When the price of gas went up, sales of popular, but gas inefficient vehicles plummeted. SUV sales dropped, light-duty trucks dropped, and large sedan car sales dropped, hitting three of the formerly highest selling auto categories.

As sales continued to drop off, the car companies realized it was time to start becoming more  efficient. That meant less workers, better, more gas efficient vehicles, and cutting costs throughout. The only problem is that as huge burecracies, these companies aren’t what one would call ‘agile’. Making these sweeping changes takes time and money. Neither of which are in great supply any longer.

Originally, as gas hovered around $4.00 per gallon, they received a multi-billion dollar investment package from the government for the design and production of new gas-efficient cars. Now, the Big three are saying that  without additional on-going working capital, they can’t take full advantage of this seed money. This additional money is needed to carry them through the tough times while they re-tool, and modernize to produce the next generation of gas efficient vehicles.

In theory, that sounds good. And there are a number of compelling reasons to lean towards investing in the auto industry.

• Job Losses – Industry experts estimate that directly and indirectly there are around 3 million jobs related to the auto industry that are at risk.
• National Productivity – America has moved farther and farther from a manufacturing economy to a service economy. Some of our last major manufacturing capabilities reside in producing cars for the worldwide auto market. If we lose this manufacturing ability, we become even more dependent on outside sources for finished goods.
• Town and City Dependencies – Many locations where there are auto plants, a significant percentage of the town’s workers are employed at these plants. If there is a large-scale closure, some towns and cities could be financially crippled for years to come.

Now For the Minority Report

There is still a vocal opposition to giving the auto makers billions of dollars in assistance. These people say things like “The automakers have already been bailed out multiple times already, when is anything going to really change?” and “Why can’t they go into Chapter 11 Bankruptcy and simply re-organize?”

Two excellent points. In 1979 Chrysler received $1.5 Billion for a ‘re-structuring’ from the government. Chrysler came out of the restructuring, and flourished with new vehicles such as the K-Car, and the minivan. Clearly Chrysler was better for the government intervention in this case.

As to Chapter 11 Bankruptcy. Many of the opposition state that there is already a mechanism in place for allowing a large business to ’submerge’ from creditors and other outside influences while it reorganizes itself. Multi-national size businesses don’t just fold up overnight without causing a tsunami of financial damage, so the Chapter 11 Restructuring Bankruptcy was created. When a company goes into Chapter 11, they are protected from creditors collections, in the idea that they can solve many of their problems, “right the ship” as it were, and emerge from bankruptcy as a profitable business again. This is clearly in the interest of the creditors, who get full value for their investment (rather than whatever is ‘left’ after a Chapter 7 Liquidation Bankruptcy) and the company’s workers continue to work and receive salaries.

More than a few of the big airlines have gone through this process (some multiple times) to reconfigure, streamline, and re-launch the business. So why can’t the auto makers do the same thing? Auto company executives state that “The American buyer won’t buy from a company in Bankruptcy.” That may be true, but until it’s actually tested, it’s just speculation.

Either way, the big debate still reigns on whether to help them up, or let them fend for themselves.

So the question I’m asking;

Do you think the government should be helping out the automakers, or should they be left to fend for themselves?

Leave us a comment and let us know your opinion.

Earlier today, OPEC ministers met and decided to cut production by 1.4 million barrels/day in response to the continuing decline in both price and demand for fuel. The worldwide economic slowdown has caused a huge drop in demand for fuel, as people around the globe try to conserve money and choose alternative transporation options, such as car-pooling or public transportation.

This decline in demand has caused the price of a barrel of oil to fall from a historic height of $140/barrel in July, to a low of around $65/barrel currently. The OPEC nations had calculated their budgets and earnings based on a continuing average price around $95/barrel, and this new low in price has them speculative on further price decreases.

Back Up Where We Belong

OPEC is cutting production in an effort to get the price back up where they feel it ’should’ be, and to forestall a further decline. There is a real danger however that the demand will continue to hold at current levels or even possibly drop. This could cause OPEC to cut back production even more, and start the whole chain all over again.

While the decline in price is a good thing, it can still have some unintended consequences. The push for ‘greener’ fuels and transportation is mainly caused by the high price in existing fuels. If the prices drop back to pre-rise levels, the momentum for ‘greening up’ may stall.

Some initiatives such as shale-oil removal, drilling in undesireable locations, and other less-than-profitable alternatives were only alternatives if they made money. Oil dropping below $70/barrel puts these back in the negative zone, and could make the R&D money dry up, at least until prices rise again.

I’m as glad as everyone that the price of fuel is dropping, but we need to continue to look down the road, and make sure we’re not distracted so much by the new prices that we miss the turn-off for sustainable, renewable fuels.

People are so nervous about banks failing and their money being unavailable that the Fed has already raised the limits on FDIC insurance for account holders to $250,000 per person. And if you’ve already read my other article on the subject, you remember that what is actually covered, is a lot more than it appears at first.

This hasn’t completely stemmed the tide of people pulling money out of banks and ‘hiding it under the mattress’ (in some cases the literal truth!). This is taking money out of circulation that the banks vitally need right now to help them feel safe enough to start lending money again. It’s a vicious cycle; Banks don’t lend because they’re afraid that they won’t be paid back, so people not getting loans fear the bank is about to go under and pull money out of the bank. Which in turn, causes the bank to hoard it’s money, and,.. not make loans. Around and around we go, where it stops? Nobody knows.

Rumors, Innuendos, and Heresay

Now, in order to regain the trust of the people, and to allay the banks’ fears of losses (at least some of them) the White House is considering removing FDIC insurance limits for individual account holders altogether. This is a bold move that follows a similar measure by some of the EU countries. This move would hopefully inject some confidence into a very scared and panicking market, kind of like a tranquilizer for a raging animal.

The nice thing, is that it would be virtually cost-free for the government to do this! Since we’re so used to the multi-billion dollar bailouts, a relatively inexpensive fix is a welcome change. The existing FDIC insurance is paid for by the banks through insurance premiums, just like any other insurance. Eliminating the limits will raise the premiums a bit, but not nearly enough to counter all the good this move will do.

Carry this Through

If you think about it, the FDIC has quite a bit of funds already, and since they’re backed by the Fed, they already have a virtually limitless supply of money if it truly comes to that. It would take a large percentage of the banks across the United States to fail all at once, something we’ve never seen yet, even during the Great Depression, in order to seriously dent the reserves already available. Moving from $250k to no limit basically includes a few of the richer people in the world, and a LOT more small/medium businesses. These are exactly the kind of accounts that need to be covered, to stabilize the economy.

I hope that this becomes more than just a rumor in days to come. It would be one of the few GOOD things to come out of this debacle in the market. If the White House and the president can get in gear and enact this, it might be the ’stimulus’ we’ve been looking for.

Now lots of people are only more than happy to blame this on either Republican mis-management by the existing presidency, or Democratic excesses by the Senate and House majorities. Many more, want to lay the blame completely on the big banks and Wall Street. I don’t think there’s a single cause or culprit that can take total blame for the mess that things are in.

A Skittish World Economy

What started as a downturn in the United States, has broadened to a world-wide meltdown of industrialized financial markets around the globe. The last few years of easy credit and good times have lured investment banks into making loans to people and businesses that they would have run away from in previous years.

The problem now, is they’re still running. It seems that no matter what the governments do, the banks continue to hoard money, and refuse to make loans to anyone that actually needs the loan. It’s a typical ‘cat on a hot stove’ reaction; A cat that steps on a hot stove, will never step on that stove again, regardless whether it’s hot or not.

Without banks circulating money, all the efforts recently by world governments to get things going again are having no effect.

Global Decrease in Interest Rates – Just a couple of days ago, the major financial systems around the world simultaneously lowered their bank lending rates. The reaction by the Dow was an eye-blink of market increase, followed by a three-digit decrease. This was duplicated around the world.

Economic Bailout/Rescue Package – Call it what you like, the U.S. Economic bill just passed was put in place to help goad the economy back into action by giving confidence to the financial world that money was available. It failed to pass the first time around, triggering a 700+ point drop in the Dow. It passed the second go-round, when a number of questionable amendments were added to get it through the House and Senate, but there was still a huge drop in the Dow the next day. Similar Bills are now appearing overseas in the EU countries, with similar lackluster effects.

Bailing Out Banks Left and Right – The Federal Reserve and FDIC have been either making direct loans to banks, negotiating sales of troubled institutions to other institutions, or taking over the banks outright and putting them into receivership. All of these steps intended to convince people on the street that their money is safe and the government will do whatever it takes to get the gears of industry going again. The problem with this tactic is that while it might have convinced Joe Average on the street (and I stress the might) it put the fear of takeover into the banks, causing them to ‘circle up the wagons’ and go into worst case scenario mode; Hoard money and all but suspending loans. No bank wanted to be the next FDIC-regulated bank.

Rapid Changes All Around Us

Whether you believe we’re in a recession, depression, or major catastrophic downturn, there are supporting statistics for and against each state. My take is that things are just ‘bad’. Different people have different levels of ‘bad’ though. Speculators and investors that thought the economy couldn’t go down and stock prices would always go up have it ‘really bad’. Consumers that have lived beyond their means for years with the maxed-out credit cards and with houses three or four times pricier than they can afford, have it ‘really REALLY bad’. Banks that invested in mortgage-backed securities, derivatives, credit-swap investments, and other things that even they had little or no idea how they worked have it ’super-duper-extra-chunky-you’ve-been-served BAD.

All this coming to a head in around a year.

Taking a look at just a few indicators shows some interesting numbers

I could continue to add statistics, but I’m getting depressed just looking at them.

What to Do, What to Do?

Short answer, “I wish I knew”. It doesn’t seem like anyone quite knows how to put this Kodiak bear of an economy back on the straight and narrow. Like little groundhogs, until the banks stick their heads out and see whether we have six more weeks of economic troubles, no one will know. Now if we can just convince them to come out of their little corporate holes and take a look.

What do YOU think is going to cause the financial industry to get back in the game?? Leave us a comment and let us know.

WaMu has been ailing for quite a while now, what with the overall financial woes of Wall Street. It also had a significant amount of mortgage loans that have ended up as lead weights around it’s neck. Add to this the loss of over 95% of it’s stock price in recent months, and according to the Office of Thrift Supervision, a loss of more than 6 billion dollars recorded in the last three quarters, and WaMu was on rocky grounds.

The last two nails in the coffin however were

Consumer Confidence fell – Since September 15th, investors had lost faith in WaMu, and withdrew 16.7 billion in assets from the banking giant. This comes out to 9% of total deposits held at the institution, all in a matter of a few weeks.

Downgrade in Rating – Last night, WaMu’s ‘trustworthiness’ rating was reduced, making it a certainty that the savings and loan wouldn’t be able to get additional credit or funding from other banks. Without the additional funding, it became clear to the FDIC that WaMu wouldn’t be able to ‘right the ship’ and stepped in.

Going to the Highest Bidder

After the Fed stepped in, banking assets of the now-defunct institution were auctioned off/sold to JPMorgan/Chase. The same JPMorgan/Chase that bought Bear Stearns earler this year. This purchase gives JPMorgan an additional 2200 bank branches in the western United States, an area that previously had very few JPMorgan branches. JPMorgan has gotten quite a deal out of the WaMu hardship, 2200 new branches, and now with locations across the U.S. Even in the worst storms, there are silver linings.

But What About the Investors?

So what about the account holders and credit card users of WaMu? What’s this ‘change in the guard’ mean? Pretty much nothing. Come meet the new boss, same as the old boss. Hope you guessed my name.

There should be no discernable differences (for the time being) now that JPMorgan has taken over the banking parts of WaMu. I expect that there will be some re-shufffling, and a re-naming (maybe) in the future, but for the time being, everything is status quo. The mortgage and loans division of WaMu still might have some serious re-work ahead though.

For more information, see This Bizjournal Article