Let me rephrase my first overly aggressive sentence of this post. If you attempted to invest in GM, you are an idiot. It in fact was a great trading vehicle for many as it was ripe with volatility and the swings that occurred when getting dropped from the DJIA.

The Waterfront HQ of GM Has Long Been Underwater

So for those who may not know, the equity or stock is the lowest level of the financing structure of a company. Owning stock means you are a residual owner, or you get what is left over. So before you get anything, Creditors of all sorts sit waiting (this includes Bondholders, Contracts, PENSIONS, Revolvers/LOCs and so on). This means, when Liabilites massively outshine Assets, your stock probably is worth nothing. At this point you will probably experience a 100% Capital Loss.

In a move that I have never heard of today, General Motors explicitly told investors to stop buying their stock, shipping down the stock price around 20% after it broke $1 intraday. This was in fact not a shocker, but the shock came when they broadcast this via a PR. Essentially, your tax dollars afforded to pay liabilities of a company who never had a chance. Not only were they strapped down with high levels of debt, but they also had massive Pension Obligations.

Now, recall the Cash Burn Ratio? Yah, they were burning cash at a rate that was unsustainable by the combination of their operations and the actions of free capital supplied by the generous tax payers. The only big investors trading in GM were shorting if they could find any borrowable shares available, or they were being forced to cover for some reason. So a company that essentially had no chance or survival besides for bankruptcy was flooded with free capital which essentially paid interest, short term liabilities and some benefits to the UAW. So what is GMs future?

GM plans to sell its “good” assets — including automotive brands Chevrolet, Cadillac, Buick and GMC — to a new company owned by the U.S. government. Under GM’s proposed terms, consumers suffering injuries or death from vehicles currently on the road wouldn’t be able to bring claims against the “New GM.” Instead, they would be left as unsecured creditors seeking claims against GM’s old estate in bankruptcy court, where they would likely receive little recompense.

What did they say today?

GM management has noticed the continuing high trading volume in GM’s common stock at prices in excess of $1. GM management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the company’s secured and unsecured creditors are fully satisfied. In this case, GM management strongly believes all such claims will not be fully satisfied, leading to its conclusion that GM common stock will have no value.

Yah, thats right. Now we get to run it, great. A company and a domestic industry which has failed for over 30 years and are now on the books of the same guys who do not know what derivatives are, nor can they create a budget that does not create deficits. Another victory for Washington D.C. Even with a printing press and an unlimited balance sheet, I would not want these brands, people, management or anything to do with them. The best case scenario is that we are able to chop the assets, strip them off to the private sector and hopefully sell each brand or business to investors as well.

Sources:
– GM Liability Plan Changed | WSJ

As the Obama administration forceful attempts to place into effect alternative energy, many of what are not yet properly developed and not economical (think Moore’s Law), they are also seeking to add more revenue with the allowances. Firstly, HR 2454 does have merits, however at current time of implementation it is horrific.

It is of course important to reduce our dependence on oil, notice how all the commercials use the term “foreign oil” but never address our domestic supply and untapped resources? However, they have not considered the effects of this, or maybe they have and just are being a little “slinky” about it.

It is very important to note that the Consumer Price Index or CPI, does not include energy costs because “they are too volatile.” This is designed to add in some smoothing effects of the data however it does not correctly reflect the true cost of living. It seems they have figured this out and will use this to increase tax revenues and push a plan.

However lets consider this. Transportation costs of goods directly shapes the final price for the consumer. For example, when oil surges so do the delivery costs of it, giving a double slap to the consumer at the pump. Therefore, even the goods in the CPI basket will experience a surge in prices due to the increased cost of oil to the consumer. It will occur and in times when we could experience large amounts of inflation due to the historically low short term rates and a dinky yield curve it could be dangerous.

As with any bill or law, the private sector will circumvent it to its best abilities. Every one knows how well the Financial industry can do this, but the Oil industry is good with accounting tactics and circumvention as well. If you notice there is two parts to this “tax.” One is on the refining process and the other is on the emissions for the actual use. You can see where some savings can occur immediately. Simply import already refined crude, essentially curbing the refining tax.

On June 16th, Jim Mulva of Conoco Phillips, one of the largest domestic refiners comments:

It will lead to the opportunity for foreign sources to bring in transportation fuels at a lower cost, which will have an adverse impact to our industry, potential shutdown of refineries and investment and, ultimately, employment

This reminds me a little about that book written along time ago, by this guy named Adam Smith, called Wealth of Nations. A research group reported that the effects would cause 1 in 6 refiners to be closed by 2020 as the companies search the globe to locate ways to hide from this tax. While I do believe alternate energy does have a huge role to play, increasing taxes and helping exacerbating inflation has no role in our current economy. Add in job losses and decreasing domestic operations ability to compete globally and this bill shows its massive flaws. Look, we already know that Oil is relatively inelastic as people have no other options. Until affordable and economical other options are common, this should not even be considered.

Sources:
– Big Oil’s Answer to Carbon Law May Be Fuel Imports | Bloomberg

Rigging a car with a red light to alert drivers when to brake, the magazine tested how long it takes to hit the brake when sober, when legally drunk at .08, when reading and e-mail, and when sending a text. The results are scary…Too many people have become too accustomed to checking e-mail or sending a text while behind the wheel, even though it’s as dangerous as drinking and driving.

– Sanford disabled tracking system on the vehicle when cheating | New York Times

Reginald Lloyd, the director of the South Carolina State Law Enforcement Division, said in a conference call that the governor had driven the vehicle to the airport in Columbia, S.C. — which he was authorized to do — but that security devices that would have helped locate the vehicle had been disabled.

– Stanford pleads not guilty, may be released on bond today | Bloomberg

Stacy set bail at $500,000 and required the Texas financier to post a $100,000 deposit in cash. Stanford was returned to jail, at least for the night, to allow prosecutors to file an appeal…“I think he’ll be very motivated not to flee if he raises the money from friends and relatives,” Stacy told lawyers.

– Impeached federal judge decides to resign after two counts of assault | Associated Press

Kent is serving a 33-month sentence in a Massachusetts federal prison for lying to judicial investigators about sexual assaulting two women. He was impeached by the House last week and this week the Senate began work to bring him to trial on the four articles of impeachment…Federal judges are appointed for life. Impeachment is the only way to force them from the bench. If they resign, they do not collect their salary.

Merrill "Bull" Logo

Firstly, of course the Fed would apply pressure to get the mergers done. Why? Look at this time line from Barry Ritholtz’s Big Picture. March 16, the Fed had to shell out some bills and arrange a merger of Bear to JPM. The next big one? September 15th, LEH declares bankruptcy. This is when the _ _ _ _ starts to really hit the fan. For reasons that no one really knows, LEH is allowed to fail while Merrill is merged with Ken Lewis’ BoA, it happened somewhat simultaneously.

On pure speculation I would say LEH goes down because it is the smallest of the bunch and the counter parties to the securitized shit and freaky derivs were not linked in (that means GS and alike). Anyways, the day after the ML and BAC marriage, an $85b shipment occurs to AIG. But wait. A week before all of this well sent $100b to Fannie and Freddie each. Bernanke is looking at all of these huge cash flows and thinking “Oh shit, I don’t want to have to buy this crap, we have no more money to ‘bail out’, I need the private sector to step up.” As in private sector I am talking a major merger with another bank. Not Private Equity.

The only option is to pressure that merger. Why? One, he knew the AIG blow up was coming along with the rest of the banks…they have all the data and the Fed is pretty good at modeling. He knew Citi was screwed, the Man with a Tan screwed up big time over at Countrywide and did what any logical person did. He effectively pressure the merger to stop this deterioration of ML if left alone. Look if you put a drop of acid on something small it may consume it, but if you put that same drop on something huge it may only burn a relatively small hole.

Bernanke forced the merger and Lewis gave into his pressure, there is no question about that. However, they are going to keep their mouths shut because both of them are on the line and the details of big deals liked to be hushed. Which is fine by me. Would you rather keep shelling them $25b every couple of months to keep them a float, cough General Motors? Bernanke did right here, and in my opinion so did Lewis. When the Fed gives you a beautifully steep yield curve and big name assets are selling cheap…its time to put capital to work. Yah that deal might not have be accretive for a year or two, but the dilution stemming from the garbage assets with burn out.

There is no point of wasting time listening to them both lie, because they really really have to. And the merger was a positive for the taxpayer now, economy and probably the company in the aggregate years down the road. Let it go and move on. I want Bernanke in the office, I don’t want him sitting in front of Congress/House listening to them not understand Finance or Economics, while asking questions that are so dumb it makes my stomach turn.

Sources:
– Bernanke Defends His Record on BOA and ML Merger Talks | Bloomberg
– Republicans, Democrats Gang Up on Bernanke | Real Time Economics WSJ
– Bernanke: Fed Acted with the Highest Integrity | Reuters
– White House and Housing Crisis: Time line | The Big Picture

What goes first? Well, Michigan closed 8 prisons and others have dropped highway projects, this of course does not help the unemployment situation. Some states with the highest budget deficits are CA, TX, CT, NY, MA, FL and AZ. This interactive map shows unemployment, budget deficits and foreclosures from the Atlantic to the Pacific and one can quickly decipher that those states with high unemployment and large foreclosures are they whom rank among the largest budget deficits. Of course, this is the aggregate state deficit, one should consider deficit per capita.

See unlike the Federal Government, these guys can’t print and really need to produce a balanced budget. With the clock ticking, keep your eye on these stories.Cali is the on the forefront because of the threat of downgrade from the rating agencies…this could be a disaster in progress if they can’t produce and authorize the 2010 budgets by early next week.

Sources:
– Unprecedented number of states lack budget with week left | CNN Money
– States Turning to Last Resorts in Budget Crisis | New York Times
– States propose $24billion in tax hikes | CNN Money

The plan will reduce the number of FAFSA questions by 20 percent and cut in half the more than 29 Web pages students must navigate when they apply for financial aid online…“We think part of the reason it goes unused is because this thing scares people off,” Duncan said of the form.

– Hav-a-tampa Cigars foced to close on smoking bans, taxes, 450 jobs lost | TBO.com

Previously, federal excise taxes on cigars were limited to no more than a nickel, said Norman Sharp, president of the Cigar Association of America trade group. The tax increase, which took effect April 1, raises the maximum tax on cigars to about 40 cents, Sharp said.

– Barney Frank asks FNM and FRM to relax lending standards for condos | Reuters

Two U.S. Democratic lawmakers [Barney Frank and Anthony Weiner] want Fannie Mae and Freddie Mac to relax recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery

– $10million in Grants to support education…IN CAMBODIA | Grants.gov

The United States Agency for International Development (USAID), is seeking applications (proposals for funding) to support U.S. or non-U.S. non-governmental organizations (NGOs) in a basic education program. This award will permit the recipient to implement a program to provide support to increase the relevance, quality, and access in Basic Education.

Spitzer's Ashley Dupre

Ok, so Clinton “Did not have sexual relations with that woman”, Spitzer ran up thousands in bills from Ms. Dupree, Ensign was gettin’ sticky with his staffer out in Vegas and now the Sanford scandal. There were more thrown in there, but these all come to memory as they each have the own ridiculous nature contained with in.

What is plain shocking is the level these guys go to get it. Sanford managed to have an affair in a different country. Spitzer brought a girl 500 miles to a hotel. Well, Clinton didn’t really try to hard but he didn’t have to, straight pimp. Ensign hit it with a colleague in various cities.

At this point in any and all of their careers they should be intelligent enough to know that they are going to get caught. They are public figures whom everyone recognizes. Not to forget about the amount of blackmail and extortion factors such relationships could create. In my memory, the Sanford affair has been the first to be so international and odd in nature.

He needed a break so he thought “maybe I’ll hike a trail” then “no Buenos Aires ahoy! I’m gonna tap that ass.” Something isn’t adding up in the story, it is just way too odd and strange. Something isn’t quite making sense, but boy the GOP is really screwing itself every second of the day. It seems they just want to give up future elections. Or could it be the Dem’s are taking a page out of L.T.’s book and sending hookers to their rooms the night before a big speech or vote?

Sources:
– Mark Sanford admits extramarital affair | Newsweek
– South Carolina Gov. admits to extramarital affair | LA Times
– Upon Return, Sanford admits extramarital affair | New York Times
– AP: Ashley Dupre on GGW and Hustler Offers [Video] | YouTube

Get to the Bailout

On Friday, the lagging rater Moody’s announced it was prepared to complete a multi notch downgrade of Cali debt if they could not work out a budget soon. There is currently a $24.3b budget gap that needs to be tightened and the raters outlook for 2010 is horrible. So apparently this weekend, the gang took off and headed to the beaches because today they proposed something that is so ridiculous I would swear it came out Congress or the House. More amazingly, they were shocked they may experience a downgrade of their debt. Really, shocked? CDS Spreads are wide, you have no budget, falling tax revenues, being crushed by the housing bubble, a total of $24b in budgetary gaps and so on. I am shocked only by how they were shocked about this developing situation that has been in the lime light for months now. What makes this story even more interesting is what they announced today as a short term solution that will kick into effect next week

Among those who could receive IOUs are county social service agencies, private contractors, state vendors and Californians entitled to income and corporate tax refunds.

These IOUs are actually warrants and after the comptroller computated the cash burn he warned cash will be dry by the end of this week. Private sector estimates have the cash shortfall at the end of July to be at $2.8 billion. Whats the stall here? They need cash or they are literally bankrupt in a couple of days and this debt is going to get dropped through downgrades. Therefore, the new stuff is going to be priced ridiculously low, have high interest rates and massive YTMs. It is a pure nightmare.

The only logical reason for delay is a prayer of a bailout. Can Cali play into the systemic risk bandwagon and have Obama and Timmy G ship over some super low cost capital? There is no real other options besides for dropping a majority of their social programs, which will not happen quickly enough. State Bail Out time?

Sources:
– Moody’s stuns California with debt warning | Reuters
– State will have to begin offering IOU’s next week | LA Times
– California soon to get junked by Moody’s | Zero Hedge

The Regulation Sensation Barney Fwwank

Ok, so the Financial Industry loves to pay big bonuses…many of which are much larger than the average Americans salary and people just hate to know this and politicians love to use this as a way to get your support. Well, there are reasons behind why bonuses are so large. The first is taxes. Strategically, these bonuses are taxed differently for both the company and the employer, and the large bonus structure is favorable. Secondly, these bonuses are discretionary. Therefore, if the company cannot afford a big cash bonus, they can do something else such as differed compensation or just dilute the shareholders by granting options.

So while the government structured quite possible the worst investments in the history of investing, they attempt to divert your attention from their mistakes onto the something else that Americans can easily understand and be upset about. Easy right? Yah, but also not inline with corporate regulations as no vote was taken and it was just shuffled through legislation. However, now the restricted companies will just increase salary to keep talent, hence creating more risk. The risk is increased because these wages are contractual and now the company is on the hook, rather than being discretionary using the bonus pool structure.

So why is the IRS happy? They will be collecting more Payroll tax from the employer and this will send many Americans into the higher income brackets. Employees will also be forced into taking all the compensation in one year rather than possibly being able to “wait” on the bonus until after the New Year to keep them in a lower bracket.

Remember hearing Congress say, “Well these people have no where to go” as an excuse to limit bonus and compensation on many? Well take a look through the industry…Middle Market and Boutiques have been snapping talent up at very large compensation packages. There are plenty of places to go, and clearly we saw the governments role as CFO go just terrific now we get to see how their role as CEO and HR manager plays out.

Sources:
– Citi boosting salaries to offset lower bonuses | Yahoo! Finance
– Citi revamps compensation structure | Financial Times
– Citi Plans to Raise Salaries by as much as 50% | Bloomberg
– Elizabeth Warren Slams Citi: “Just don’t seem to get it” | The Hill

I eventually looked down the third base line and noticed a massive sign that said AMTRAK…it was time to get pissed…

AMTRAK, yes AMTRAK, that very expensive rail system that was bailed out by the government years earlier, created with government insured debt and loans, bailed out again and so on. This subsidized company cannot turn a profit and has been draining tax payers dollars since 1971, yet the management still has the balls to say their subsidies are way too low compared to that of the highway systems.

If you actually look at the amount of public capital that flows into the rail network per passenger, it’s like $40 a passenger for Amtrak and $500 to $700 per automobile out there through the highways.

Well, when the price of taking jet aircraft from New York to Washington D.C. is lower and is faster in travel time than taking a train you wont be receiving lots of customers. Anyways, why no public outraged over the Amtrak sponsorship? We have poured billions into this blackhole since the ’70s and have made little progress in terms of transportation and usage. Not to mention, they didn’t stop at simply an advertisement…they sponsored the “Acela Club” and have become fully integrated into sports marketing. They acutally have had sports marketing agents since 2001.

As part of the partnership, Amtrak — the nation’s passenger rail provider — gains branding rights to the name-entitled “Acela Club,” Citi Field’s 350-seat restaurant overlooking left field. This multi-tiered, climate-controlled Acela brand centerpiece at Citi Field will provide uninterrupted views of play and showcase a fine-dining experience from Drew Nieporent’s Myriad Restaurant Group. Prominent signage will feature Acela branding on the restaurant façade facing into the ballpark.

So, Amtrak, essentially a government bail out/created mess since ’71 can purchase advertisements, sponsor their own restaurant and brand 350 seats and the public does not care. If I have to hear people bitch about Citi sponsoring the stadium, I better freaking here others complaining about Amtrak. If a banking or financial services operation comes under heat for sponsoring a stadium or golfing event that they have proven for over 20 years directly drives revenues, so should Amtrak.

Sources:
– Q &A with Amtrak President Alex Kummant | Reuters
– Amtrak Joins Mets at Citi Field’s Acela Club | MLB.com