by Calculated Risk on 3/30/2009 10:28:00 PM

From the NY Times: A Dealer’s Big Bet Is on the Line as the Hummer Falls From Favor

Sales of Hummers over all have fallen so far — 51 percent last year, the worst drop in the industry — that General Motors is trying to find a buyer for the brand. Without one, the company might close Hummer. An announcement about Hummer’s fate may be made Tuesday.

“It’s a brand that represents a lot of what people want to get away from,” said Rebecca Lindland, an analyst with the research firm I.H.S. Global Insight.
...
If Hummer is closed, it would be phased out “rather quickly,” G.M.’s president, Frederick A. Henderson, said last month.

And from: Humbling a Giant

For too long, [GM] sold too many models, under too many brands, in too many markets — with too few customers.
...
The task force ... said Monday that G.M. had to drastically pare the broadest lineup of products offered by any car company.

“G.M. has retained too many unprofitable nameplates that tarnish its brands, distract the focus of its management team, demand increasingly scarce marketing dollars, and are a lingering drag on consumer perception, market share and margin,” the task force said in its report.
...
Instead of cutting eight brands down to four in the United States, G.M. may be left with Chevrolet and Cadillac.

There is much more in the 2nd article about the downsizing of GM. The Hummer will probably be history tomorrow.

by Calculated Risk on 3/30/2009 08:06:00 PM

Most of the news today was about GM and Chrysler. See WSJ: Obama Favors Bankruptcy for GM, Chrysler and NY Times: Obama Issues Ultimatum to Struggling Automakers

Bankruptcy is likely.

For some interesting reading, there was an excellent article in the NY Magazine today about a software programmer who wrote some of the software for securitizing mortgages: see: My Manhattan Project

And here is a story from Michael Lewis writing in Vanity Fair on Iceland: Wall Street on the Tundra Short excerpt:

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.
...
An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”

by Calculated Risk on 3/30/2009 05:59:00 PM

From the WSJ: Cerberus’s Equity in Chrysler’s Auto Company to Be Eliminated

Cerberus Capital Management will lose its equity stake in Chrysler ... as a condition of the Treasury Department’s bailout deal with the U.S. auto maker ...

The New York private-equity firm purchased an 80% stake in Chrysler in 2007 ... In term sheets released by the Treasury Department on Monday, the government said Chrysler’s restructuring “at a minimum will require extinguishing the vast majority of Chrysler’s outstanding secured debt and all of its unsecured debt and equity.”

I wonder if any banks still hold Chrysler debt?

And from CNBC: New GM CEO: Bankruptcy May Be Best Option for Automaker

General Motors's new chief executive told CNBC that filing for Bankruptcy may be the best option for the struggling automaker. ... Henderson told reporters that the company would still prefer to restructure outside of court, but the level of support Washington is offering would help the company quickly restructure through bankruptcy.

A bankruptcy sounds very likely.

Added: I think a reasonable role for government is to guarantee the warranties (so people keep buying cars) and provide DIP (debtor-in-possession) financing. There are many other issues too - like making sure the vendors don't all go bankrupt, and the U.S. Pension Benefit Guarantee Corp. (PBGC) will probably be taking significant losses on GM and Chrysler pensions.

Good thing the PBGC invested so wisely recently, see: Pension insurer shifted to stocks

Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

Heckuva job.

by Calculated Risk on 3/30/2009 05:02:00 PM

For your reading enjoyment ... here is an article about a software programmer who wrote some of the software for securitizing mortgages.

From Michael Osinski in New York Magazine: My Manhattan Project How I helped build the bomb that blew up Wall Street

I have been called the devil by strangers and “the Facilitator” by friends. It’s not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It’s been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.

I wrote the software that turned mortgages into bonds

Because of the news, you probably know more about this than you ever wanted to. The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we’re in. I don’t completely disagree. But in my view, and of course I’m inescapably biased, there’s nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them. Here’s one thing that’s definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.

by Calculated Risk on 3/30/2009 04:00:00 PM

These swings are wild ...

DOW down 3.3% (254 points)

S&P 500 down 3.5% (28 points)

NASDAQ down 2.8% (43 points)

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

And since I haven't posted this for awhile, here are a few credit crisis indicators ...

The British Bankers' Association reported that the three-month dollar Libor rates were fixed at 1.2075%, down from Friday's 1.22%. The dollar LIBOR was at 1.31% just 10 days ago - so this is some improvement.

The LIBOR peaked at 4.81875% on Oct. 10th, and hit a cycle low of 1.0825% on Jan. 14th.

There has been improvement in the A2P2 spread. This has declined to 0.92. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

Meanwhile the TED spread is holding steady at 108.7. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is around 50 bps. The TED spread has been relatively flat for months (and is being impacted by the Fed and other Central Banks).