gold, Going or Completely Gone?
This past Tuesday evening I found myself reading a snippet from Enrico Orlandini’s, DTAnalysis [DT stands for “Dow Theory”] - where Mr. Orlandini opined,
"I believe the [U.S.] trade gap will surprise people and continue to shrink and may even turn positive for the first time in decades. Unfortunately, this will only facilitate the flow out of the US dollar and bond and that’s not a good thing.”
With Enrico being “technically oriented” and me being more fundamentally oriented, I recall how I intuitively did not believe the U.S. Census Bureau’s published U.S. Trade numbers and how I might go about proving that they were falsified:
My primary field of research is focused on precious metals; namely, gold and silver, and I know that recent reports indicate that various countries are contemplating repatriating their sovereign gold reserves. Further, the U.S. Treasury and Federal Reserve have balked at GATA’s recent Freedom of Information [F.O.I] requests and demands for an independent, verifiable audit of the Sovereign U.S. Gold Reserve – thus a little bit of forensic investigation of U.S. gold exports was in order.
I just needed to figure out how to access the relevant numbers.
The United States Geological Survey [USGS] publishes monthly Mineral Industry Surveys designed to provide a macro-import/export-overview of the U.S. precious metals [gold] industry. The data in these surveys is supplied to the USGS principally by industry trade groups such as the World Gold Council as well as official sources like the U.S. Census Bureau:
source: USGS Feb. 09 Mineral Industry Survey
I took special note of how 2,920 metric tonnes of “Gold Compounds” had been exported from the U.S. in 2008. This number seemed BIGGER than BIG – because the U.S is only alleged to have stockpiles of sovereign gold of 8,100 metric tonnes while annual U.S. mine production of gold is roughly 228 metric tonnes. This figure of 2,920 metric tonnes is equal to 36 % of all alleged sovereign U.S. gold stocks or more than 14 times annual U.S. gold mine production. So, I was left wondering, “just what is/are ‘gold compounds’?
I contacted the USGS and queried a qualified individual [who had working knowledge of this data stream] about the definition of “Gold Compounds”. I was told that, according to the U.S. Census Bureau – who supplies not only the definition but the actual reported numbers, gold compounds were typified by industrial type products containing low percentages/amounts of actual gold content – like gold paint.
I then reasoned with the USGS person, if such were the case, why would U.S. exports have increased in 2008 to nearly 3,000 metric tonnes [when the Global Economy was slowing and the U.S. Dollar was strong] from 2007, when U.S. exports totaled approximately 2,000 metric tonnes [when the U.S. Dollar was weaker and the Global Economy was booming]? I noted that this was counter-intuitive and made no fundamental economic sense:
source: USGS Feb. 08 U.S. Mineral Industry Survey
When confronted with reason, the individual for the USGS agreed that the data, as published, did not make logical sense and explained that the U.S. Census Bureau was questioned as to the veracity of this particular line item in their data.
I asked the USGS employee if the gross weight or the gross value [not shown in the table but known to the USGS] of the “Gold Compounds” was queried.
The individual confirmed that their query to the U.S. Census Bureau dealt with the gross value being assigned to these exported goods.
I responded rhetorically, “being an issue of gross value – then let me guess that the U.S. Census Bureau is assigning an astronomically high value to these goods. Such a high value would be COMPLETELY INCONSISTENT with what the U.S. Census Bureau claims these items are- namely, industrial goods. The values being reported would be more in line with these goods being gold bullion or equivalents”.
The individual from the USGS confirmed my reasoning when he responded, “that would be CORRECT”.
Ladies and gentlemen, the foregoing data and discussion with the USGS individual is proof that the United States of America [or criminal elements within its Treasury and/or The Federal Reserve] “HAS” surreptitiously exported physical gold - and continues to do so. It is confirmed. The exports are likely coin melt [or gold compound, if you prefer] from the great gold confiscation back in 1933; or alternatively, this terminology is being used to disguise physical repatriation of foreign gold bullion formerly on deposit with the N.Y. Federal Reserve. Such repatriations are recorded as “exports” in U.S. Trade data. Public acknowledgement of same would scream like a siren call that the global financial community has totally lost faith in American financial stewardship – hence the need to do so on the sly.
This is being done in a vain/desperate/losing battle to satiate “off the charts” global demand for physical gold bullion arising from the profligacy of the American Empire’s two previous Administrations and to prop up the failing U.S. Dollar.
Over the course of 2007 / 2008 – more than 5,000 metric tonnes of “Gold Compounds” have been exported from the United States of America representing more than 62 % of reported sovereign U.S. gold reserves or about 24 times annual U.S. mine production.
5000 metric tonnes = 160 753 733 troy ounces [$128 billion+ at today’s prices]
The fact that industry funded trade groups like the World Gold Council and other professional gold consultancies, who shall remain nameless, have not reported these facts negates their credibility and illuminates them as dupes or willing shills. These fraudulent or ignorant organizations deserve to be shuttered and disbanded.
U.S. Trade Data Is Bogus
The value of these bullion exports significantly “skew” the doctored U.S. Trade numbers [coincidentally, also prepared by the U.S. Census Bureau] in an attempt to convey a picture that the U.S. financial position is improving.
The reality is this, when gold exports are backed-out, the U.S. Trade picture is decidedly worse.
The United States of America claims to possess a little more than 8,100 metric tonnes of sovereign gold stored principally at Fort Knox, Kentucky, West Point, N.Y., the Denver Mint and The New York Fed. The sovereign U.S. gold reserve has not been independently audited since the 1950’s during the Eisenhower Administration. GATA’s freedom of information requests are all about ensuring that the 8,100 metric tonnes of U.S. sovereign gold is still owned by the U.S.
In April, 2008 the Federal Reserve responded to GATA’s request, releasing hundreds of pages of worthless information with significant portions redacted. They also claimed that they were withholding hundreds of additional pages of documents. The status of the withheld documents is currently under appeal.
These stonewalling tactics – withholding details - are eerily similar to those employed by Messer’s Bernanke, Paulson and Geithner refusing to divulge frank details as to “who” the beneficial recipients were of TARP and TALF funds.
No credible audit of the Sovereign U.S. Gold Reserve will EVER be allowed – because the gold is simply not there.
Hope you have some.
Northern Rock risk revealed in 2004 'war games'
Banking regulators identified Northern Rock as the weak link in Britain’s banking system during secret "war games" held as long ago as 2004, the Financial Times has learned. The risk simulation planning, conducted by the Financial Services Authority, the Bank of England and the Treasury, made clear the systemic risks posed by Northern Rock’s business model, and its domino effect on HBOS, then the UK’s largest mortgage lender. The revelation is at odds with the notion that no one could have foreseen the September 2007 collapse of Northern Rock or the subsequent rescue of HBOS, which was sold to Lloyds Bank.
The FT has found the troubled lender and HBOS were at the centre of a 2004 war game that regulators held to test how banks would cope with sudden turmoil in mortgage markets and the withdrawal of the money from foreign banks on which Northern Rock’s business model relied. Regulators chose that scenario because they were worried about the growing dependency of banks such as Northern Rock and HBOS on such funds rather than on stable retail deposits. Even though the exercise revealed the banks’ vulnerability, the regulators concluded they could not force the lenders to change their practices, according to several people familiar with the matter.
It was felt that it was too hard to say Northern Rock’s business model was excessively risky, and in any case banks following that strategy were profitable and growing, though the Bank did warn of the growth in wholesale deposits repeatedly in its financial stability reports. However, as wholesale lending markets dried up in mid-2007, the war game’s findings proved eerily prescient. Both banks sustained irreparable damage beginning in 2007 as wholesale lending markets seized up and mortgage-backed securities became unsaleable. Regulators on Friday confirmed that Northern Rock and HBOS were central to the war game. But spokespeople for the FSA and the Bank of England said the exercise was focused on uncovering weak regulatory practices rather than predicting individual bank failure.
Mervyn King, Bank governor, alluded to the war games in a 2005 interview with the FT, saying the Bank had looked at a situation in which "there could be a problem in a particular institution which isn’t terribly big, which may for completely unpredictable reasons turn out to pose a liquidity problem to a very big institution". But until now no one has known the name of any banks used in the exercise. The Financial Times sought details in early April under the Freedom of Information Act from the Bank and the Treasury, but those requests have so far been unsuccessful.
EU Plans Fresh Strike on Microsoft
Frustrated with past efforts to change Microsoft Corp.'s behavior, European Union regulators are pursuing a new round of sanctions against the software giant that go well beyond fines. The regulatory push is focused on a longstanding complaint against Microsoft: that it improperly bundles its Web browser with its Windows software. Rather than forcing Microsoft to strip its Internet Explorer from Windows, people close to the case say, the EU is now ready to try the opposite measure: Forcing a bunch of browsers into Windows, thus diluting Microsoft's advantage. The sanctions would come from an EU investigation that began last year. In a sign of how rapidly the case is progressing, these people say, the possible penalty has emerged as a key focus in discussions between the parties.
The potential action would be a sharp parting blow by Europe's competition commissioner, Neelie Kroes, as she enters the waning months of a term marked by aggressive enforcement. This month, Mrs. Kroes hit semiconductor maker Intel Corp. with a record antitrust fine of $1.48 billion. The EU hasn't made a final ruling on Microsoft, and likely won't for at least several weeks. An EU spokesman says any sanction against Microsoft "would be based on the fundamental principle of unbiased choice." A spokesman for Microsoft says it is committed to "full compliance" with EU law. The EU has stacked up more than $2 billion in fines against Microsoft since 2004. Mrs. Kroes has taken a hard line -- calling out Microsoft as not compliant and more than doubling the original penalties.
Still, all of the fines have outwardly changed little about how the software giant does business.
The EU's bid in 2004 to separate Microsoft's Media Player multimedia software from Windows is widely viewed as a timid solution that failed. Now, emboldened by a 2007 court ruling that upheld the 2004 case and confirmed the EU's wide discretion, regulators are inclined to go further. People close to the case say EU regulators are inclined to demand a so-called ballot screen that would present a new computer user with a choice of browsers to install, and the option to designate one of them as a default. Regulators have also signaled that they may require Microsoft to ensure contractually that computer manufacturers keep the ballot screen on machines they ship.
In discussions with regulators and in confidential filings made to the EU this week, competing browser makers are also urging a requirement that Microsoft offer alternative browsers to millions of existing Windows users via an automatic download, these people say. "To be effective, a remedy must present users with a real choice in browsers, and make it easy for them to execute that choice," says Julia Holtz, senior competition counsel in Europe for Google Inc., which makes the Chrome browser. The EU sent preliminary charges to Microsoft in January. In a securities filing that month, the company said the EU might "obligate users to choose a particular browser when setting up a new PC" and require manufacturers to "distribute multiple browsers on new Windows-based PCs."
The EU is wrapping up the collection of written submissions from Microsoft, from Opera Software ASA, a small Norwegian browser maker whose complaint sparked the case, and from a constellation of third parties, which were due this week. A ruling could arrive in the coming months, before Mrs. Kroes, who has long made plain her distaste for Microsoft's conduct, leaves office and a new set of European commissioners are seated. Any ruling would almost certainly face years of appeals in EU courts.
In its legal filings to the EU, Microsoft questioned whether the EU can legally require it to offer other makers' browsers, people familiar with the matter say. It has also argued that PC users are capable of downloading other browsers like the Mozilla Foundation's Firefox and Google's Chrome, these people say, and noted that alternate browsers have recently been gaining users while Internet Explorer's market share is falling. Internet Explorer's share among Web surfers in Europe, which was above 80% a few years ago, has fallen to about 48% as of April, according to StatCounter, which tracks Web traffic. Firefox was No. 2 with 39% of the market with the balance going to Apple Inc.'s Safari, Opera and Chrome. The gulf between Internet Explorer and other browsers is wider in the U.S.
Action by the EU against Microsoft would go beyond what counterparts in the U.S. have done. The U.S. Department of Justice brought browser-bundling allegations against Microsoft in the 1990s and at one time sought to break up the company, but wound up settling the case without forcing big changes in Microsoft's practices. European law has long held that a company dominating the market for one product generally can't "tie" another product to its sales. In a key 1991 case, the European Commission -- the bloc's executive arm -- ruled that Tetra Pak, the dominant maker of machines that package milk into cartons, couldn't require that customers buy their cartons from it alone; a 1987 ruling similarly went against a maker of nail guns and nails. European courts upheld the commission in both cases.
The Media Player dispute extended the jurisprudence of nail guns and milk cartons into the world of software. Despite protests by Microsoft that the low cost of downloading lets consumers easily choose another piece of software to watch videos, the commission found in its 2004 ruling that Media Player was illegally tied to Windows. An appellate court agreed and Microsoft later dropped its legal challenge. The EU's remedy was out of the milk-carton playbook: It ordered Microsoft to sell a version of Windows without Media Player. Microsoft did, but at the same price as the full version. Not surprisingly, it barely registered any sales. In a sense, the Web browser ballot screen is the biggest legal leap the EU is taking: A requirement to carry a competitor's product is a step usually taken in cases where the competitor has limited or no access to a distribution network -- for instance, operators of electric grids who also sell electricity might be required to let other producers sell power on the grid.
Still, the EU is likely to argue that it has broad powers to fashion an effective remedy. "There's nothing in EU law that requires the remedy to be a mirror image of the infringement," says Thomas Vinje, a lawyer at Clifford Chance LLP who represents Opera Software. It isn't clear which browsers would be listed on the ballot screen, nor how the browsers would be installed. Competitors are arguing that the EU should insist that Microsoft "preload" Windows with other browsers so users don't have to download the software. The competitors say many users who attempt to download a new browser quit midway through.
Also unclear is how, or whether, the EU could insist that computer manufacturers preserve the ballot screen on Windows before shipping the machine. That concept has raised hackles with some smaller computer manufacturers. "What you are imposing on them -- against their will -- is a customer-support and technical-support burden," says Lars Liebeler, a lawyer for CompTIA, a trade association that represents some PC maker and has filed papers on Microsoft's side with the EU. (Microsoft is a paying member of CompTIA.) "This is a remarkable step by the commission, to now take over the process and mandate what can be put on a computer," Mr. Liebeler adds.
A History of Combat
Key dates in the EU's antitrust battles with Microsoft Corp.
March 24, 2004: EU says Microsoft broke antitrust law by denying technical information to competitors and bundling its Media Player software with Windows, levies €497 million fine.
July 12, 2006: Microsoft is fined €280.5 million for non-compliance with the ruling.
Sept. 17, 2007: EU's Court of First Instance upholds the 2004 ruling, in a blow to Microsoft.
Oct. 22, 2007: Microsoft agrees to drop any further appeal.
Dec. 13, 2007: Norwegian browser maker Opera Software ASA files complaint over the ties between Internet Explorer and Windows.
Feb. 27, 2008: Microsoft is fined €899 million for non-compliance with the 2004 ruling.
Jan. 15, 2009: EU sends preliminary charges to Microsoft, saying it believes the inclusion of Internet Explorer in Windows is illegal.
World Bank's Zoellick Warns Stimulus 'Sugar High' Won’t Stem Unemployment
World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the "real economy" and rising joblessness threatens to set off political unrest across the globe. "While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working," Zoellick said in an interview yesterday with Bloomberg Television’s "Political Capital with Al Hunt." "When unemployment increases, that’s probably the most political combustible issue."
Zoellick’s caution is a contrast with private economists, who are raising their outlooks for growth from India to China as stimulus measures take effect. The biggest developed and emerging nations have committed spending increases and tax cuts totaling 2 percent of their combined economies, a level the International Monetary Fund recommended to end the recession. The World Bank is monitoring private companies’ abilities to roll over "a lot" of debt in the developing world, Zoellick said. At the same time, he played down risks to the global recovery posed by rising U.S. Treasury yields, saying that "in terms of absolute levels, rates are still pretty low for most players."
Zoellick also said that the dollar will remain the world’s main currency "for a long time," and noted that investors flocked to the dollar as a haven during the worst parts of the financial crisis. Zoellick, 55, took the helm of the World Bank in 2007, and served as U.S. deputy secretary of state and chief trade negotiator in the Bush administration, and in positions at the Treasury Department under President Ronald Reagan. At State, he played a central role in formulating policy toward China, before departing government for a stint at Goldman Sachs Group Inc.
Chinese officials’ comments calling for a new international currency have been "over-read" and may be more of an indication of the nation’s desire to free up its capital flows, Zoellick said. He added that China’s stimulus has helped stoke growth in the nation that "may even beat expectations a little bit." China this year approved a $585 billion (4 trillion yuan) stimulus plan, and the U.S. is now implementing a $787 billion package of tax cuts and spending that President Barack Obama signed in February. "Right now, the international system appears to have a sufficient amount of stimulus," Zoellick said. "The danger is if you spend too much government money, you create a different problem."
Benchmark 10-year U.S. Treasury yields have climbed about 1.25 percentage point so far this year to 3.46 percent, reflecting in part some investors’ concerns at faster inflation and record budget deficits. Rates on 30-year fixed mortgages exceeded 5 percent. Still, Zoellick noted that in recent days there’s been "unwinding" of some of investors’ concerns. "In terms of financial markets, I think people have broken the fall," Zoellick said. What’s needed now is to "focus on how to recapitalize banks and deal with the bad assets -- that’s a story that’s still going forward." In the U.S., Treasury Secretary Timothy Geithner aims to use money from the $700 billion financial-rescue fund to help kick-start a $1 trillion effort to remove devalued loans and securities from banks’ balance sheets. The first transactions for mortgage securities aren’t expected to start for months.
Eastern Europe is one region in particular danger of a further economic decline, the World Bank president said. "The nature of integration over the past 20 years has been unwound somewhat," Zoellick said. He warned about "the danger of unemployment leading to protectionism as politicians sort of feel they run out of different levers." Eastern European nations have received more than $90 billion in international aid since September to prevent the countries shaken by the financial crisis from defaulting. Nations that have received bailouts include Romania, Hungary, Belarus, Serbia, Latvia and Ukraine. Credit ratings companies have downgraded the outlooks for banks in the Czech Republic, Ukraine and Kazakhstan.
Foreign lenders in Romania and Hungary pledged this month to keep doing business there to help the economies weather the economic turbulence. Romanian banks, about 90 percent foreign- owned, agreed to boost their capital by a total of 1 billion euros ($1.4 billion) by March 2010 as overdue debt rises, the IMF said on May 22. Another threat is trade protectionism, which nations may resort to in order to protect their industries from the global slump, Zoellick said. "The real danger is that you get into a cycle of retaliation," he said. He estimated that 17 of the Group of 20 emerging and developing nations are considering or imposing restrictions on trade, breaking a pledge they made during an April 2 summit in London.
The World Trade Organization in March predicted a 9 percent drop in global commerce this year. China and Brazil are researching how they can conduct trade in the yuan and real, in a signal they’re seeking to reduce their reliance on the dollar. "You could -- and you’ve already seen this over the past 20 years -- have multiple currencies" used in the global system, Zoellick said. "You will see China and India playing a larger role, including in financial markets." Still, he added that "I just don’t believe it’s going to supplant the U.S. as a reserve currency."
Is Larry Summers Taking Kickbacks From the Banks He's Bailing Out?
Is Larry Summers taking kickbacks from the banks he’s bailing out? Last month, a little-known company where Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective "economy czar," has been doling out billions in bailout money to: Goldman Sachs, Citigroup, and Morgan Stanley. The banks invested into the small startup company, Revolution Money, right at the time when Summers was administering the "stress test" to these same banks.
A month after they invested in Summers’ former company, all three banks came out of the stress test much better than anyone expected -- thanks to the fact that the banks themselves were allowed to help decide how bad their problems were (Citigroup "negotiated" down its financial hole from $35 billion to $5.5 billion.) The fact that the banks invested in the company just a few months after Summers resigned suggests the appearance of corruption, because it suggests to other firms that if you hire Larry Summers onto your board, large banks will want to invest as a favor to a politically-connected director.
Last month, it was revealed that Summers, whom President Obama appointed to essentially run the economy from his perch in the National Economic Council, earned nearly $8 million in 2008 from Wall Street banks, some of which, like Goldman Sachs and Citigroup, were now receiving tens of billions of taxpayer funds from the same Larry Summers. It turns out now that those two banks have continued paying into Summers-related businesses. According to filings obtained for this story, Summers first joined the board of directors of Revolution Money back in 2006 (when it was called "GratisCard"), the same year that Summers was forced to resign as president of Harvard after his disastrous tenure. Revolution Money/GratisCard was a startup headed by former AOL chief Steve Case. Revolution Money billed itself as the Next Big Thing in online payment, "PayPal meets Mastercard," according to their own pitch.
In September 2007, Revolution Money announced that it had raised $50 million from a group of investors including Citigroup, Morgan Stanley and Deutsche Bank. Some found the investment strange even then, because normally big banks don’t get involved in seeding small startups -- that’s the domain of venture capitalists, not mega-banks. Especially not in September, 2007, when these same megabanks were Chernobyling their way into full-fledged balance-sheet meltdown. What seems clear is that at least part of Revolution Money’s success in raising funds is due to their star-studded board of directors -- which included not only Larry Summers, but also the notorious Frank Raines, the former Fannie Mae chief whom Time Magazine named to its "25 People To Blame For The Financial Crisis" list. Raines is still a board member.
Over the next year and a half, Revolution Money didn’t quite live up to its promise of competing with PayPal or Visa/Mastercard. At least some of this could be attributed to the difficulty of starting up an online credit card company in the middle of a triple-cluster credit crunch, banking crisis and recession. But there is also evidence that the company wasn’t run well. Another one of Steve Case’s "Revolution" brand startups, "Revolution Health," (which also features a star-studded board of directors including Carly Fiorina, Colin Powell, and several future-Obama Administration officials) essentially folded last autumn when it was sold to Everyday Health last September and merged into that company’s operations.
In spite of all of this, on April 6, 2009, Revolution Money announced the happy news: it had just successfully raised $42 million dollars in the most difficult market since the 1930s. The investors? Goldman Sachs, Citigroup and Morgan Stanley -- bankrupt institutions that Larry Summers was transferring billions in bailout funds to.At the very same time that these three megabanks were pouring millions into Summers’ former company, Obama’s economic team, starring Larry Summers, was subjecting these same banks to a "stress test" to decide how deep in shit these same banks really were. The banks wanted the government to fudge the results for obvious reasons -- who wants the world to know how deep of a hole you’ve dug for yourself? When the stress test results were finally released, the banks all came out with glowing reports that beat expectations and caused plenty of skepticism.
In an interview for this article, William Black, a former bank regulator who exposed the $160 billion Savings & Loan scandal and its ties to powerful U.S. Senators, remarked,"Summers wasn’t hired [by Revolution Money] for his expertise because he doesn’t have relevant expertise in this kind of credit card operation." "He’s not a techie. He doesn’t have business expertise," Black said. "So this is solely someone hired for the name and contacts because he’s politically active and politically connected. And that’s made all the more clear by the fact that Frank Raines was put on the board at a time when he was pushed out in disgrace from Fannie Mae. Why? Because of his political connections." And it worked, as the recent investment shows.
"That’s the pattern of this entity," said Black, "Which hasn’t been doing well financially and desperately needs to get money from others, and has been able to get money from banks at a time when [these same banks] largely stopped lending to productive enterprises. But with this politically-connected entity [Revolution Money], they’re happy to dump money." According to a company spokesperson, Summers resigned from the board of directors at Revolution Money this January, just three months before the banks invested. On one of Revolution Money’s main websites, Revolution Money Exchange, you could still see Summers' name still listed as a director when this story was filed
(Oddly, company filings obtained for this article show that Summers wasn’t even on Revolution Money’s board of directors in 2007-8, even though both he and Revolution Money repeatedly stated that he was on the board, and only served on GratisCard’s board in 2006, "c/o Revolution GC Holdings LLC.") Whatever the case, Summers was pushing Revolution Money as recently as last September, in an interview with Portfolio magazine: "I've enjoyed being involved with a number of smaller companies such as the Revolution Money venture, which has a potentially very exciting credit-card technology, using credit and debit technology, using the internet that, in a sense, brings together bricks and clicks by providing both a capacity for regular retail transactions and also for online."
Whether or not Summers has a personal interest in the company, it still stinks that a company where the head of the National Economic Council served on the board of until just a few months ago subsequently received millions in investment funds from banks Summers bailed out. Taxpayer dollars went into these banks, and from the banks into the Summers-connected firm, a firm he was hired onto precisely because his connections could bring in this kind of money. His involvement wasn’t just incidental—if you look at the press releases, Larry Summers’ name is always touted as part of its selling point -- one press release in 2007 refers to Summers as "Legendary."
Moreover, Summers’ longtime chief of staff, Marne Levine, who also served as Summers’ chief of staff when he was in Treasury under Clinton and again at Harvard, joined Summers at Revolution Money, serving as "Director of Product Management." Black pointed out another sleazy aspect of Revolution Money's pitch: it proudly boasted in late 2007 that it would make it easier than ever for people with low credit ratings to find access to lines of credit. In other words, Revolution Money billed itself as the ultimate ghetto loan shark. According to a 2007 press release, the same one boasting of "Legendary" Larry Summers, "Unlike most bank credit card issuers who are limited to a narrow scope of credit approval guidelines specific to their bank, RevolutionCard seamlessly utilizes multiple partners to achieve unparalleled consumer approval rates."
Nineteen months later, Larry Summers, now in control of the economy, told Meet The Press, "We need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again savings, and families are again preparing to send their kids to college, for their retirement and so forth." So once again, Larry Summers creates a problem that the rich profit from, then is put in charge of "fixing" it after vulnerable Americans have been picked clean. Whether or not the three bailed-out banks’ investment in Revolution Money last month represents some kind of bribe or kickback or even the appearance of corruption is almost secondary, because the shameless cronyism is the problem, and this is the reason why America is in the horrible mess today.
"Polite society was supposed to impose social pressures to make sure this wasn’t tolerated," Black said. "Like the old phrase about hogs being slaughtered. But now the hogs get even wealthier, even fatter." Everything about Summers, from his horrible track record in the developing world in the 1990s to the sleaze and plunder he’s overseeing in the White House should make us terrified. Hell, he even looks like some old Batman villain: Summers, whose trademark bullfrog neck was enough of a distraction before Obama brought him into the White House, has seen his gelatinous layers of neck-fat swell up like an amphibian guarding its eggs ever since he took control of the economy. Get this monster out of the White House now, before he devours us all.
Ilargi: The following article on Brooksley Born ia a few days old AND mostly repeats things already posted, but in view of its link to the Larry Summers piece above, here it it anyway.
Credit Crisis Cassandra
Friends nudge the woman who saw the catastrophe coming. They want Brooksley Born to say four words, four simple words: "I told you so." Ah, but she won't -- not at legal conferences or dinner parties. Not even in a quiet moment in her living room, giving her first interview with a major news organization since last fall's economic collapse. She just smiles, perched ever so properly in an upholstered armchair at her Kalorama home. "More coffee?" she asks daintily, changing the subject.
A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America. Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers -- the same Larry Summers who is now a key economic adviser to President Obama. She was the head of a tiny government agency who wanted to regulate the derivatives. They were the men who stopped her.
The same class of derivatives that preoccupied Born -- including the now-infamous "credit-default swaps" -- have been blamed for accelerating last fall's financial implosion. But from 1996 to 1999, when Born was the chairman of the Commodity Futures Trading Commission, the U.S. economy was roaring and she was getting nowhere with predictions of doom. So, upstairs in the big house in Kalorama, Born tossed and turned. She woke repeatedly "in a cold sweat," agonizing that a financial calamity was coming, she recalled one recent afternoon. "I was really terribly worried," she said.
Before taking office, Born had been a high-octane attorney, an American Bar Association power player, a noted advocate of feminist causes and co-founder of the National Women's Law Center. But none of that carried much weight when she crossed over into government; for all her legal experience, she was a woman who wasn't adept at playing the game. She could be unyielding and coldly analytical, with a litigator's absolute assertions of right and wrong. And she was taking on Beltway pros, masters of nuance and palace politics. She marched into congressional hearing after congressional hearing -- pin neat, always with a handbag -- but no one really wanted to listen.
The Wall Street Journal declared that "the nation's top financial regulators wish Brooksley Born would just shut up." The Bond Buyer newspaper compared her to a salmon "swimming against raging currents." That last one cracks her up. "Maybe not an inappropriate analogy!" she says. Now that she is retired and far from a position of influence, Born, 68, may be closer than ever to vindication. No longer an outlier, she attended a small, private dinner at the Treasury Department last week with current and former regulators at the invitation of Secretary Tim Geithner, according to two sources. And the Obama administration has unveiled a plan to regulate some of the derivatives she warned about, though the proposal must still get through Congress and falls short of regulating the entire over-the-counter market that kept her awake all those years ago.
Still, maybe -- just maybe -- her old friends say, the people in charge are beginning to realize what they thought all along: "the lady with the handbag was right." Born's baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan -- routinely hailed as a "genius," the "maestro," the "Oracle" -- wanted her to come over for lunch. Greenspan had an unusual take on market fraud, Born recounted: "He explained there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."
This made no sense to her. She'd spent much of the 1980s defending clients caught up in a vast conspiracy by two wealthy brothers, Nelson and William Hunt, who duped investors while trying to corner the world silver market. "After all," Born said, looking back, "I'm a lawyer, and I think the existence of fraud prohibitions is critically important." But Greenspan was insistent, she said. Finally, he said, "Well, Brooksley, I guess you and I will never agree about fraud." (Greenspan did not respond to requests for comment. Daniel Waldman and Michael Greenberger, both top aides of Born's, were briefed on the lunch at the time and independently confirmed Born's recollection of the conversation.)
That was just the beginning. By early 1998, Born had also tangled with Treasury Secretary Robert Rubin, his deputy, Summers, and Securities and Exchange Commission head Arthur Levitt, not to mention members of Congress, financial industry heavyweights and business columnists. She wanted to release a "concept paper" -- essentially a set of questions -- that explored whether there should be regulation of over-the-counter derivatives. (Derivatives are so-named because they derive their value from something else, such as currency or bond rates.) They warned that if she did so, the market would implode and predicted tidal waves of lawsuits. On top of that, Rubin told her, she didn't have legal authority to regulate the derivatives anyway.
She wasn't buying any of it, and she wasn't backing down. Arguing with the Big Boys, as it turns out, is exactly what she'd been doing her whole life. Born's father, a San Francisco welfare agency director, wanted a son. The boy would be named after his best friend, Brooks. He got a girl instead, and came up with Brooksley in "a last-minute attempt to feminize" the name, Born said. Born was "awful" at junior high school home-economics class, she said, and "a bit of a nerd." As an undergraduate at Stanford University (1957-1961), she scored high as a doctor on an aptitude test and low as a nurse. The guidance counselor chided her, she said, accusing her of only wanting to be a doctor because it paid well. "It certainly was a reflection of the society we were living in," Born recalled. "To aspire to be a doctor or a lawyer was thought to be arrogant and somewhat inappropriate."
The summer after she graduated, Born was a bridesmaid in two weddings. Some of Born's girlfriends in her Stanford graduating class were going off to be stewardesses, dental hygienists, nurses, teachers. She headed for Stanford Law School. Not long after she started law school, a male classmate confronted her. "He told me I was taking up space in the class for a man who undoubtedly was being drafted to go to Vietnam," she recalled. One law professor tried to trip her up by making her answer questions for an hour; another refused to call on her or any other women in the class. After watching the professor skip over female students on a question that had stumped all the men, she shouted out an answer. "The little girl has it!" Born remembers the professor saying.
She became the first female president of the Stanford Law Review and the first to finish at the top of a Stanford Law School class. Still, a dean told her that "the faculty stood ready to take over the law review if I ever faltered," she said. "I told him I didn't intend to falter." Traditionally, Stanford's top law student was essentially guaranteed a U.S. Supreme Court clerkship. But the law school's selection committee recommended two male students instead. She flew to Washington anyway, and had tea with Justice Potter Stewart, who told her he "wasn't ready" to have a female law clerk, Born said. Justice Arthur Goldberg, whom she'd met previously at a reception, didn't extend an offer either, but gave her a note to help her get a federal court clerkship. "It said something like, 'Of course, I can't have a woman law clerk, but she seems well qualified,' " Born recalled.
Born got her clerkship, but at the 9th U.S. Circuit Court instead of the Supreme Court, then signed on at the prestigious Arnold & Porter law firm. Marriage -- to Jack C. Landau, an attorney and journalist who was one of the founders of the influential Reporters Committee for Freedom of the Press -- followed, and a son, Nicholas, was born during a year leave for her husband's Nieman Fellowship at Harvard. Sarah Hughes, the pioneering federal judge who swore in Lyndon B. Johnson as president on Air Force One after the Kennedy assassination, had once told her that if she wanted to be a success, she "needed to give up everything in terms of a family life and dedicate myself exclusively to the law."
But, back in Washington, she had other plans. Ahead of her time, she found a solution to the work/family conundrum: She went part time at the law firm and still managed to make partner. She also became the first female head of the ABA's federal judiciary committee, which at that time played a make-or-break role in the confirmation of Supreme Court justices. In 1981, she conducted a review of President Reagan's nominee, Sandra Day O'Connor. The lawyer who couldn't get a Supreme Court clerkship because she was a woman was about to help usher in the country's first female justice and she "was thrilled."
Born was seriously considered for attorney general in 1992, but eventually lost out. Four years later, she got her consolation prize: the chairmanship of the Commodity Futures Trading Commission, an afterthought in the Washington power game that Waldman, Born's eventual general counsel there, called "a sleepy little agency."The CFTC had been created in the 1970s, primarily to regulate futures contracts purchased by farmers to hedge against price fluctuations. But by the time Born took office in 1996, futures were a much more sophisticated game. Four years earlier, the CFTC had created a giant opening for sharp market players, exempting most privately negotiated over-the-counter derivatives contracts from regulation. Waldman calls the decision "the seed" of the current financial crisis because bad bets on unregulated derivatives crippled large firms such as Bear Stearns and AIG last fall.
In the late 1990s, the seed had sprouted into a $25 trillion derivatives market and Born saw trouble coming. The mostly unregulated "dark markets" had shown signs of danger in the preceding years, such as the bankruptcy of Orange County, Calif., which lost heavily investing in derivatives. Born's agency set its sights on a highly caffeinated market. "I was very concerned about the dark nature of these markets," Born said. "I didn't think we knew enough about them. I was concerned about the lack of transparency and the lack of any tools for enforcement and the lack of prohibitions against fraud and manipulation."
Based on her lunch with Greenspan, Born knew she would run into heavy resistance. "Brooksley's view was that he didn't believe in regulation," Waldman recounted. But Born did, and she was about to demonstrate it. In early 1998, Born's plan to release her concept paper was turning into a showdown. Financial industry executives howled, streaming into her office to try to talk her out of it. Summers, then the deputy Treasury secretary, mounted a campaign against it, CFTC officials recalled. "Larry Summers expressed himself several times, very strongly, that this was something we should back down from," Waldman recalled. In one call, Summers said, "I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II," recounted Greenberger, a University of Maryland law school professor who was Born's director of the Division of Trading and Markets. Summers declined to comment for this article.
The discordant notes crescendoed in April 1998 during a tension-filled meeting of the President's Working Group, a gathering of top financial regulators that periodically met behind closed doors at the Treasury Department. At that meeting, Greenspan and Rubin forcefully opposed Born's plans, Waldman said. "Greenspan was saying we shouldn't do it," Waldman recalled. "Rubin was saying we couldn't do it." The next month, Born released her concept paper anyway. Within weeks, she was under attack. Lauch Faircloth, then a Republican senator from North Carolina, took to the Senate floor to call her "a rogue regulator." A Boston Herald column accused her of a "power grab. . . . She reached for that brass ring and in doing so cast a pall of legal uncertainty." Greenspan, Rubin and Levitt jointly urged Congress to pass a moratorium on the CFTC regulating over-the-counter derivatives.
With emotions running high, Born was summoned to the office of House Banking Chairman Jim Leach, a Republican from Iowa, to meet with top officials from the Fed and the Treasury. Born raced to Capitol Hill from the bedside of her daughter, Ariel Landau, then 27, who was about to undergo knee surgery. "The feelings in the room were very tense," recalled Leach, who said he felt the CFTC was too small to govern over-the-counter derivatives and wanted derivatives moved to clearinghouses regulated by the Fed or the Treasury. "In my time in public life, I have never seen the executive branch so bifurcated. You had a feeling that the Fed and the Treasury didn't have a great deal of respect for what the CFTC was made of."
Also, "There were some very profound personality clashes between Rubin and [Born], and Greenspan and her," Leach said. "They felt, I think, that they understood finance better than she did." Barbara Holum, who was a CFTC commissioner at time, said Born irreparably damaged the agency's reputation by releasing the concept paper without achieving a consensus. "They didn't trust her anymore; it was a matter of style, not the regulatory approach," Holum, now retired, said recently. "When she left the CFTC, the agency was back in good graces." Born's supporters, though, said she was only exercising her agency's independence and that the other regulators simply dismissed her.
"She was not a charming, motherlike figure, which may have been what they were looking for," Greenberger said. "Her professionalism, and maybe, her lack of bonhomie had been interpreted as stridency." "If you could fault her for anything, it's not recognizing the politics," Waldman said. "She assumed the force of her ideas were going to be sufficient." But then, in September 1998, a huge hedge fund that had bet heavily on derivatives -- Long-Term Capital Management -- nearly failed and had to be bailed out by a group of banks. Here was a living example of Born's prophecy. Even Leach, who supported the moratorium on CFTC regulatory action, introduced Born at a hearing by saying, "You're welcome to claim some vindication, if you want."
Born responded: "I certainly will not do so." But she went on to tell the committee that the Long-Term Capital debacle "should serve as a wake-up call about the unknown risks in the over-the-counter derivatives market." No one woke up. That same month, Congress passed the moratorium. Born says they were "muzzling an independent agency." Two months later, Born announced that she would not seek reappointment to a second term. She left office in April 1999. She has never said she resigned because her regulatory efforts were thwarted; she says even today that she merely wanted to return to practicing law. Either way, she was finished as a government regulator and so was any hope that light would come to the Dark Markets.
Born, who retired in 2003, is now more likely to fixate on the weather report -- ever looking for good sailing conditions -- as the financial world. She and her second husband -- a retired Arnold & Porter partner named Alexander Bennett -- split time between Washington and a summer home on Squirrel Island, Maine, and keep a 32-foot Morris sailboat and a 28-foot powerboat in Galesville, Md. She maintains a little office at Arnold & Porter, where she tinkers with ABA projects, such as a sprawling oral history of women in the law. Almost every week, it seems, someone is giving her props on Capitol Hill. At a recent hearing, Democratic Sen. Maria Cantwell, of Washington state, pointed out that Summers had opposed Born's effort to regulate over-the-counter derivatives.
"There's a few people in the administration who still can't say that it was a mistake, and those are the same people, I think, who ar e slow-walking, thinking we're all going to forget about this regulatory reform that is needed," Cantwell said recently. "I can assure you that we're not going to forget . . . my patience is running out with the administration." Born keeps informed, but she has other concerns, bird-watching jaunts and trips to Antarctica to plan, mystery novels to read, four grandchildren to dote on. "I'm very happily retired," she says. "I've really enjoyed getting older. You don't have ambition. You know who you are." Sometimes this woman -- whose mother always made her wear white gloves when they went downtown -- doesn't bother dyeing her hair, letting it go gray.
"I go through phases," she said one afternoon, smiling and drawing a thin, small finger across her head. "I was just looking in the mirror this morning and thinking, 'Maybe it's time.' " Last week, with her hair colored and the gray gone, she traveled to Boston to receive the John F. Kennedy Profiles in Courage award. Finally, though perhaps too late, everyone wanted to listen to Brooksley Born. She once again warned about the danger of Dark Markets, now grown to $680 trillion of notional value, according to the Bank for International Settlements -- "more than 10 times the amount of the gross national product of all the countries in the world. "If we fail now to take the remedial steps needed to close the regulatory gap," Born said, "we will be haunted by our failure for years to come." All during her spotlight turn at the John F. Kennedy Library, of course, she clutched a handbag.
Manipulation: How Markets Really Work
Wall Street's mantra is that markets move randomly and reflect the collective wisdom of investors. The truth is quite opposite. The government's visible hand and insiders control markets and manipulate them up or down for profit - all of them, including stocks, bonds, commodities and currencies.
It's financial fraud or what former high-level Wall Street insider and former Assistant HUD Secretary Catherine Austin Fitts calls "pump and dump," defined as "artificially inflating the price of a stock or other security through promotion, in order to sell at the inflated price," then profit more on the downside by short-selling. "This practice is illegal under securities law, yet it is particularly common," and in today's volatile markets likely ongoing daily.
Why? Because the profits are enormous, in good and bad times, and when carried to extremes like now, Fitts calls it "pump(ing) and dump(ing) of the entire American economy," duping the public, fleecing trillions from them, and it's more than just "a process designed to wipe out the middle class. This is genocide (by other means) - a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts."
Fitts explains that much more than market manipulation goes on. She describes a "financial coup d'etat, including fraudulent housing (and other bubbles), pump and dump schemes, naked short selling, precious metals price suppression, and active intervention in the markets by the government and central bank" along with insiders. It's a government-business partnership for enormous profits through "legislation, contracts, regulation (or lack of it), financing, (and) subsidies." More still overall by rigging the game for the powerful, while at the same time harming the public so cleverly that few understand what's happening.Market Rigging Mechanisms - The Plunge Protection Team
On March 18, 1989, Ronald Reagan's Executive Order 12631 created the Working Group on Financial Markets (WGFM) commonly known as the Plunge Protection Team (PPT). It consisted of the following officials or their designees:
- the President;
- the Treasury Secretary as chairman;
- the Fed chairman;
- the SEC chairman; and
- the Commodity Futures Trading Commission chairman.
Under Sec. 2, its "Purposes and Functions" were stated as follows:
(2) "Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
- the major issues raised by the numerous studies on the events (pertaining to the) October 19, 1987 (market crash and consider) recommendations that have the potential to achieve the goals noted above; and
- ....governmental (and other) actions under existing laws and regulations....that are appropriate to carry out these recommendations."
In August 2005, Canada-based Sprott Asset Management (SAM) principals John Embry and Andrew Hepburn headlined their report on the US government's "surreptitious" market interventions: "Move Over, Adam Smith - The Visible Hand of Uncle Sam" to prevent "destabilizing stock market declines. Comprising key government agencies, stock exchanges and large Wall Street firms," this group "is significant because the government has never admitted to private-sector membership in the Working Group," nor is it hinting that manipulation works both ways - to stop or create panic.
"Current mythology holds that (equity) prices rise and fall on the basis of market forces alone. Such sentiments appear to be seriously mistaken....And as official rhetoric continues to toe the free market line, manipulation has become increasingly apparent....with the active participation of selected investment banks and brokerage houses" - the Wall Street giants.
In 2004, Texas Hedge Report principals Steven McIntyre and Todd Stein said "Almost every floor trader on the NYSE, NYMEX, CBOT and CME will admit to having seen the PPT in action in one form or another over the years" - violating the traditional notion that markets move randomly and reflect popular sentiment.
Worse still, according to SAM principals Embry and Hepburn, "the government's unwillingness to disclose its activities has rendered it very difficult to have a debate on the merits of such a policy," if there are any.
Further, "virtually no one ever mentions government intervention publicly....Our primary concern is that what apparently started as a stopgap measure may have morphed into a serious moral hazard situation."
Worst of all, if government and Wall Street collude to pump and dump markets, individuals and small investment firms can get trampled, and that's exactly what happened in late 2008 and early 2009, with much more to come as the greatest economic crisis since the Great Depression plays out over many more months.
That said, the PPT might more aptly be called the PPDT - The Plunge Protection/Destruction Team, depending on which way it moves markets at any time. Investors beware.
Manipulating markets is commonplace and as old as investing. Only the tools are more sophisticated and amounts involved greater. In her book, "Morgan: American Financier," Jean Strouse explained his role in the Panic of 1907, the result of stock market and real estate speculation that caused a market crash, bank runs, and hysteria. To restore confidence, JP Morgan and the Treasury Secretary organized a group of financiers to transfer funds to troubled banks and buy stocks. At the time, rumors were rampant that they orchestrated the panic for speculative profits and their main goals:
- the 1908 National Monetary Commission to stabilize financial markets as a precursor to the Federal Reserve; and
- the 1910 Jekyll Island meeting where powerful financial figures met in secret for nine days and created the private banking cartel Federal Reserve System, later congressionally established on December 23, 1913 and signed into law by Woodrow Wilson.
Morgan died early that year but profited hugely from the 1907 Panic. It let him expand his steel empire by buying the Tennessee Coal and Iron Company for about $45 million, an asset thought to be worth around $700 million. Today, similar schemes are more than ever common in the wake of the global economic crisis creating opportunities to buy assets cheap by bankers flush with bailout cash. Aided by PPT market rigging, it's simpler than ever.
Wharton Professor Itay Goldstein and Said Business School and Lincoln College, Oxford University Professor Alexander Guembel discussed price manipulation in their paper titled "Manipulation and the Allocational Role of Prices." They showed how traders effect prices on the downside through "bear raids," and concluded:
"We basically describe a theory of how bear raid manipulation works....What we show here is that by selling (a stock or more effectively short-selling it), you have a real effect on the firm. The connection with real value is the new thing....This is the crucial element," but they claim the process only works on the downside, not driving shares up.
In fact, high-volume program trading, analyst recommendations, positive or negative media reports, and other devices do it both ways.
Also key is that a company's stock price and true worth can be highly divergent. In other words, healthy or sick firms may be way-over or under-valued depending on market and economic conditions and how manipulative traders wish to price them, short or longer term.
The idea that equity prices reflect true value or that markets move randomly (up or down) is rubbish. They never have and more than ever don't now.The Exchange Stabilization Fund (ESF)
The 1934 Gold Reserve Act created the US Treasury's ESF. Section 7 of the 1944 Bretton Woods Agreements made its operations permanent. As originally established, the Treasury ran the Fund outside of congressional oversight "to keep sharp swings in the dollar's exchange rate from (disrupting) financial markets" through manipulation. Its operations now include stabilizing foreign currencies, extending credit lines to foreign governments, and last September to guaranteeing money market funds against losses for up to $50 billion.
In 1995, the Clinton administration used the fund to provide Mexico a $20 billion credit line to stabilize the peso at a time of economic crisis, and earlier administrations extended loans or credit lines to China, Brazil, Ecuador, Iceland and Liberia. The Treasury's web site also states that:
"By law, the Secretary has considerable discretion in the use of ESF resources. The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s....the Secretary (per) approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities."
In other words, ESF is a slush fund for whatever purposes the Treasury wishes, including ones it may not wish to disclose, such as manipulating markets, directing funds to the IMF and providing them with strings to borrowers as the Treasury's site explains:
"....Treasury has often linked the availability of ESF financing to a borrower's use of the credit facilities of the IMF, both to support the IMF's role and to strengthen assurances that there will be timely repayment of ESF financing."The Counterparty Risk Management Policy Group (CRMPG)
Established in 1999 in the wake of the Long Term Capital Management (LTCM) crisis, it manipulates markets to benefit giant Wall Street firms and high-level insiders. According to one account, it was to curb future crises by:
- letting giant financial institutions collude through large-scale program trading to move markets up or down as they wish;
- bailing out its members in financial trouble; and
- manipulating markets short or longer-term with government approval at the expense of small investors none the wiser and often getting trampled.
In August 2008, CRMPG III issued a report titled "Containing Systemic Risk: The Road to Reform." It was deceptive on its face in stating that CRMPG "was designed to focus its primary attention on the steps that must be taken by the private sector to reduce the frequency and/or severity of future financial shocks while recognizing that such future shocks are inevitable, in part because it is literally impossible to anticipate the specific timing and triggers of such events."
In fact, the "private sector" creates "financial shocks" to open markets, remove competition, and consolidate for greater power by buying damaged assets cheap. Financial history has numerous examples of preying on the weak, crushing competition, socializing risks, privatizing profits, redistributing wealth upward to a financial oligarchy, creating "tollbooth economies" in debt bondage according to Michael Hudson, and overall getting a "free lunch" at the public's expense.
CRMPG explains financial excesses and crises this way:
"At the end of the day, (their) root cause....on both the upside and the downside of the cycle is collective human behavior: unbridled optimism on the upside and fear on the downside, all in a setting in which it is literally impossible to anticipate when optimism gives rise to fear or fear gives rise to optimism...."
"What is needed, therefore, is a form of private initiative that will complement official oversight in encouraging industry-wide practices that will help mitigate systemic risk. The recommendations of the Report have been framed with that objective in mind."
In other words, let foxes guard the henhouse to keep inventing new ways to extract gains (a "free lunch") in increasingly larger amounts - "in the interest of helping to contain systemic risk factors and promote greater stability."
Or as Orwell might have said: instability is stability, creating systemic risk is containing it, sloping playing fields are level ones, extracting the greatest profit is sharing it, and what benefits the few helps everyone.
Michel Chossudovsky explains that: "triggering market collapse(s) can be a very profitable undertaking. (Evidence suggests) that the Security and Exchange Commission (SEC) regulators have created an environment which supports speculative transactions (through) futures, options, index funds, derivative securities (and short-selling), etc. (that) make money when the stock market crumbles....foreknowledge and inside information (create golden profit opportunities for) powerful speculators" able to move markets up or down with the public none the wiser.
As a result, concentrated wealth and "financial power resulting from market manipulation is unprecedented" with small investors' savings, IRAs, pensions, 401ks, and futures being decimated from it.Deconstructing So-Called "Green Shoots"
Daily the corporate media trumpet them to lull the unwary into believing the global economic crisis is ebbing and recovery is on the way. Not according to longtime market analyst Bob Chapman who calls green shoots "Poison Ivy" and economist Nouriel Roubini saying they're "yellow weeds" at a time there's lots more pain ahead.
For many months and in a recent commentary he refers to "the worst financial crisis, economic crisis and recession since the Great Depression....the consensus is now becoming optimistic again and says that we are going to go from minus 6 percent growth to positive growth in the second half of the year....my views are much more bearish....The problems of the financial system are severe. Many banks are still insolvent."
We're "piling public debt on top of private debt to socialize the losses; and at some point the back of (the) government('s) balance sheet is going to break, and if that happens, it's going to be a disaster." Short of that, he, Chapman, and others see the risks going forward as daunting. As for the recent stock market rise, they both call it a "sucker's rally" that will reverse as the US economy keeps contracting and the financial system suffers unexpected or manipulated shocks.
Highly respected market analyst Louise Yamada agrees. As Randall Forsyth reported in the May 25 issue of Barron's Up and Down Wall Street column:
"It is almost uncanny the degree to which 2002-08 has tracked 1932-38, 'Yamada writes in her latest note to clients.' " Her "Alternate Hypothesis" compares this structural bear market to 1929-42:
- "the dot-com collapse parallels the Great Crash and its aftermath," followed by the 2003-07 recovery, similar to 1933-37;
- then the late 2008 - early March 2009 collapse tracks a similar 1937-38 trajectory, after which a strong rally followed much like today;
- then in November 1938, the market dropped 22% followed by a 26% rise and a series of further ups and downs - down 28%, up 23%, down 16%, up 13%, and a final 29% decline ending in 1942;
- from the 1938 high ("analogous to where we are now," she says), stock prices fell 41% to a final bottom.
Are we at one today as market touts claim? No according to Yamada - top-ranked among her peers in 2001, 2002, 2003 and 2004 when she worked at Citigroup's Smith Barney division. Since 2005, she's headed her own independent research company.
She says structural bear markets typically last 13 - 16 years so this one has a long way to go before "complet(ing) the repair process." She calls the current rebound "a bungee jump," very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong.
Expect market manipulators today to produce similar price action going forward - to enrich themselves while trampling on the unwary, well-advised to protect their dollars from becoming quarters or dimes.
The End of Our Love Affair With Cars
The phrase "bankrupt General Motors," which we expect to hear uttered on Monday, leaves Americans my age in economic shock. The words are as melodramatic as "Mom’s nude photos." And, indeed, if we want to understand what doomed the American automobile, we should give up on economics and turn to melodrama. Politicians, journalists, financial analysts and other purveyors of banality have been looking at cars as if a convertible were a business. Fire the MBAs and hire a poet. The fate of Detroit isn’t a matter of financial crisis, foreign competition, corporate greed, union intransigence, energy costs or measuring the shoe size of the footprints in the carbon. It’s a tragic romance—unleashed passions, titanic clashes, lost love and wild horses.
Foremost are the horses. Cars can’t be comprehended without them. A hundred and some years ago Rudyard Kipling wrote "The Ballad of the King’s Jest," in which an Afghan tribesman avers: Four things greater than all things are,—Women and Horses and Power and War. Insert another "power" after the horse and the verse was as true in the suburbs of my 1950s boyhood as it was in the Khyber Pass. Horsepower is not a quaint leftover of linguistics or a vague metaphoric anachronism. James Watt, father of the steam engine and progenitor of the industrial revolution, lacked a measurement for the movement of weight over distance in time—what we call energy. (What we call energy wasn’t even an intellectual concept in the late 18th century—in case you think the recent collapse of global capitalism was history’s most transformative moment.)
Mr. Watt did research using draft animals and found that, under optimal conditions, a dray horse could lift 33,000 pounds one foot off the ground in one minute. Mr. Watt—the eponymous watt not yet existing—called this unit of energy "1 horse-power." In 1970 a Pontiac GTO (may the brand name rest in peace) had horsepower to the number of 370. In the time of one minute, for the space of one foot, it could move 12,210,000 pounds. And it could move those pounds down every foot of every mile of all the roads to the ends of the earth for every minute of every hour until the driver nodded off at the wheel. Forty years ago the pimply kid down the block, using $3,500 in saved-up soda-jerking money, procured might and main beyond the wildest dreams of Genghis Khan, whose hordes went forth to pillage mounted upon less oomph than is in a modern leaf blower.
Horses and horsepower alike are about status and being cool. A knight in ancient Rome was bluntly called "guy on horseback," Equesitis. Chevalier means the same, as does Cavalier. Lose the capitalization and the dictionary says, "insouciant and debonair; marked by a lofty disregard of others’ interests, rights, or feelings; high-handed and arrogant and supercilious." How cool is that? Then there are cowboys—always cool—and the U.S. cavalry that coolly comes to their rescue plus the proverbially cool-handed "Man on Horseback" to whom we turn in troubled times. Early witnesses to the automobile urged motorists to get a horse. But that, in effect, was what the automobile would do—get a horse for everybody.
Once the Model T was introduced in 1908 we all became Sir Lancelot, gained a seat at the Round Table and were privileged to joust for the favors of fair maidens (at drive-in movies). The pride and prestige of a noble mount was vouchsafed to the common man. And woman, too. No one ever tried to persuade ladies to drive sidesaddle with both legs hanging out the car door. For the purpose of ennobling us schlubs, the car is better than the horse in every way. Even more advantageous than cost, convenience and not getting kicked and smelly is how much easier it is to drive than to ride. I speak with feeling on this subject, having taken up riding when I was nearly 60 and having begun to drive when I was so small that my cousin Tommy had to lie on the transmission hump and operate the accelerator and the brake with his hands.
After the grown-ups had gone to bed, Tommy and I shifted the Buick into neutral, pushed it down the driveway and out of earshot, started the engine and toured the neighborhood. The sheer difficulty of horsemanship can be illustrated by what happened to Tommy and me next. Nothing. We maneuvered the car home, turned it off and rolled it back up the driveway. (We were raised in the blessedly flat Midwest.) During our foray the Buick’s speedometer reached 30. But 30 miles per hour is a full gallop on a horse. Delete what you’ve seen of horse riding in movies. Possibly a kid who’d never been on a horse could ride at a gallop without killing himself. Possibly one of the Jonas Brothers could land an F-14 on a carrier deck.
Thus cars usurped the place of horses in our hearts. Once we’d caught a glimpse of a well-turned Goodyear, checked out the curves of the bodywork and gaped at that swell pair of headlights, well, the old gray mare was not what she used to be. We embarked upon life in the fast lane with our new paramour. It was a great love story of man and machine. The road to the future was paved with bliss. Then we got married and moved to the suburbs. Being away from central cities meant Americans had to spend more of their time driving. Over the years away got farther away. Eventually this meant that Americans had to spend all of their time driving. The play date was 40 miles from the Chuck E. Cheese. The swim meet was 40 miles from the cello lesson. The Montessori was 40 miles from the math coach. Mom’s job was 40 miles from Dad’s job and the three-car garage was 40 miles from both.
The car ceased to be object of desire and equipment for adventure and turned into office, rec room, communications hub, breakfast nook and recycling bin—a motorized cup holder. Americans, the richest people on Earth, were stuck in the confines of their crossover SUVs, squeezed into less space than tech-support call-center employees in a Mumbai cubicle farm. Never mind the six-bedroom, eight-bath, pseudo-Tudor with cathedral-ceilinged great room and 1,000-bottle controlled-climate wine cellar. That was a day’s walk away.
We became sick and tired of our cars and even angry at them. Pointy-headed busybodies of the environmentalist, new urbanist, utopian communitarian ilk blamed the victim. They claimed the car had forced us to live in widely scattered settlements in the great wasteland of big-box stores and the Olive Garden. If we would all just get on our Schwinns or hop a trolley, they said, America could become an archipelago of cozy gulags on the Portland, Ore., model with everyone nestled together in the most sustainably carbon-neutral, diverse and ecologically unimpactful way,
But cars didn’t shape our existence; cars let us escape with our lives. We’re way the heck out here in Valley Bottom Heights and Trout Antler Estates because we were at war with the cities. We fought rotten public schools, idiot municipal bureaucracies, corrupt political machines, rampant criminality and the pointy-headed busybodies. Cars gave us our dragoons and hussars, lent us speed and mobility, let us scout the terrain and probe the enemy’s lines. And thanks to our cars, when we lost the cities we weren’t forced to surrender, we were able to retreat.
But our poor cars paid the price. They were flashing swords beaten into dull plowshares. Cars became appliances. Or worse. Nobody’s ticked off at the dryer or the dishwasher, much less the fridge. We recognize these as labor-saving devices. The car, on the other hand, seems to create labor. We hold the car responsible for all the dreary errands to which it needs to be steered. Hell, a golf cart’s more fun. You can ride around in a golf cart with a six-pack, safe from breathalyzers, chasing Canada geese on the fairways and taking swings at gophers with a mashie.
We’ve lost our love for cars and forgotten our debt to them and meanwhile the pointy-headed busybodies have been exacting their revenge. We escaped the poke of their noses once, when we lived downtown, but we won’t be able to peel out so fast the next time. In the name of safety, emissions control and fuel economy, the simple mechanical elegance of the automobile has been rendered ponderous, cumbersome and incomprehensible. One might as well pry the back off an iPod as pop the hood on a contemporary motor vehicle. An aging shade-tree mechanic like myself stares aghast and sits back down in the shade. Or would if the car weren’t squawking at me like a rehearsal for divorce. You left the key in. You left the door open. You left the lights on. You left your dirty socks in the middle of the bedroom floor.
I don’t believe the pointy-heads give a damn about climate change or gas mileage, much less about whether I survive a head-on with one of their tax-sucking mass-transit projects. All they want to is to make me hate my car. How proud and handsome would Bucephalas look, or Traveler or Rachel Alexandra, with seat and shoulder belts, air bags, 5-mph bumpers and a maze of pollution-control equipment under the tail? And there’s the end of the American automobile industry. When it comes to dull, practical, ugly things that bore and annoy me, Japanese things cost less and the cup holders are more conveniently located.
The American automobile is—that is, was—never a product of Japanese-style industrialism. America’s steel, coal, beer, beaver pelts and PCs may have come from our business plutocracy, but American cars have been manufactured mostly by romantic fools. David Buick, Ransom E. Olds, Louis Chevrolet, Robert and Louis Hupp of the Hupmobile, the Dodge brothers, the Studebaker brothers, the Packard brothers, the Duesenberg brothers, Charles W. Nash, E. L. Cord, John North Willys, Preston Tucker and William H. Murphy, whose Cadillac cars were designed by the young Henry Ford, all went broke making cars. The man who founded General Motors in 1908, William Crapo (really) Durant, went broke twice.
Henry Ford, of course, did not go broke, nor was he a romantic, but judging by his opinions he certainly was a fool. America’s romantic foolishness with cars is finished, however, or nearly so. In the far boondocks a few good old boys haven’t got the memo and still tear up the back roads. Doubtless the Obama administration’s Department of Transportation is even now calculating a way to tap federal stimulus funds for mandatory OnStar installations to locate and subdue these reprobates.
Among certain youths—often first-generation Americans—there remains a vestigial fondness for Chevelle low-riders or Honda "tuners." The pointy-headed busybodies have yet to enfold these youngsters in the iron-clad conformity of cultural diversity’s embrace. Soon the kids will be expressing their creative energy in a more constructive way, planting bok choy in community gardens and decorating homeless shelters with murals of Che.
I myself have something old-school under a tarp in the basement garage. I bet when my will has been probated, some child of mine will yank the dust cover and use the proceeds of the eBay sale to buy a mountain bike. Four things greater than all things are, and I’m pretty sure one of them isn’t bicycles. There are those of us who have had the good fortune to meet with strength and beauty, with majestic force in which we were willing to trust our lives. Then a day comes, that strength and beauty fails, and a man does what a man has to do. I’m going downstairs to put a bullet in a V-8.