Bailout Watch 48: AIG SOS = GM RIP?

by Robert Farago

September 17th, 2008 9:40 AM

Earlier today, Merrill Lynch upgraded GM to “neutral.” The fact that this is the same Merrill Lynch that’s teetering on the brink of bankruptcy, the same Merrill that hoovered-up the remains of GM’s busted deal with FIAT back in 2002 (buying The General’s 5.1 percent share of the Italian automaker at a fire sale price of $1.16b), has absolutely nothing to do with it. Anway, Merrill’s optimism re: GM could be about to disappear; the upgrade was based almost entirely of the possibility that The General will scarf low-interest loans from you-know-who (hint: you). That’s because Uncle Sam has agreed to an $85b loan to insurance giant AIG to stave off bankruptcy (AIG’s, not Uncle Sam’s). This dramatic development could cut one of two ways for GM. The AIG bailout may increase the likelihood that Motown will score its $25b+ federal bonanza (the Daniel Howes “You Saved Wall Street So Why The Hell Not US?” prophecy). Or it will decrease Detroit’s chances of immediate federal assistance significantly (the Holy Shit bailout fatigue non-option). Place your bets now. But as far as your tax dollars or the free market is concerned (the feds now hold an 80 percent share of a formerly private insurance company), any way you look at this, you lose. Who wants to own GM? Not me.

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Mel23 on Sep 17, 2008

Pch101: What you say is true in large part, but the situation has come to this point because the big boys wanted to take care of the big boys regardless of the OBVIOUS risk to the society as a whole. And now today, after the AIG action, it's the credibility of the US Fed and Treasury as a whole that's coming into question. The cost of insuring against a default by the US has risen dramatically. We're considered to be less safe than Australia; not as bad as Russia yet. Silver is up 11% today, gold up over 9%, but 'somehow' the USD is down barely at all. I have to believe the Mid East and asian holders of the USD are pulling it out in huge quantities, and the USD is being supported by our govt. This can't go on, and if/when it fails, the failure of AIG would be a blip in comparison. It's like the mess in Iraq; it's a near impossible problem now but could have been easily prevented earlier.

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CarShark on Sep 17, 2008

I heard that the reason that all these brokers and AIG went into Death Spiral Mode was because they killed the "uptick rule" for stocks. How much truth is there to that? I like the idea of deregulation...so long as the remaining regulation works.

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Pch101 on Sep 17, 2008
the situation has come to this point because the big boys wanted to take care of the big boys regardless of the OBVIOUS risk to the society as a whole. That's partly true. But the core motivation is to prop up US gross domestic product, which means getting consumers to spend, spend, spend. The government isn't going to bother telling you this, but they have a lot invested in getting the average Joe and Jane to spend a lot of money, as that is what keeps the system propped up. They were enablers and beneficiaries of the boom that led to this crisis. They can all wring their hands and blame "irresponsible" homeowners (read: minorities), but they ultimately wanted there to be a system that created loans that had a high risk of default. Any situation that allows people to buy a house with almost nothing down is begging for default, no matter how high of a FICO score that the borrower has. I’m not disagreeing with you, but won’t this take down at least one domestic automobile company, and really damage some of the foreign ones, as well? Sure. With the credit crunch, car loans will be harder to get, and leasing is bound to be curtailed as residuals take a hit and become unpredictable. Toyota and Honda will be fine, as they have brands that are strong enough to attract the buyers who are left. Consumers are bound to become more risk adverse when times are tough, which means that the strongest brands will get stronger over the long run. The domestics will have problems; they had them before, and now they'll be worse. We'll see what happens, but I expect that GM may end up being sold, with the present shareholders getting a tiny fraction of the current stock value. (Sorry, Buickman.)

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Mel23 on Sep 17, 2008

I think the easy money for the common consumer eventually became a feedstock byproduct of the financial game of the derivative and collateralization game. Thousands of foolish people were eager to sign on for a mortgage deal they couldn't support and go nuts on credit cards they couldn't support which became raw meat for the financial magicians to mix with a ton of hamburger helper of their hugely leveraged 'instruments' and walk away with billions. Now we have the residue. The game was set up to end up just where it's going. All kinds of offshore orphan corporations established with the sole purpose of isolating the perpetrators from responsibility and claw back when it went down. This stuff went on and was certainly not a secret to anybody in the business or with a legislative or regulatory role. I guess there's no point in getting excited about it; it's just the way we do things.

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