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Obamageddon 2012

“In 2012 as we push forward, it IS Obamageddon. He’s bankrupting the nation, with these rescue plans, these buyout schemes, cap-and-trade, paying cash for clunkers, you name it…”

-Gerald Celente, trend strategist and founder of the Trends Research Institute, on the FOX Business Network’s “Happy Hour” program last Friday.

“Gerald Celente Obamageddon 2012”
YouTube Video Link

Federal Bailout Application

Almost funny… if it didn’t hit so close to home.

From Bruce Feirstein at VanityFair.com (click on image).

Bike-Riding Bailout Protestor Killed In Illinois

From the Associated Press this past Tuesday:

A Chula Vista man riding his bicycle across the country to protest government bailouts has been struck and killed by a suspected drunken driver in Illinois.

Sixty-five-year-old Jim Gafney left San Diego County on April 27 and had completed about 2,000 miles of his 3,000-mile ride he called his “Mad As Hell Bike Ride Across U.S.”

The San Diego Union-Tribune says Gafney had become fed up with the bailouts and was worried about how it would affect future generations.

Illinois State Police Master Sgt. Chris Trame says Gafney was on U.S. Route 50 about 60 miles east of St. Louis just before 1 a.m. Sunday when he was struck from behind by a Nissan Altima driven by a 27-year-old man.

The driver was arrested.

Jim Gafney’s Last Video Diary Entry
YouTube Video Link

Source:

“Protesting bicyclist killed on cross-country ride”
Associated Press, June 23, 2009

Congress Scrutinized For Potential Conflicts-Of-Interest

Washington lawmakers are receiving more attention these days for possible conflicts-of-interest relating to the taxpayer bailouts and the proposed health care system overhaul. From the Washington Post’s Paul Kane and Carol D. Leonnig last week:

Top House lawmakers had considerable holdings in major financial institutions that took billions of dollars in taxpayer bailouts at the end of last year, according to annual financial disclosure reports released yesterday.

From stock holdings to retirement funds to mortgages, more than 20 House leaders and members of the House Financial Services Committee had large personal stakes in the Wall Street powerhouses whose collapse last year led to an unprecedented government intervention in the marketplace. In some instances those lawmakers, like millions of other investors, sold their holdings at steep losses while others retained the stocks at greatly diminished value.

House Speaker Nancy Pelosi (D-Calif.) and her husband lost hundreds of thousands of dollars investing in American International Group, which has received $170 billion in government loans and cash injections, making it by far the largest recipient of federal bailout dollars. Republican Whip Eric Cantor (R-Va.) and his wife held stock, retirement plans and other investments worth at least $183,000 and as much as $495,000 in firms benefiting from federal government rescue efforts, including Goldman Sachs and Morgan Stanley.

At least 18 members of the House Financial Services Committee — which oversees the banking and housing industries at the core of the economic meltdown — held stock last year in firms that received federal bailout assistance, according to a review of the forms that were available yesterday.

As President Obama pushes his universal health care program, more potential conflicts-of-interest involving lawmakers have surfaced. From the Associated Press’ Larry Margasak and Sharon Theimer last Friday:

Influential senators working to overhaul the nation’s health care system have investments and family ties with some of the biggest names in the industry. The wife of Sen. Chris Dodd, the lawmaker in charge of writing the Senate’s bill, sits on the boards of four health care companies.

Members of both parties have industry connections, including Democrats Jay Rockefeller and Tom Harkin, in addition to Dodd, and Republicans Tom Coburn, Judd Gregg, John Kyl and Orrin Hatch, financial reports showed Friday.

Jackie Clegg Dodd, wife of the Connecticut Democrat, is on the boards of Javelin Pharmaceuticals Inc., Cardiome Pharma Corp., Brookdale Senior Living and Pear Tree Pharmaceuticals…

Other publicly available documents show Mrs. Dodd last year was one of the most highly compensated non-employee members of the Javelin Pharmaceuticals Inc. board, on which she has served since 2004. She earned $32,000 in fees and $109,587 in stock option awards last year, according to the company’s SEC filings.

Mrs. Dodd earned $79,063 in fees from Cardiome in its last fiscal year, while Brookdale Senior Living gave her $122,231 in stock awards in 2008, their SEC filings show. She earned no income from her post as a director for Pear Tree Pharmaceuticals but holds up to $15,000 in stock in Pear Tree, which describes itself as a development-stage pharmaceutical company focused on the needs of aging women.

Sources:

“Lawmakers Invested in Bailed-Out Firms”
Paul Kane, Carol D. Leonnig
Washington Post, June 11, 2009

“Key health care senators have industry ties”
Larry Margasak, Sharon Theimer
Associated Press, June 12, 2009

A Plea From Michael Moore

“Save our CEOs”
YouTube Video Link

Mayors: Give Us, Not The States, More Money

Speaking of bailouts… from Reuters’ Camille Drummond this morning:

Without more direct aid to U.S. local governments, Washington may make matters worse for cities facing falling tax revenues and increased spending needs, the nation’s mayors said at their annual meeting this weekend.

Mayors said they bear the tough task of cutting services and jobs vital to U.S. cities, even with help from the $787 billion in stimulus funds Congress passed in February…

Local governments, struggling to issue debt in a largely stalled municipal bond market, expressed worries that current federal stimulus initiatives — including development grants, infrastructure funding, and the subsidized Recovery Zone and Build America Bonds — while helpful, may not be enough in the financial crisis.

“And it’s important that metropolitan areas get money directly for recovery, and not through the states,” said Los Angeles Mayor Antonio Villaraigosa, who has voiced concerns that states may use stimulus funds to close their own budget deficits, especially in California with its massive $24.3 billion gap.

“Take your stinking paws off our money,
you damn dirty states!”

Source:

“Mayors say cities need direct economic help”
Camille Drummond
Reuters, June 15, 2009

Signs Of The Time, Part 48

Bailouts are all the rage these days. So I’m not too surprised to learn that a country club in Palm Desert, California, is looking to its local government for financial relief as well. From The Desert Sun’s K Kaufmann on June 9:

Palm Desert Country Club could be on the brink of financial failure and is looking to the city for a bailout.

The club closed its nine-hole executive course last week, said Dave Simmons, a resident who also is the club’s general manager. A second 18-hole course remains open.

“It’s a matter of not being able to generate the income you need during season to get you through the summer,” he said. “Financially, we’re on life support. It’s at the point that the club can’t meet its obligations.”

As a result, club members have approached the City of Palm Desert for a bailout. Kaufmann wrote:

Owners Randy Case and Larry Kosmont were not available for comment Monday, but club members have put forward two city-funded rescue proposals for consideration, Simmons said.

The city could buy 10,000 rounds of golf at $20 per round for a cash infusion of $200,000 per year for the next 10 years. City residents would then be able to play at the club for $25 a round. Current regular summer rates are $45 until noon and $35 after noon. Season rates are as high as $80 a round.

The second proposal centers on the city buying the club’s nine-hole executive golf course and turning it into a public course, possibly for children and seniors…

Mayor Pro Tem Cindy Finerty said with the city facing its own financial crunch — a projected 13 percent drop in revenue for the coming fiscal year — Palm Desert Country Club may be facing some hard choices.

“The concern is how is that (helping the club) going to impact Desert Willow,” Finerty said, referring to the city’s upscale golf resort on Country Club Drive, which is also feeling the pinch. “We have to ask ourselves, do we want to be in the business of bailouts?”

According to the piece, the National Golf Foundation estimates that as many as 15 percent of private country clubs across the country are facing financial or membership crises.

Source:

“Country club asks city for financial bailout”
K Kaufmann
The Desert Sun, June 9, 2009

U.S. Budget Deficit Closing In On $1 Trillion

“You cannot keep out of trouble by spending more than you earn.”

-Abraham Lincoln (16th U.S. President. 1809-1865)

More bad news concerning the nation’s finances. From the Associated Press’ Martin Crutsinger today:

The federal budget deficit soared to a record for May of $189.7 billion, pushing the tide of red ink close to $1 trillion with four months left in the budget year.

The rising deficit reflects increased government spending due to the recession, and billions of dollars spent on bailouts for banks and other troubled companies.

The Treasury Department reported Wednesday that the red ink so far this year totals $991.9 billion. The administration is projecting the deficit for the budget year that began Oct. 1, will total an all-time record of $1.84 trillion. That would be more than four times the amount of last year’s record deficit…

The new Treasury report showed government spending totals a record $2.37 trillion through the first eight months of the budget year, 18 percent more than the year-ago period.

At the same time, the economic downturn has cut into tax revenues. The report showed that government receipts total $1.67 trillion through the May, down 18 percent from last year. Rising unemployment and struggling businesses have meant a drop in both income and corporate taxes…

The $991.9 billion deficit so far this budget year is more than triple the amount of red ink incurred during the year-ago period.

Source:

“Budget deficit hits record for May of $189.7B”
Martin Crutsinger
Associated Press, June 10, 2009

General Motors Will Not Go Bankrupt

“General Motors has no bad years, only good years and better years.”

-Harlow H. Curtice (General Motors CEO, 1955 TIME “Man of the Year.” 1893-1962)

So GM finally went bankrupt. No news there. We all saw it coming.

Or did we?

From Edmunds.com, February 6, 2006:

General Motors will not go bankrupt… so says Jerry Flint, a former Forbes senior editor who has covered the automotive industry since 1958.

Says Flint: “The company has $19 billion in the kitty and just about $100 billion in the pension fund. But there’s more here than the balance sheet. When I was a boy, there was one reason companies went bankrupt: They couldn’t pay their bills… GM can pay its bills, so that’s not a problem.”

I guess time will tell…

From CNBC’s Phil LeBeau, July 3, 2008:

Well, for those of you writing off GM, be careful. This company may be in a crisis, but that does not mean bankruptcy is likely in the near future.

How can I be so sure? My belief is based on two things. First, this company has plenty of cash to get through this year and if it needs more next year, it has several options. The bottom line is this company has the resources to ride out this terrible stretch. At some point these guys will need to get the revenue and sales to support their turnaround, and whether or not that happens is still unclear. But before they throw in the towel, they have the time and resources to make a serious run at turning things around.

The second reason I don’t expect GM to go bankrupt is because this company’s leaders will likely act on their own, before they have someone else (creditors) call the shots. If that means finding an alliance or third party to inject more money into the company, then that’s what they’ll do. You get the idea. They’ll pick their poison before letting someone else do it.

Bottom line: be careful buying into the bankruptcy talk surrounding GM. Sure these guys are in major financial bind, and the future looks bleak. But they can get out of it and will try several options to raise cash before chapter 11 become the best option.

From Motor Trend’s Truck Trends, July 11, 2008

GM and Chrysler have been up against it recently, with both automakers cutting production and dropping models in light of declining sales. As they continue to bleed red ink, Wall Street has begun speculating that one or the other will be forced to declare bankruptcy soon. The two continue to insist they’re more than capable of weathering the current hard times, and exciting new products will put them back in the black soon. But despite this the rumors persist, and now both are reassuring the public — yet again — that they’re not going under anytime soon.

From Reuters, April 5, 2009

Bankruptcy is not inevitable for General Motors Corp, said the automaker’s new chief executive on Sunday, who is under White House orders to win more concessions from bondholders and unionized workers.

Fritz Henderson became chief executive a week ago after a White House auto task force rejected the turnaround plans submitted by GM and Chrysler LLC. The automakers were told they had to write broader plans to restructure…

Asked on NBC’s “Meet the Press” if bankruptcy was inevitable, Henderson replied, “No.” He said he intended to meet the administration’s demand to move more rapidly and to cut more deeply. The White House set a 60-day deadline for results.

Which brings us to today.

From the Wall Street Journal, June 1, 2009

General Motors Corp. filed for Chapter 11 bankruptcy early Monday, marking the humbling of an American icon that once dominated the global car industry and setting up a high-stakes gamble for U.S. taxpayers. (See the Chapter 11 filing.)

The bankruptcy filing, made in the U.S. Bankruptcy Court in Manhattan, marks the climax of a lengthy debate over the auto maker’s future after it sought a bailout from the U.S. government in December to stay alive. In the end, GM couldn’t complete its restructuring out of court and filed for bankruptcy-court protection to get billions more in aid from U.S. taxpayers.

The question now facing 56,000 auto workers, 3,600 GM dealers and the Obama administration: Will it work?

Sources:

“General Motors will not go bankrupt…”
Bob Holland
Edmunds (Straightline Blog), February 6, 2006

“GM Going Bankrupt? I Don’t Buy It And Here’s Why”
Phil LeBeau
CNBC, July 3, 2008

“Chrysler, GM continue to not go bankrupt”
Andrew Strieber
Motor Trend’s Truck Trends, July 11, 2008

“GM CEO Henderson says bankruptcy not inevitable”
Charles Abbott
Reuters, April 5, 2009

“GM Files for Bankruptcy Protection”
Kevin Helliker, Neil King, Jr., John D. Stoll
Wall Street Journal, June 1, 2009

Boom2Bust Turns Two Years Old

Memorial Day Weekend 2007. Sure seems like yesterday….

Friday, May 25, 2007.

The Dow Jones Industrial Average closed out the week at 13,507.28. The S&P 500 index finished up at 1,515.73.

The median house price is $222,700, according to the National Association of Realtors.

Family net worth is at an all-time high of $64.36 trillion for the quarter.

The number of unemployed persons is 6.8 million and the unemployment rate is 4.5 percent.

Total public debt outstanding in the United States is $8.8 trillion.

Talk of the “Goldilocks economy” rules the day, and Washington and Wall Street are in “don’t worry, be happy” mode.

Federal Reserve chairman Ben Bernanke doesn’t believe the nation will slip into a recession, and he rejects the notion raised by his predecessor, Alan Greenspan, that the economy’s expansion could be in danger of fizzling out…

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan recently said there’s a one-in-three possibility of a recession this year.

But Bernanke — while acknowledging there are risks — told Congress’s Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

“I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end,” Bernanke said. “I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”

-Associated Press, March 29, 2007

…a new SUV in every McMansion’s garage

Fast forward to today…

The Dow Jones Industrial Average closed at 8,473.49. The S&P 500 index finished up at 910.33.

The median house price in the first quarter of 2009 is now $169,000, according to the National Association of Realtors.

Banks and businesses worldwide have lost $1.47 trillion in write-downs and credit losses in the past 22 months stemming from the collapse of the subprime-mortgage market.

Household net worth dropped a record 9 percent in the fourth quarter of 2008, pushing total net worth down to $51.48 trillion. It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. Also, the drop in net worth in the fourth quarter of 2008 was the largest drop in dollar terms on record, going back to 1951, when the U.S. government began keeping quarterly records. The 9 percent drop was also the largest drop as a percentage change on record.

In April (the last month data is available for), the number of unemployed Americans reached 13.7 million persons and the unemployment rate was 8.9 percent. According to the Bureau of Labor Statistics, 5.7 million jobs have been lost since the recession began in December 2007.

The total public debt outstanding in the United States is now $11.3 trillion. Furthermore, as Bloomberg’s Mark Pittman and Bob Ivry pointed out on March 31:

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Goldilocks made a fine meal for the bears.

But I’m convinced our fuzzy friends still want more.

Thank you all for reading and contributing comments to Boom2Bust.com, and for inspiring me to post about some of the financial research I come across on a daily basis.

Personally, I think that while we may get out of this recession soon enough, I fear all the additional obligations accrued since 2007 will only have made the house of cards that is the U.S. financial system weaker, thereby setting ourselves up for more pain when the eventual crash comes.

You can only kick the can down the road for so long before you have to call it a day.

Year three, here we come!

Christopher E. Hill
Editor

Fannie Mae, Freddie Mac Face ‘Critical’ Financial Problems

For regular Boom2Bust.com readers, the following piece about mortgage giants Fannie Mae and Freddie Mac isn’t really news. From CNN Money’s Tami Luhby this past Monday:

Fannie Mae and Freddie Mac, charged with helping lead the nation out of its housing crisis, are facing “critical” financial problems, federal regulators said Monday.

The companies suffer from severe financial, operational and compliance weaknesses, the Federal Housing Finance Agency said a report to Congress detailing its annual examinations of the firms. Taken over by the government in September, Fannie and Freddie are not able to operate without federal assistance.

“With new senior management teams, each enterprise has made strides in remediating problems,” the agency said. “But they still face numerous significant challenges including building and retaining staff and correcting operational and credit management weaknesses that led to conservatorship.”

Luhby pointed out that while the two mortgage companies are considered essential to a housing market and larger economic recovery, their balance sheets are hemorrhaging, requiring them to use taxpayer funds to stay afloat. From the piece:

Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) play a vital role in the national housing market, accounting for a combined share of 73% of mortgage originations in the second half of 2008. They also serve central roles in the Obama administration’s foreclosure prevention plan.

To continue functioning, the firms have drawn down about $60 billion of their combined $400 billion lifeline from the federal government. Fannie reported a $23.2 billion quarterly loss and Freddie a $9.9 billion quarterly loss earlier this month.

Source:

“Fannie and Freddie in ‘critical’ condition”
Tami Luhby
CNN Money, May 18, 2009

Agency That Insures Pensions To Require Bailout?

Think you’ve seen the last of the taxpayer bailouts? Maybe not. The Associated Press’ Deb Riechmann wrote earlier today:

In an ominous setback, the government agency that insures the pensions of 44 million Americans has amassed a record $33.5 billion deficit — triple what it was just six months ago.

The bleak financial snapshot, in a report obtained by The Associated Press, raises new fears that a federal bailout eventually will be needed for the Pension Benefit Guaranty Corp. The beleaguered agency is being saddled with the underfunded pension plans of companies going bankrupt in the worst economic slump since the Great Depression.

A rare midyear financial update requested by Congress shows the $11.1 billion deficit the agency posted at the end of its fiscal year on Sept. 30 has swelled by $22.5 billion to its highest level in the agency’s 35-year history…

The agency does not insure 401(k) plans, but its fate is important not only to the workers covered by more than 29,000 employer-sponsored benefit pension plans but to all taxpayers who could be asked to foot the bill on a bailout if the agency ever becomes insolvent.

It’s possible the Pension Benefit Guaranty Corp. could be saddled with even more liabilities down the road. Riechmann added:

The agency is closely monitoring the auto, retail, financial services and health care industries, all in financial distress. The PBGC estimates that pension underfunding in the auto sector alone is $77 billion.

Source:

“Deficit surges at agency that insures pensions”
Deb Riechmann
Associated Press, May 20, 2009

Freddie Mac Bailout: $51 Billion And Counting

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis… The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

-Congressman Barney Frank (D-MA), September 11, 2003

From the Washington Post’s Zachary Goldfarb this morning:

Freddie Mac yesterday reported that it lost $10 billion in the first three months of the year, as investments in mortgages continued to fall in value at the federally run housing finance giant.

The disclosure automatically prompts a $6 billion investment from the Treasury Department to keep the company solvent, bringing Freddie Mac’s bailout total to $51 billion in the first nine months of its government rescue…

Last week, Fannie Mae reported that it lost $23.2 billion in the first three months of the year as mortgage defaults increasingly spread from risky loans to the far-larger portfolio of loans to borrowers who have been considered safe. The loss brought District-based Fannie Mae’s total bailout to $34 billion.

Freddie Mac’s $10 billion loss compares with a $149 million loss in the same quarter last year. It was far smaller than the fourth-quarter loss, which was $24 billion.

The federal government has pledged $200 billion to offset losses at each mortgage giant. In the years of the housing boom, Freddie Mac, even more than its counterpart Fannie Mae, moved swiftly into buying mortgage investments created out of pools of loans made to people with weak credit histories or no proof of income or employment.

Source:

“Freddie Mac Loses $10 Billion for Quarter”
Zachary A. Goldfarb
Washington Post, May 13, 2009

Next Bailout: Newspapers?

And many thought the next bailout was going to be commercial real estate. From Joe Weisenthal on the CNN Money/Fortune website yesterday:

Folks who just a few days ago guffawed at the prospect of a newspaper bailout are already coming around to the idea after seeing politicians spring to action.

Yesterday, Sen. John Kerry held a hearing on the “Future or Journalism” – but we’ll just call it what it was: A hearing about a possible newspaper bailout.

See, politicians aren’t like us. When we get concerned about newspapers becoming “endangered species,” we talk about it or discuss it. When politicians do, they pass laws to deal with it. A hearing isn’t just an idle event…

One gets the distinct impression that John Kerry’s interest mainly stems from the realization that The Boston Globe is in a very real danger of shutting down. His interest in this subject is no different from the fact that politicians from Michigan are inordinately concerned with the auto industry.

For now, nobody will actually call the bailout a bailout. The current proposal has to do with letting papers be non-profits, more easily. At best that’ll help around the margins, but doesn’t solve anything fundamentally. The next step is some kind of national journalism fund or bank to help papers cross the bridge to a sustainable digital future. Just watch.

And the scramble for taxpayer “bailout” funds continues…

Source:

“The Ridiculous Newspaper Bailout Begins”
Joe Weisenthal
CNN Money/Fortune, May 7, 2009