Big Three Ask For Bailout, Problem Banks Expand 30%, Home Prices Drop, & Record Bank Debt Coming Due

Automakers seek $50 billion in fed loans

WASHINGTON -- Detroit's Big Three automakers are planning an aggressive push on Capitol Hill as they seek up to $50 billion in low-cost loans to speed the development and production of more fuel-efficient vehicles.

General Motors Corp., Ford Motor Co. and Chrysler LLC would use the money to help pay for retooling of older assembly plants and developing advanced technologies.

This is simply a request for a bailout by the automakers. I know they’ve wrapped it in other language such as “retool to make more fuel efficient vehicles,” but the truth is that any money they receive will disappear into the black holes that reside at the center of each company. Besides the fact that they really should not have been caught unawares again, I think that GM, Ford, and Chrysler should provide clear plans for how they intend to return to profitability using taxpayer money. So far they’ve displayed horrible management skills, and it is not clear to me that the best use of taxpayer money is with these companies.

Instead, I wonder what $50 billion could do the dozens of start-up electric vehicle companies out there? Sometimes companies are just too sclerotic to get out of their own way, and a fresh start is the best option.

S&P: Home prices drop by record amount in 2Q

NEW YORK (AP) -- A widely watched index released Tuesday showed home prices dropping by the sharpest rate ever in the second quarter, but the data for June suggest the severity of the housing slump may be waning.

The Standard & Poor's/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.

Still, on a year-over-year basis, no city in the Case-Shiller 20-city index saw price gains in June, the third straight month that's happened.

We’ve had damaging housing busts in the past, but they’ve always been contained to a specific region. Houston in the 1980’s and Florida in the 1920’s taught us that even a localized housing bust could spread ripples of discomfort far beyond their borders. This data showing that NO cities in the index saw a price gain deserves some notice. First, because we’ve never faced a truly nationwide housing bust before. Second, because it says the correction is still in its early stages.

U.S. Says Banks on 'Problem List' Rose 30% in Quarter

Aug. 26 (Bloomberg) -- The U.S. Federal Deposit Insurance Corp. said its `"problem list'' of banks increased 30 percent in the second quarter to the highest total in five years as more commercial real-estate loans were overdue.

"Quite frankly, the results were pretty dismal, and we don't see a return to the high earnings levels of previous years any time soon,'' FDIC Chairman Sheila Bair said at a news conference in Washington.

The deposit insurance fund fell 14 percent to $45.2 billion and the reserve ratio, or balance divided by insured deposits, was 1.01 percent. The FDIC is required to shore up the fund when the ratio falls below 1.15 percent.

It’s worth noting that not every bank on the problem list will fail, and not every failure will be on the list. To my knowledge, IndyMac was not on the list prior to failing. But the trend here tells us something meaningful; a 30% increase in problem banks in one quarter says we’re still in the early stages of this credit crisis.

Also, I have always thought that the 1.15% “coverage ratio” was better suited to trouble-free times than to any period of instability. It simply will not take much in the way of bank troubles to wipe out that FDIC fund. What will be interesting will be to see the approach the FDIC takes to securing more funds. Will they hit up all banks equally, nail the bad banks a bit more, or tap the taxpayer? Each of these routes has very different pros and cons.

Merrill, Wachovia Hit With Record Refinancing Bill

Aug. 26 (Bloomberg) -- Merrill Lynch & Co., Wachovia Corp., Lehman Brothers Holdings Inc. and the rest of the U.S. finance industry are about to find out how expensive credit has become.

Banks, securities firms and lenders have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co., just as yields are at their most punitive compared with Treasuries. The increase in yields may cost them as much as $23 billion more in annual interest versus a year ago based on Merrill Lynch index data. Higher refinancing expenses will restrict the ability of banks to borrow in the capital markets and lend, further cutting off credit to consumers and businesses and curbing what is already the slowest growing economy since 2001.

"The gears of capitalism are grinding to a halt,'' said Mirko Mikelic, senior bond fund manager at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees $21 billion in assets. "There is a tremendous concern over the banking sector and a scramble right now for capital.''

And here’s the data I’ve been waiting for. To the exhaustive pile of new borrowing that the US government needs to shoulder, we can add $871 billion of debt that financial firms will need to somehow fund at the exact same time. I will be more than a little surprised if this does not result in either drastically higher interest rates, or massive inflation.

In the higher rate scenario, the Federal Reserve shows some restraint and does not try to solve the problem with printing, meaning that all this borrowing has to compete for limited investment funds. When firms compete for money, they do it by offering higher and higher rates to attract that capital to themselves. So interest rates will rise. In the other scenario, the Fed simply expands its alphabet-soup lending facility programs and hands out dough for debt.

This is also known as “monetizing debt,” and is one of the key events that I am on vigilant alert for, since it will presage the beginning of massive inflation, the destruction of the dollar, or both. As always, I consider the monetization of debt to be twice as likely an outcome as the prospect of spiraling interest rates.