US stocks have been slammed this morning because investors suddenly remembered GM. Oh yeah that’s right – the real economy. They had been sailing along on a breeze of optimism about the banks, only to be brought up short by reality.
None of the plans put in by General Motors or Chrysler are any good, and President Obama has decided that both firms are insolvent and unviable. Another new plan is needed. GM chief Rick Wagoner is led away, mumbling, and his 2IC, Fritz Henderson, shuffles forward to take his place before the firing squad.
Is this is another Lehman Brothers moment? Bankruptcy of the motor companies would have a huge impact on customers, since car buyers are concerned with after-sales service, and a massive flow-on effect to parts suppliers. The effect on employment would be devastating.
But the companies are not viable any more. Even if they are kept out of formal bankruptcy by a new, new plan, they will be much smaller businesses, so motor industry employment is heading further south anyway.
Meanwhile it turns out the banks aren’t going quite as well as first thought. Jamie Dimon of JPMorgan and Ken Lewis of Bank of America have both now said that March is turning out to be, ahem, pretty tough.
At the beginning of the month they both said that they had been operating profitably in January and February. Vikram Pandit of Citigroup said the same thing, adding: “We are having the best quarter-to-date performance since the third quarter of 2007.”
Rolfe Winkler, who writes a blog called Option Armageddon, calls this the “ultimate bait and switch”.
In February it was understood the banks were all insolvent and that the only thing to do was nationalise them. The market, at this point, was tanking.
Then in early March the bankers come out one after the other and say that, actually, things are going rather well – they are profitable, would you believe. The market rallies, and nationalisation is off the agenda. Treasury Secretary Geithner announces the non-nationalisation, Treasury-funded, bank rescue plan.
As Winkler says: “They got what they always wanted – a bad bank! An entity that will actually absorb losses from the asset side of the balance sheet! Shareholders and creditors don’t have to worry about further write-downs, not the ones that can’t be hidden anyway. Taxpayers will pick up the cheque!
“Even better, the Geithner plan is so ridiculously complex – and public disclosure is likely to be so minimal – that toxic asset transfers are likely to happen largely out of view. Maybe Treasury will have to increase its borrowing substantially in order to fund the losses, but by that point everyone will be celebrating that banks have started lending again. Hooray!”
The sound the sharemarket is making these past few days is: “Hmmm…”
This article first appeared on Business Spectator
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