Aamer Ghaffar's Blog

After seeing the extremely unprofessional (yet to an extent understandable) drubbing assistant treasury secretary Kashkari got from the senate oversight committee, I began to wonder how the new treasury secretary will be treated by Congress, the market, the media and the general American public. Surely after the presidential election this is by far one of the most important and exciting decisions and has got everyone talking. Since no one has any idea who President elect Obama is going to choose, I am going to go through the list of the people I feel are in the running and even be bold enough to make a prediction as to who will be chosen to take the hot seat and why….

Lets examine the choices:

Bob Ruben
The ex director of Citi as well as the assistant to the President for Economic Policy during the Clinton administration was a front runner but withdrew his name due to being too old (he is 70)

Larry Summers
A child prodigy who went to MIT when he was 16 and a tenured professor at Harvard university by the time he was 28. He is also the Former chief economist at the World Bank who would not be a stranger to the position as he was treasury secretary during the Clinton administration. However, he brings a lot of baggage with him (negative comments in regard to environmentalists, affirmative action as well as women will not sit well with the Obama cabinet or supporters who are looking for progressive ‘change’. The government cannot afford to be defending their treasury Secretary and focus on the economy at the same time.

Paul Volcker
The former treasury secretary under Carter and Reagan is a real task master and a true believer in doing whatever it takes to get the job done. He does not pay attention to the sentiments and reaction of the market, public or even the president for that matter. During the Carter administration he raised interest rates to 22 percent while inflation was at an unbelievable 16 percent. He was criticized and ridiculed for his actions but stood his ground. The long bull market that ensued for the next 20 years (starting in 1982) can be directly attributed to Volcker’s policies and his dedication to sticking to his guns and doing what he thought was right. Though this is such a time, I do not know if Obama or the rest of the country is ready for someone who has historically been very strong in his decisions, focusing on the long term benefit and sacrificing current comfort as well as the incumbents chance of being reelected. Furthermore, after the democrats made such a big deal about senator McCain’s age it will be tough to justify hiring an 81 year old man as treasury secretary.

Tim Geithner
The 9th president of the Federal reserve of New York is: young (same age as Obama), well traveled (lived his formative years abroad, again like Obama), dynamic, apolitical and is known to gets things done. He has been at the center of this perfect storm playing a key role in trying to unfreeze the current credit market. Geithner was a major player in the Bear Sterns deal, in bailing out AIG and in not bailing out Lehman (which may not have been the best decision. However in all fairness, hindsight is a perfect science).

Though not widely considered as a front runner, I have to admit that I am a fan of John Corzine, the current Governor of NJ. Known for his tremendous financial acumen, he started his career as a bond trader and made partner at Goldman Sachs within five years and Chairman and CEO after being at the company just nineteen years. His move up the ranks was justified and paid dividends (no pun intended) as he reversed the fortunes of Goldman that was going through a very tough time during the downturn of the bond market (in the early to mid 90′s).

All these men are accomplished smart individuals that bring a lot to the table. I feel Geithener is a smart man and will be the one to get the job, due to being young, apolitical and being recognized on Wall Street as someone who makes things happen. In my opinion I feel John Corzine would also be a great choice (maybe even slightly better) since he has been slightly removed from the current crisis and can bring a fresh perspective to match his seasoned knowledge. Admittedly that may be my bias and admiration talking, plus I do not think that Obama will want to go with another Goldman man.

On a side note Christopher Cox (Chairman of the SEC) is one funny man. He just came to the realization that more oversight is needed for credit default swaps….
“The virtually-unregulated over-the-counter market in credit default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of AIG,” Cox said in a statement. “Bringing transparency to this market is vitally important.” Great observation sir, just a few years too late.

Politics

I started writing this piece in an attempt to explain my views on the current economic crises to a dear friend of mine. I am now posting it to get feedback. I realize it is especially long for a blog post but request that you read on and let me know what you think.

Note: This piece was written during the last few weeks of October 2008.

Revisiting the bailout

The Economy

GM has suspended merger talks with Chrysler and both companies along with Ford (through the UAW) are asking congress for $25 billion bailout and $50 billion for the reissuance of debt! I am baffled as to how the UAW can possibly justify this amount? I understand that they want to save the US auto industry, its workers and the surrounding areas around the car plants. However, the road to hell is paved with good intentions, and in this case good intentions are just not going to cut it.

Currently GM is burning through its cash and has already spent a whopping $6.9 billion of its liquid assets (cash) in the last quarter alone. GM reported a $4.2 billion third-quarter operating loss today and said its available cash fell to $16.2 billion on Sept. 30 from $21 billion at the end of June. Though GM insists that cash requirements will be significantly less in the coming quarters, there is little evidence of that happening. Furthermore, GM also carries the debt burden of GMAC (GM’s financing arm) that has a large exposure to credit default swaps, making it a ticking time bomb.

If stopping job loss is the main justification that the Big Three are giving for getting money, then the money would be better spent on retraining its workers or giving the workers some form of compensation. Not bailing out companies that are going to burn through the cash and be back asking for more again a few months later. Chrysler on the other hand went private a few years ago after being bought by private equity giant Cerberus Capital Management LLC, that hoped to fix the company’s problems by cutting costs, streamlining production etc. and eventually going public again and making a killing at the market. Unfortunately that scenario is not panning out for them, primarily for the same reasons as GM: poor perception of the brand from consumers and a flawed business plan among other reasons. However, the company will continue to explore possible strategic alliances or partnerships in order to remain afloat. Chrysler and Ford are not as pressed for time as GM because they have enough liquidity to last the year.

“Cutting back on discretionary expenses, including travel, consulting and unscheduled overtime” is what GM is proposing to do to solve the problem. I don’t think it’s worthwhile to even talk to the companies unless they are willing to change their long term business models, consumer perception and possibly even management. Admittedly this is easier said than done. I am well aware that all this cannot happen overnight but some serious steps in this direction have to be taken in order for the government to even consider looking at these companies. It is not impossible to make these changes. Looking at the companies present in South Detroit like Honda and Toyota, re branding, cost cutting and overall efficiency is an attainable goal.

What makes this a tricky situation is that unlike the banks that have FDIC insurance on deposits, the auto makers have nothing to back their warranties on cars or ensure the production of spare parts. Therefore, bankruptcy is not an option, as consumers traditionally do not buy cars from such companies for reasons such as being fearful of the warranty not being honored or spare parts not being available. Furthermore, bankruptcy would result in 2.5 million jobs lost in the first year among automakers, suppliers and related businesses, according to a November 4 report by the Center for Automotive Research, based in Ann Arbor, Michigan. Analysts speculate that a Ford or GM failure can result in a $100 billion hit for the economy.

What should the government do? Not knowing the details of the situation I can recommend what the government should not do, and that is to blindly bail out the auto industry. The government should only consider the package after witnessing some serious signs of the Big Three proactively changing the way they operate. Till then the government should not even bother giving a cent let alone the $25 billion package or the $50 billion in issuance of new loans. If the government decides to bail out the UAW “just this one time” without any serious caveats on the rescue package or changes demanded, they might as well add another line item to the federal budget as it WILL be a recurring cost!

The Economy