Should the Auto Companies Be Saved?

I have been turning over in my head this whole issue about the auto manufacturers needing a financial bail out for days now. The fact that I’ve had a migraine that has been hanging on for days now too doesn’t seem to have helped me to think this matter through.


My first reaction is to bail them out. After all, there are millions of jobs directly on the line if Ford, GM, and/or Chrysler folded. That doesn’t even count the millions of jobs for people employed at companies that supply the auto manufacturers in order for them to build the cars, or the jobs affected by companies that rely on selling related products for those cars once they are in the hands of the consumer. The fact is that people still need to buy cars, and if there aren’t American made cars to be bought, it will drive the consumers to foreign made cars. And their dollars will go with them.

The flip side is that car manufacturers have been slow to innovate. They continued to spit out gas-guzzling behemoths because people want them. Or, it was just good marketing on the part of the car companies that made people think they wanted them. The other problem is that the auto manufacturers are up to their necks in unions, which may be choking them with expenses. Granted, the need for unions years and years ago helped to protect the employees from poor working conditions and helped people get a fair wage for the work for what they do, but now they seem to be too confining. Companies can’t control the massive costs that these unions carry when it comes to pensions, health care, and hourly wages. While I don’t want companies to have no checks and balances when it comes to compensation for its employees, I also think the unions are at fault for their sometimes exorbitant demands.

Something has to give.

Right now, I am leaning toward letting one of these car companies go bankrupt. It will force the company to reorganize and maybe even weaken its union, if not dismantle it all together. Sure, it will be painful and a lot of people will be affected by it. But something needs to happen to scare the living daylights out of the big car companies and the big unions. They need to change how they operate, and they need to provide higher quality products that last longer and don’t require financing over 5-6 years. They also need to start building more fuel efficient vehicles like those that we were promised in the 1970s with the last oil/gas crisis. So, let’s say that GM goes belly up. Maybe that would force Ford and Chrysler and their unions to make change quick so they aren’t next. The loss of money in one’s own pocket can sometimes be a great motivator.

The Fed could bail them out. But, let’s be honest here. The Fed is waffling now about how it will use the bail out money for the financial institutions. I think that the whole economic problems we are facing right now are so huge that the Fed honestly don’t know what to do. I can’t say that I blame them. But their indecisiveness isn’t helping matters. So, if they bail out the car companies, they better do it with some hard and fast rules about how the money is used and there better be some clear expectations for specific results. There should be controls in place to make sure the money doesn’t just fall into a black hole. There should be no bonuses for any executives - or anybody - until the money is repaid. In fact, there should be no RAISES for anybody until the money is repaid, and every employee should take a pay cut. Within 2 years I’d want a car that gets 50 miles to the gallon, or one that runs on renewable energy, or both. I would want something for my money. Is that too much to ask?

It’s no wonder I still have a migraine.

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Who Regulates the Regulators?

With hearings going on right now by the House Government Oversight and Reform Committee to review the recent financial crisis, something is becoming very clear to me.

The regulators haven’t been regulating. And it seems like none of them – Alan Greenspan and his successors, the banks and financial institutions, etc. – didn’t see the financial collapse coming. Some financial people and regulators made comments before the implosion that things were going to go bad, but they did nothing to alert the right people or to take corrective action. A perfect example of the attitude could be found at Standard & Poors, as evidenced by an email from 2006 (yes, 2006) that stated “Let’s hope we are all wealthy and retired by the time this house of cards falters.” So, even in 2006, some knew that the country’s financial framework was shaky at best.

It seems that the regulators have been derelict in their own duties. Was it their own greed? Was it that they were just terrified what would happen if they blew the whistle? Was it incompetence? Laziness? Indifference? Fear?

The more the hearings continue, the more I realize that there isn’t anyone minding the store. Sure, we have regulators, but it appears that their role was nothing more than to be window dressing.

The first thing that comes to mind is that we may need some “grand, all-knowing, all seeing overseer” who is in charge of all these financial processes and will take care to make sure they all are doing their jobs. But wait, what happens if the “grand, all-knowing, all seeing overseer” doesn’t do their job? And why must we add more government and more bureaucracy just because some people aren’t doing the jobs they are supposed to be doing?

We need to first look at those government agencies that are in charge right now and assess the level of competence of the people at the top, and clean house and bring in new blood, starting with the Fed and the Treasury. While the SEC is not the apparent cause of the stock market’s recent collapse – the collapse being an after-effect of the financial crisis – it does seem that some trading methods and practices need to be reviewed and possibly eliminated or re-tooled. Tight controls need to be put in place for hedge funds, which operate as if this is the Wild West. And companies like Standard & Poors or Moody’s that evaluate and rate stocks need to be audited themselves and if evidence that they ignored signs of trouble in the housing market and/or with financial companies and they did not reflect it in their ratings, they should be charged with fraud and face stiff fines. And, since it appears that these places profited from the housing market as long as they continued to rate companies favorably I think there was definitely too many conflicts of interest that go unchecked in the financial markets.

I admit, I don’t know the answer to the problem. I suppose that a “grand, all-knowing, all seeing overseer” would help, but I would prefer that these agencies just do the job they are paid to do. Is that too much to ask? But where does it end? The buck must stop someplace. Whatever the government decides to do, the American people should ask for complete transparency in everything these people are doing, and even the smallest tidbit of information on what these people do should be made public. I am sure there are millions and millions of Americans who would be more than happy to help keep an eye on the country’s financial health and would be quick to blow the whistle if anything improper is discovered. Count me in!




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Wall Street Crisis: Mass Extinction Underway?

Months ago, when the Fed helped to bail out Bear Stearns by brokering a deal with J.P. Morgan Chase, it was clear that this was just the tip of the iceberg. And with the Fed recently helping to bail out Fannie Mae and Freddie Mac, it was only a matter of time before the Fed ran out of fingers to put in the leaking dike.

The extend of the greed and risk-taking on the part of Wall Street financial firms with respect to careless lending practices with home mortgages is now obvious. With Lehman Brothers now filing bankruptcy, and with Bank of America buying Merrill Lynch, we are seeing some long time financial forms either bit the dust or being assimilated. While it is sad to see any employee lose their jobs, I have no sympathy for the fat cats of Wall Street who made the collapse happen.

If you don’t have money in these troubled institutions, you may not think you have a problem. And if you do have money there, you may think that the FDIC insurance of balances up to $100,000 will keep you somewhat protected. Think again. Shortly after the Bear Stearns collapse, my husband and I took the opportunity to split up our CDs (which had just matured) and split them up over several banks. We were told at that time that while FDIC insurance is real and it will cover depositors, what the FDIC doesn’t make very clear is HOW LONG it will take to recover the money. In fact, one bank told us that it could take 10-20 years before we ever got the full amount of our money back, if in fact there was a collapse of the bank. So those people who have money in a Lehman Brother’s bank may have to wait a long time to see the full amount of their money should the FDIC have to step in to cover deposits.

Should people feel unsettled about these happenings? You bet. With many people having money in personal retirement plans like 401ks and IRAs, there is a lot of money out there just sitting and waiting for someone to screw it up for you. Even though the days of free-wheeling mortgage lending seem to be over for now, the repercussions will be felt for some time to come. It really is about time that the greedy executives and money managers at financial firms bear some punishment for the risks they took with money that didn’t belong to them. Unfortunately, the people who will really pay are depositors and average stockholders and the “common” employees who put their trust – and their money – in these firms.

If you haven’t taken a look at your own finances, it’s time that you do. If you have any deposits in any banks that exceed FDIC insurance limits, it may be time to split them up. And do your research – make sure if you do start moving your cash or investments that you put them in financial institutions that seem to be at the top of the heap right now. J.P. Morgan Chase, who basically stole Bears Stearns, and Bank of America, who lapped up Merrill Lynch, seems to be some of the few that appear stable. While I am not telling people to use these banks, it’s just a hint to do your homework before you hand over you money.

When the dust settles – and who knows when this will all be over – we may see less banks and financial institutions, but they may be stronger for it. Maybe the Fed will also get its act together and get some needed controls put in place. Hopefully, everyone will also learn from these mistakes and be smarter for it. My money - your money - depends on it.





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The “Collapse” of Bear Stearns

The recent near fatal collapse of investment company Bear Stearns is not a surprise. In fact, it was probably years in the making, with greedy financiers capitalizing on the real estate boom and the Fed continuing to lower interest rates to ridiculously low levels. So low, in fact, that banks and investment groups were loaning money to people that didn't have jobs.

Bear Stearns got caught in this mess by getting in so deep with the real estate market that when it started to become undone, Bear Stearns had little to protect itself. Then, when it’s banking investors decided to take their money out of Bear as they had little confidence in them, the company found itself on the brink of insolvency. Of course, the Fed (Federal Reserve) comes to the rescue. They had to; otherwise the entire banking system may have faced a domino effect collapse.

Barrons is reporting “Wall Street hasn't faced a crisis of this magnitude since the implosion of the giant hedge fund Long Term Capital Management in 1998. And the news isn't expected to improve any time soon. This week Bear, Goldman Sachs (GS), Lehman Brothers (LEH) and Morgan Stanley (MS) are slated to report results for their first quarter, ended in February. The results won't be pretty”

How could a company like this get into a mess like this? My thought it is greed, plain and simple. They took the words of fictional movie character Gordon Gekko a little too seriously, when he said in the 1987 movie Wall Street, “Greed is good.” Well, greed is not good, because companies like Bear Stearns were so blinded by the real estate bubble – caused by low interest rates – that they couldn’t see that the bubble was bursting around them and they had no safety net.

But I also blame the Fed. They lowered interest rates so low that banks made risky loans to virtually anybody with a pulse. People were getting interest-only loans for price-inflated homes, with adjustable rate mortgages. Problem is, people didn’t realize that those adjustable rates could go UP. Yet, the Fed continued to lower rates, causing money to be so cheap that inflation started to run rampant. So now the Fed has to bail out Bear Stearns and who knows what other financial institutions down the road. I suppose we are lucky that the Fed can bail them out, but it makes me wonder if we weren’t – or aren’t – a breath away from a depression-like era. The great depression of 1929 started because of over speculation on the stock market. Now we may be faced with a similar situation because of over speculation in the real estate market.

I worked for a company who was owned for a short time by Bear Stearns in the 1980s. They were greedy then, taking out every single dime of the company they could, and cutting costs to the point that there was almost no company left to run. We were lucky that someone came along and bought us from Bear and allowed us to actually run the business. In a way, I’m glad to see their fall from grace. But I’m sorry that the Fed has to bail them out, and I’m also sorry that it may still create a huge ripple effect in the banking industry.

These are very uncertain financial times for everyone. Bear Stearns may be only the tip of the iceberg. Stay informed, and watch your investments carefully. Don’t be like Bear Stearns and let greed blind you to any financial peril ahead.

NOTE: It was reported that late in the day Sunday March 16, J.P. Morgan purchased Bear Stearns - for $2 a share. The big losers here are shareholders; Bear opened on Friday March 14 at $54.24, and closed that day at $30. Hopefully some of the executive at Bear lost a lot of money in their own stock holdings.

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