Private Jets Blog

I know the temptation to delve into the details but details are the labyrinth in which the beast is hiding. It is wiser to stick with the auto industry at the top level, because this beast is huge.

The first problem of the auto industry is that it is based on a 17m/yr assumption of unit sales, when the demand suddenly fell 40% lower, and both for environmental and energy reasons letting demand in that industry stay at those levels is great. It is the best energy independence and environmental policy that could have happened.

If the volume stays at those levels (which unfortunately it will not) it translates into a 40% reduction in oil dependence and a 40% reduction of the worse pollution right away; and a 40% reduction in the long term need for roads and bridges. (Which, by the way, should not be the primary emphasis for the new stimulus package for exactly the reason above; rather the emphasis should be on investments in technology and incentives for the clean energy sector and for other sectors that need technology improvements such as info technology for medical records, encryption technology for national security and infrastructure for schools particularly urban schools and some but not as much as Obama has talked about in the roads and bridges part of it. To move ahead we need improvements in technology, particularly hardware (in the broad sense of the word not just computer hardware) technology that involves manufacturing and thus real high paying sustainable jobs, and the jobs should go into those sectors, not same old same old.) The stimulus package should be focused on the strategic areas that Obama talked about in the campaign, (clean energy, education, manufacturing jobs and health care cost reductions; while $100b of the rest of the TARP funds should be on homes), thus all the stimulus should be “two-fors.” The measure of the appropriateness of specific stimulus programs should not be as much about the immediate impact in jobs (that should also be a factor but not the primary factor) but if they reduce the need for future government spending, (by at least 15% per year in those areas) so that year 3 and 4 are years of deficit reductions (both Federal and Trade) and significant government spending reductions.) If anyone had a strategic plan that was worth at least a little more than crap the stimulus package would be no more than bringing in about 5% of the investments of years 3 and 4 into years 1-2 to both provide 1-2 year stimulus and structurally reduce the investments-expenses necessary and planned for years 3-4, by about 1% from current levels.

The answer to the first problem of the auto industry is thus simple and straight forward. It involves a 30% cut in the value of the principle of all bond and warrant holders and putting them in second position behind the government, by decree of the csar, and thus by law confirmed by Congress, a 20% cut in the labor force of the industry, a 30% cut in the pay and benefits of new auto workers, a conversion of 30% of the liabilities to pensioners and current workers to equity, a 20% cut in the salaries and bonuses of all employees, (and they can get a day off every week) until the companies are profitable, a 20% increase in the deductible portion of all medical-dental costs, a 30% conversion of the liabilities to suppliers to equity (in all cases equity at the current low values); a 20% cut in the number of dealerships, a 20% reduction in the number of products they each sell, a 10% tax on cars and SUV’s that go at less go at less than 25 m/gallon, a limit of executive total compensation to a max of 2m/yr, prohibition of company use of private jets, a 50% cut in the advertising budgets within which there would be a 30% increase in the advertising of the higher efficiency vehicles and a 70% cut in the current common and preferred dividend yields. (And by the way, a mandate to the energy companies that at least 30% of their stations will have alternative fuel pumps by 2011; and an immediate cut of the tariffs for sugar cane ethanol and a commitment by both the manufacturers and the suppliers to increase by 30% their domestic content.)

Since this is the best opportunity to move the industry towards higher energy efficiency a pull-in by 30% of the timing of the new higher efficiency (hybrids, plug-in hybrids, natural gas, flex fuel, electric and hydrogen cars and trucks) must be accompanied by the investment of the government which is in convertible preferreds owning 30% of the company and getting a 5% dividend yield. The investment must be approx. $75b ($25b already appropriated for energy efficiency; $35b from TARP for this bailout and $15b for the financing companies through the Fed’s commercial paper program.) The investments should all involve owning preferred stock in both the parent companies and the financing companies of 30% except for Chrysler which should be at 70% of the equity because it is a private firm whose owners have money yet refused to add money to bail it out and have agreed to forgo any benefits of the upside which means would be happy to convert their debt to equity and keep 30% of the equity of a successful company. The government should also place a limitation on itself in that it will sell all of its ownership in these companies within the next 10 years.

Only within the above dictates, the bottoms up plan from the industry and their individual companies can make sense. I know that Congress cannot be coherent enough to produce such a simple and coherent mandated solution, maybe the csar they appoint is. These are straight forward and fair across the board with each stakeholder taking a 30% “haircut” to avoid losing a lot more (and maybe all) and to get a chance to participate in the future upsides of the companies. (With a small bias towards the labor and dealerships which is the bias towards not losing too many jobs, particularly not at this stage.) If the above dictates are not given and a compromise by issue and group is attempted in detail, one is almost at the kind of time-frames and processes of a bankruptcy case, which is too long and thus will force bankruptcy.

This plan gets to an immediate 30% reduction in oil dependence and 30% reduced transportation emissions, and 30% reduced road infrastructure needs with another 30% coming annually after that for several years; normally to do this would take at least a decade; don’t blow the chance.

It will also produce a very viable industry because demand is most likely going to be only 10%-20% lower from the 17m/yr level in 2010, (in fact it maybe as high as 17m/yr), thus actually the companies will be profitable in 2010 and very profitable after that, because Americans if they get credit they buy like mad, especially if the manufacturers indeed pull in their advanced energy and cost efficiency vehicles.

In a few months, after negotiating tariff reductions among democracies, at least a 20% tax on imported OPEC oil and on Chinese imports (or on Yuan/$ conversions) will help all the domestic constituents of this and all industry significantly and it is necessary to avoid getting deeper into the hole, because all the de-leveraging of individuals and industry is happening by the dramatically increased leveraging of the government, both Federal and State and local, which needs these taxes and reductions in trade deficits to avoid becoming the next and biggest ever bubble that bursts. As I explained on a previous article the underlying liquidity-credit crisis is a monetary policy immense screw up, with interest rates still way too high and can be fixed quickly without forcing the government to leverage as much.

Since we are at solutions might as well deal with the first problem, i.e. the issue of the housing crisis with housing values dropping and housing demand lagging. It is, as usual, a three fold solution with a) monetary policy; reducing long term (30 year) interest-mortgage rates to less than 5%, for good credit, fast through the Fed action (buying Fannie May paper, financed by a lot fewer short term T-Bill auctions and a lot more 30yr Note auctions), for the overall housing demand part; and the drop of the Discount Rate to .5% b) a loan “mod” program requirement for all Banks, prior to any foreclosure, taking 90 days for all involved to compromise allowing Banks to take warrants in the ownership of the house and thus on its appreciation, if the loan is delinquent by more than 60 days, (for those that can and want to continue staying in their house if the payments were by 20% or so lower), (This can also be the FDIC proposed and enforced plan); and a foreclosure program with TARP funds of $100b in which the government buys 20% of the equity of the house from the Banks that having gone through the mod processes above will have to go to foreclosure anyway because the owner is too much upside-down or has lost too much of their income. The government buys the 20% equity from the Banks at 80% of mortgage value, i.e. Banks automatically lose 20% once the government has to step in, and the Government-Banks that own-are the lenders of these foreclosed properties have a conversion-management corporation that rents these properties. (The Federal Government in this case would be allocating the money to the Municipalities and Cities that would implement this program.) Thus the three components of the problem are dealt directly, the interest rate for all demand; the “mod” for those that can stay with less payments yet with less ownership upside; and for those that will have to foreclose having at least a rental unit and a rental market that is bigger and thus more affordable.

These actions will cause the rebound of the housing market by Q2 09.

The plans above for the auto industry crisis and the housing industry start so but do not stay so. That is because these are the backstop plans that go into effect until the Industries (both the auto and the housing and might as well require the Finance industry to join them), from the bottom up bring plans to Congress that have the relative consensus of all stakeholders that they believe are more fair and better for all, before March 1, 2009, knowing that if they don’t agree to something better this is what will stay. (Of course by that time Congress can improve these plans for better detail working with them or independently.) (And knowing that if they don’t agree to make this work now they will all lose at least 90% which is what the lawyers and judges may let them keep after they have their own feast in Bankruptcy, being the only winners, and in this case liquidations of many large and medium sized and small companies and a very severe recession that lasts through 2009 and maybe more.)

Please stop kitchen sinking and get things done focused as above, because so far Congress and its leadership is proving extremely inadequate and all the change so far is only in the type of bs that is doled out.

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