Years of Poems and Spirits

Just some interesting facts:
1. The big three at first asked for $34 Billion loan. Congress ready to dish out $15 Billion. Their total market cap? $14 Billion.
2. The big three’s manufacturing capacity is 17 million cars. In 2007, Americans bought only 14 million cars (domestic and foreign).
3. Ford pays, on average, $71 an hour to its workers. The Japanese U.S. plants pay $49/hr. Source see NYT.
4. The auto sale declined the most when gas price peaked after summer. Recently, there is a sales rebound despite poor economy. Trucks rebounds the most. Small cars may actually declined.

Thoughts:
- Undoubtedly the auto industry will shrink and restructure. However,
- The current difficulty is largely due to past sins. In terms of cost structure, the auto industry may be on the rebound. (in Ford, new employees are paid $53/hr)
- The auto industry lacks the vision and business foresight? Well, how about blaming “the American Dream” for a change? How many Americans can stand up and say, “I had nothing to do with this”?

Said a lot more yesterday. But I’d better stick to what I know

The news of the Citi bailout came with a pretty detailed term sheet. The center piece of the deal is that Citi will take on the first batch of sure losses. After that, the U.S. will absorb additional potential losses up to $250B. In return for this guarantee, Citi agrees to pay a quarterly premium of $0.4B.

So at what point does this deal makes sense for tax payers? I did some basic math trying to find out.

The calculation is more difficult than I thought because the 8% is not compounded return! To proximate, let’s say it is.  The result: if time horizon is set to 3 years, the threshold is 22% (or, as long as those assets don’t lose that much, the bailout was worth it). If it is 5 years, it is 25%. 10 years, 31%. (The numbers: $306B, $29B citi’s share, 10-90 split after that, excluding $15B from TARP and FDIC (considered pre-allocated), 2% T Bill/risk-free rate, $20B PV/Investment, 4 payments a year, 8% int. rate)

In short, the deal does NOT look like a sure winner in the short term (again, I was compounding the 8% where I shouldn’t)

However, since the public has become a vested partner in the deal, then what prevents the government to artificially inflate the assets’ value? It is a scary thought, since the government–and ONLY the government–has the power to do so (through monetary policy or its equivalent). Especially now people are talking about “forgetting the deficit”, where is the sanity check except real inflation?

Leaving tomorrow for Japan. Just some thoughts to write down …

1. I think the financial crisis is about to be over. Once the extra liquidity is taken out of the system and excess leverage is held in check, we will go back to the basics. The production function comes down to K and L (capital and labor). When both are healthy and in balance, I think we are fine. The real depression will only come when natural resources becomes the bottle neck.

2. The British rescue package (i.e. injecting cash to banks) is a superior solution to the original American one.  Bernanke kept saying “price discovery”, which I interpret as to let market figure out asset’s true price. However, the original package ran contrary to this principle: it required the government to buy up assets (instead of letting banks to pick sellers and set prices).

3. Although commercial banks are saviors of the day, the “animal instinct” of investors will again raise the profile of ibanks. No wonder Goldman Sachs decides to apply the NY state bank charter, instead of the national one: it doesn’t care about retail banking at all.

4. Japanese Yen and Chinese RMB will likely appreciate. Since Japan cannot lower rates any more, it will have to absorb the impact of increased domestic debt by other nations (produced by the bailouts). China may lower the rates but I believe it is under greater inflationary pressure than everyone else. Therefore, it may have to raise rates or appreciate RMB.

5. For the developed nations, it is easy to release money to the market in unison. But it is going to be a lot harder to take money out of circulation once the economy improves. To be more precise, since nations recover at different speed, some may need to restore monetary discipline earlier than others. However, because the financial market is globalized, the liquidity excess may soon return (or linger?).

6. Is Moral Victory is now called “Nobel Prize”? The Swedish Academy shouldn’t be playing God. If Krugman gets an “early” pass, then Gore and DaLai got an easy one.