A Tale of Two Cities

CitiBank – Lost market cap; reported losses; refused to file bankruptcy; accepted billions of dollars in bailout package and  

Circuit City - Lost market cap; reported losses; filed bankruptcy and finally decided to liquidate its assets (Should I add that it did not convert into a bank-holding company to be eligible for the TARP??)

Circuit City surely sets an example and hope for free market world. But pragmatic thinkers (including me) say -at the end of the day it is CitiBank that (so far) survived!!

© Rohit Deshpande

"Please Accept Our Cash"

Another economic panic - Three-month U.S. Treasury rates reaching negative territory. With the stock market crashed, commodities sinking, housing underwater and banks starved of liquidity, it seems that investors are searching safe heaven at the US Treasury. In other words investors are ready to “pay” the US Treasury for “borrowing” their capital where they think that they can protect the values of their capital.  But that also means that borrowing becomes even more difficult with widening spreads. The only silver lining is that bailouts would look much cheaper! 

Three Month T-Bill Rate [12/9/2008] 

[The three-month T-bills rate is lowest rate since the US Treasury started auctioning the securities in great depression era according to Bloomberg.com]

© Rohit Deshpande

Financial_Crisis@harvard.edu

Global financial crisis has now reached the most prestigious and probably the richest academic institution in the world - Harvard University. 

Harvard Universit President Drew Faust said the school is preparing for ``unprecedented'' losses in its $36.9 billion endowment and will seek new sources of revenue and savings.

Another option is ask for a bailout package to avoid the potential "systemic risk" !

© Rohit Deshpande

Big Three → Big Two

In last 15 years, Chrysler Motors has gone through every possible form of business entity – from a publicly traded corporation to acqusition by a prestigious European carmaker to a limited liability company owned by a private investment group to an impending merger with another near-bankrupt automaker with a possible government ownership. Nothing seems to have helped.

The details of GM-Chrysler merger are not finalized but if finalized this is what GM would get, in assets and in liabilities –

1. $11 billion in cash
2. Estimated $35 billion to $40 billion in yearly sales
3. 47,500 union workers and network of 3,700 dealers
4. Mostly unpopular products lines, very identical to GM’s own products (few exceptions like Jeep and Dodge Ram)
5. Stake in Chrysler; valued at zero by Daimler AG, which owns 20% of ownership.

[Grant Thornton’s Corporate Advisory and Restructuring Services Group just published a report on possible merger between GM and Chrysler. Its forecasts closure of half of Chrysler's 14 existing manufacturing facilities.]

What Detroit lacked is the long term vision. Here is an example - Toyota introduced its mid-size hybrid car in 2001 when average crude oil prices were in mid twenties. In two years Honda launched its mid-size hybrid car. It took 2007 for GM to launch its mid-size hybrid Saturn Aura Hybrid. By that time Toyota has already sold over half a million of hybrid cars, captured the majority of the market and established the strong brand identity. Chrysler even doesn’t have any hybrid model!

Oil Prices ($/bbl) since 2000 and Hybrid Car Launches

GM has asked the $10 billion in assistance from the treasury. This is on the top of $30 billion assistance from Department of Energy. Yesterday Larry Kudlow harshly criticized the Detroit’s bailout – “It’s like industrial policy. It’s saving a failed industry, that’s what it is doing. …  It’s a Franco-German style industrial planning bailout. We are just protecting a failed industry. And I think it’s a completely bad policy”

In the days of economic contraction, FED’s printing press has very aggressive expansion plans!

© Rohit Deshpande