You Think You Know GM, Ford, and Chrysler? 6 Myths You May Be Relying On

One of our readers sent this to me. It is important to consider as our lawmakers are thinking about lending the big 3 money:

6 Myths About the Detroit 3

By Mark Phelan
The Detroit Free Press

The debate over aid to the Detroit-based automakers is awash with half-truths and misrepresentations that are endlessly repeated by everyone from members of Congress to journalists. Here are six myths about the companies and their vehicles, and the reality in each case.

Myth No. 1 - Nobody buys their vehicles

Reality

General Motors Corp., Ford Motor Co. and Chrysler LLC sold 8.5 million vehicles in the United States last year and millions more around the world. GM outsold Toyota by about 1.2 million vehicles in the United States last year and holds a U.S. lead over Toyota of about 560,000 so far this year. Globally, GM in 2007 remained the world's largest automaker, selling 9,369,524 vehicles worldwide -- about 3,000 more than Toyota.

Ford outsold Honda by about 850,000 and Nissan by more than 1.3 million vehicles in the United States last year.

Chrysler sold more vehicles here than Nissan and Hyundai combined in 2007 and so far this year.

Myth No. 2 - They build unreliable junk.

Reality

The creaky, leaky vehicles of the 1980s and '90s are long gone. Consumer Reports recently found that "Ford's reliability is now on par with good Japanese automakers."

The independent J.D. Power Initial Quality Study scored Buick, Cadillac, Chevrolet, Ford, GMC, Mercury, Pontiac and Lincoln brands' overall quality as high or higher than that of Acura, Audi, BMW, Honda, Nissan, Scion, Volkswagen and Volvo.

Power rated the Chevrolet Malibu the highest-quality midsize sedan. Both the Malibu and Ford Fusion scored better than the Honda Accord and Toyota Camry.

Myth No. 3 - They build gas-guzzlers

Reality

All of the Detroit Three build midsize sedans the Environmental Protection Agency rates at 29-33 miles per gallon on the highway.

The most fuel-efficient Chevrolet Malibu gets 33 m.p.g. on the highway, 2 m.p.g. better than the best Honda Accord.

The most fuel-efficient Ford Focus has the same highway fuel economy ratings as the most efficient Toyota Corolla.

The most fuel-efficient Chevrolet Cobalt has the same city fuel economy and better highway fuel economy than the most efficient non-hybrid Honda Civic. A recent study by Edmunds.com found that the Chevrolet Aveo subcompact is the least expensive car to buy and operate.

Myth No. 4 - They already got a $25-billion bailout.

Reality

None of that money has been lent out and may not be for more than a year. In addition, it can, by law, be used only to invest in future vehicles and technology, so it has no effect on the shortage of operating cash the companies face because of the economic slowdown that's killing them now.

Myth No. 5 - GM, Ford and Chrysler are idiots for investing in pickups and SUVs.

Reality

The domestic companies' lineup has been truck-heavy, but Toyota, Nissan, Mercedes-Benz and BMW have all spent billions of dollars on pickups and SUVs because trucks are a large and historically profitable part of the auto industry. The most fuel-efficient full-size pickups from GM, Ford and Chrysler all have higher EPA fuel economy ratings than Toyota and Nissan's full-size pickups.

Myth No. 6 - They don't build hybrids.

Reality

The Detroit Three got into the hybrid business late, but Ford and GM each now offers more hybrid models than Honda or Nissan, with several more due to hit the road in early 2009.

The Market Breathes a Sigh of Relief. Dow Up 936 Points

[George Soros is the creepy guy in the picture]

Update at bottom***********************

The market breathed a sigh of relief as the Dow was up over 900 points and world markets rebounded. The relief was based on the central banks of the Western world meeting and their plans to rescue the various banks and markets across the world.

This is good news but the storm may not have passed. Great Britain has nationalized it's three largest banks and George Soros is floating a plan for the US to buy equity [read controlling interest] in all of the American banks.

Of course, I don't trust George Soros. When he's happy about the government buying into banks, my warning system goes off.

Wait a minute...can you see Nancy Pelosi dictating who the banks should give loans to? OMG. It was Obama's advisors who ran Fannie Mae into the ground. [Click here for Washington Story.] Besides them, it was the Dems who pushed for open lending so everybody could get a loan. They ignored the Republicans warnings in 2006 that the system was broken. It was Mass. Rep. Barney Frank, head of the Congressional Banking Committee, who said in this past summer that going forward Fannie Mae and Freddie Mac were doing fine.

My mind boggles.

Imagine the new Soros planned US Government owned bank loan application:

1. Purpose of Loan: Never mind!
2. Do you wholeheartedly believe in Global Warming? If yes, go to #3
3. Do you support same sex marriages? If yes, go to #4
4. Do you support putting more and more animals on the endangered species list? if yes, go to #5
5. Do you support more and more taxes?

If you answered no to any of these questions, LOAN REJECTED!

I'm having a nightmare while awake.

Next thing you know, they'll put some community organizer with no leadership experience in charge just because of hope, or change, or some such drivel.

Oh yeah, they're trying to do that now. His name is Obama.

Update: It appears the US is already planning to buy equity shares in the top nine US banks.

O'Reilly Blasts Mass. Rep. and Banking Chairman Barney Frank as a Liar and Coward on Oversight of Fannie Mae

Right before this clip, O'Reilly had played an audio clip of Barney Frank in July of 2008 saying that while Fannie Mae and Freddie Mac had had troubles, going forward, it would be swell. As you know, in September, the Feds had to take over Fannie Mae and Freddie Mac.



H/t to the Drudge Report for the tip.

GOD'S BANK AIN'T BUSTED YET: An Old Poem from the Great Depression Times

By Mrs. Bessie Tichelaar

The bank had closed; my earthly store had vanished from my hand;
I felt there was no sadder one than I in all the land.
My washerwoman, too, had lost her little mite with mine,
And she was singing as she hung the clothes upon the line.
"How can you be so gay?" I asked. "Your loss, don't you regret?"
"Yes, ma'am, but what's the use to fret?
"God's bank ain't busted yet."

I felt my burden lighter grow, her faith I seemed to share;
In prayer I went to God's great throne and laid my burden there.
The sun burst from behind the clowds in golden splendor set;
I thanked God for her simple words:
"God's bank ain't busted yet."

And now I draw rich dividends, more than my hands can hold,
Of faith and hope, and love and trust, and peace of mind untold.
I thank the Giver of it all, but still I can't forget
My washerwoman's simple words:
"God's bank ain't busted yet."

Oh, weary one upon life's road, when everything seems drear,
And losses loom on every side, and skies are not so clear;
Throw back your shoulders, lift your head and cease to chafe and fret.
Your dividends will be declared;
"God's bank ain't busted yet"

What Does the FDIC Do? Part One - Insure Deposits

I just heard a clip from the Clark Howard show while driving home from the store. If you don't know who Clark Howard is, he's a radio talk show host whose forte is the common man's economic adviser. His shows will discuss when the best time is to buy Christmas gifts to get the best deals, or what web site to look at to determine which auto or life insurance is rated the best or most sound. He gives advice about how to contact a VP of a company when the "no-service" department won't help you. He warns about Nigerian email scams and how a 529 College Savings Plan works and which state gives the best deal.

I turned on the radio after the caller had asked her question, but Clark's answer made it clear that he was explaining why the FDIC had to insure deposits. When he explained that the bank does not keep your exact money in a drawer in a vault but lent it out to other borrowers, the caller - who sounded like a woman in her 60s - audibly gasped "Oh my!".

It was obvious that she didn't know what banks do with her money and she had called into the station upset about the bailout and increased FDIC limits.

I was so shocked that she thought that banks kept her money separate from everybody else until she needed it, that I decided that I needed to write and explain what the FDIC does.

What Happens to Your Money

A woman, let's say Sarah, gets her paycheck for $1000. She works for Sam, who manufactures hardware parts for wholesale to hardware stores. The paycheck is written on Bank of Z (hereafter "BoZ") but she's going to open up an account at Bank of A ("BoA"). In fact, it turns out that she will be the very first customer of BoA.

She opens her account by depositing the full $1000 check. In a another post we'll talk about the check, but for now she has a checking account with a balance of $1000.

Bob just opened the local hardware store. He goes to BoA to get a loan to buy inventory from Sam the hardware manufacturer that Sarah works for. BoA only has $1,000 in it's accounts. By law, set by the Federal Reserve, BoA must keep 20% of their deposits in hand to give customers petty cash, and so forth. So they can lend $800 out.

They need to lend some money out because they have to make money to pay their employees and pay for the checking operations center they had to set up to handle Sarah's check. So they lend $800 to Bob for 10%. They will make $80 on the loan and maybe Bob will be successful and deposit more money there.

Bob deposits the $800 in his account. The bank now has $1800 of deposits. Sarah's $1,000 and Bob's $800. They can now lend out another $640 - 80% of 800 to another customer. The total of all customer's accounts is $1800 BUT THERE IS ACTUALLY ONLY $1000 IN THE ACCOUNTS OF BOA!

Now let's make this real, real simple.

Let's assume there is no FDIC insurance for BoA. That afternoon, both Sarah and Bob hear a rumor that BoA is going to fail. They both race to the bank. Bob gets there first and takes out his $800 because he's already ordered inventory from Sam and he needs to be able to pay him.

When Sarah gets there to withdraw her $1,000, the bank says "We're sorry, all we have is $200". She's says I need $750 today or I'll default on my mortgage. Sarah is very upset and calls all her friends and relatives and tells them her terrible story about how she lost $800. She tells them they had better take their money out of their accounts too. They say, "Well, we don't bank at BoA!" But what she says scares them, so they call each other and say "Maybe we'd better take our money out of BoZ". Soon the rumor spreads that there is a run on BoZ and everybody had better get their money now.

But at least Sarah still has her job at Sam's the Hardware manufacturer. Next week, she'll cash her check and pay the mortgage and a late fee and will be okay.

But by the next day, there has been a terrible run on BoZ by Sarah's family, friends, and their families and friends. BoZ has given out all their money and closed it's doors. Many, many people have lost a lot of money.

In fact, Sam was supposed to deliver $800 of inventory to Bob. He has $400 of inventory on hand but he needs to purchase more raw material to make the other inventory that he has promised to sell. But with the closure of BoZ, Sam doesn't have enough money to purchase the raw materials.

In fact, he has to lay Sarah off and tell her he can't give her a paycheck this week. He asks her if she would like to take some wire spools, plywood, or left over hammers to make up for no paycheck. She rightly says, "what am I going to do with those?"

Meanwhile, Bob opens his business with the $400 of inventory he did get. Unfortunately, so many people have lost their money and jobs that his business is poor and he shuts his doors.

With the FDIC Insurance

This is the way it was for years in the 1800's and up until the FDIC was created in 1933 and 1934. Now all banks pay an insurance premium to cover their accounts up to $100,000 per person.

In the above scenario, this would have happened:

Bob and Sarah would have heard the rumors of BoA's insolvency and probably ignored them because they were insured by FDIC.

But if they had made a run on the bank, the FDIC would have come in and taken over the bank. They would have "sold" the good parts of the bank to say BoZ. BoZ wanted new depositors and the lending business that BoA had.

This is important and a little more complicated.

BoZ would have paid a premium for the good assets of BoA. Let's say for the 2 accounts of Sarah and Bob - a total of $1800, and $1800 from the FDIC, they would have paid $100 premium. Since BoA only has $1000 in it, the FDIC has to chip in $800 (less the $100 premium they get from BoZ) to transfer the accounts to BoZ.

So far, it only cost the FDIC $700 and Sarah, Bob and BoZ are all happy and the other bank didn't fail and Sam bought the extra raw material and made the parts for Bob who the sold them to the people who still had their jobs, who bought from Bob's hardware, who hired some help, etc., etc.

(Not discussed is any bad loans that BoA has. BoZ can refuse to take them and the FDIC will probably pay BoZ to service them or they will sell them at pennies on the dollar to a loan wholesaler who will try to collect on them, so the FDIC will pay more than $700 but you get the idea.)

CONSERVATIVES: HERE'S MY POINT: THE FDIC IS LIKE AN ANTIBIOTIC SHOT WHEN YOU GET SICK. The fat cats generally get fired. It is not bailing them out, it is bailing Sarah, Bob, Sam, your neighbors and you out. Our economy only works when it is flowing. When it stops, people who want to work and do right, can't.

Otherwise we go back to keeping gold coins buried in the yard and hope that thieves don't steal our life savings.

NYT story on new deposit limits here.

Harvard Economist: Let the Banks Fail - No Bailout is Best

One of our alert readers from the Left Coast (which may become the Right Coast if all of Wall Street fails) pointed out that there are many good arguments for no bailout.

One Harvard economist and a libertarian argues that bankruptcy, not a bailout, is the best solution to the problem. He says that in bankruptcy, the good assets would be sold off and the shareholders would lose all their equity. But that the economy would move forward. [Article here.]

Let me tell you that there is an appeal to that argument. I certainly don't trust the government to do much. I trust the free market. I want to believe that is the answer.

But is that too easy of an answer? Remember, even with conservatives there is a place for government. Can you imagine your town if there were no roads built by government. What roads would there be if a road was only built once enough neighbors got together and chipped in several million to build a paved road?

And what if we only had a military when enough of the neighbors' kids decided that they needed to buy some guns and go fight the enemy?

And what if we only had electricity after the neighbors chipped in enough to build a power plant for your subdivision?

While I hate government involvement, fluid markets and solvent banks is a necessary infrastructure to existing in today's world. Between the civil war and 1900 - a period of 35 years - with no central liquidity maker, America suffered 8 recessions - despite amazing economic growth as a nation.

There are few things worse than not having a job when you are ready able and willing to work. Especially if it is because of economic conditions way beyond your control. And when people don't have jobs, housing, and food on the table - which they have earned - they are ripe for fanatics' ideas.

We all remember (or remember hearing about) the great depression. What we may have forgotten is that those years also spawned communism, Naziism, fascism, the USSR, Nazi Germany, the Japanese aggression, WWII, the rape of Nanking, death camps, millions dead, and ultimately the detonating of atomic bombs and the start of the cold war.

Would these things have happened without the financial collapse of the 1920's? Maybe. Bolsheviks came into power as early as 1917. And the capacity for man to commit evil seems to know no bounds, but the petri dish of the 1920s was certainly ready to give great growth because of the dire times.

So I hate it. I hate supporting anything that grows the government. But like chemotherapy, while the medicine hurts as much as the disease, it looks like we need to take the medicine to be able to see another day.

Ground up peach pits, another helping of vegetables, or magnets will not in my opinion cure this disease. Let's be adults and take the medicine while it can still work.

UPDATE: I just heard Rush Limbaugh make a good argument for no bailout: There is no surplus to pay for the bailout, therefore we are just creating a larger deficit. That certainly sounds appealing to my ears, but I still wonder what happens when we don't move and cure the problem when we had time.

Congress on the Bailout: Keystone Cops to the Rescue

What the h--- is Congress doing about the bailout? They can't pass a plan. The plan they have agreed upon releases bailout funds a little at a time.

That's like having a fire at the Empire State Building and only sending a few fire trucks at a time.

That's like going to a doctor's office and getting only part of the medicine that you need.

Doctor: "You've got cancer and you need a full treatment of chemotherapy, but I'm going to prescribe that you only get partial treatments now. After your cancer has spread further, then we'll give you some more."

If you are going to do a bailout - if you need a bailout - then give the medicine in full and calm the markets down.

If you don't need a bailout then don't give any bailout.

And what have the candidates been doing? McCain put the bailout high on his priority list and suspended his campaign to go to Washington. He should, he's a senator and has been for a long time. He should be working with other senators to get the job done. But why did he fire off his mouth and declare he'd fire the head of the SEC, Christopher Cox? There will be a time for heads to roll, but why Cox? Did the SEC encourage bad lending practices? And why get everybody in the blame/avoid blame mode when a problem has to be solved? McCain - we don't need you to prove you're a maverick right now.

Obama finally showed up in Washington for a photo op and then left. His campaign says he's been on the phone every day to Treasury Secretary Paulson.

What the h--- is that? On the phone while a crisis is looming. Obama - you're a senator don't forget! (I know you have been one for such a short time that you probably forgot.) I bet you're doing the same thing you did in Illinois every time a tough piece of legislation came to a vote: you voted "present" so you wouldn't have to take a position. Obama - are you once again hiding from the tough decisions so you can blame it on somebody else? One way or another, if you win the election, you're going to be living with the loan debacle as we Americans will be.

We don't want you to vote present. We want leadership.

Financial Bailout Reached?

Yahoo News reports that Congress has reached an agreement on the bailout. The Dow is up.

The Bailout: A Simplified Explanation of the Problem

I worked for years as outside counsel to the FDIC, the Resolution Trust Corporation, Fannie Mae, Freddie Mac, and several banks including Bank of America. From that experience, I gathered this knowledge which should help you understand the underlying problem in the loan industry.

First of all, in mortgage loans, there is A, B, C, and D paper.

"A paper" is a standard home loan of 80% LTV "loan to value". For example, if your cost of a new home is $300,000 and you are going to put 20% down, i.e. $60,000 and you have a high credit score, your loan is "A Paper". With "B paper" your credit score is lower or you are getting a 90% loan but it is close.

With "C Paper", the credit score is lower. We used to say that only an Italian named "Guido" will loan on "D Paper". That's a hard money loan.

"C Paper" can also be 2nd mortgages on a home. It is a "C" because if the borrower defaults on the 1st mortgage, the 2nd mortgage can only save it's security (that is the house) by paying the first mortgage off. The 2nd actually has to put money in to save a 2nd mortgage.

Bank Lending 101

In a small town at the turn of the 1900s, a small bank like Bailey S&L from "It's a Wonderful Life" would get in say $100,000 in deposits. If they had to keep a 20% reserve (to cash checks and cover regular withdrawals) they could lend up to $80,000 on a mortgage.

But once they lent that $80,000, they would have to turn down other fine citizens because they had no more money to loan.

So Fannie Mae and Freddie Mac were formed to buy those loans. Bailey would "sell" the loan to Freddie Mac for $80,000 (less some discount) and Bailey's would continue to service the loan.

Bailey's now had another $80,000 to lend a fine homeowner. But in our example, Freddie Mac doesn't have another $80,000 to buy a 2nd Bailey's loan and thus a 3rd fine citizen can not buy his home, and therefore Pottersville Construction Company doesn't need to hire workers, Pottersville's grocery store and auto dealer don't get the worker's wages they would have made, and so forth.

But Freddie Mac could sell the loan to a rich company who wanted the security of monthly payments at a set interest rate secured by a home. Once Freddie does that, it now has another $80,000 and can buy Bailey's 2nd loan, and Bailey S&L can now lend to another citizen.

This is how it works, or is supposed to work. The exception is that these loans are not sold individually but rather bundled in $100,000,000 groups and bonds secured by the loans are sold by Fannie Mae. Also there are certain rules that make the loans similar and safe. They can't be jumbo loans ($410,000 or above) and the home buyer has to put 20% down (or 10% with PMI insurance) so that the homeowner has some serious motivation to save his home if things go bad.

I believe that Fannie Mae and Freddie Mac loans are guaranteed to the buyer, but I'm not absolutely sure of that.

Meantime, the C and D paper loans also get bundled together and bonds are sold secured by these loans. These bonds pay higher interest than the Fannie Mae loans because they are riskier.

What Happened

People were getting A loans because they were putting 20% down. But then some people didn't have the 20%. So loan brokers (who get paid by the number of loans funded, not by how the loans perform) said: "No problem. We'll get you a 2nd mortgage on the same property for 20% so you can put 20% down."

Now this is even before loan brokers who lied about income and assets. That's a separate deal.

A Real Story

A man had worked hard all his life in the construction trades. His wife worked for the school system. He had always lived in an apartment but wanted to provide for his family. He was jealous because some of the guys he knew bought a house for $450,000 and the value went up to $600,000. They had made "$150,000" in addition to their salaries over the last several years. The man had been working 12 hour days for years and had no equity to show for it.

He wanted a home.

A friend of his became a real estate agent who "had a loan broker who could get anybody funded". Now before you get mad at this loan broker, remember that he only gets paid and only gets new business and referrals if he can get deals done. He gets paid nothing when they don't get done.

The man "bought" a $620,000 house. Even he admitted it was expensive, but he had had a good year the year before. He worked almost everyday except Christmas. He had to turn clients away.

He just didn't have the down payment.

But if he could work just as hard for a few years, maybe when his kids went to college he could sell the house for $150,000 profit.

There was no malice here at all!

The real estate agent said: My loan broker can get you a 1st and a 2nd loan. You'll get into the house without a down payment. And he did - with a $5,000 per month mortgage.

The economy slowed down. People were no longer buying houses.

The real estate agent went into another line of business. The loan broker quit and retired.

The man's construction business slowed down. Fewer people were hiring this man. Some who did hire him, welched on their contracts and didn't pay him. He couldn't keep paying the full $5,000. He tried to pay a partial payment of $4,500 but they returned the payment (partial payments are not allowed. It's all or nothing).

He went into default on the 2nd mortgage. They sent out a notice of default which put the 1st mortgage in default. The bank said if he paid them $12,000 immediately, it would come out of default. He said he now had $5,000 but he couldn't get $12,000.

The bank foreclosed. The man and his wife are angry with one another. They are both embarrassed because all they wanted was a piece of the American Dream.

Meanwhile

Somewhere some company (e.g. AIG) had bought a bond containing $100,000,000 of C paper loans. "How many of these loans are bad?" The president cried. The CFO said: "There is no way to tell." The CEO screamed "Well then don't buy any more until this crisis is over!".... and the market for home equity loans dried up.

But AIG's president's problems weren't over. His accountants and stockholders said "Your balance sheet lists a bond secured by $100,000,000 in home loans. How many of those loans are still good?" And AIG's president said "Nobody knows". So then stockholders sold his stock and other people wouldn't lend AIG any money. In fact, even though AIG had basically a good business, it might have to declare bankruptcy.

But it doesn't end there. But to keep it short, I'll make this part really simple.

1. There is a company, let's call it ABC who did a big deal with XYZ. XYZ was insured by AIG. When ABC heard that AIG might go under, they called XYZ and said: "We no longer feel secure in this deal. No matter what the contract says, we may pull out because we can't trust that AIG will be able to pay off any insurance claim." XYZ threatened to sue ABC but that would take years. In the meantime, they told their HR department to lay off most of the people working on the project with ABC. One of the workers laid off defaulted on his 2nd mortgage which put the first mortgage in default. See above for what happened to this man's loan.

2. There is a money market fund with a lot of retirement money in it. The money manager only invested in the most secure investments to guarantee that his retirees would have their retirement money. In fact, he bought a bond from Fannie Mae which is secured with $100,000,000 home loans. The man's home loan is in that package. The money manager wants to know if his investment is any good. "How many loans have gone bad?" he screams to Fannie Mae. "It's hard to tell" Fanie Mae says. If Fannie Mae can't sell their next $100,000,000 bond, because nobody wants to buy a bond secured by home loans, that will mean that the bond that the retirement fund has will be almost worthless too. The retirement fund won't have enough assets to pay off all the pensions. What then happens to the retirees?

That's why there needs to be a "bailout". It's for everybody, not just the rich. And while the CEO's may have taken too big of a bonus, their bonus was not the cause of the problem.

(My apologies to anyone who has a better knowledge of this. We accept your comments.)