Welcome. This here blog offers what I learn, in commentary for all its worth. Know that I try to know best, when I know anything at all.

Journey onward!!!

Wednesday, April 8, 2009

GM in America, Land of the Subprime?

The joke is on us. If you thought the subprime mortgage market collapse was "funny," then the auto market collapse is even funnier. GM, as it turns out, was no less subprime than home owners in Arizona who borrowed beyond their means. Like Washington, our bankruptcy-bound automaker had presided over a business model running almost entirely on debt.

They call it 'borrowing,' but in reality Wall Street was basically GM's way of printing its own money. It is no coincidence that, just as Wall Street collapsed, GM executives promptly knocked on Washington's door. They were begging the Treasury to print some money for their company because, for the first time, Wall Street (and GMAC) didn't have any left to bail them out.

To Washington, this was something wholly new, but to GM it was just business as usual. What difference does it make that GM is bailed out by Washington or Wall Street? Perhaps one: GM is now dealing with a lender with real teeth and some semblance of conscience. After all, we are talking about prospective taxpayer money here.

The truth is that GM was crushed beneath an old weight. It was a slow death because up until 2008, plentiful Wall Street loans kept GM humming indefinitely. Armed with credit eternal, GM made and sold enough cars to make its minimum loan payments. All the while GM's debt kept ballooning and its global competitiveness continued to falter.

But that was fine with GM, apparently, so long as it could borrow enough money to pay its bills.

Little did Wall Street know it was lending to a subprime borrower in GM. Perhaps GM itself did not know. Actually, maybe regulators, bankers and rating agencies just ignored some facts (from 2004) and made the loans out anyway. This kind of self-assured negligence in Washington and Wall Street is precisely what precipitated the subprime mortgage market crash and vaporized a whole lot of phantom wealth.

Sadly, GM's bankruptcy will vaporize more than just wealth, namely tens of thousands of jobs.

This is not just about GM. What brought down the ill-fated automaker also brought much of the American economy to its knees. See job losses in 2008. As it turns out, credit flowed from Wall Street to credit-unworthy or -addicted borrowers across the economic spectrum. The question now is who will be the latest on the chopping block.

Don't just take it from me, but from the man who saw it all coming: Nouriel Roubini, affectionately known as Dr. Doom, who had the strength of will to see through mainstream pre-2008 economics. Everything he is about to say in the following warning is worth looking out for:
This crisis is not merely the result of the U.S. housing bubble’s bursting or the collapse of the United States’ subprime mortgage sector. The credit excesses that created this disaster were global. There were many bubbles, and they extended beyond housing in many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans. There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic, and destructive financial instruments. And there were still more bubbles for local government borrowing, leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and credit-default swaps—a dangerous unregulated market wherein up to $60 trillion of nominal protection was sold against an outstanding stock of corporate bonds of just $6 trillion.
(read the whole thing here)

This is a joke on us. Have we emerged from the American Century not only as the sole superpower, but also a subprime nation in disguise? When the American economy looks itself in the mirror, does it see GM? How about that family with the foreclosed home? Just don't ask Dr. Doom.

One thing is for sure: we reap what we sow. Wall Street made us rich beyond imagination; too rich, as it turns out. By the 21st century, we had too much wealth chasing too few worthy investment opportunities. So Wall Street, with Washington's nod, proceeded to loan out to the unworthy, the subprime, the GMs of the world, and any family who happens to wants a house.

(Hell, even to illegal immigrants; I mean come on, why not! The party was just getting started!)

After all, Wall Street had no choice. The only alternative was to forfeit the wealth flowing into our markets from all around the world and say, "thanks but no thanks, heehee, we are too rich already." But of course, no self-respecting capitalist nation could ever do such a wrong thing. Certainly not Wall Street, the key driver and underwriter of the indomitable American economy.

This is precisely why our best and brightest minds worked on Wall Street, and why the sum of Wall Street bonuses can dwarf entire nations. This is also why AIG "deserves" its retention bonuses (as I have argued) and Wall Street managed to bag the sixth largest all-time bonus payout in 2008, as I have previously reported.

(F*%&-ing EH, where were the pitch forks for the Wall Street bonuses??!?! AIG was NOTHING compared to what the real banks got. I'm REALLY pissed about that. It was appalling, what populist Washington did to AIG. Democracy at its worse, I'm sorry to conclude.)

It may be hard to imagine today, but there was a time when Wall Street was a legitimate force respected worldwide (even if grudgingly). Of course, this was before Wall Street had to squeeze corners and coax the subprime to keep growing, and growing, and growing, which is what capitalism is all about: relentless growth for profit and shareholders, often at a cost that is not immediately apparent.

Capitalists, as such, cannot escape the temptation of alchemy, that elusive art of spinning straw into gold. The best kind of money is, of course, the kind that you don't have to do anything to make. Just ask Wall Street.

Admit it, you wish you had a friend named Rumpelstiltskin, just like the American economy and GM had a friend named Wall Street.

Whether we like it or not, the post-industrial American economy, as it were, is done for. "Change" is coming and it has nothing to do with Obama's initiative, whose job is merely to administer change. It is "change" we might have to believe in.

The biggest irony is that this crisis was made in our own subprime image. Like GM, Washington saw this coming with eyes wide shut. Have our free markets grown to a weight that can rival that of any centrally planned economy?

Now that, my friends, is a scary thought.

Forget about AIG bonuses or Obama palling around with Jay Leno or his stupid teleprompter. That the very notion of American capitalism is under siege at home and abroad should receive our full attention.

I for one never imagined I would write as I am about these topics. Hell I can't even vote yet!!