BofA, WTF

It looks like another bank consolidation will be using federal juice to get the deal done. The WSJ reports today that Bank of America will be tapping the TARP to complete it's acquisition of investment house Merrill Lynch. Think of it as affirmative action for creative destruction. Not exactly what Joseph Schumpeter had in mind when he was developing the concept of corporate evolution through the natural uninhibited cycles of free market ebb and flow. The TARP, pitched as the only means to keep the credit markets from freezing up for good, has become the grease lubricating a new round of bank consolidations.

There are no letters in the acronym TARP that describe the unexpected outcome of the federal bailout to banks. Citi has benefited greatly from the largess and PNC used the TARP to buy our beloved NatCity. Compare and contrast these events with the struggle to get a loan package approved for the U.S. automakers. Paulson et al insisted the remaining TARP funds were committed for an undisclosed use and would not be available to loan to the automakers. Now that the story is out is appears to this observer of recent history that the BofA Merrill deal was given priority over the Big Three loan. That puny $17.4 billion loan package begrudgingly handed over to the Big Three was dwarfed in by the crazy billions being thrown at BofA and Citi alone.

This latest episode is one more example of the Treasury Department's tilt towards helping Hank's comrades in the financial sector. As an example take a look at this piece from The Big Picture comparing the terms the Treasury gave to Goldman in comparison to what super-investor Warren Buffet was able to demand for a stake in the firm. Clearly the Treasury program was designed to provide money without much in return from the banks.

A massive reorganization of the big players in banking was always in cards when you consider the people involved, I guess it shouldn't be a surprise. Congress, taxpayers and the losers who got the short end of the deals (Nat City) shouldn't be surprised at the outcome of TARP I. The next chapter, TARPII will be getting under way soon. Maybe the next round will have more accountability and less emphasis on creative destruction.

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PNatCity

Game Over. The purchase of Cleveland banking staple National City Corp. by PNC was approved by shareholders today. The NCB name will eventually go the way of Euclid Beach Park, Sohio and Cleveland Trust but, we're use to this type of thing by now.

PNC's purchase of Nat City was made possible by the largess of the Treasury TARP program. This has called into question the motive behind allowing the acquisition to go through considering that Nat City was denied TARP funds resulting in the PNC takeover.

As much as the circumstances around PNC's purchase have rankled local members of Congress the short lived Save NCB Movement was no match for the forces of creative destruction. I am of course being cynical about the creative destruction part. The TARP and the resulting thumbs up and thumbs down are government sponsored financial engineering at its finest. So much for an invisible hand on the tiller.

Regardless of the way NCB was getting the shaft in this deal there are two inescapable facts that should be considered. One, NatCity was for sale with or without the government backed infusion that pushed PNC over the edge. The private equity investment NCB received in May was not enough to prevent a future sale. I've had people from NCB tell me as much. Two, the sorry condition of Nat City is the direct result of the bank's management team betting that the subprime cash conveyor belt would never shut down. It did and now the local banking landscape is a changin'.

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The Citi Slide

A sliding stock price, thousands of layoffs and dire predictions from the financial press bring the troubles of the U.S. automakers to mind.

I'd almost forgotten about the tail spin the banking sector has been in. While the fate of the Big Three was debated on Capital Hill this week the wheels were falling off the banking giant Citigroup. We thought the TARP program had provided some stability to the reeling financial markets but there are more rumblings of looming problems, especially at Citi. Today's peice in the NYT recounts the all too familiar hubris laden journey of the firm over the past five years.

It will be interesting to see what happens with Citi. Will they be sold or merge with another Wall Street titan? Better yet, will the Treasury Department decide that Citi is too big to fail? Maybe it's true when they say the first $25 billion is the hardest to come by. Brad DeLong has an interesting yet cynical outlook on what to do with Citi:

Yep. Time to do it. Swedish model. No more of this "preferred stock capital injection" business. Common stock. And with commitment comes control.

If it comes to that then surely a loan to the U.S. automakers is in order.

Update: This story is running on Bloomberg. Looks like Citi is too big to fail.

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Big Three Battlegrounds

Why can't we all just get along? The prospect of of having to intervene in another sector of the economy, the auto industry, has created a defacto battle ground of sorts. The attention being paid to the sad state of affairs at GM, Chrysler and Ford has exposed harsh divisions along policy, ideological and societal lines. What could have been a straight forward debate about loaning money to the Big Three has become a struggle along multiple fronts. You thought the people in Washington just wanted to entertain a new bailout package but there are more layers to this onion than meets eye.

The Fight For Stability in a Crisis
The guys in charge of the automakers will tell you that their companies are fighting to stay alive and the dysfunctional state of the credit markets is making things hard. They'd love to turn to the credit markets to borrow money and replace the cash they are burning through but there's a financial crisis in full swing so that's not an option. Considering all that is being done for the financial sector a loan to save or stabilize the U.S. automakers and the thousands of jobs that are at risk doesn't seem out of bounds.

Remember that $150 billion bailout of AIG (originally set at $87 billion) was deemed necessary because of their omnipresent status in the global financial system. The Treasury coughed up $150 billion to stave off excessive counter party risk. Surely a loan to car makers to bridge the economic crisis caused by the likes of AIG is in the realm of the possible. I think it's safe to say that GM workers will not be attending retreats at exclusive resorts during the loan period. That little fit the media is throwing over the use of corporate jets really seems trivial when compared against the massages and other pampering AIG employees received whilst on government sponsored holiday.

Definitional Schism
There's a low level verbal skirmish over the definition of what government action is, a loan or a bailout. The more loathsome someone feels about the Big Three the more emphasis that is placed on the term bailout. So it may sound like BAILout when muttered on cable television. I'll stick with the more accurate title, it's a loan.

The continued seizing of the credit markets would probably make a reorganization under Chapter 11 untenable. There is a consensus developing not a myth that the bankruptcy would quickly back slide into a liquidation. Consider that auto industry jobs have a multiplier of 9 or 10. A liquidation of GM et al means the evaporation of suppliers and other related industries that are supportive to the manufacturing sector. That includes the mom and pop (sorry for the cliche) diners, barbershops, pizza places etc. that will face untimely eradication from the local economies that depend on auto laborers to pump money into there businesses.

A Tipping Point in the Ideological Struggle?
The right wing pundits, columnists, policy makers and disciples of creative destruction see the argument over "bailing out" the Big Three as a tipping point of sorts. A victory would mean shutting the automakers out of receiving any federal loans and force them into a tailspin leading to liquidation or fragmentation into smaller entities. This scenario may sound detrimental to the U.S. economy as a whole but theses guys know the survival of their ideology is at stake. They have picked this debate, not the $700 billion one, as the final showdown in eradicating the perceived cancers of the free market system they crave.

Mitt Romney, Fox News, the WSJ Opinion page, George Will and others have weighed like an angry mob from the Roman Coliseum with a collective thumbs down. They may arrive at the prognosis using a different methodology but the conclusion is the same. Let them fail and we will be stronger is a common chant from the market worshipers.

The dialectic we are witnessing is actually a full assault on the soft underbelly of the nemesis of free market acolytes. Namely the economic safety net provided by organized labor over the years. You know, luxuries like living wages, health care, pensions and safe working environments. There's blood in the water and the antagonists are waging a proxy war against one the largest remaining strongholds of organized labor. Consider this, one of the graphics run on Fox News today read, "Is this a bailout of the union!". Bailing out shameful greed on Wall Street okay, providing loans to the Big Three (union workers), bad.

If a fatal blow can be dealt to the Big Three surely they think a significant remnant of industrial labor movement could be neutralized in one stroke. Attacking organized labor vis a vis the demonization of the individual worker is one more tactic utilized by the "on your own" crowd. This type of assault on the structure of union employment had been going on before the Big Three Battle of 2008. George Will wrote a celebrated column on the decline of GM in 2006 where he referred to the health care and pensions offered to GM employees as "welfare". He penned a reprise to that column in this week's Post.

Yes, the beloved Joe Six pack that the GOP crowed about during the 2008 election busted his ass on the GM assembly line for 25 years to become a welfare recipient, he in no way earned those benefits. Funny how propping up AIG artificially with unlimited billions doesn't draw the same animus from these guys.

You would think that the crumbling of one of the pillars of free markets ideology, unregulated markets, would have discouraged the protraction of the ideological war. Of course the abysmal attempt of the past few years to embrace free market dogma has been a train wreck all together but that hasn't abated the trumpeting from the sons of Friedman.

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Nat City Gets TARPed

It was only a matter of time for National City Bank. The subprime inflicted damage and bad financial outlook took its toll on the local banking mainstay. The news we had all been waiting for finally hit this morning. The buyer, PNC a Pittsburgh based bank with backing from the U.S Treasury, is plopping down a mere $5.6 billion for National City. The deal is being aided with funding from the government bailout program (from Marketwatch):

PNC also said it plans to sell $7.7 billion of preferred stock to the Treasury under the government's Troubled Asset Relief Program, or TARP.

The U.S. Treasury giveth and PNC taketh your locally headquartered bank away. Talk about unintended consequences of of the bailout plan. The very plan that was designed to salvage the banking system has also hastened the loss of local prestige and an untold number of good paying jobs. This new facet of the Treasury plan includes using up to $125 billion in funds to shore up large banks, like PNC. As usual with corporate mergers,Northeast Ohio gets caught on the short end of the deal.

The Cleveland bank whose name is festooned on several downtown buildings and inside Cleveland Browns Stadium has been in trouble since early this year. The cash infusion from a private equity firm this spring wasn't enough to keep National City's stock price from sliding into Hades and setting off warning bells in the local business community.

As we are seeing first hand that the Treasury program is a neutral arbiter of the needs of the macro level players of the financial system. The bailout was not intended to rescue the real economy. The inhabitants of the ground floor are powerless observers of the sea changes that are happening as the financial sector reconfigures itself. The worried looks on the faces of Nat City employees that I see on East Ninth Street and the North Coast Express have turned to quiet resignation. There's not much that can be done other than wait and see if their jobs will be eliminated (some probably have an inkling). The damage to the 401k plans has already been done and now careers of hundreds of employees, taxpayers and consumers are about to be drawn into the turbulence.

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Petroblogging: Greed's Oily Residue

Oil and all the woes it has been causing us seem to be ingrained in the collective conscious of America right now. I think the McClatchy news website will need to add a separate section just for oil stories the way things are going. Fighting for oil, crying about the price of gas and abject paranoia about speculative plots are just some of the noise we're getting inundated with lately. These things speak to the power of the petrodollar which leads to my attempt at petroblogging.

There Will Be Blood in Congress
Big Oil and steadily increasing gas prices have created all sorts of problems for the average minivan driver. On the legislative and policy side there are multiple "fixes" being thrown into the mix in Congress. The Dems are thinking of a multi-faceted approach that includes a windfall profits tax on oil companies (this makes no sense), capping the Strategic Petroleum Reserve, taking away tax breaks and cracking down on energy market speculation. A windfall by definition is a one-time increase in profits. The profits Exxon and company are seeing are the normal thing now. So why would a windfall profits tax be applicable in today's situation?

The GOP is looking almost exclusively from the supply side with proposals that call for increased drilling (including in ANWR) and refinery building and the normal emphasis on converting resources to cash. The only proposal that will get widespread support is the cap on the strategic reserve. Politico has a really good run down on the various legislative proposals that are presented in a Factcheck.org fashion.

Is the Gas Tax Holiday Dead?
File this one under Panderer in Chief or When Economists Attack. The McCain/Clinton plan to lower gas prices for the summer driving season using voodoo economics has been fading in popularity, and that's not just my impression. Does it have to do with every economist in the world calling it a bad idea? It seems that the McCain advisers that hatched the plan ignored the cold hard facts of tax incidence theory and went straight for the lame gimmickry of the appeal of a tax holiday. Hillary of course glommed on to the gas tax holiday looking for anyway to get an edge on Obama. Now that she is all but cooked in the race for the nomination, her support of a holiday from gasoline reality doesn't mean much. Enough rational introspection from the media and even average citizens has appeared to relegate this one to the silly season column.

Bush Off to Visit His Saudi Overlords
While we are left to guess what the price at the Circle K station will hit tomorrow the Prez heads off to the Middle East to survey the damage of seven years of failed foreign policy. Every Bush or Cheney Mid East trip of course ends with the requisite stop in Saudi Arabia to engage in royal ass kissing. maybe this trip will be different. It would be nice to see someone going to bat for us and maybe ask the Saudis to increase oil production. Is it possible that W. will threaten to pull out of Iraq and let the crazy Iranians increase their influence even more? Will King Abdullah be scared shitless about growing Shia influence in the region stirring up unrest amongst the population of Shias that inhabit the oil rich eastern part of his kingdom? Maybe the King will choose to hold hands with W. and buy his allegiance with another shiny sword.

It's Not a Bubble
Professor Krugman takes the speculation on speculation to task in yesterday's NYT column. The theory that energy speculators are behind the rapid increase in oil and gas prices has taken hold recently and for good reason. The guys making all of the money on the oil boon are the ones closely connected to the markets and traders that seemingly create the frenzy that is pushing up the price of oil. Krugman refutes this notion with sound economic reasoning. His contention is that speculation requires hoarding of supply to be effective and currently the supplies of oil are at normal or below average levels. Sorry, the oil companies are easy to hate but our dilemma is driven by good ol' supply and demand principles. If we could only get that Iraq occupation thing to work maybe the price would go down.

We're Americans and we ain't drivin' 55 or taking the damn bus to work.

Job Losses Bad News For NEO

The latest round of bad economic news arrived this week in the form of more job losses. If that isn't enough to bum you out then the impact of the downturn in NE Ohio will. George Zeller from the Center for Community Solutions spells out out the impending hard times for NEO in his latest information release:

In Ohio, our year over year job growth has been a loss for the last
12 consecutive months. It is likely that we will see the same in the
March 2008 figures when we get them on April 18.

Of course, we have no evidence at all that Ohio or Cuyahoga County
ever recovered at all from the 2000s recession. Thus, the new federal
figures today for the whole country are not a good sign for us
locally. We have now gone more than one quarter with job losses in
the USA. In another two months, unless job growth resumes, we will
have two quarters of national job losses. Even then, until the
Conference Board sees two negative quarters of GDP, they probably
will not declare an official recession. But, there is obvious
significant weakness in the national economy right now, and that is
very likely to spill over into our local situation.

Therefore, despite a lack of a local component in today's new
figures, the national employment figures are discouraging for us in
Ohio and in Cuyahoga County.

Zeller has had the unfortunate role of chronicling our economic woes. As he mentions we are already vulnerable due to the lack of a true recovery from the previous recession. The take away here is that the ebb and flow of the Dow Jones Index and Fed bailouts are only a small portion of the economic picture. These latest indicators point to adeep and troubling times for NE Ohioans.