Our House

By a vote of 237-170, the House of Representatives approved emergency funding for the automakers. Although this is good news for the automakers, they are not out the woods yet. The deal was the result of negotiations between the White House and Congressional Democrats. Congressional Republicans were mostly left out of the mix. Republican Senators appear ready to exact their pound of flesh. Reports from inside the Beltway are that the Senate does not have the 60 votes required to approve the emergency funding for Detroit. Senate Republicans want to see a significant restructuring of the Detroit Three's business model and more power given to the proposed "Car Czar" and less to Congress. This is consistent with my argument that Detroit needs to be flexible enough to build cars the market demands rather than cars that political agendas demand.

Although a deal to provide emergency funding is likely to pass in some form, bankruptcy filings by GM and, possibly, Chrysler, are not out of the question. In fact, emergency funding now does not eliminate the possibility of bankruptcies a month or two down the road. This possibility is one of the major concerns of Senate Republicans. My opinion is that whether or not GM files for bankruptcy protection, it is unlikely that bondholders (and other creditors) will be made whole. It is difficult for analysts to determine recovery values for bonds because of the political involvement. My belief is that all but the most aggressive investors may want to sell their bonds into any strength provided by the emergency funding plan.

Further clouding the picture was GMAC's unsuccessful attempt to become a bank holding company. The FDIC stated that GMAC does not have sufficient capital GMAC was unsuccessful in its efforts to conduct a debt exchange with its institutional investors. This is now pushing GMAC to the brink of bankruptcy. Logic dictates that if GM is to recover, it needs a viable auto financing unit. However, it is become less likely that GMAC will be that unit. There is a chance that GMAC is also kept afloat as part as the emergency government funding, but no mention has been made thus far. I would also sell into strength if I held GMAC bonds, but having ridden them down to these levels, I would wait to see what if any help GMAC receives as part of the auto bailout.


The Fed announced that it is considering issuing its own debt. The problem is that it is unclear if the Fed has the authority to do so. Another problem is that these securities would be similar to T-Bills and could cause problems in that market. The problems would include pushing short-term yields higher (not what the Fed wants right now) and create confusion as to just what guarantee Fed debt will carry.

The CDS market is not all that sanguine as to the credit quality of U.S. treasuries. Bloomberg News reports that CDS for five-year Campbell Soup bonds (51 basis points) is now lower than that for five-year U.S. treasury notes. This is clearly a market technicality as the treasury can print money. This means that, although the dollar may not be worth as much as it is now, investors in U.S. treasuries will get every dollar owed to them. All Campbell's can promise is a tasty chunky soup. Heck with the winter weather moving into the Northeast, maybe I should go long Campbell's.

Investors who may be thinking that we have seen the last of financial sector asset toxicity may be disappointed. AIG announced that it has amassed another $10 billion worth of losses on bets on the performance of various vehicles and collateral with Goldman Sachs. There are no actual securities involved, merely counterparty contracts between the two firms which stipulate that payments will be made from one firm to the other based on the performance of various vehicles, none of which were owned by either firm. This is yet another example of how the credit crisis is far beyond non-performing subprime mortgages. Financial firm balance sheets are littered with all kinds of esoteric contracts and vehicles. This is probably why Hank Paulson has given up on the TARP plan. In many cases there are no actual assets to be purchased only counterparty contracts. What a colossal mess and there is probably more to come.