Friday, November 21, 2008

What Should Happen & What Is Likely To Happen


General Motors

What Should Happen
- Allow the company to go into Chapter 11 or what we call bankruptcy. Then the company will have real negotiation leverage and the unions will really have to listen and make concessions. The government can then step in with some funding but call the shots. Force the merger of General Motors and Chrysler. All outstanding car warranties will be guaranteed by the government via a separate vehicle. Following huge concessions made by the union, the selling down and dismantling of parts, the reworking of cost savings with the 2 companies... maybe, just maybe they can survive.


What Is Likely To Happen
- Democrats will probably approve a US$25bn bailout when they return on December 8, but a viable plan is expected from the automakers. Expect Chrysler to quicken talks with GM to hash a merger to get the US$25bn bailout plan approved. Short term feel good, but without bankruptcy, the unions and their demand swill stay the same. Its the liabilities and claims by employees on the company's balance sheet which will always bring the company down. The lifeline will give then a few months grace but the end result is bankruptcy.
The trouble is that with the US$25bn bailout, the unions will not lower their rights and demands... you need to put the company into bankruptcy to leverage your negotiations. Sink or swim.

Citigroup


What Should Happen
- JP Morgan or Morgan Stanley should step up to buy Citigroup, with the Treasury guaranteeing maybe US$30-50bn in losses. That will calm markets. Its not likely Citi will be able to remain independent for long on its own. The amount of toxic assets is US$80bn, and we haven't even looked at the fallout on funds being tied to Lehman Brothers. Citigroup has another shoe to drop, credit card debts, which will implode as well. A merger would see a bid of at least US$20 per share. It will further reduce counterparty risks in dealing with Citigroup.


What Is Likely To Happen
-
The company will be taken over by FDIC to prevent a bank run, especially from global depositers. Their liquidity ratios are seriously questionable at this point. The result would be a total break-up of the group. JP Morgan may still end up with the commercial banking side in a break up sale. As Citigroup is trading at barely 1/4 book value, a break up sale should see at least a US$10 value to its shares.

Other Potential "Bad Developments" In Coming Weeks & Days

a) GMAC running into deep trouble.

b) GE Capital running into deep trouble.

c) The merger between Bank of America and Merrill Lynch running into problems owing to ML's excessive exposure to toxic assets.

d) Nobody steps in to help Citigroup, and this time global effects will be felt as Citi's exposure is more pervasive globally.

e) Markets switch to look at credit cards implosion, dragging Citigroup and Amex into deeper trouble.

Still, we are seeing possibly the "peak in selling" here, expect 7,000-7,300 to be attract strong buyers for the longer term and should hold up well there. Asian markets should find good buying support now as there is almost zilch holdings by foreign funds - nothing left to sell now literally. Its not hunky-dory, but those with at least a 6 montn view may nibble.


p/s photos: Li Bing Bing

15 comments:

solomon said...

I strongly felt that the US govt is going to bail out the auto industries. The delays is mainly to squeeze the most value of the TOP3 in distressed time.

And just cross my mind, I am just wondering what is the economic situation (income per capital/GNP etc)back then when Dows was 7000 pt. Is it that bad now comparatively except for employment and housing mkt?

Another observation is that for the last 7-10 trading sessions, the Dows industries just have free falls in the last trading hours. What is the exact explanation for this sell-off? Could it be the so called fund redemption or excessive short covering (manipulation) in the market? Again, it is the emotion vs fundamental situation. Is the SEC working here or there is some hidden agenda the Main Street people did not know?

Richard Cranium said...

FDIC may have different criteria in asset valuations. What may pass of as valuable by Citi may just be non-value to them.

If that's so, then you are right that there's still some selling to go.

I just sense that there is a buying opportunity in Citi....question is when is a good time to jump right in.

Pat said...

From the statements of Ron Gettlefinger (UAW president) seems to me that he has given the impression that allowing the auto industry to fail is not an option. In addition to what he said,I don;t think the UAW will concede to new concessions. He added that the auto industry, forms the backbone of the US economy (which I think is bs) and that the country will be close to a depression if the the Big 3 are allowed to fail considering loss of jobs, federal taxes, pensions, healthcare, blah blah, blah.

True but the stranglehold of UAW on the auto industry has made their products so uncompetitive in US that they have started blaming state governments for their concessions to foreign carmakers(eg Alabama to Mercedez. (Mind you plants like GM perform better in overseas countries, without union labour.)

I say let them go Chapter 11, wiping all existing agreements with UAW and erasing all inefficient and quesionable business practices. Other foreign carmakers will increase production via additional workers or new plants to make up for the slack. New business models (ala Japanese and German) will be adopted. However, I would prefer Fed to support their pensions and healthcare.

Sounds simple but they have to break the unions stranglehold. More severe pain in short and medium term but can't blame anyone but themselves.

hjghaz said...

Dear Sir,

Thanks for very informative blog entries..

However, much as you "hate" Jim Cramer I guess you owe him an apology...

That "get-on your nerve" guy was correct that DOW breached 7700.

Many don't mind people call them financial idiots if they are worth USD 100 Mio each?! Nope?!

Thanks n Sorry, just a poke..

sopsky said...

dali,

interestingly, citi and jpm are moving down in tandem with great stride! both bucked the trend of their peers... v likely to have something... maybe. pure price movement speculation.

Gamelion said...

Every night Citibank will never sleep for worrying and thinking very hard for a white knight saviour !!!!!

Salvatore_Dali said...

hjzhaz,

Pls read my post properly.... my pissed off stance against Jim Cramer is not on his predictions, as he has been wrong many times... he called for a buy at 11,000 and the at 10,000 and then at 9,000... when it broke that he said 7,700 ... whether that level is reached or not does not change my mind that he is an idiot... read my posting below carefully:




If ever there was a consistent financial idiot, it would be Cramer. If you look up the dictionary under "idiot" you'd probably find his picture there. I am so glad he panicked and call for a sell. I am so so relieved. I rarely call anyone a financial idiot, but apparently the phrase "financial idiot" was invented strictly for him. (Even if the index does get to 7,700 he is still a financial idiot... randomness alone can get you 2/5 correct)

The Rock said...

Unless the US govt issued an explicit guarantee on Citi's business, the shareholders may be wiped off soon.

The most probably upcome would be similar to AIG whereby US govt will inject hundreds billions into Citi in exchange for a majority stake.

The existings shareholders will be left with a minority position. Hence the past peak of USD50+ will translate to apeak of USD20 or less.

Maybe when the dust settles, it can recover to USd 10.

The book value is an illusion now as they have yet to account for all their skeletons.

The Rock

Ivan said...

Dali,


Do you think the Citi all staff will be cut pay effectively on Jan 2009?

Some more, do you believe the 2008 bonus will be pull out for malaysia citi banker? any idea to cool down the citi banker?

the FEd came in. the US gov came in, sure it will change the management people. . .

Remnant 613 said...

For the benefit of those who bank with Citibank in Malaysia, how will this Citigroup fallout affects the depositors in Malaysia.?

Appreciate yr thoughts on this.

virtualmystic said...

I strongly disagree with the bail out of the American Auto Industry. As bitter a pill that it is, it must be swallowed if the patient is to be cured. The big 3 must be made to re organise and re think their business model. To read my opinion on the issue go to my blog at virtualmystic.wordpress.com

Ivan said...

Remnant 8,

I believe Msia Gov will help . ..and if i am not mistake, all deposit in malaysia has guarantee by Gov Malaysia until year 2009 for unlimited amount as well.

so, need not to worry lo . .isnt ?

Gamelion said...

All banks are leverage more than 30-40 times their deposits saving and even our local not bad in term of catching up to 10-20 times leverage. Conclusion you have better
chance of surviving in this great financial turmoil if you withdraw your cold hard cash to stash at your mattress or bury it very deep at your own backyard !!!!!!!!!!!!!!!

virtualmystic said...

Pardon my engineering background, but how does a bank get leveraged 10 to 20 even 40 times it's deposit savings? Does it mean that they loaned out 40 times the amount in the savings account?

Salvatore_Dali said...

remnant,

to be on the safe side, put yr money in local banks... if citi implodes, there could be a freeze in deposits withdrawal n u may not get yr money for a certain period till they work things out, its a small chance but hey its yr money

virtualmystic,

banks operate on capital... they also make the spreads on deposits and money they lend out... when to underwrite a bond, they may need to buy the amount of bond stated if they cannot place them out ... CDOs are bonds ... trouble starts when they think they were so attractive to buy it themselves... they usually put up only 5% to buy the bonds hence the leverage ... these things just snowball after a while