GMAC asks for 3rd bailout November 3, 2009
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American lender GMAC is asking for a third injection of taxpayer cash from the U.S. government, a Treasury Department spokesperson confirmed Wednesday.
GMAC is the former lending arm of General Motors and remains an important provider of financing for GM and Chrysler dealers to pay for vehicles for their lots. It’s also a significant player in the U.S. residential mortgage market.
GMAC lends to GM and Chrysler dealers so they can buy cars for their lots.(Canadian Press)
It has received two packages of bailout money totaling $12.5 billion already, and the government holds 35 per cent ownership. While other banks have been able to raise capital from private investors, GMAC has been forced to go back to the government.
If the cash were approved, GMAC would be the only company to receive three bailouts. The move would also represent a further entrenchment for the U.S. government into the auto industry.
The government also owns a majority-stake in GM and a smaller stake in Chrysler. The Treasury spokesperson declined to comment on whether the government’s ownership stakes in the two automakers make it more willing to again help GMAC.
With files from the Associated Press (more…)
AIG loses $61.7B US, gets reworked bailout March 3, 2009
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American International Group Inc., once the world’s largest insurer, said Monday it lost $61.7 billion US in the fourth quarter, the biggest quarterly loss in U.S. corporate history.
The results come as the U.S. government also Monday announced a restructuring of a bailout plan for the troubled insurer, extending $30 billion in additional aid to the company.
New York-based AIG said it lost $22.95 per share in the last three months of 2008. It lost $5.3 billion, or $2.08 per share, in the quarter a year ago.
The latest results include $7.2 billion in unrealized losses and credit valuation adjustments at AIG Financial Products, the source of credit-default swaps, and pretax losses of $21.6 billion tied to the declining value of AIG’s investment portfolio.
AIG’s general insurance business swung to a loss on $2.8 billion in net realized capital losses. General insurance net premiums dropped 16.3 percent to $9.2 billion, and net premiums earned fell 5.9 percent to nearly $11 billion.
Adjusted to exclude certain items, operating losses totalled $37.9 billion, or $14.17 per share, versus a loss of $3.2 billion, or $1.25 per share, last year.
Analysts had underestimated losses
The results drastically fell short of estimates. Analysts surveyed by Thomson Reuters had, on average, forecast a loss estimate of 37 cents per share on revenue of $24.82 billion. Analysts have been dropping coverage of AIG in recent weeks due to the uncertainty of the firm’s future.
“We have made meaningful progress in addressing liquidity issues related to AIG Financial Products and our securities lending activities and have announced several divestitures,” said AIG president and chief executive Edward Liddy in a statement. “However, the economy and capital markets remain in turmoil and we are taking additional steps to preserve the value of our businesses and maximize the ultimate proceeds for the benefit of all stakeholders, including taxpayers.”
The government’s new financial assistance to AIG includes providing the troubled company another $30 billion on an “as needed” basis. The Federal Reserve will also take stakes in two international units.
Instead of paying back $38 billion in cash with interest that it has used from a Federal Reserve credit line, AIG now will repay that amount with equity stakes in Asia-based American International Assurance Co. and American Life Insurance Co., which operates in 50 countries.
It marked the fourth time the government has stepped in to help AIG. Its initial lifeline came in September. The action was announced jointly early Monday by the Treasury Department and the Federal Reserve.
Bailout ready to go, but auto sector takes its cues from Detroit January 25, 2009
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With just days to go before the federal budget is tabled, Canada?s industry minister seems to be running out of patience with the automakers.
Ottawa and Ontario have agreed to provide $3 billion to General Motors and $1 billion to Chrysler as part of a bailout. The Canadian subsidiaries have until Feb. 20 to provide the governments with a restructuring plan.
“I’m signalling to them, let’s get a move on, let’s finish our discussions and our dialogue, and if you need the money, let’s flow the money,? Tony Clement said on Jan. 19. ?If you don’t need the money, that’s fine, too. We understand that.”
But the fact is, the car companies have bigger fish to fry. They?re working out the conditions of a much bigger $17.4 billion rescue package with the U.S. government. And they?re doing it as they continue to watch their industry crumple like a slow-motion car wreck.
Since 1931, General Motors has been able to call itself the world?s biggest carmaker.
No longer.
‘Canadian auto manufacturers remain caught in a maelstrom of industry changes, a trend that is unlikely to improve until at least 2010′?Sabrina Browarski, Conference Board of Canada
It says it sold 8.35 million vehicles in 2008, about 620,000 fewer than Toyota?s 8.97 million. GM?s sales were down 11 per cent from 2007. It hasn?t turned a profit since 2004.
The company?s chief operating officer, Fritz Henderson, said on Jan. 21 that GM will run out of cash long before the end of the first quarter if it doesn’t get the second installment of U.S. government loan money, soon.
He attributed the delay of the $5.4 billion US to the U.S. Treasury Department’s workload and the change in administrations.
So while Canada?s Finance Minister may be fed up waiting for the car companies to restructure, it sometimes seems as if they?ve done little else.
Here’s a rundown on what they’ve been up to:
General Motors
In July 2008, GM cut its white-collar workforce and sped up production cuts. The previous month, it announced it was closing a truck plant in Oshawa, Ont., affecting approximately 2,500 workers. Three other truck plants in North America would also be shut. The news came just weeks after the closure of a transmission plant in Windsor, Ont., affecting 1400 workers.
In December, GM said it was idling about 30 per cent of its North American assembly capacity during the first quarter of 2009. Production cuts hit 20 assembly plants and, combined with earlier cuts, will result in 250,000 fewer vehicles being produced during the first quarter of this year.
Another 700 jobs at its Oshawa, Ontario plant are scheduled to be cut by February 2009.
GM employs about 20,000 at Canadian plants.
About 90 per cent of its assembled cars are shipped to the U.S. market.
Chrysler
Chrysler has long been in the worst shape of the Detroit Three. Its German partner Daimler AG saw the writing on the wall in 2007 and sold its stake to Cerberus Capital Management, a New York-based private investment firm.
In February of that year, Chrysler announced 13,000 job cuts ? 2,000 in Canada ? along with the closure of two U.S. facilities and shift reductions at two others.
By fall, Chrysler had cut another 1,800 positions and was looking to reduce 5,000 more positions throughout the buyout route.
Chrysler idled all of its North American manufacturing operations for at least 30 days in December, and some remain closed.
The company may have been given a lifeline in January when Fiat made a deal to form a strategic alliance that would give the Italian auto company a 35-per cent stake in the automaker and potentially take full control of Chrysler.
Chrysler would have access to new markets and cheaper, more environmentally friendly technologies, while Fiat would gain a foothold in the huge U.S. market.
Chrysler employs about 9,800 people in Canada.
Ford
Ford lost a startling $12.7 billion US in fiscal 2006 and was $2.7 billion in the red for 2007. The company said it would cut 15 per cent of its salaried workforce costs, or around 2,000 employees, by August 2008. It also said it was cutting back on truck and SUV production. The restructuring followed a January 2006 announcement of as many as 30,000 job cuts and the closure of 14 plants, including the Windsor casting plant.
Ford extended the traditional holiday shutdown at 10 of its North American assembly plants for an extra week in January due to the slumping U.S. auto market. In 2008, U.S. car and light truck sales plunged 18 per cent to 13.24 million vehicles, the worst year for sales since 1992
While Ford?s house may not be exactly in order, alone of the Detroit Three, it did not ask for emergency government loans. It did, however, ask for standby line of credit.
It expects to be back to profitability by 2010.
Ford Canada employs about 10,000 people
Market share skids to 47%
As recently as 1998, the combined market share of the Big Three in Canada and the U.S. was 70 per cent. Just 10 years later, that share had skidded to 47 per cent in both countries.
The Conference Board of Canada believes Canadian car manufacturers will lose $1.4 billion this year, a result of crashing consumer confidence and plummeting auto sales.
“Canadian auto manufacturers remain caught in a maelstrom of cyclical and structural industry changes, a trend that is unlikely to improve until at least 2010,” said Sabrina Browarski, an economist with the Conference Board.
Browarski thinks that economic storm could translate into another 15,000 job cuts in the assembly sector this year. And other spinoffs industries will chop their workforces as less manufacturing translates into lower demand for parts and car services.
Detroit has a lot of problems, but analysts say they really come down to two things: labour costs and product.
Electric cars and hybrids dominate the Detroit auto showA look around at this year Detroit auto show in January shows an industry trying to change. The shiny models include hybrids, extended-range electrics and other advanced high-mileage cars. Ford did not show the newest model of its Explorer, because, it told Bloomberg, it wasn?t ready. What a change from the 1990s, when the newest Explorer sport-utility vehicle got the company?s top billing at the show.
Cutting the gas-guzzlers won?t be easy, but what may be even more painful, is cutting costs.
Generous Motors
GM once picked up the entire cost of funding health-insurance premiums of its employees, their survivors and GM retirees.
Those costs have gone through the roof in the past few years, rising at double-digit rates every year.
A recent agreement with the UAW will allow GM to trim billions from its annual health-care bill, but the non-unionized Japanese automakers, with their younger Canadian and U.S. workforces (and far fewer North American retirees), will continue to enjoy a cost advantage.
One of the terms of the Canadians loans to GM and Chrysler is that they are required to make their labour costs competitive with the U.S. operations of Japan-based auto makers.
Canadian Auto Workers president Ken Lewenza, however, doesn?t believe wages and benefits are the root of the problems plaguing automakers. The union represents 27,800 active GM, Chrysler and Ford Motor Co. workers in Canada.
“Concentrating on the compensation paid to workers, which in Canada is seven per cent of the total cost of an assembled vehicle, is just being totally dishonest with the challenges we have in the auto industry,” says Lewenza.
“Until this global financial crisis and credit freeze is corrected, auto workers are going to continue to face significant layoffs, significant insecurities, regardless of how much we make.”
While there is no shortage of opinions on whether the bailouts should go ahead, it?s very clear an automaker bankruptcy would have immediate effect. Oshawa Mayor John Gray says governments must to do whatever it takes to save the struggling industry.
“GM pays about $20 million in property taxes ? how do you make up that difference? You have to have massive tax shifts, and the lion’s share of that burden would be borne by the residential sector,? he said.
Linda Hasenfratz, the CEO of parts maker Linamar of Guelph, Ont., says auto parts suppliers are facing liquidation and bankruptcy this month unless they, too, can get a bailout. She suggested they could tap into Washington?s $700 billion Wall Street rescue fund.
Without government help, the companies don?t believe they?ll survive, throwing thousands out of work, bringing down the supply chain, and starving communities of tax revenue.
Even with government help, there are no guarantees. The loans may be paid back, or bankruptcy may happen regardless.
Since Canadians will be putting up the money for the loans, as well as paying the costs of failure, we all have a stake in this.
Britain unveils 2nd bailout in bid to boost lending January 21, 2009
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Watched by Chancellor of the Exchequer Alistair Darling, right, British Prime Minister Gordon Brown told a news conference at 10 Downing Street in London on Monday that there would be a second rescue plan for Britain’s banks.(Lewis Whyld/Associated Press)
The British government has announced a second bailout for banks that includes a plan to insure them against further losses in a bid to boost lending to individuals and businesses.
Under the package, banks are required to identify their riskiest assets and pay a fee to insure them with the government. The plan targets assets most affected by the economic crisis.
The banks must set out how much they expect to lose and then all but 10 per cent would be covered.
The residual amount provides institutions with an “appropriate incentive” to keep losses to a minimum, the government said in a news release.
British Prime Minister Gordon Brown said banks must enter legally binding agreements to lend more money to borrowers.
“The impact of today’s announcements on public finances will be temporary, investments will be held for no longer than is necessary to ensure stability,” Brown said. “We will protect taxpayers’ interests, liabilities will be backed by assets and fees will be charged for the schemes that we are introducing.”
Brown’s plan will see £50 billion (about $90.6 billion Cdn) set aside to create a special fund for the Bank of England to buy high-quality loans and other assets directly from banks. That plan is also aimed at bringing down borrowing costs.
?There?s been a lot of money put into the banks, but not much has come out to the people who need to borrow it. As a result, we?ve got a lot of businesses getting into difficulties because they can?t get the cash,” Matthew Bishop, the Americas Business Editor for The Economist told CBC News.
?Unfortunately, although I think it?s a step in the right direction, the scale of the British plan is still relatively small,? he said. ?I suspect if this latest scheme to encourage lending actually does work, then we?ll see other governments around the world follow suit and that will have a co-ordinated effect that means the recession won?t be as bad as it might be.?
Though some experts worried that another bailout could strain public finances, Treasury chief Alistair Darling defended the plan.
He said it was needed because a first bailout announced in October, worth about £37 billion (about $68 billion Cdn), had not done enough to boost the economy and restore bank lending to needed levels.
“Banks all over the world have got themselves in huge difficulties and frankly governments all over the world are having to sort the problem out,” Darling said.
Last October, the British government announced it would partly nationalize its major banks.
Bank losses
Also Monday, the Royal Bank of Scotland revealed that its losses for the full year could be as high as £28 billion.
That would mark the largest loss by a United Kingdom corporation.
In an announcement Monday, the bank said it expects a “break-even underlying financial performance after credit impairment losses.”
It said profits in retail and commercial business in the U.K. had been offset by losses in its global banking and markets division.
Brown said the government has increased its stake in RBS from 58 per cent to almost 70 per cent, but declined to say whether he believed the bank would eventually be fully nationalized.
With files from the Associated Press (more…)
U.S. automaker bailout package dies in Senate December 15, 2008
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A planned $14-billion US federal bailout of the Big Three carmakers died Thursday on the U.S. Senate floor after negotiations between Democrats and Republicans collapsed over a dispute about wage cuts for autoworkers.
The Senate rejected the bailout 52-35 on a procedural vote ? well short of the 60 votes needed to pass the plan.
Ahead of the vote, Democratic Senate Majority Leader Harry Reid said he was “terribly disappointed” to see several hours of unprecedented private talks in Washington with Senate Republicans, representatives from the country’s auto industry and labour groups come to naught.
“There’s too much difference between the two sides,” Reid said from the Senate floor.
Asian financial markets fell sharply Friday as news of the failure emerged, with the Nikkei and Hang Seng both down more than five per cent. Reid could only speculate on the potential fallout when North American stock markets opened.
“I dread looking at Wall Street tomorrow,” Reid said late Thursday night. “This could be a very, very bad Christmas as a result of what takes place here tonight.”
Early indications were that Wall Street would incur a steep sell-off. The Dow Jones industrial average futures contract retreated three per cent overnight from its close Thursday afternoon, suggesting the index will open significantly lower on Friday.
Earlier in the evening, Reid said a tentative deal had been reached and the Senate could vote on legislation that night, but just hours later he asked to invoke closure to end the nighttime legislative session without an agreement.
The deal stalled over the United Auto Workers’ refusal to accede to Republican demands for swift wage cuts before their current contract expires in 2011.
‘3 words away’ from accord: Republican negotiator
The House of Representatives had passed legislation on Wednesday to speed the bailout package to approval. But prospects for the Senate to pass the rescue funds dimmed early Thursday amid strong Republican opposition, despite urgent appeals by both president-elect Barack Obama and the Republican administration of President George W. Bush.
“We have reached an impasse,” said Senate Republican Leader Mitch McConnell, who came out against the legislation ? the product of a hard-fought behind-the-scenes compromise between the majority Democrats and the White House.
Bob Corker, a Tennessee Republican senator who led the closed-door talks for his party, said the two sides were “three words away, maybe two” from reaching landmark legislation that would have allowed the automakers to go forward “stronger than they have been in 40 years.”
“I think there is a way for us to get there; I still do,” Corker told the Senate.
After the vote, White House spokesman Tony Fratto said the Bush administration found it “disappointing” that lawmakers failed to act to avoid disorderly bankruptcies.
“We will evaluate our options in light of the breakdown in Congress,” Fratto said.
Can’t just stand by: Obama
In Chicago, Obama told reporters that the government can’t just stand by and watch the industry collapse, saying that would have a “devastating ripple effect” throughout the economy.
Proponents of the package scrounged for the Senate votes to clear the legislation as early as Thursday afternoon. The president was lobbying for the bill, as well, arguing that the economy can’t stand massive new layoffs.
But McConnell said the measure “isn’t nearly tough enough.” The Republican Senate leader also called for a different bill ? one that would force U.S. automakers to slash wages and benefits to bring them in line with Japanese carmakers Nissan, Toyota and Honda ? in return for any federal aid.
That approach was virtually certain to be a non-starter among Democrats who count labour unions among their strongest supporters.
Many Republicans remained staunchly opposed to the bailout, and some Democrats were ill or absent from the emergency, post-election congressional session. Supporters of the bailout acknowledged that in this scenario, getting the requisite 60 votes to pass it would be very difficult.
The stalemate highlighted the difficulty of pushing another rescue package through a bailout-fatigued Congress, particularly one designed to span the administrations of a lame-duck president and his successor, even though they were united in pressing hard for its swift approval.
With files from the Associated Press (more…)
U.S. lawmakers, White House agree on $15B auto bailout plan: officials December 7, 2008
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Auto industry workers and supporters demonstrate outside the office of California Senator Diane Feinstein on Saturday.(Ron Lewis/Associated Press)
U.S. politicians have reportedly agreed on a plan to provide a $15 billion US emergency loan to the country’s beleaguered automakers, although it’s less than half the amount of bailout funds the Big Three car companies were seeking.
The White House and congressional Democrats reached an agreement in Washington, D.C., late Friday night, a senior congressional aide told Reuters.
Another source said that negotiators had “agreed in principle to moving ahead but details have to be worked out.”
The breakthrough was said to have been made after the Speaker of the House of Representatives, Nancy Pelosi, caved to a condition set by U.S. President George W. Bush that the money come from a $25-billion Energy Department fund, according to officials from both the Republican and Democratic parties.
That fund provides advanced energy technology loans to assist auto companies produce more fuel-efficient cars.
Pelosi had previously demanded the aid come from the $700 billion fund created to rescue U.S. financial institutions ? a proposal the Bush administration flatly rejected. In a statement issued Friday, Pelosi suggested she could agree to using Energy Department funds under certain conditions.
“We will not permit any funds to be borrowed from the advanced technology program unless there is a guarantee that those funds will be replenished in a matter of weeks so as not to delay that crucial initiative,” Pelosi said.
In a separate statement, Pelosi said bailout legislation will include “rigorous and ongoing oversight to guarantee that taxpayers are protected and that resources are directed to ensure the long-term viability and competitiveness of the American automobile industry.”
The terms of the aid will include the establishment of a trustee or overseer group to ensure the money is used properly to stave off collapse, according to officials from both parties.
Specific details on the conditions of the bailout loan, however, are still being worked out, likely over the weekend, a source told Reuters.
Many hurdles still to cross
Once it is settled, the automaker assistance plan would require the approval of both houses of Congress. Votes in the House of Representatives, as well as the Senate, are expected next week, Pelosi and Senate Majority Leader Harry Reid said in separate statements.
If they pass quickly, the bill could be signed into law by Bush before president-elect Barack Obama takes office.
Democrats, however, said Pelosi’s intention was to have the aid built into an economic recovery bill that lawmakers are expected to prepare for Obama’s approval once he takes office in January.
The $15-billion agreement is less than half of the $34 billion auto executives from the Big Three ? General Motors Corp., Ford Motor Co. and Chrysler LLC ? requested of Congress this week. It comes on the same day U.S. data showed employers cut more than 533,000 jobs in November, the biggest monthly loss in 34 years.
“I think it’s fair to say that the jobs report today, this disastrous jobs report, has heightened the interest in doing something,” said Massachusetts Representative Barney Frank, a senior House Democrat.
Both GM and Chrysler have warned of imminent collapse in the absence of government assistance.
The bailout funds are expected to last until March, at which point Obama’s administration will have to decide how to proceed.
President expresses concern
Earlier Friday, Bush expressed deep concern for the fate of the country’s auto giants.
“I am concerned about the viability of the automobile companies,” Bush said.
“I’m concerned about those who work for the automobile companies and their families. And likewise, I am concerned about taxpayer money being provided to those companies that may not survive.”
Thousands of employees have been laid off by the automakers in both Canada and the U.S. as they deal with slumping car sales.
The Canadian subsidiaries of GM, Ford and Chrysler on Friday asked the federal and Ontario governments for financial aid that could total as much as $6 billion.
The requests were made as the companies provided financial information and details of their restructuring plans that the governments had asked for in return for considering a potential aid package.
With files from the Associated Press, Reuters (more…)
U.S. government won’t use bailout fund to buy troubled assets November 13, 2008
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The U.S. government is making a big move away from its original plan to use a $700-billion US bailout fund to buy up illiquid assets at financial institutions.
Treasury Secretary Henry Paulson said Wednesday that the government is now looking at ways to use the money to encourage private investment in the lending market for credit in areas such as credit cards, car loans and students loans. He said about 40 per cent of all U.S. consumer credit comes through that market.
“This market, which is vital for lending and growth, has, for all practical purposes, ground to a halt,” Paulson told reporters in Washington.
When the huge bailout plan was originally unveiled, the U.S. government planned to use the money in the Troubled Asset Relief Program to take illiquid assets, such as mortgages in default, off the books of lenders.
However, the government has decided that method is “not the most effective way” to use the money, Paulson said.
The government has allocated about $250 billion from the bailout fund for direct injection into banks through purchase of their stocks.
GM, Chrysler want $10 billion US bailout to help them merge: report October 29, 2008
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General Motors three-month chart
General Motors and Cerberus Capital Management, which owns Chrysler, have asked the U.S. government for around $10 billion US in an unprecedented rescue package to support a merger between the two car companies, two sources with direct knowledge of the talks have told Reuters.
Separately, Canadian auto parts makers have asked the federal and Ontario governments for “immediate, short-term, low-interest loans” to survive the credit crunch.
“Assistance is required immediately if our country has any hope of salvaging a once vibrant and prosperous industry,” Gerry Fedchun, president of the Automotive Parts Manufacturers Association Canada, said in a letter to Finance Minister Jim Flaherty and his Ontario counterpart, Dwight Duncan.
Fedchun’s office would not confirm reports that the industry seeks as much as $1 billion Cdn from the two governments.
“The answer is we simply don’t know how much will be needed,” his executive assistant, Janet Soutar, told CBC News.
In Washington, the White House reiterated Tuesday that U.S. automakers may be eligible for the Treasury’s $700 billion US financial rescue package and that they have been in contact with the Treasury, Energy and Commerce departments.
Heavy lobbying in Washington
Separately, the Associated Press reported that the $700 billion US financial bailout has become the biggest lobbying target in the U.S. capital.
Automakers, insurers, securities dealers and American subsidiaries of foreign banks all want the Treasury to cut them a piece of the largest government rescue in U.S. history, and the betting is that many will be successful amid faltering financial markets and predictions that the economy is heading into a deep recession, AP said.
In the auto industry, the Treasury is considering a request for direct aid to facilitate a GM-Chrysler merger and a decision could come this week, sources familiar with the still-developing government response told Reuters on Monday.
GM has been in talks with Cerberus about buying Chrysler since last month but the discussions have been snagged by difficulty in securing investment or financing for a deal at a time when credit is tight and global auto sales are in rapid retreat, others close to the talks have said.
A decision by the Bush administration to provide the government’s first funding for the auto sector since the $1.5 billion US bailout of Chrysler in 1980 has been widely seen as the merger’s best chance for success.
“The automakers are facing a maelstrom and that’s why I think an unprecedented government infusion could happen,” said Efraim Levy, an automotive equity analyst with S&P.
An injection of $3 billion in equity to support a GM acquisition of Chrysler would be roughly equivalent to the current, depressed value of the top U.S. automaker.
It would also give U.S. taxpayers a large stake in the turnaround of a struggling industry that employs over 350,000 Americans and is credited with supporting employment for another 4.5 million in related fields.
Analysts see GM, Chrysler and rival Ford Motor as having been driven to the brink of failure by a combination of management missteps, slowing global growth and problems in credit markets.
Now, in addition to taking a stake in what would be the world’s largest automaker by volume, the U.S. government is also being asked to provide support by taking over some $3 billion in pension obligations, the first source said.
The final component of the proposed support would be a credit line that could include U.S. government purchases of commercial paper to relieve short-term pressure on liquidity, the person said.
GM could not be immediately reached for comment. Cerberus and Chrysler had no comment.
Too big to fail?
A combined GM-Chrysler would control roughly a third of the U.S. auto market by sales and would face immediate pressure to cut costs stemming from excess capacity in almost all facets of its business. Those would include a stable of 11 brands, some 10,000 dealers and 97,000 union-represented factory workers.
But one of the conditions of a merger would be that GM-Chrysler would spare as many jobs as possible to win broad political support for the government funding, people familiar with the merger discussions said.
Many analysts are skeptical that balance can be struck. “I still think they need to make deep cuts to survive,” said IHS Global Insight analyst Aaron Bragman.
The roughly $10 billion in government funds to support a merger would be in addition to whatever funds would be allocated under an already approved $25 billion program to provide loans to help the industry retool to make more fuel-efficient cars.
A government rescue package would come at a time when investors and creditors are increasingly concerned about the ability of U.S. automakers to survive a punishing downturn in sales now expected to continue into 2010.
Moody’s Investors Service on Monday cut its rating on GM deeper into junk territory on the view that GM’s liquidity would continue to erode into 2009. The ratings agency also cut Chrysler for similar reasons and said it might cut Ford.
GM has a market capitalization of just over $3 billion based on Monday’s close and roughly $10 billion of outstanding debt. Chrysler’s privately held auto operations were valued at zero last week by Daimler AG, which holds the 19.9 percent of the struggling automaker not owned by Cerberus.
Chrysler’s U.S. sales have tumbled 25 per cent this year, almost twice the rate of decline for the overall market. GM’s sales had dropped almost 18 per cent through September.
GM’s shares have slumped nearly 80 per cent this year and its market value has dropped below what it was in 1929.
With files from Reuters and the Associated Press (more…)
$25B credit backstop for banks ‘not a bailout’: Harper October 14, 2008
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Finance Minister Jim Flaherty announces new measures to ease pressure on financial institutions on Friday.(CBC)
The federal government’s $25-billion takeover of bank-held mortgages to ease a growing credit crunch faced by the country’s financial institutions is not a bailout similar to recent moves made in the United States and other Western countries, Conservative Leader Stephen Harper said Friday.
“This is not a bailout; this is a market transaction that will cost the government nothing,” he told reporters at a campaign rally in Brantford, Ont., ahead of Tuesday’s federal election.
“We are not going in and buying bad assets. What we’re doing is simply exchanging assets that we already hold the insurance on and the reason we’re doing this is to get out in front. The issue here is not protecting the banks.”
Earlier in the day, Finance Minister Jim Flaherty announced the government’s plan to buy the securities through the Canada Housing and Mortgage Corp. and provide much-needed cash to financial institutions that sell the so-called “National Housing Act mortgage-backed securities.”
Flaherty announced the new measures in an attempt to assuage concerns over the burgeoning global financial crisis and defuse criticism that the Harper government was ignoring the spreading lending crisis.
Dealing with Armageddon
Governments in many countries have been grappling with how to stop the deterioration in the health of financial institutions as companies are forced to write off billions in losses from holdings of now worthless asset-backed commercial paper.
However, Canada’s market for insured mortgage pools still functions.
‘Didn’t Harper just say we would never need this kind of thing? Isn’t he supposed to be an economist?’
— R Gerald
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In addition, many of the mortgages that are bundled together to make up these securities are not in default, unlike the situation in the United States. For instance, in the second quarter of 2008, the percentage of American mortgages that were more than 90 days in arrears — a measure of the level of home defaults — stood at a gaudy 4.5 per cent. In Canada, that same figure stood at 0.3 per cent.
The specialized housing securities, both in Canada and the United States, generate cash based upon the stream of payments from the underlying mortgages. High default rates mean these bonds cannot produce a sufficient amount of cash for investors.
That was what caused the asset-backed market in United States to collapse.
Canada does not face the same problem, Flaherty insisted.
Instead, the country’s financial companies are having trouble getting money to borrow because banks and other lenders in other countries are not offering up enough money — a classic credit crunch.
After the announcement, Canada’s leading banks said they were cutting their prime rates by 15 or 25 basis points — a quarter or fifteen-one-hundredths of a percentage point.
Greasing Canada’s financial system
Under the proposal, Ottawa plans to sell a combination of government bonds and other public debt instruments to raise the $25 billion. Then CMHC will ask the banks and other financial institutions to ascertain how much debt they would like to sell to the agency, using a process known as a reverse auction.
Conceptually speaking, the financial companies will offer CMHC the debt at a discount to its face value. Starting with the bids containing the largest discounts, the housing corporation will buy these instruments from the financial institutions until the agency uses up the $25 billion.
This way, Ottawa injects money into a cash-strapped market. In return, the government gets a series of securities with a rate of return well in excess of the rate Ottawa would pay on the $25 billion it borrows in the first place.
The federal government anticipates that few of these mortgages will default, and most are guaranteed by the CMHC. Thus, Ottawa actually expects to earn a profit from its holdings of these securities.
“This program is an efficient, cost-effective and safe way to support lending in Canada that comes at no fiscal cost to taxpayers,” Flaherty said.
Flaherty said the action would “make loans and mortgages more available and more affordable for ordinary Canadians and businesses.”
On Thursday, Flaherty said he had no doubts over the health of Canada’s banks, adding the government has no plan to undertake a massive government bailout similar to those mounted by the United States and other Western countries.
He repeated that theme on Friday, saying the problem the country’s financial institutions face is not solvency but the availability of credit.
“It is important to underline that Canada’s banks and other financial institutions are sound, well-capitalized and less leveraged than their international peers. Our mortgage system is sound. Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes than in the U.S.,” Flaherty said.
British PM announces $75B bank bailout package October 14, 2008
Posted by businessnewss in Uncategorized.Tags: announces, bailout, bank, BRITISH, package
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The British government will inject nearly $75 billion of taxpayers’ money into three of the country’s largest banks to protect the institutions from collapse amid the global financial crisis, Prime Minister Gordon Brown announced Monday.
The move means the government is effectively taking over the Royal Bank of Scotland and will also hold a large share of Lloyds/TSB and the Halifax Bank of Scotland, Brown said.
In announcing the details of the bailout package, Brown said the government had no choice but to act.
“The action we are taking today is unprecedented but essential to all of us,” Brown told reporters. “We must in an uncertain and unstable world be the rock of stability upon which people can depend.”
The response to the move and similar measures by other European governments to prop up their banks has largely been positive, as stock markets across Europe and Asia went up in Monday trading.
The government said that its investment in RBS, Lloyds and HBOS is not permanent, and that it intends to sell its shareholdings in an orderly way as soon as the market recovers.
In return for the financial lifeline, the banks accepting public money have agreed to the government’s strict conditions, Brown said.
Board members have been let go, while the government also insisted that the bulk of future bonuses be paid in shares to ensure that bonuses encourage management to take a more long-term approach to profit-making.
