Car Deals

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.” (more…)

General Motors, once the biggest companies in the world is now on its knees in search of new capital, consumers, respite from oil prices and most importantly profit! The biggest car-marker which once accounted for half the cars in America now just occupies 20% of the market share.

What exactly happened to GM, the first company to post $1 billion in profit in a single year, way back in 1955 ?? Read on….

The last few weeks have been the toughest in General Motors’ era, having seen their market capitalization succumb to only $5.6 billion – a ridiculous sum considering their assets almost 10 times that figure.

1. Credit crisis/Subprime Mortgage has taken its toll in the form of consumers defaulting on their car loans. SUVs and Pickup trucks’ resale value have diminished as a result. In turn, the Company bears losses of cars returned after their lease has expired. (more…)

I read somewhere that the crisis on the financial markets was partly due to a change in a law signed by President Clinton. The (previous law) Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services. The (new) Gramm-Leach-Bliley Act (established in 1999) allowed commercial and investment banks to consolidate. This makes the market less transparent but whether and how it has contributed to the crisis remains unclear.

A crisis offers a moment of reflection. Although many don’t learn, people tend to wonder what went wrong at least to avoid the same mistakes in the future. But it is hard to find a single cause as the financial world is way too complex.

But if there was to be a single cause I would imagine it to come from one person, or to put it more precisely: from one productive role in the economic system. This is a person you can trust. He or she has a track-record and it is someone people know. It’s about closing the sale to end up with the transaction.

Transactions are the basis of an economic system. Some of those transactions involve financial means other physical means like collateral. Every transaction requires a buyer and someone who sells. It is the latter where the problem starts in case of the financial crisis. (more…)

The recent economic crisis is a toxic cocktail of immense proportions. Understanding what to do next is impossible without first understanding the individual ingredients in the cocktail. To be sure, each of these ingredients requires a fully-orbed separate treatment for proper analysis of individual situations. Let’s stipulate to this fact now. Knowing the ingredients, however, will go a long way in getting off on the right foot for future analysis and problem solving. Here are five ingredients.

First, Congress in 1977 compelled banks to lend money to people with unworthy credit. This was the Community Reinvestment Act of 1977. In the intervening years, any congressional suggestion that this might be a bad idea was met with social ridicule. We now call these acts of congress “subprime mortgages.”

Over the last several years, secondly, bank regulators essentially took a long vacation. Everyone knew that these loans were carried on the books at questionable values. Then suddenly, the regulators asked that these investments be “marked to the market.” In short, banks were then forced to carry these assets as if they were a fire sale today instead of a long-term investment for tomorrow. This scenario ignores the sort of assets that were carried off the books, which is extra trouble. (more…)

Politicians and other talking heads (and thus the general public) seem to agree that the current credit crisis was caused by lack of governmental oversight of the big bad bankers. In actual fact, it was just the opposite. The cause of the crisis was Government pressure (mostly but not entirely from Democrats in the White House and Congress) imposed on the mortgage lending industry as far back as the beginning of the Clinton era. Semi-government institutions, Freddie Mac and Fannie Mae, caved in to the pressure, and by readily buying ever-increasing numbers of shaky loans, they made it highly profitable for loan originators (mostly local brokers and bankers) and loan “bundlers” (Wall Street) to willingly go along.

Starting in 1992, a majority-Democratic Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, became aggressive and creative in stimulating “minority gains.” The Clinton administration investigated Fannie Mae for racial discrimination and proposed that 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low- to moderate-income borrowers by the year 2001. The Clinton administration criticized the mortgage industry for looking at “outdated criteria,” such as the mortgage applicant’s credit history and ability to make a down payment. Threatening lawsuits, Clinton’s Federal Reserve demanded that banks treat welfare payments and unemployment benefits as valid income sources to qualify for a mortgage. That isn’t a joke — it’s a fact. (more…)

Nothing ever seems to happen without causing some good. For instance, there seems to be a little uptick in analyzing our thinking, as a result of wading through this financial crisis.

Radicals are starting to say that simple cause and effect reasoning could have prevented the current financial crisis. You may remember cause and effect from school, where as a thinking skill it is second in popularity only to the skill of avoiding thinking completely. But could an understanding of cause and effect have made a difference in the financial crisis?

Undeniably, cause and effect has its uses. The neat thing about cause and effect is that it makes you look good without much effort. When you know that something causes a certain effect, you can easily impress your friends. You look up and see a bunch of dark clouds and you casually mention that you think it’s going to rain. Then sure enough, it rains. Clouds then rain: cause and effect. Just don’t tell anybody how you do it and you’ll get a reputation for being really smart.

Unfortunately, cause and effect can get tricky. After you start using cause and effect, you begin to believe that everything has a cause and that you can spot that cause. Not so fast; you’re getting a little ahead of yourself. Sometimes things just happen out of the blue, without warning or reason.

That’s the situation with the financial crisis. No matter what anybody says, the current crisis is just the result of bad luck. There was no cause. It just happened, like all those forest fires, droughts, 100-year floods, and mega-storms that people predicted would be caused by global warming. Get real; predicting something doesn’t actually mean that you know the cause.

Let’s take a closer look at the financial crisis. With something this large, which has created hardships for more than half of the US population, people will probably ask questions: Couldn’t something have been done to prevent it? Cause and effect reasoning might have put us on the right track, if only those government economists could have found cause for alarm.

But nothing was obvious enough to cause concern. You can see that if we look at the major pieces of this crisis. (more…)