Rick Newman
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How Buying a Car is Going to Change
Continue reading… 30 CommentsIt's business as usual: That's what General Motors and Chrysler want car buyers to believe as the two automakers work through the biggest financial crises in their history.
It's also wishful thinking. With both companies working through bankruptcy, firms that control nearly one-third of the U.S. car market are undergoing profound disruption. Ford, Toyota, and several other automakers are losing money and revamping their own operations. On top of that, the Obama administration is speeding up the pace at which car companies need to introduce new technology, cut tailpipe emissions, and make major gains in the fuel efficiency of their fleets.
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GM Bankruptcy Watch: The “Main Street” Bondholders
Continue reading… 47 CommentsOne of the saddest stories emerging from the GM bankruptcy drama is the plight of “Main Street” bondholders. Most of the investors holding $27 billion in GM debt are big banks and institutional firms, but apparently Mom and Pop-type investors hold about $7 billion in GM bonds.
Unlike the big firms, they’re generally not secured: They can’t demand collateral if GM defaults, and for the most part they didn’t buy financial insurance to hedge against the risk of losses. So in bankruptcy, they go to the back of the line, where they’ll be lucky to recover even a small portion of their investment.
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GM Bankruptcy Watch: The Stock Price
Continue reading… 2 CommentsGeneral Motors seems almost certain to file for Chapter 11 protection within days (or hours), yet somebody is still buying the company’s stock—even though it would essentially be wiped out the moment GM declares bankruptcy.
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How To Find Gold In a Recession Economy
Continue reading… 11 CommentsThe recession has hammered New York, yet the mood is upbeat in a midtown Manhattan classroom where struggling business owners have gathered to sip wine and swap business cards. "I'm going to bring my business to a whole new level," vows Valerie Bennis, whose company, Essence of Vali, sells natural health and beauty products. Orders from spas and hotels have dried up, but that's forced Bennis to seek lucrative new customers, like drug companies looking to expand their product lines. Matthew Frank, laid off from Goldman Sachs last year, is starting a consulting firm targeting local utilities—with hopes to land a couple clients by summer. Lauren Levy works at a big Wall Street firm that announces layoffs every week, so in her spare time she's helping a college pal start an infant-wear business. "The only way to go in a recession like this is up," she grins.
Millions of American may feel like they're going in the opposite direction, yet for all the distress, recessions can also be a time of fantastic opportunity. Without a doubt, the Great Recession has triggered widespread pain, as companies from Wall Street to Detroit shrink (or die), jobs disappear, incomes decline and anxiety spreads. But in American history, virtually every period of economic upheaval has sundered bloated conglomerates, carved openings for hungry new competitors, rewarded aggressive innovation, and produced Adversity Millionaires. "There's always been a yin and yang," says Professor William Sahlman of Harvard Business School. "One person's crisis is another's opportunity."
[See how businesses can prosper, even now.]
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Foreign Carmakers: More "Domestic" Than Detroit
Continue reading… 29 CommentsBefore long, you'll be more likely to get an American-made car by buying an import brand instead of a Ford, General Motors, or Chrysler vehicle. New data show that for the first time ever, foreign-based carmakers are poised to build more vehicles in the United States than the Detroit 3.
The American automakers have obviously hit the skids, with GM and Chrysler in bankruptcy and Ford losing billions. Detroit's woes are accelerating a market share decline that's been underway for years. And now, forecasting firm CSM Worldwide predicts that in 2010, foreign-based automakers like Toyota and Honda will build more cars in the United States than the so-called domestic automakers.
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The Upside of Economic Carnage
Continue reading… 10 CommentsYou may have heard the phrase "creative destruction." Well, now you're living in it.
Economist Joseph Schumpeter coined the concept in the aftermath of the Great Depression to explain how, in a free market economy, the death of obsolete companies and industries makes way for newer and better ones. We seem to be in the early phase of that now, as banks, auto companies, retailers, and other longstanding firms falter. To gain a better understanding of what's going on, and how the past might predict what happens next, I interviewed economic historian Tom Nicholas of Harvard Business School. Some of his thoughts:
We're seeing the destructive part of creative destruction. Where's the creation? People tend to hold their plans in abeyance, which is why you don't see many of the positives right now. But there is a flip side to recession. For certain companies with assets at their disposal, this is a good time to increase market share and increase R&D. Companies do this.
[See how bailouts can butcher capitalism.]
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How Businesses Can Prosper, Even Now
Continue reading… 6 CommentsMany Americans are hunkering down, but even a grinding recession presents chances to get ahead—and maybe even earn your fortune. The very disruptions causing pain for many workers—spending cutbacks, layoffs, and corporate bankruptcies—often create openings for others. To figure out where to look, I asked William Sahlman of Harvard Business School, an expert on entrepreneurship. Some of his observations:
Creative destruction, like we're seeing now, generates opportunities, right? Do you see new opportunities forming? There's always been a yin and yang of opportunity. One person's crisis is another's opportunity. If you're a buyer of assets in distress, for example, you're able to pick up companies you may never see again at these prices. Right now there's $8 trillion or $9 trillion of cash sitting on the sidelines. People are waiting for signs so compelling that they're willing to go back in.
[See why optimism over the economy is premature.]
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Why Credit Card Fees Won’t Go Up
Continue reading… 8 CommentsThe bankers make it sound like a certainty: New rules limiting high credit-card interest rates and other usurious practices are going to cut into bank revenues, so they’ll have to make up the difference somewhere. That means fees have to rise for everybody else. It’s just a truism, see, the way every action in Newtonian physics produces an equal and opposite reaction.
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How Obama Is Revamping America's Cars
Continue reading… 26 CommentsThe usual practice in Washington is to issue marginal new rules and declare them revolutionary. President Obama’s new fuel-economy standards for automobiles, by contrast, may be even more sweeping than Obama himself acknowledges.
The president’s goal is to improve America’s collective gas mileage, cut emissions of carbon dioxide and other greenhouse gases, and reduce U.S. imports of foreign oil. To do that, Obama aims to limit the amount of tailpipe emissions cars can spew, the first such federal regulation. And he’ll raise gas-mileage standards by 40 percent, basically accelerating new rules put in place during the Bush administration. Those rules were considered aggressive when passed in 2007, but now Obama will bring them into effect four years sooner. It’s an “epoch-changer,” says Jack Nerad of car-research site kbb.com. “It will markedly change what Americans drive.” Here’s how:
Cars will cost more. Raising fuel economy so quickly will force automakers to fast-track new technology that might otherwise evolve over years or decades. That will be expensive. The new rules start to get phased in for the 2011 model year, which will include many cars appearing in showrooms in 2010. By the time the rules are fully implemented for the 2016 model year, the auto industry estimates that meeting the new requirements could add $1,300 to the cost of a car. The industry has overstated such estimates in the past, yet even environmentalists who have pushed for the changes expect car prices to increase $1,100 or so by 2015.
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30 Investors Poised To Lose the Most on GM
Continue reading… 54 CommentsWith General Motors in bankruptcy, some of its investors—including bondholders, secured lenders, and the U.S. government—are likely to get a portion of their money back. But stockholders, with virtually no protections, have been essentially wiped out.
To gauge who stands to lose the most, we obtained a list of GM's biggest shareholders from research firm Thomson Reuters. In general, the largest shareholders are at risk of losing the most. But losses on stock holdings also depend on the price paid for the stock, compared to the price at which it's sold. And big shareholders typically build their positions over time, buying at a range of prices.
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Who Will Lose the Most From the GM Bankruptcy
Continue reading… 34 CommentsDealers will close. Jobs will disappear. Customers may flee. With General Motors in bankruptcy, millions of GM workers and other Americans will suffer the collateral damage.
So will the investors who own (make that owned) GM stock. GM's share price peaked in 2000 at over $90, then fell steadily over the following years as GM's market share dwindled and its earnings turned from positive to negative. In October 2007, GM stock was worth about $42. Now, those old shares are effectively worthless, and new shares will be issued to bondholders, the government, and an auto-workers' trust fund.
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How TARP Began: An Exclusive Inside View
Continue reading… 22 CommentsWhen it first came into existence last September, TARP—the troubled assets relief program—sounded like just another ungainly government acronym. But since then, it has become an integral—and controversial—part of America's recession economy.
TARP's chief architect was Henry "Hank" Paulson, President Bush's treasury secretary, who led the financial rescue along with Federal Reserve Chairman Ben Bernanke and New York Fed Chairman Tim Geithner, who's now Paulson's replacement at treasury. Their initial plan was to use the $700 billion in TARP funding approved by Congress last October to purge financial firms of their so-called toxic assets.
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12 Cars That Could Spoil a Chrysler-Fiat Deal
Continue reading… 27 CommentsAs the Chrysler bankruptcy proceeds, the odds are improving that enough of the automaker will survive to consummate a merger with the Italian automaker Fiat. But how, exactly, will the reformulated Chrysler return to profitability?
The company claims that Fiat's innovative small-car technology will fill a gaping hole in Chrysler's product lineup and turn Detroit's No. 3 automaker into a winner. Chrysler desperately needs that kind of help, and Fiat does have some appealing vehicles, like the 500 and Panda, each of which has earned honors as European car of the year. If the Fiat deal flies, such models could be imported to the United States and even built here.
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The Chart That Launched the TARP
Continue reading… 1 CommentLast fall, as the financial crisis was mushrooming, officials from the Treasury Dept. and the Federal Reserve had a hard time explaining to members of Congress why they needed a $700 billion emergency rescue plan.
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Why the Banks Still Aren’t Fixed
Continue reading… 29 CommentsThe stress tests are done. The results are better than feared. Bank stocks are up. A few large lenders, such as Capital One, US Bancorp, and BB&T, are even preparing to repay billions in federal bailout money. Sounds like the bank crisis is solved!
Except for everything that could still go wrong. "Yes, everyone passed the stress test, but it was a questionable test to begin with," writes Charles Rotblut of Zacks Investment Research. "Foreclosures are still rising, credit card defaults will get worse, and, despite all of the analysis, nobody still knows how to value the toxic assets."
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How the Job Numbers Complicate Obama’s Agenda
Continue reading… 0 CommentsWe’re all dying for some good news—any news—so fewer job losses in April seems like reason to celebrate. Instead of shedding more than 600,000 jobs, as in previous months, the economy only lost 539,000 jobs last month. Pop the champagne.
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6 Stress-Test Surprises
Continue reading… 0 CommentsExpectations were low back in February when the Federal Reserve and Treasury Dept. first announced their plan to conduct “stress tests” on big banks, to gauge their ability to weather a nasty recession. The test criteria weren’t all that stringent, for one thing, and the initial plan was to keep the results confidential anyhow.
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5 Signs the Bailouts Are Getting Better
Continue reading… 1 CommentBailouts are now routine in America, and a lot of disgusted taxpayers have simply tuned out and stopped following the details. That’s too bad, because all that government aid might finally be helping.
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The Best and Worst Bailed-Out Banks
Continue reading… 10 CommentsThe bank "stress tests" administered by the Obama administration were controversial even before they were conducted. Critics have complained that the government's worst-case testing is too lenient, the methodology whitewashes the worst problems, and the whole exercise amounts to a phony show of faith in banks that remain deeply troubled.
There are plenty of other stress tests, though—including the one administered in the stock markets every day. So to gauge which of the big bailout recipients seem to be in the best and worst shape, U.S. News ran a kind of poor man's stress test, based on easy-to-understand data that are publicly available.
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Banks Most Likely to Pay Back Bailout Funds
Continue reading… 1 CommentSince last fall, when the financial bailouts began, the government has injected about $250 billion into hundreds of banks, whether they're faltering or not. The original Troubled Assets Relief Program flooded all banks of significant size with money to prevent bank runs, prop up lending, and convince consumers and investors that the entire banking sector is safe.
Since then, the TARP mission has changed. Regulators, politicians, and taxpayers all want to know which banks are healthy and able to pay back their taxpayer funds and which are sick and likely to need more. The Obama administration's "stress tests" of the 19 biggest banks are one effort to figure out which banks can stand on their own and which are likely to need more government aid.
