Banks and Big Auto Foresee Tougher Challenges Ahead

Several news agencies are describing how banks receiving TARP funds like Citibank and Bank of America are sitting on the cash instead of lending. The idea is that they are seeking to stabilize their balance sheets and retain what shareholder value they can. This is debatable though because everyone knows, banks make money by lending. Stability for banks remains a perennially relative term when for instance, B of A back in 2007 lost $5.6 billion from CDO exposure. (As quoted in Bank of America's Investor Full Year Factbook 2007, Page 45)

http://library.corporate-ir.net/library/71/715/71595/items/283997/IRFactBookFullYear2007.pdf)

But lending is still occurring, albeit at low velocity, and that is an encouraging fact. B of A for instance, said in a press release on 2/17/09 that it has extended some $115 million in the 4th quarter of 2008 alone. While this may be a relatively small sum it d0es represents the understanding that at the macro level, bank executives realize if they do not lend, the economy will not right itself.

But for the next TARP, we should expect a money grab, and not just from banks. It will come from other ailing businesses as well. Automakers like GM have been vocally, and publicly asking for the cash. Conservatives, often point out that the key to the economic crisis is consumer spending and everything else should be secondary.

Unfortunately, the auto industry is in my view, doomed to fail. The industry itself has long been crippled by the money killing effects of Union Labor, old-timey business practices, and other fixable issues that render the overall business models perpetually stodgy and therefore unable to compete in the global marketplace. Their benefit plans and salary scales are out of wack; rank and file fabricators make as much money as many mid to upper level managers do in other industries. Until this nonsense discontinues, more failure lies ahead. The fact remains, consumer spending and consumer lending are the only way out of this mess. With everything else just mentioned, the US auto industry is on a uniquely treacherous climb.

President Obama was asked about the auto industry shortly after he was elected. The video below goes into some of the details, but also mentions some of the reasons why helping the auto industry is challenging. You may also note how the specifics were still scant:





Like the auto industry in some respects, banking has its own uniqueset of systemic and business practice-related issues. In my humble opinion, bank nationalization is a bad idea from the word "go." Our banks are in a model wherein investors, both conservative and speculative converge and figuratively hoist the banks on their shoulders. Bankers, advisors, and all types of financial people are in the business to win and take pride in the glory of being in the financial industry. In the current climate the luster is gone and the financial jobs are disappearing into thin air. Be that as it may, I think the baby and the bathwater metaphor seems to fit here. We hope our leaders can start to figure out how to free up some of the blockages internal and external that are plaguing the industry. Either way, investments will start flowing back in once things like lending and housing start to trickle back up.

Lately, the Federal Government is cracking down on the latest series of corruption, taking down Stanford Investments. Well dressed G-men in dark suits and briefcases invaded the corporate office in Texas and are sorting out mess the financial strife currently. I expect raids like this to continue occurring at increasing pace in the near future. The government is at least seemingly wise to the fact, that some of the ill was caused by corruption.

While each one of these investment "firm" takedowns has a cumulative effect on the consumer psyche, I think the long-term effect remains positive. While watching CBS video, you might note how far-reaching this particular investment firm reached politically. Was it just one man's hubris?



As the plot thickens, bold men and women educate themselves. They write letters to congressman and senators who are in the wrong. Work can be difficult in difficult times, but this country is worth fighting for, and sometimes the toughest fighting is not on the battlefield.

Good evening

-C