Chrysler and Windsor at the Brink

The big news in the auto sector today is the U.S Supreme Court's stay on Chrysler's sale to Fiat. With deadlines looming, the deal is looking increasingly shaky.

This is devastating news for Windsor, already ground zero in Ontario's manufacturing meltdown. There is little indication of what effect liquidation would have on Chrysler's pension obligations. And with unemployment already nearing 15% and Detroit in a state of collapse, the prospects for this manufacturing centre are particularly grim.

Blame Obama

In a sure sign that things are far worse in Canada than we had been led to believe, Finance Minister Jim Flaherty and his apparently less than independent Bank of Canada Governor Mark Carney are blaming the Obama Administration for being somewhat slow off the mark in showering banks with obscene amounts of money while requiring no meaningful reforms.

Canada has of course done much better, funneling up to $200 billion to the banks through the EFF, with no oversight by Parliament or opposition parties. Not surprisingly, for this and other nefarious reasons, our banks are in far better shape.

Yet our economy is not, as the energy sector is in free-fall and our auto industry is heading into bankruptcy protection. GDP is declining at almost 8% per year -- near depression rates. And unlike Obama, who faces real, if delusional, opposition, the Harper government faces an opposition far more concerned with political manuevering than with holding this government to account at a crucial time in our history.

Why We Don't Trust Markets -- My Morning Rant

On Tuesday, I had some harsh comments on Citigroup's claim to seemingly miraculous profitability, and the market's uncritical acceptance of the bank's story.

So imagine my chagrin this morning when Bloomberg ran a story that Citigroup executives had pocketed a quick $2.2 million U.S. on the rise resulting from the announcement. And the profits were on shares purchased last week -- i.e. prior to Tuesday's announcement by CEO Vikram Pandit. Surely this is insider trading.

The hapless American taxpayer has watched countless billions thrown at these institutions to avoid financial Armageddon. While this may be necessary, surely the same government that grants these gifts has a moral obligation to investigate, and where necessary prosecute this type of behavior. Bernie Madoff will be a guest of the state for the rest of his life, why not these guys (and they are guys) too.

In my Tuesday comment I said that Citigroup's actions bespoke desperation. I was wrong. If Citigroup executives were long on this trade, one wonders if they had short positions as well when the stock dropped 95% over the past five quarters. In fact, one wonders whether they, or their "masters of the universe" colleagues in general are capable of subordinating self interest to any greater good.

Recession, Depression, What's in a Name?

Bloomberg has a depressing (pardon the pun) piece on their site this morning that draws on remarks from half a dozen or more prominent economists that together suggest that if we are not in a depression now (and we are not) then we certainly are facing the real possibility of one. Key quote:

Combined with collapsing house prices, the free-fall in the stock market will destroy $23 trillion worth of U.S. wealth, reckons Lawrence Lindsey, a former senior White House official who now heads his own consulting company in Arlington, Virginia.

To put this in perspective, world GDP in 2008 was about $60 trillion U.S.. So U.S. losses in wealth alone amount to almost 40% of world GDP. And we're not done yet. Debt deflation is a real possibility, unemployment is growing as fast as it ever has and we still have no real clue where all of the toxic assets are buried. If we are not staring into the abyss, we are surely sneaking a peak at it.

So are we in a depression? Stay tuned.

Adam Posen on lessons from Japan

Paul Krugman quotes Adam Posen talking about lessons we should learn from Japan's efforts to recapitalize their banks during the lost decade of the 1990s. Posen underscores the risks involved when these efforts are not accompanied by equity stakes or enhanced regulation:

The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

Indeed.

Given depressed share prices, the big five Canadian banks are currently paying historically high dividend rates. Andrew Willis of the Globe and Mail tells how BMO is paying an historically high 10.8% that will capture 80% of earnings. Why?

What about Canada, eh?

One frustration I have had following the economic crisis in Canada is any strong sense of what shape our banks are in. Clearly our banking system is fundamentally different than that of the U.S.. But if the rest of the world was beating a poorly regulated path to these toxic assets, we must have been too. So where are they? And how do they affect the balance sheets of our admittedly more risk averse banks? And what about the non-bank sector, particularly hedge funds and the like?

Is anyone blogging this here in the GWN?