Where’s the Guy Who Doesn’t Know $hit about Wall Street?
Steven Rattner doesn’t know shit about cars.
Or at least he didn’t a month and a half ago. And then, President Obama decided he was the single best person in the country to lead the auto task force–to assess the state of the auto industry, figure out whether letting one or both of the failing companies go under, and if not, how to bring them out of their doldrums.
Frankly, I’m unconvinced Rattner was the guy to assess and guide the auto restructuring–mostly though because he seems to have gotten picked because he’s a schmoozy insider with a great talent for self-promotion. But I do appreciate this qualification of Rattner’s:
"What I bring to this is the advantage of no preconceived notions. I don’t come with an embedded view," Rattner said in an interview, calling the job "the most complex challenge I’ve ever had to deal with."
And here’s another "qualification," pitched by his buddy Steven Weisman:
"He may not have had a particular history of interest in the auto industry, but he would bring the ability to ask basic questions and try to get basic answers and drive toward the agreement on a solution."
Sean McAlinden, who does know the auto industry, reports that at least Rattner has been learning quickly.
Now like I said, I’m not convinced having someone who is totally ignorant about an industry is the best person to come in and try to rescue it. But at the very least, having someone as ignorant as Rattner go through the process of learning about the auto industry may help Obama to rethink his significant preconceived notions about why the auto industry is in trouble and what to do about it.
I realized today–as I was doing a radio interview about AIG bonuses with Nancy Skinner, also in MI–how dramtically different Obama’s approach to assessing and resolving the finance industry (the folks who, after all, caused many of the more urgent woes of the car companies).
Obama’s first instinct in assessing the auto industry was to bring in someone who was completely ignorant of the industry, to ask questions. His inherited plan to assess and resolve the finance industry–one he reinforced though his choice of advisors–was to bring in a bunch of people who consider themselves experts, who have been immersed in this world and its crappy decisions for decades, and who have operated under the same failed assumptions as the people who screwed up our economy.
Now you might say the finance industry is more complex than the auto industry–that credit default swaps are more complex than the auto supply chain. Though you’re certainly dealing with the same interlocking structure that makes "too big to fail" so dangerous. In any case, there is something to be said for a smart outsider (though hopefully one who knows a little more than shit) to actually go in and ask questions before dumping billions into the industry. If nothing else, it would force the masters of the universe to actually explain what they’re doing in clear enough terms to allow a real assessment of those actions.
I know I harp on the comparison of the different treatments of the auto industry and the finance industry a lot. And yes, I am biased.
But the comparison is always instructive for the way it reveals the self-deception in Obama’s treatment of the two crises. On the one hand, he decided the very best thing he could do was to send in someone who knew nothing. On the other hand he sent in only people who have been immersed in this world–many of whom have severe conflicts of interest. On the one hand, he sent in someone who may challenge the assumptions and orthodoxy of those receiving federal aid. On the other hand, he sent in only those with the same fixed ideas of what could and couldn’t be done.
As a Michigander, I do, however, take solace in the possibility that the auto bailout may be more successful than the finance bailout thanks to the role of the guy who doesn’t know shit.
I’ll do it.
If the cruxiest piece of the problem is that we don’t know how many mortgages in a given CDO are likely to default, then (along the lines of Prof. Galbraith’s idea, though a bit different) wouldn’t a better solution be to simply re-evaluate the current creditworthiness of every mortgagee whose mortgage has been bundled into a CDO? I mean to have the homeowners essentially go through the loan qualification process again, but for assessment purposes only and without any risk of actually losing the mortgage. Then legislate a way for the CDO to shed its bad mortgages (defined as more than X% likely to default over the next Y months) at an attractive discount (by selling to the USG or private investors, don’t care which) without otherwise disrupting the CDO. And of course outlaw naked CDSes at the same time. Doing all that would chelate the risky mortgages out of the CDOs which would stabilize and boost the value of the CDOs, which would in turn both improve the banks’ balance sheets (out of the red, one hopes) and also reduce the likelihood that any collateralized CDSes based on the CDOs would ever trigger. Thus greatly reducing systemic risk through de-leveraging, which should lead to a general thawing of the interbank lending freeze that’s currently starving the economy.
There, done. I also clean swimming pools.
That’s part 1, part 2 is given a foreclosure what is the recovery rate? Pre-bubble a foreclosure was bad, but the recovery rate was still pretty good since the property could likely still be sold for around the remainder of the loan. Probably not enough to fully cover, otherwise the owner probably would have sold to avoid foreclosure, but much of it would be covered. Now that recovery rate is so low property value has to be figured into the re-application. Many people current on their mortgages couldn’t qualify for the same loans today since their properties are worthless. How do you price that? If that family loses an income stream they suddenly jump from the current on mortgage to the likely foreclosure low recovery category.
But figuring out the status of any given mortgage is not all that hard, and by analysis we can show that in the average case the valuation isn’t near-zero, it’s quite high because the loan is collateralized by the house which can be foreclosed and sold. So even at worst case, a bad mortgage is still worth a goodly share of its face value, not the 15 cents on the dollar that people are talking about paying under today’s new plan. Therefore the actual losses to the CDO holders are nowhere close to 100% on “toxic” mortgages. (So in a sense, I’m shocked to say I agree with Geithner that calling them “toxic” is misleading; the source of the toxicity is when failures in the mortgages are hyper-leveraged via CDS instruments.)
To show my work: Assume a mortgage with an original loan-to-value ratio of 70% (and that’s high) where the real estate market has declined 30% since the loan incept (and that’s a lot). That makes the market value of the house 100-30 = 70% of the original value, same as the mortgage balance. Figure in a hefty 25% discount for the post-foreclosure distressed property status, and then the actual loss to the CDO holder is only 25% of the initial mortgage face value. (Modulo some fixed costs of sale, and ignoring whatever pay-down has already happened on the mortgage.) Not even close to a 100% loss.
Of course the true value of holding a CDO is the anticipated future interest as it accrues over time, and it’s true that all that is lost to the CDO holders when there’s a foreclosure — but on the other hand, that balance is also picked up by some other CDO when the property is sold and the new mortgage enters the system. In terms of the whole pool, it’s about a wash.
(Shrug) Didn’t strike me as ‘harping’, actually. Struck me as a useful contrast. Still does; even more informative by the day.
But hell, as far as I can tell from reading Hmmmm’s comments around here, s/he’d be a fine candidate.
Although, EW + bmaz + Dean Baker would be a kickass trio.
Actually I’m pretty sure Ian, Masaccio, Hugh, ew, and Bmaz all kick my ass qualitywise, but thank you very much indeed for the kind comment.
– Hmmm (who is, in fact, a he)
No worries on the compliment, but I think you’ve named a great team.
“See this Big Shitpile here? We’re going to keep setting piles of money on fire until it goes away.”
I’m not sure there’s enough money in the world for that. (Or, as one of my teachers once said, approximately: Probability says that it’s possible to throw a piece of chalk through a wall, all the molecules passing through without interacting. Physics says you’ll have to throw that chalk at that wall for a very long time.)
I got the perfect guy. Bob Lutz. He is a cranky, yet critical, thinker, is extremely bright and a fast study. He has made a life out of diving headfirst into complex, out of control and failing situations and righting them. He knows how to ask questions, demand answers and cut through bullshit. And he is already planning on retiring from GM at the end of 2009 (once the Volt is actually into it’s initial production run). This would require him taking some time off out of his last few months, but I have a feeling that GM wouldn’t mind if they saw the possibility of turning Maximum Bob loose on the banksters the way the money people have attacked GM. Did I mention he might be a little cranky?
Excellent choice, really.
http://blog.wired.com/cars/200…..lobal.html
You want Maximum Bob to handle the bankers bailout? Bwahahaha! I thought I hated bankers:)
Uh, maybe it’s because Priuses make no economic sense.
It took quite a few years for the Prius to even break small profit margins–far, far more than would be deemed acceptable under the business case models that ANY of the auto makers use. Even now, it’s market is unreliable and small. And that’s for Japan, which is getting subsidized health care on (thus far) ALL of its production costs. GM’s costs would be much higher because, as an American business, they’re expected to pay things their competitors don’t.
As to why GM is introducing hybrids. Two reasons. One, CAFE requires them to make gas efficient cars for which a market doesn’t exist. And two, because they don’t have to do a lot of the R&D work that Toyota had to on the Prius.
You see, you’ve stumbled right into the whole POINT of this post–you don’t know enough about the auto industry to see whether this stuff makes sense. Rattner is undoubtedly getting these same kind of simple lessons. Lutz would be getting them in Wall Street.
I know enough about the auto industry to say a $40,000 Volt won’t sell in a market where Honda is making a cheaper hybrid, and that the Green crowd does not trust or like Maximum Bob.
I know enough that Honda and Toyota made enough money making small fuel efficient cars because they saw the possibility that gas prices would rise one day that they could afford to make hybrids.
Ford and GM however did what with their profits during those years invest in the future tech? Get Investors rich? Give themselves raises? Just who gets payed more the CEO of GM or Toyota, how much more compared to the size of their business?
The market for fuel efficient cars does not exist so why is GM and Chrysler not Toyota and Honda who both make lots of fuel efficient cars asking for a government bailout? Why do they have the cash to both subsidize as you say the cost of every hybrid sold and the cash to weather the credit crunch?
Are you saying that GM and Chrysler should refuse the money Obama wants to give them to retool their factories to make greener cars because there is no market for them?
The wisdom of Detroit losing market share for decades. Small cars cost to much we can’t compete against Japan on labor costs well maybe they could if we had national healthcare but do the CEO’s of the big three EVER say that?
There is no market for hybrids they cost to much Toyota subsidizes the cost of every Prius. How much is every Prius subsidized?
A million Priuses sold so lets say Toyota gives $100 a Prius at $100 a car thats $100 million that you are saying Toyota gave away over the years.
But Toyota makes small gas efficient cars you said that there is no market for them maybe there would be if American cars were cheaper like if we had National Healthcare?
Granted Toyota and Honda did get into the big truck market recently they don’t only make small cars but the big truck market hasn’t been making them money.
Nope its small cars.
However if you want to investigate allegations of slave labor and push to ban Japanese cars because of that and point out the cost savings the Japanese get from that I’m with you.
The big three did not invest their profits with an eye for the future. They push to cut labor pay and benefits rather than push for national healthcare and make them more efficient.
They complain about alleged subsidies to push new tech and create new markets for new products when they should have been bringing up slave labor Grit TV has a great piece on this. Why the big three are silent I don’t know.
Of course those are the kind of details a 2 semester highschool auto mech, one semester community college Econ person who likes to read can make.
Good job on with Nancy today, EW. Thanks for doing it.
Thanks for having me!! (and thanks to her, too).
I nominate Craig Fugate (local success story). Since the economy is a disaster, it seems like the new head of FEMA is the perfect choice for fixing it.
“self-deception”
i doubt it.
obama is a banker’s grandson and well-supported by (at least) investment bankers at goldman-sachs.
he deals with banks in a respectfully cautious way.
he deals with the auto industry in a “well, we must be realistic” way.
there is a difference in approach here between those i suspect the president empathizes with and those he does not empathize with.
some critics have asked – crudely/rudely of course – why should the auto workers have to give up pay advantage while the obama sec of treasury works hard to protect hyper-rich insurance industry/banking personnel from NOT receiving their BONUSES.
is it too early in the obama administration to point out that this guy – obama – was always and only a smart, rich kid with a smart campaign organization and a completely inexperienced political executive.
not unlike the previous occupant of 1600 penn – who was also a smart rich kid with a smart campaign organization but with little experience as a political executive.
the nation’s future?
the (or “a”) national interest?
competent leadership?
as susan gay stolberg might write, “fuck all that stuff, it’s irrelevant.”
“Privileged” in terms of education is different from “rich” in terms of income. I personally experience this every day. Obama always was the first but was not always the second.
hmm… comparing Bush and Obama that way…. doesn’t seem… quite right.
Now, back to my online traffic school. fucking fascist CHP.
It beats the alternatives. And I think they really want you to not do whatever-it-was again.
ugh.
true, it really does beat the alternatives. Perhaps I shouldn’t complain too much. The funny thing is I got a speeding ticket for doing 70 on a California freeway. That speed will get you run over in a lot of spots here…
Tidbit I learned today: Obama’s Chief of Staff was an investment banker.
Just because you know it’s a protection racket doesn’t mean they won’t burn your house down. It’s easy to bully the auto industry. It’s not so easy to bully the banksters.
Kiss up, kick down. The banksters own the US now, by virtue of having lost so much that exposing it brings the whole damn thing down, and I’m not sure what can be done about it. It’s not simply that the banksters employ more guys in suits; it’s that they’ve fucked up in ways that even the bosses of Chrysler, with their awful convertibles and dog-taking-a-dump coupés, could dream of.
EPUd from prior thread:
re black funding for covert ops…France after WW2 had little to fund its covert ops that were so important for maintaining its colonies, etc,. Their answer was to enable the heroin labs in Marseille etc and rake off huge flows of drug money. That example surely set a precedent for CIA and others obtaining untraceable funding.
The Politics Of Heroin In Southeast Asia by Al McCoy; it’s the primer on this.
Later, from Alaskan Airlines, Air America and 100’s of other legitimate businesses and investments, the CIA long ago solved its desire for $$$ that bypasses all accounting. Even banking services. Of especial note, the drug trade yields the $$$flows especially to covert NonGovOrgs run often by those with prior experience.
btw, why would a rational spook re-invent the wheel and do it any other way?
Ok let me get his straight an industry that makes real products and sells them gets a complete novice a Bush MBA pick a good manager cab manage any company he does not need any expertise only the ability to choose good advisers.
Just how do you choose good advisers from Conmen trying to give you a snowjob without expertise in the field?
(Bush would say go with your gut, we already know how that worked)
Now then the Ponzai/Pyramid scheme people the Scientists with the Math to show that the fairy tale of higher home prices would go on forever. That there would never be a world wide economic collapse. That there was no need to keep cash in reserve to pay on their Credit Default Insurance Swaps just so long as they dropped the word insurance legally they were clear.
This Fairy Tale industry gets all the insiders, experts helping plan their bailout?
When Fairy Tales are more important than reality something is wrong.
Maximum Bob is just a guy who ignored higher gas prices for all the Bush years sure he Drove GM to Bankruptcy but he did make cool looking gas guzzlers.
Summers and Geithner helped create this mess but they never created a real product they can’t even lie very well.
I’m sure the banksters’ brainiacs regard themselves more as ethereal than as immaterial.
Sen. Jay Rockefeller suggests internet shouldn’t exist
http://www.youtube.com/watch?v=Ct9xzXUQLuY
The New World Order goons are inventing reasons to shut it down (so that others don’t shut it down).
When the Masters Of The Universe finally flush the bottom out of the market and the banking system, this is the tipoff that they will also shut down the Internet, while having laid the groundwork well in advance for you and me to swallow the lie that “the terrorists” did it – which, while accurate, will leave you assuming they are referring to guys in turbines – and not guys in three piece suits (the ACTUAL terrorists).
Let the American auto industry go bankrupt.
They will restructure with better contracts. Maybe they could use free lance workers, of which there are a lot of in the states these days. A restructure without the uaw union would be a good thing.
Get out from under the heavy industry burdening hand of the uaw.
I would imagine that the administration has already chose it’s direction for the auto industry, hes the individual picked to do the investigation. The administration is pro union and will do anything to promote those unions.
Dear Acknowledged Troll, we have smacked down your point over and over again last fall. The core of it was that the auto industry affects a network of manufacturers and suppliers that is far greater than the industry itself. “Too big to fail” is real because there are real economies of scale.
I guess that because the American auto industry go under for a few months all the vehicles will be collected and disposed of. How about all of the mechanics around the country fixing used vehicles. I would think that they need parts and supplies.
I worked in commercial banking for 25 years, and during that time I managed a field audit department, then a loan operations department, and later was a commercial loan underwriter for a regional bank. Then it was bought by one of the big banks that has now received TARP funds, and the banking world I knew disappeared. Commercial loans became ‘loss leaders’ and all the talk was of trauches and derivatives. I was kicked down the ladder, shuffled off to a near-clerical job and thankfully they finally eliminated my job. (I wasn’t going to quit–I hung on waiting for a severance package).
(I have been reading FDL and Emptywheel since 2002, and used to post as emma but hadn’t been able to get logged back in on my new computer so I tried again) I have been dying to comment, and am so glad to be back.
One of my early jobs in banking was field auditor, and in addition to making regular on-site visits to our customers with asset-based loans to make sure they weren’t cheating or committing fraud. I also did pre-loan audits, which meant in one or two days, I had to lear all about the company and how things worked, and determine whether they had sufficient accounting controls to provide the bank with the information needed; the amount available to them to borrow was based on a formula, such as 80% of eligible accounts receivable, so companies could cheat by not excluding ineligible accounts from the formula, or by by creating false accounts receivable, etc.
My approach was very Columbo-like. I asked a lot of questions, and the CFOs would often be insulting because they thought I must be stupid, but I wanted to know what they meant with their jargon, and I found they often used it to cover up what they didn’t want me to find. Then, I would talk to the accounting clerks and bookkeepers, ask more ‘dumb’ questions, to make sure they were handling things the way the CFO said they were…and often that’s where I discovered the fraud. The accounting clerk didn’t know the big picture, and did what they were told was right by the CFO, and that’s how I found most of the cheating or fraud. The person who made the entries didn’t know they were participating in cheating…they had never seen the loan agreement and didn’t know what accounts were eligible, etc.
So what we need is someone who doesn’t go in with too many preconceived ideas, and who asks a lot of questions…and who asks the right questions, and who can talk to the minions as well as the execs…especially to the minions and find out what really went on every step of the way.
I have always believed in vertical integration of tasks. The big banks have done so much horizontal integration that everyone is just ‘doing their job’ without understanding how it fits into the overall process. Only the big boys know that, but they’re not going to tell you. You ask them, and then you verify it by asking everyone who ever touched that transaction from beginning to end. And then we’ll know what was going on and how to unwind it….and who to prosecute.
Wonderful comment.
Can we clone you about 1,000,000 times? And pronto!
Thank you–a high compliment coming from you….I always enjoy your excellent comments.
After my disillusionment with banking after the big takeover, I couldn’t bring myself to work in the industry again after leaving in 2002. Since then I’ve been trying (not exactly successfully in the monetary sense)to eke out a living doing research, consulting, and grantwriting relating to sustainable industry, eco-industrial development, urban redevelopment, energy efficiency and alternative energy. Even though it meant paying penalties for early withdrawal from my IRA (rollover from bank IRA), I have trudged on, having decided when I left banking that I would never work for a big corporation again, and would never work on something I didn’t believe in. When the crash hit my IRA, I realized I can never retire, and have to start making enough income to pay the bills without touching the IRA.
When the financial crash came (with a huge hit on my IRA), I saw the result of what I’d seen happening with the big bank that bought us. I remember in the early days of the takeover, one of the senior regional hot shots (who was probably under 30) held a meeting for all the commercial banking group and announced how the big emphasis wasn’t going to be loans but Treasury products, investments, etc. In other words, if a customer just needed a commercial loan and wouldn’t buy any of the other fee-generating services, they would need to go elsewhere. He then said that with all the buffet of services we could now offer (via the big bank), that this was the death knell for all the little community banks. It was all I could do not to roll my eyes, because I knew he was giving the little banks the best gift they could get…the good, local middle-market businesses who made their money by providing their goods and services, not through investments. And, a decade later, those smaller banks are thriving.
The big banks are too big to fail? No, they are too big to exist, and should be broken up. (Sell off the branch locations to the local community banks if they want them.) The repeal of Glass Steagall Act started it all. Before it passed, I remember getting at least one memo a year asking for a contribution to the bank’s PAC and that was the big legislation they wanted. Although I risked the wrath of higher-ups, I refused to participate. But enough people did contribute to hire the lobbyists and elect the repubs that made it happen. And that’s when our regional bank was bought by the big bank and it all went downhill from there…for us ‘old’ bankers, and 10 years later, the US economy.
If the government needs people who can ask the questions and find the fraud, we are out here. I would love to work on that–although with 4 cats, one of them diabetic and requiring an insulin injection every 12 hours, I’m not exactly mobile. But if I could work on it from my home office, I would like nothing better than to be part of the solution, which starts by dissecting it all.
And the banking industry needs to re-learn how to make a go of it at more traditional, much lower, profit margins. As a matter of fundamental public policy and societal stability. Reinstate Glass-Steagall and let the high-wire banksters go play in their world, but isolate all that foolishness from the assets of ordinary people who require only stability and modest long-term asset growth (and richly deserve to get it).
Just for information: Looks like Prius has sold about 1.2M units worldwide and ranks as Toyota’s 3rd most popular vehicle. That does not seem to indicate absence of market for that car.
Also I would think that two major factors in the slowing of Prius sales late in 2008 would be (1) high anticipation of the frombacious 2010 model which is arriving very late, and (2) the Global Economic Unpleasantness which as we all know has killed new car sales dead across the board — a non-Prius-specific phenomenon.
But then again I bought one, so I’m probably biased to look at things this way.
Just how much cash has the big three burned through not making small cars or hybrids that can compete in the market vs the amount Toyota has spent on subsides for hybrids? The big three were loosing money and market share before the banking crisis.
One could argue they are subsidizing all their cars at the cost of their entire business.
I agree look at my comments @BooRadley’s Oxdown on the Volt. I like the idea just not the cost.