Thursday, June 4, 2009

Who drove the Chevy off the levee?

How on earth did this happen?

General Motors, the 100-year-old car company that once employed more than 500,000 workers and had a 50 percent market share, just crumbled into bankruptcy. The government now runs it.

Chrysler, 30 years ago, teetered on the brink of bankruptcy. If it had been allowed to collapse, the remaining Big Two would likely have purchased much of Chrysler's plants and equipment and hired at least some of its workers. Instead, Congress provided financial aid to "rescue" the company. By not letting Chrysler fail, two major things occurred. First, a feeble company remained alive, only to limp from financial crisis to financial crisis for the next several decades. Second, it sent a message not only to Detroit but also to the rest of America: Expect a taxpayer bailout if the government deems a business "too big to fail."

After World War II, manufacturers in Japan sought out the advice of W. Edwards Deming, an American quality-control expert. American businesses ignored Deming's theories on continual improvement, but Japanese companies lingered on his every word.
Today outstanding Japanese companies receive the Deming Application Prize for excellence in total quality management.

Back in Michigan in the '70s, I read article after article about how the Big Three should/could/would respond to the foreign invasion. But in practice, I saw excuses and pleas for protectionism.

"Why doesn't General Motors," I recall asking my roommate, "offer a boatload of money, steal Toyota's No. 2 executive and put him in charge?" My roommate laughed, "Because he doesn't speak English and wouldn't be able to understand the American market." I said, "And General Motors does?"

Today I know that my idea of stealing a Toyota exec was bad. GM should have picked up the phone, asked the government to buy a majority share in the company, handed the office keys to the President of the United States, and said, "Here. You run it."

Full story here

Larry Elder

An Easily Understandable Explanation of Derivative Markets

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

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