Ever been to Dodge? It was time to get out of there a long long time ago, and yet, there are still folks there.

If the big 3 could ever ditch their legacy costs they could be like porsche without the designers.

They could have sold this debt last fall, but held off to let the market recover.

Unfortunately, its only gotten worse. Still, better to sell the debt at 63 cents on the dollar than later in the year when unemployment is near 7% and auto sales are at a 14M run rate.

How can this person remain employed? That statement is so stupid!
wilson | 04.09.08 - 5:02 pm | #

Don't forget to add that this new loan would not be recourse. It would be complete based on the faith of the borrower.

wow.

I know Chrysler's a bad candidate to stay out of FC but GS wouldn't give away their spot in the BK without a reason unless they were gonna make it back elsewhere.

Or they thought that they'd only get 62* cents on the dollar in the case of BK.

*Ignoring time value of money issues.

freakdog writes:
Citigroup is financing their 12B asset sale by loaning the money to the buyers...

Does that mean they see the buyers as a better credit risk than themselves?

hmmm....

so Chrysler debt is almost 3x as risky as a Jumbo loan in California based on yield.Woof.

Ralph Cramdown: If Chrysler fails again, I don't think any foreign carmakers are going to want to pick it up.

Except Jeep

Cars have the same basic problem today as houses: Too much inventory.

There are reports of used car lots full to the gills with 3-6 year old low mileage cars, especially SUVs. They are from trade-ups, repos and too many leases with returns written for too long.

The car industry traded-up and leased itself into a sharp downturn, just like the HBs overbuilt into theirs.

You are almost a fool today to pay for a new car, when you can get an almost new car for half price or less.

The impact of excessive used car inventories hasn't even begun to hit new car sales/production yet in a big way. 14+ million will soon be a pipe dream.

That ain't all the Fed may end up with ownership of:

Buyout CLOs May Be Used for Fed Loans, Analysts Say (Update1)
By Jody Shenn and Pierre Paulden

April 9 (Bloomberg) -- Wall Street firms may be bundling high-yield, high-risk corporate loans into securities to use as collateral to borrow from the U.S. government, according to a report by Morgan Stanley analysts.

Securities firms can borrow against collateralized loan obligations at the Federal Reserve's Primary Dealer Credit Facility, the analysts said. The Fed set up the facility last month, its first extension of credit to non-banks since the Great Depression.

The creation last month of CLOs comprised of loans used in private-equity buyouts or other leveraged loans to larger companies totaling $11.4 billion ended the deep freeze'' in the market, and many arose from unusual motives, today's report said.At least one'' recent CLO was probably done to take advantage of the Fed's new facility, it said.

``It's not cheap to finance loans today in the market,'' Vishwanath Tirupattur, a Morgan Stanley analyst in New York, said in a telephone interview.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, last month created the $2.8 billion Freedom CLO, the largest this year, out of loans that couldn't be sold to investors, such as for buyouts of payment processor First Data Corp. and power producer TXU Corp. JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc also underwrote CLOs in March, according to data complied by Bloomberg.

[snip]

"Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, last month created the $2.8 billion Freedom CLO, the largest this year, out of loans that couldn't be sold to investors,"

The Freedom CLO? You have got to be #%$&ing kidding me. If that is not air-raid-loud siren warning, I don't know what is.

Based on the name choice of of this CLO alone I would say Lehman is toast.

I see it's politics as usual.

Marcus Aurelius | 04.09.08 - 6:46 pm | #

You don't understand Marcus. It is not politics that's bad. It's YOUR politics that's dad.

Compared to this Chrysler deal, Citi's 90 cents on the dollar deal seems too good to be true.

I'm going to take a bow here. I called it.

Citi's 90 cents on the dollar price is to good to be true. But the deal works because they are probably getting a kicking interest rate on the new loan from Citi to fund the deal.

In other words, with enough spread between what the assets are paying and the interest rate on the new loan from Citigroup the price doesn't matter. With enough leverage at the point that the loans are likely to default you've already made back your principal (and them some) in interest.

The only real risk is that the loans default before you've recovered your principal. Having multiple leverage loans in the same pool reduces that risk somewhat.

It works for Citigroup because they are getting a higher than market price for the loans which means they don't have to take as large a hit to capital (which is scarce). And the loans are now "off" the balance sheet don't have to be marked-to-market.

This could work for housing! (joke)

You bought a 1M dollar multi-tenant rental with 5% down at a 7% interest rate with an interest only, non-recourse loan. The cap rate is 7% so you're breaking even month-to-month.

But, you got a big chunk of cash as "consulting fees" upfront to close the deal so you're okay with that.

The market tanks and the rental unit is now only worth 800K and you threaten to walk.

The banks knows that if you default it's going to to take a 200K loss on the loan. So, it comes back to you and says "The Fed's willing to loan me money at 2%. If I give you a 2% loans are you to put 5% more down if we do the re-fi for 90 cents on the dollar?"

So, the break-even investment is now paying 5% (50K) per year. You only need to put 50K more in the pot to make it happen. As long as you don't default in one year your money ahead. Two years and you've recovered your original down payment. Anything after three years is gravy.

And the best part is if the market tanks two year from now you can still walk and the bank eats the entire loss!

With the "Freedom" CLO and Citi's deal, I get the funny feeling that wall street's sharks are a step or two ahead of the Fed. The Fed is playing "lets make liquidity". The banks are playing "lets suck this new kid dry."

Marcus Aurelius,

One way to revolt is for home owners to just walk away. Or better yet, take your heloc and pay off all debt except the mortgage of course. Once your financial house is in order, stop paying the mortgage and move on with life. Heck buy a nicer house and have a smaller monthly payment and less debt.

Use the system, don't be used by it.

Didn't you sort of bury the lead? A price was established and they traded, which was the big concern on the "mark-to-market" issue because nobody knew at what price (or when) these securities would change hands.

The issue is all the other banks with these loans on their books will need to mark them down to the recent price.

Kicker,

That's the cycle now. The notion that banks will have a kitchen sink quarter and it will all be behind us is ludicrous. The market is NOT frozen. The banks just won't trade at current market prices. Doing so would be an admission of insolvency.

The fed and banks are just buying time while they raise capital and dilute existing share holders.

Bonuses & buybacks were a joke. A giant scam. Lending trillions to people who can't repay against a backdrop of the biggest housing boom in history! How can that be written off in a quarter or two?

It is amazing how quickly the "the recession is here but it is priced in and we are looking across the valley" crap that was being touted everywhere on Monday has evaporated. I expected them to be more resilient.

Looks like we will be taking a trip down into the valley after all.

I planned ahead and am renting mules to make the trip easier for everyone. I'm long mules.

I haven't done the math but I probably had a better first quarter than goldman. Can I get me some of that discount window action? Because if i can lever up 30:1 on some SRS at these prices using my current equity I can quit the game when SRS hits 120 in a few weeks. And if I"m wrong, I'm out a couple hundred grand. Big deal. It really is insane to not invest at 30:1 if you can. Hell, I'd go 100:1 if they'd let me. The joke is on anyone not doing it.

Kicker said: "The issue is all the other banks with these loans on their books will need to mark them down to the recent price."

I'm okay with that, because it removes the uncertainty of "we don't know how bad it's liable to get." Now we do, and buyers are establishing prices at which they'd be willing to accept risk.

Sebastia

The strategy is pretty clear now : buy time at all costs. If you dont like the value of assets, dont value them. Just make up a number and stick it in Level 3. Basically, we are saying that the balance sheets of our financial system are a fraud, but we dont care. (Where's Jas when you need him?) If anything untoward happens, perhaps like someone getting themselves out of line, being forced to trade something, make sure that trade is defined as under duress, and that it has no impact on values of similar assets. Leave those in fantasy land. If any duress sale looks to be causing contagion, use the Fed backstop, and put it on the eventual taxpayer tab.

Seems that this model has inspired confidence in some that you can go forward with it indefinitely. And that's the real issue. How long do you go until the next bust up? In the meantime, who is picking up the tab? Looks like the taxpayers unwittingly, but also the folks who are current holders of the garbage that will be diluted by SWF inflows, and the like. Nevertheless, the losses are the losses, right? Or is this another shell game, where we never acknowledge the losses, and just play pretend and a few years later it's as if the bad times were never there.

Ive seen this before - it was the way much of the commercial real estate valuation process worked when a certain sector in a certain region fell apart. Dont like that the building you paid $50 million for is worth $20? OK. Just change the assumptions in the valuations and viola! THere it is. Never put it on the books. But in the meantime, pray like hell you arent ever forced to sell it.

Im with Jas....it's a fraud out there.

Re the Citi sale, Mish is stating that the first 20 cents of any loss is actually indemnified by Citi. Is this true? I haven't been able to find any news stories confirming this.

John- I would agree that most of us don't want every banking related institution to blow up. And I agree we are better off trying to make a buck off the gov't intervention rather than just watch it happen.

What I am pissed about is that same folks who gamed the system to create our current problems and now gaming the new, taxpayer-backed system to their advantage as well. I like to think of myself as a rational reasonable person, but the more I see of this crap, I feel like going jas jain on everyone and ranting about how they should all be locked up and their bonuses confiscated.

I wouldn't mind the fed slowly pumping leverage out of the system, preventing it from blowing up all at once. I do mind what seems to be the Fed, and then the taxpayers, being played like a fiddle by some very sharp folks.

I'll be happier, Marcus, when the indictments are handed up

all the way to the top.

I can dream, anyway.

Ipodius, Conjure and I are eagerly awaiting the introduction of the Chinese-designed and Chrysler-produced "Happy Cat on Wet Linoleum."

ipodius @ 859:

No, I won't be cheering for the end of the financial system nor will I be upset if things play out well.

What ticks me off is that a part of my coming tax increase is directly attributable to the utter lack of judgement of these people when they did all of the MBS/CDO/MICKEY...

And there's no apparent penalty for them apart from the wipeout of the workers in those firms that die. Now these same people have figured out a way to game the system again, at the cost of the public trough. Again, my pocket. I can intellectually applaud their cleverness; but their chutzpah is galling.

And how do they pay a penalty? Why do they prosper while a lot of others get screwed? Yeah, there's a sense of violation of justice.

And of course you know why Chevrolet couldn't get their Nova to sell in S America in the 1970s...

ipodius | 04.09.08 - 8:59 pm

Is it anger or just frustration, the problem, if there in one, is of watching water boil.

Only bigger, much bigger and infinitely more complex. Metaphors of freight trains are imbecilically simple by comparison; a couple of engines and several hundred cars.

Our little piece of the problem involves 300 million components acting more or less in concert. So anything involving a shift in direction is unnameable to dissection or interpretation at internet speeds.

Ethics is a major branch of philosophy, encompassing right conduct and good life. It is significantly broader than the common conception of analyzing right and wrong. A central aspect of ethics is "the good life", the life worth living or life that is satisfying, which is held by many philosophers to be more important than moral conduct.

And morality doesn't equate to ethics. Ethics states that i do what i say i'm going to do and i don't go out of my way to screw someone. But if i get an opportunity to get a screaming deal and you have to go down, that's business.

As always, I actually appreciate the honest, undiluted view of things. I recall your posts after Bear Stearns got taken by Dimon. That said, what these guys are doing isn't ethical and I don't see it as business as usual. This - for them - is business as usual, but it's not for the remaining 99% of the populace as it's this short-term, profit-at-any-cost mentality that helped get us here. Wild volatility, a credit bubble that's bursting and a debased currency (granted they've had help).

Afraid that I just don't see it your way here.

And now I really do have to get off my brains and read to a kid.

Later, y'all.

homedad- "And now I really do have to get off my brains and read to a kid."

He's the only one here doing something important. I miss those years, and wish I could do it again, but it can't be.

Oh and, ipod, I wasn't picking on you. I was pretty much agreeing with you.

Cobra You sound like a landlord with a heart. But then, from reading your comments for a while, I already knew that. Good on Ya.

$50K at poker during WWII???

Inflation-adjusted, that would be equivalent to well over $500K in today's money -- perhaps more than $1 million.

Very hard to believe -- unless one interprets it as a means of explaining away a large sum of money he'd made doing something less legal -- black market, smuggling, bribes from campaign supporters, etc. That I could believe.

China on hyper-inflation path
Chinese exporters convert their dollars to Yuan in their local bank. The Yuan deposit account earns 3.75% interest. Inflation in china is around 8.75%. Chinese banks earn 3.75% on their dollar deposit from China’s central bank. Now, the Chinese banks don’t earn any money on their dollar deposit since the spread is zero or negative. The dollar deposit used to earn around 4% till a quarter ago. I do think that there is a limit or restriction on how much farm land a person can have. This means that there may not be a big bubble in form land.
The Chinese stock market has declined 40% from its high. This has caused lots of wealth destroyed for people who came into it in the last year. The Chinese people can’t save their money in bank deposit account which earns negative interest rate of 5% (inflation 8.75% - deposit interest rate 3.75%). So they put all their savings in stock-market and lost everything. This means that most of the Chinese people now live on wage. No wage, no food at the table. With the rising food & commodity inflation comes with wage inflation. Increase the Yuan exchange rate (reduced exports) to contain the inflation but that would cause job loss. The hyper-inflation is much better choice then local civil unrest.

You might all be interested in checking out the Foreclosure heat maps.

Midwest, centered on Michigan
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Los Angeles (all red!)
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SF Bay area (notice that even the Silicon Valley has a lot of red)
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Colorado and parts of the midwest
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Areas in red mean at least 1 of 600 homes are in foreclosure. Many areas of California have 1 in 150 homes in foreclosure. LA seems especially hard hit (includes the O.C.)

zoom in, zoom out. look in other areas. enjoy.

ipodius | 04.09.08 - 9:17 pm | #

What a lame excuse. You would take candy from a child, and claim they just couldn't hold onto it well enough, as just business.