The path of self destruction

General Motors finally filed for bankruptcy today. Those reading this blog [me and possibly my mother] will relate to my interest in General Motors. This has been since I wrote the first paper on the topic. It was something everyone was talking about. The inevitable finally happened. Mr. Ingrassia in the article below [published in the Wall St. Journal] talks about the path to self-destruction.
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Decades of dumb decisions helped send General Motors to a bankruptcy court yesterday, but one stands out.

The year was 1998, and the United Auto Workers was striking at two factories in Flint, Mich., that made components critical to every GM assembly plant in the country. The union was defending production quotas that workers could fill in five or six hours, after which they would get overtime pay or just, you know, go home.

Most strikes are forbidden during the life of a labor contract, so to provide legal cover the union started filing grievances. GM lawyers contended the walkouts violated the contract anyway and drafted a lawsuit -- the first by the company against the UAW in more than 60 years. But GM's labor-relations department freaked out because the lawsuit would antagonize the union.
[How GM Lost Its Way] Chad Crowe

Just think about that. The union had shut down virtually all of GM, costing the company and its shareholders billions of dollars, and yet the company's labor negotiators were afraid of giving offense. After heated internal arguments, the suit was filed and GM seemed on the verge of winning. But the company settled just before the judge ruled.

UAW members marched victoriously through downtown Flint. GM executives who advocated a tougher stand got pushed out of the company.

The picture of a heedless union and a feckless management says a lot about what went wrong at GM. There were many more mistakes, of course -- look-alike cars, lapses in quality, misguided acquisitions, and betting on big SUVs just before gas prices soared. They were all born of a uniquely insular corporate culture.

The GM bailout probably will cost close to $100 billion, counting money from the governments of the U.S., Canada and Germany. On paper, the new company should emerge from Chapter 11 fully able to compete in the brutally competitive auto industry. Whether it will actually prosper is far less certain, but some things are beyond dispute. Bankruptcy didn't have to happen and the fact that it did happen is incredibly sad given GM's many contributions to American society and culture.

General Motors invented the modern corporation by developing the concept of giving operating executives power and responsibility to run far-flung operations subject to central financial control. While Henry Ford invented mass manufacturing, GM's long-time president and chairman of the board, Alfred P. Sloan Jr., developed mass marketing: a "car for every purse and purpose," as he put it in the company's 1924 annual report. This meant a hierarchy of brands ranging from practical Chevrolets to prestigious Cadillacs. GM's industrial might helped win a world war and made America rich in its aftermath.

For half a century, between the 1920s and the 1970s, GM seemed to have an instinctive feel for what Americans wanted before consumers themselves even knew it. Chrome, tail fins, muscle cars and even the first catalytic converters that let cars run on lead-free gasoline were developed at GM.

But the company signed generous labor deals during the 1970s, including the right to retire after 30 years with full pension and benefits, partly because it believed the contracts would cripple its smaller competitors, Ford and Chrysler. Then along came Honda, Nissan and Toyota, which didn't have to deal with labor contracts at all. That was the beginning of the agonizing decline.

This fate could have been avoided with better foresight and less hubris, but by 18 months ago bankruptcy was inevitable. GM's U.S. market share had declined to 22% from 52% in the early 1960s. There were too many brands, too much debt, a cumbersome union contract as big as a phone book, and an enormous dealer network built for the glory years of yesterday instead of the market share of today.

The question for Presidents George W. Bush and Barack Obama was whether to stand by and watch, or instead to use the public purse to shape the bankruptcies of both Chrysler and GM to mitigate the damage to a shaky U.S. economy. They intervened, which was the unpleasant but correct decision.

By and large, Mr. Obama's automotive task force has done its job pretty well, forcing the companies and the UAW to make difficult decisions that they should have made themselves long ago. GM will shed four of its eight U.S. brands -- Saab, Saturn, Pontiac and Hummer -- thousands of dealers, 11 factories, and much of its debt. It is no small irony that a Democratic administration brought in a bunch of private-equity types to impose rational management on big business.

That said, a couple of aspects of the GM and Chrysler bailouts could come back to haunt U.S. taxpayers and the Obama administration.

The company that controls Chrysler, Italy's Fiat, is getting a special government incentive -- a potential increase in its Chrysler ownership stake -- to build a small car in America that will get 40 miles per gallon. General Motors made a similar decision to build a high-mileage small car in the U.S. of its own accord, but certainly with an eye toward current political "realities."

Both moves fit the green agenda of Mr. Obama and congressional Democrats. They're also egregious examples of mission creep. GM and Chrysler should get just one marching order from the government: Earn enough money so taxpayers will recover as much as their investment as possible. If the new small cars flop because gas prices drop, the result will be more losses and, potentially, Bailout II.

The other questionable call is the government's big ownership stake in both companies -- 60% of General Motors and a much smaller share of Chrysler. The rationale is reasonable. The government is providing the $50 billion of financing needed to restructure GM so taxpayers might as well get something for their money. But this relegates unsecured lenders to the back of the line behind the government and the union. More worrisome, it invokes the question famously asked before the U.S. invasion of Iraq: You can go in, but can you get out?

The answer will depend on the success of GM, which in turn will hinge on whether the new company can cast off the culture of the old one. One encouraging sign is that, thanks to the labor contract amendments imposed by the Treasury's task force, UAW members will be required to work 40 hours a week before getting overtime pay. Less encouraging is that workers still will be allowed six unexcused absences before being fired. It doesn't take that many at a Honda plant.

As for management, not long ago a group of executives was reviewing a prototype new Buick model, about the size of a BMW 3 Series, at GM's design studios. The sporty styling had been developed in China for sale both there and in the U.S. But the company's cautious product planners suggested conducting customer clinics to gauge reaction to the design and possibly changing both the front and back end. It would have delayed the project and cost tens of millions of dollars.

CEO Fritz Henderson wisely said no. But the very next day the product planners were charging ahead with their clinic plans anyway, just in case the boss wanted to see the results of their research. Maybe the new Buick should be named the CYA. Neither billions in losses nor the brink of bankruptcy, it seems, have been enough to change many traditional ways of doing things at GM.

Heaven only knows what will be enough. But a company with a cautious, slow-moving management and a union committed to defending ridiculous work rules won't have a chance of succeeding. Perhaps everyone remaining at the new GM will realize that. The rest of us can only hope for the best.

Mr. Ingrassia won a Pulitzer Prize in 1993 for covering the last crisis at GM. His book on Detroit's current crisis, "Crash Course," will be published by Random House in January.

Greed is Good?

Prof. Roy C. Smith, former managing partner at Goldman Sachs and my professor at NYU talks about bonuses at Wall Street firms. We discussed this topic in class and his rationale and points were worthy. Or was it that they seemed right because I was on a different side of the line? The professor said that the headline was not his idea and he didn't like it as well. He also said that he got close to a hundred hate mails for the article which appeared in the weekend edition.

Produced in verbatim, the article written by Prof. Smith in the Wall Street Journal
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1973 was a terrible year on Wall Street. An unexpected crisis in the Middle East led to a quadrupling of oil prices and a serious global economic recession. The president was in serious trouble with Watergate. The S&P 500 index dropped 50% (after 23 years of rising markets), and much of Wall Street fell deeply into the red. There were no profits, and therefore no bonuses.

I was a 35-year-old, nonpartner investment banker then and was horrified to learn that my annual take-home pay would be limited to my small salary, which accounted for about a quarter of my previous year's income. Fortunately the partners decided to pay a small bonus out of their capital that year to help employees like me get by. The next year was no better. Several colleagues with good prospects left the firm and the industry for good. We learned that strong pay-for-performance compensation incentives could cut both ways.

Many wondered if that was still the case last week, when New York State Comptroller Thomas DiNapoli released an estimate that the "securities industry" paid its New York City employees bonuses of $18 billion in 2008, leading to a public outcry. Lost in the denunciations were the powerful benefits of the bonus system, which helped make the U.S. the global leader in financial services for decades. Bonuses are an important and necessary part of the fast-moving, high-pressure industry, and its employees flourish with strong performance incentives.

There is also a fundamental misunderstanding of how bonuses are paid that is further inflaming public opinion. The system has become more complex than most people know, and involves forms of bonuses that are not entirely discretionary.

The anger at Wall Street only grew at the news that Merrill Lynch, after reporting $15 billion of losses, had rushed to pay $4 billion in bonuses on the eve of its merger with Bank of America. Because Merrill Lynch and Bank of America were receiving substantial government funds to keep them afloat, the subject became part of the public business. The idea that the banks had paid out taxpayers' funds in undeserved bonuses to employees, together with a leaked report of John Thain's spending $1 million to redecorate his office, understandably provoked a blast of public outrage against Wall Street. The issue was so hot that President Barack Obama interrupted his duties to call the bonuses "shameful" and the "height of irresponsibility." Then, on Wednesday, he announced a new set of rules for those seeking "exceptional" assistance from the Troubled Asset Relief Program in the future that would limit cash compensation to $500,000 and restrict severance pay and frills, perks and boondoggles.

In the excitement some of the facts got mixed up. Mr. DiNapoli's estimate included many firms that were not involved with the bailout, and only a few that were. Merrill's actions were approved by its board early in December and consented to by Bank of America. But the basic point is that, despite the dreadful year that Wall Street experienced in 2008, some questionable bonuses were paid to already well-off employees, and that set off the outrage.

Many Americans believe that any bonuses for top executives paid by rescued banks would constitute "excess compensation," a phrase used by Mr. Obama. But no Wall Street CEO taking federal money received a bonus in 2008, and the same was true for most of their senior colleagues. Not only did those responsible receive no bonuses, the value of the stock in their companies paid to them as part of prior-year bonuses dropped by 70% or more, leaving them, collectively, with billions of dollars of unrealized losses.

That's pay for performance, isn't it?

Source:Wall Street Journal
Wall Street" has always been the quintessential, if ill-defined, symbol of American capitalism. In reality, Wall Street today includes many large banks, investment groups and other institutions, some not even located in the U.S. It has become a euphemism for the global capital markets industry -- one in which the combined market value of all stocks and bonds outstanding in the world topped $140 trillion at the end of 2007. Well less than half of the value of this combined market value is represented by American securities, but American banks lead the world in its origination and distribution. Wall Street is one of America's great export industries.

The market thrives on locating new opportunities, providing innovation and a willingness to take risks. It is also, regrettably, subject to what the economist John Maynard Keynes called "animal spirits," the psychological factors that make markets irrational when going up or down. For example, America has enjoyed a bonus it didn't deserve in its free-wheeling participation in the housing market, before it became a bubble. Despite great efforts by regulators to manage systemic risk, there have been market failures. The causes of the current market failure, which is the real object of the public anger, go well beyond the Wall Street compensation system -- but compensation has been one of them.

The capital-markets industry operates in a very sophisticated and competitive environment, one that responds best to strong performance incentives. People who flourish in this environment are those who want to be paid and advanced based on their individual and their team's performance, and are willing to take the risk that they might be displaced by someone better or that mistakes or downturns may cause them to be laid off or their firms to fail. Indeed, since 1970, 28 major banks or investment banks have failed or been taken up into mergers, and thousands have come and gone into the industry without making much money. Those that have survived the changing fortunes of the industry have done very well -- so well, in fact, that they appear to have become symbolic of greedy and reckless behavior.

The Wall Street compensation system has evolved from the 1970s, when most of the firms were private partnerships, owned by partners who paid out a designated share of the firm's profits to nonpartner employees while dividing up the rest for themselves. The nonpartners had to earn their keep every year, but the partners' percentage ownerships in the firms were also reset every year or two. On the whole, everyone's performance was continuously evaluated and rewarded or penalized. The system provided great incentives to create profits, but also, because the partners' own money was involved, to avoid great risk.

The industry became much more competitive when commercial banks were allowed into it. The competition tended to commoditize the basic fee businesses, and drove firms more deeply into trading. As improving technologies created great arrays of new instruments to be traded, the partnerships went public to gain access to larger funding sources, and to spread out the risks of the business. As they did so, each firm tried to maintain its partnership "culture" and compensation system as best it could, but it was difficult to do so.

In time there was significant erosion of the simple principles of the partnership days. Compensation for top managers followed the trend into excess set by other public companies. Competition for talent made recruitment and retention more difficult and thus tilted negotiating power further in favor of stars. Henry Paulson, when he was CEO of Goldman Sachs, once remarked that Wall Street was like other businesses, where 80% of the profits were provided by 20% of the people, but the 20% changed a lot from year to year and market to market. You had to pay everyone well because you never knew what next year would bring, and because there was always someone trying to poach your best trained people, whom you didn't want to lose even if they were not superstars. Consequently, bonuses in general became more automatic and less tied to superior performance. Compensation became the industry's largest expense, accounting for about 50% of net revenues. Warren Buffett, when he was an investor in Salomon Brothers in the late 1980s, once noted that he wasn't sure why anyone wanted to be an investor in a business where management took out half the revenues before shareholders got anything. But he recently invested $5 billion in Goldman Sachs, so he must have gotten over the problem.

As firms became part of large, conglomerate financial institutions, the sense of being a part of a special cohort of similarly acculturated colleagues was lost, and the performance of shares and options in giant multi-line holding companies rarely correlated with an individual's idea of his own performance over time. Nevertheless, the system as a whole worked reasonably well for years in providing rewards for success and penalties for failures, and still works even in difficult markets such as this one.

As firms became part of large, conglomerate financial institutions, the sense of being a part of a special cohort of similarly acculturated colleagues was lost, and the performance of shares and options in giant multi-line holding companies rarely correlated with an individual's idea of his own performance over time. Nevertheless, the system as a whole worked reasonably well for years in providing rewards for success and penalties for failures, and still works even in difficult markets such as this one.

At junior levels, bonuses tend to be based on how well the individual is seen to be developing. As employees progress, their compensation is based less on individual performance and more on their role as a manager or team leader. For all professional employees the annual bonus represents a very large amount of the person's take-home pay. At the middle levels, bonuses are set after firm-wide, interdepartmental negotiation sessions that attempt to allocate the firm's compensation pool based on a combination of performance and potential.

Roy C. Smith, a professor of finance at New York University's Stern School of Business, is a former partner of Goldman Sachs.

To be or not to be

An oft asked question. A rarely given answer

For starters, the real [and only true] question that you need to ask yourself as you get out of Atria mall and take a cab down to Worli Seaface and walk by as the water hits the walls is... Why do you want to pursue an MBA?

* Is it only because the world does it?
* Is it only because you want to see what else is there to offer?
* Is it only because you want to move away from where you are?
* Is it only because you want to be independent and away from home?
* Is it only because you could live in NY?
* Is it only because you want to make shitloads of money?
* Is it only because you want to be successful in life?

If you answer in the affirmative to any of the questions other than the last, you probably want to re-assess why you want to pursue an mba and the self doubt is well-placed. If you affirm to the final question though, you are probably on the right track.

The MBA today has become [unfortunately] a fashionable thing to do. It is like colouring ones hair [ I swear i couldnt get a better analogy and this isnt aimed at anyone in particular ] or getting the latest phone. People pursue it because everyone else does it. People go to some random school to pursue it, if they have to. It is a rat race and they think they are missing something if they don't run that race as well. They don't know why they are running. They have no freaking clue. All they know is that they need to run.

Another reason is because people are generally escapist [I do not judge, it is perfectly fine to want something that is out there that one wants and cannot get to] and want to run away from what they are currently doing. One major reason for the plethora of engineers/IT guys after that MBA dream is that they don't like what they do and see this as an avenue to escape. This is a fair reason, a good reason. But I am sure there are other ways to do what they want to do. Also, the world after an MBA is not some super rosy place where there are no assholes, back-stabbers and super-achievers. On the contrary, it may be far worse sometimes.

Inertia is a bad thing. It makes things difficult to start moving. Things are easy the way they are and most people like to keep them that way. Then, there are others for whom change needs to be constant. For some, that change never came. They have lived where they have [albeit a few geographic changes] all their lives. Life has been sheltered and they haven't seen the world outside. They yearn to break the proverbial shackles, to travel to lands unseen and to live life as they want to. Life at their pace, where they are in charge of their destiny. They love their parents to death. Yet, they desire to experience life as a lone stranger who walks down Marine Drive, assimilating the wonders and experiences of life. They want to shave their head bald, to colour their hair blonde, to wear those plunging necklines and to live-in with their girl. And yet, not have to deal with the frown of daddy and mummy dearest.

Someone liked the city so much, they decided to name it twice. Hence, it is New York, New York. The Greenwich Village, Central Park, Wall Street, Broadway, Chelsea, TriBeCa and the Washington Square Park are places they want to be and visit. Friends was their favorite show and they like all things American. They speak with the American slur, believe that colour should be color and not the other way around. The Lion King, Phantom Of the Opera and other shows on Broadway are on the top ten things on the list of things to do. Wouldn't they kill to get that elusive American visa, land on the chimerical soil and live that elusive dream? Touted to be the best city in the world, a reputation one believes that it lives up to. A good reason to try to land at JFK or EWR and believe that they have Truly Arrived!

Green is good, green is fashionable. A few extra thousand to spare, those elusive Jimmy Choo stilettos, that Brooks Brothers tailored single button suit, the Roger Vivier tag in the closet, the Bulgari dress watch, the Hermes and Ferragamo ties, the Lexus Sedan and that annual trip to the Alps. The life in the dreams, one that you always wanted, but was very much out of reach. So out of reach that you didn't even know anyone who had even one item in the list. You could have been the person that told Dawar Seth in Deewar, 'Main aaj bhi phenke huey paise nahin uthata'. You wanted to be there since a kid and would put in whatever effort it would take.

You have a dream. You want to make it big. You have an interest. You want to pursue that interest. You don't work for charity, and yet money is not the only thing that drives your career ambitions. You have things to prove to yourself. You want to chart new territories. Have a great life along the way. Meet great people, have awesome experiences while you do so. Rise up fast and yet know what you are doing. Be the star that people talk about, yet have your feet on the ground. In short, be something. There are many ways to get there. An MBA is merely one of them.

Some of us are brilliant. We become the Bill Gates of the world. Some of us are gifted, we become the Richard Bransons of the world. Some of us pursue a dream, we become the Jyotiraditya Scindyas of the world. Some of us have the vision, we become the Laxmi Mittals of the world. The others try to get to where these people are. They try to pursue utopia. Some succeed, some don't. They do because they are what they are. Not only because they did what they did.

There are many ways to the top of the pyramid. Some paths are easy, others are hard. Some paths need luck, others need a fairy godmother standing by. The MBA is not a sure shot to success. It merely offers a ladder. The biggest lesson in business school is not taught in class. It is in the experience. One learns from the situations, one learns from their peers and most importantly one learns from themselves. As one chugs through the two years, one learns things that cannot be learnt from reading text or watching videos. One learns from experiences. If these experiences come in a multi-ethnic setting in the midst of minds that think much differently from your own, they are worth all the more. Living in India, studying in India prepares us to a particular mindset. An education in a different setting teaches us things we would never have imagined or been exposed to.

You research on schools, you write LONG applications. You edit and re-edit. You take exams after a long hiatus. You beg and plead people for recommendations. You beg and plead people to review your essays. You study day and night for the GMAT. You miss the neon lights, the whiff of white wine and the adrenaline rush of dancing to Punjabi MC. You apply. You pray. You interview. You beg and plead. And finally you get in where you want to. It seems like a lot of work. It seems like it's hardly any fun. It hardly is. But at the end of the day, the sweet pleasure of two years that were the best you ever had... more than makes up for it.

I think that coming to the US to study is the best investment you can make in yourself. It is fun that I cannot explain. You have to study, it can be strenous. But you won't hear people complain about it, other than a random bitching. Secure job in one of the MNCs is great. But I am sure you want and can do better. Manager position is good. The question is: what next? An MBA gives you the tools and the pedigree to succeed. Not only at the job you have, but also the one when you need to switch. i believe that the math changes a lot.

That said, the MBA pours you the drink. It doesn't sip it for you.

It is most definitely and certainly worth leaving and coming. the funds are probably the single most difficult reason. The thing is that it can be totally funded on loans. If you have someone in the US you know well who can cosign your loan, you can get the entire education funded on loan. Else, you can fund it with a mix of educational loan in India and the US [no co-signer required]. It is not the most lavish of life, especially after not thinking twice before spending the money. But it can be managed. Dad may have to be your guarantor, which I am sure he will, if you call him daddy dearest from now on until the fateful day.The exposure is enormous. The ROI depends solely on what you want to do with your life. I think its an investment. A very good investment in yourself. Sometimes, its obvious right from the word go. Other times, its more intangible.

The proverbial ball is in your court. The question is, what do you want to do with it?

The Incorrigible Optimist

What’s the definition of optimism?
An Investment Banker ironing five shirts on a Sunday evening.

In the times that we live in, it is an unfortunate joke that is perched on the pedestal of possibility. Given the weird and incessant layoffs that we see day in and day out, it is not difficult to assume that the above joke is not far from reality. Every other day, I get the unfortunate news of someone I know who was asked to leave.

Mostly, I would add for little to no fault of theirs. All those who are crying hoarse for the blood of investment bankers need to realize that the Associate and to a large extent the Vice Presidents have had nothing to do with the current issue other than to be the menial labour in the chain.

Unfortunately, the bleeding just doesn't stop. What that means is that good and deserving candidates like us [ take a hike if you think otherwise :P ] don't get an entry into the door to show our wares.

This is likely to go on for long, though we would like to hope and wish that this was not the case. Aah well, the problems of an incorrigible optimist I guess. Another thought of hope I guess.

Option Valuation

Overheard between two MBA students [A and B] as they discuss another MBA student [C].

A: We had basically been discussing the new year eve parties
and i was telling C he should value it like an option
B: You said youu wanted help with option valuation!
A: The potential for an encounter is subject to much volatility
B: Okay, I can understand the analogy.
A: We wanted your expertise in option valuation to value the price of the party
A: Obviously the strike price is the ticket
B: Okay
A: The time frame is known. The woman's response is the volatility factor which we are having difficulty assigning value to. Bernanke has also helped by lowering interest rates to zero.
B:: Women are empirically known to be more volitile than the market. You have to take the volatility to be atleat 50%. If C can choose between the party and the chick, it has to be valued as a chooser! The best of both outcomes. Else if is buying the ticket, and can seek a refund then it is a put option.
A: One will lead to the other. Where is the chooser in it? If he doesn't got to the party, where will he meet the woman
B: I thought that he can go to a party with us or take a chick for a date
A: No, he is talking about going to a party and finding a girl there.
B: Then, it has to be valued as a compound call option. Event 2 is dependent on event 1. If he comes to the party, then there is a probability that he finds a chick. The key is in choosing the right party.
A: I guess that for him time also will be inversely proportional if he finds the girl at 6 AM, she may decide to go to breakfast rather than for some other 'activity'.
B: Yes, it seems to be a very complex option depending on whom he finds there. You can raise this question to (Aswath) Damodaran for real options. Anyway, from what i can see, we are busy valuing the option and C is busy with the chicks.
A: Yes, that is true. He seems to have disappeared.
B: I will catch up with you later.
A: Cool. Later.

Bismarck Bailout

Picture Source: Bloomberg.com
The US Government has finally saved the Bismarck from sinking by stepping in to secure a huge load of its troubled assets.
Bailout Plan
- $306 billion of troubled mortgages and toxic assets guaranteed by the U.S. government under a federal plan.
- $20 billion cash infusion from the Treasury, adding to $25 billion it received last month under the TARP.
- Citi to swallow first $29 billion of losses on the $306 billion pool
- After that, government covers 90% of losses, Citigroup covers other 10%
- CEO Vikram Pandit keeps his job

Price for Citi
- Government to get $27 billion of preferred shares with an 8% dividend
- Warrants to buy 254 million Citigroup shares @ $10.61 each

“The Achilles heel with Citi is their exposure to emerging markets and what’s going to happen when emerging markets turn down, as they’re doing now.”

Here is the entire article on Bloomberg.

PS: Seems like the government does work the weekends and late into the night.

Insurance Indeed

Picture Source: Bloomberg.com archives
Here is an interesting email that I received over the weekend that gives you an idea of the run-on-the-bank that Citibank is currently facing. While there are few rumors as to whether Citi will survive to see Monday morning, it is now almost certain that there is no news that will emerge before the start of markets. If there was any news, it would have emerged [or leaked] by this evening which would have given us a good sense of where Citi is currently headed. That has not happened and hence, I believe that we will see Citi opening to a low this coming week when markets do open on Monday.

Here is the email that I [and other Citibank customers received]

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Dear Max,

Good news! Citibank is participating in the FDIC's Temporary Liquidity Guarantee Program. Through December 31, 2009, all of your non-interest and interest bearing checking deposit account balances are fully guaranteed by the FDIC for the entire amount in your account. *

And as a reminder, in October the FDIC increased the amount of insurance on eligible savings accounts -- such as savings, market rate, money market accounts, club and holiday accounts, and certificates of deposits -- from $100,000 to $250,000 through December 31, 2009.**
...

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I have no doubts that my money is safe, given its meagre amounts. Nevertheless, I have withdrawn substantial amounts considering the fact that I may not be able to withdraw money immediately in case the bank does go under. Better to be safe than sorry they say.

While I do believe that Citigroup cannot be let to go down, purely because of the effect that it would have on the already bleeding financial markets, I am waiting to see what sort of a plan will be cooked up by the government and its emissaries.

Global Banking & Capital Markets

One of the most interesting classes that I take this semester is the Global Banking and Capital Markets class with Roy C Smith, an ex-chairperson of Goldman Sachs and someone who has seen a financial crisis too many [and for no fault of his own] in his long and illustrous career.

In this class, we have talked about the various crises that have been seen in the current times. We discussed a wide variety of current issues in the financial markets, while discussing the fundamentals of capital markets and financial systems
- the downward spiralling mortgage markets
- the bailout of Fannie Mae and Freddic Mac
- the unfortunate demise of Lehman Brothers
- the capital infusion in AIG
- the acquisition of Lehman Brothers' assets by Barclays PLC & Nomura
- the sale of Merrill Lynch to Bank of America
- capital raising by Morgan Stanley and Goldman Sachs
- the sale of WaMu to JPMorganChase
- the sale of Wachovia to Citi
- the subsequent renege and sale of Wachovia to Wells Fargo
- the downward spiral of Citi
- the fate of General Motors
- Troubled Asset Relief Program
- Federal Reserve and Ben Bernanke
- Treasury Secretary Hank Paulson and his efforts
- Banking Failures in the UK
- Banking Failures in the rest of Europe
- Banking in China
- the benefits of Obama vs. McCain
- What it means to have Obama

This was one of the most informative and illustrative class that I have taken at Stern. It touched upon various developments in the current financial turmoil [or what Prof. Smith refers to as the financial tsunami]. A great course. Most definitely recommended.

Here is an article that Prof. Smith wrote in Forbes where he talks about the questions that he, as a professor, and his students [that is us] would have for the new treasury of the Federal Reserve, Mr. Geithner.

I hope that Mr. Geithner reads this article and implements some of the suggestions and answers the questions that the professor and his class have for him and the new administration.

Citigroup, the Bismarck?

Roy Smith, my professor and ex-chairperson and partner of Goldman Sachs talks about the run down in the share price of Citigroup.
"We used to say that Citigroup was like the Bismarck. It could take bullets forever without sinking. But ultimately, the Bismarck sank."

At $26-billion, it is now worth about the same as Toronto-Dominion Bank and $11-billion less than Royal Bank of Canada.

One thing is for sure, Citigroup CANNOT fail. I just shudder to even think of the thought of where the markets are headed if it thinks that Citi could potentially fail.

Read an interesting article here which quotes the above italicized information. Could the markets go more downward? I shake my head in disbelief.

An Orderly Chapter

Taking my point [well, based on what I have learnt from professors, the press and my research] further on how I believe GM should handle its bankruptcy, this new article by Andrew Ross Sorkin of the DealBook column in the NYTimes online website talks about why he believes General Motors needs an orderly Chapter 11 bankruptcy.

Picture Source: Consumerist.com

Published in verbatim below from the article in DealBook in the NY Times.

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Taxpayers shouldn’t fork over a cent to General Motors, Andrew Ross Sorkin argues is his latest DealBook column, noting that G.M is using money so quickly that a $10 billion infusion made today would disappear by February.

Instead of giving the ailing automaker a loan to get them over this “rough patch,” Mr. Sorkin says, the government should shepherd G.M. into an orderly bankruptcy, so that the company can begin a much-needed reorganization.

The goal — one aided by government involvement in a debtor-in-possession loan and a warranty guarantee fund — is to guide the carmaker into a Chapter 11 restructuring, not a Chapter 7 liquidation.

A Bridge Loan? U.S. Should Guide a Helpful Chapter 11
By ANDREW ROSS SORKIN

Tony Cervone, a spokesman for General Motors, has a warm and friendly way to summarize his ailing company’s ongoing dance with disaster.

“The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan,” Mr. Cervone said this weekend to The Detroit Free Press.

To him, G.M. is merely in a temporary bind. If the government — that is, taxpayers — were just willing to spot G.M. some cash to get it over this little rough patch, everything would be just fine.

Mr. Cervone’s comment reflects what’s wrong with the mind-set in Detroit.

G.M is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized.

But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington. It makes a lot of sense.

Here’s how it could work:

First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.

So, first, the government would force G.M into a prepackaged bankruptcy now — even before policy makers may think it needs to be. As an inducement, the government would allow the merger with Chrysler to go forward. (There’s a lot of resistance to saving Chrysler too, but we need to look at the industry as a whole. And don’t worry: Cerberus, the private equity firm that owns Chrysler, would have its equity wiped out too.)

The merger should reduce costs by as much as $7 billion. But that’s not the tough stuff. The harder decisions are these: Both companies would have to jettison brands — lots of them. In the case of G.M., frankly, the only ones worth saving are Cadillac, Chevy and Buick. (Buick? Yes. Despite its lackluster sales and fuddy-duddy image in the United States, it’s a huge seller in China.)

That means Saturn, Pontiac, GMC and Saab would all disappear. Deutsche Bank estimates that reducing G.M.’s brands from eight to three would bring down the company’s cost base by $5 billion annually. If you’re able to shut the dealerships too, lop off another $4 billion. Chrysler is an even sadder situation: the only brand with any value is Jeep. Its Dodge Ram truck lineup could be merged with Chevy, which would also pick up pieces of the GMC business. And Chrysler’s minivan business could be combined into the Chevy brand as well.

In all, the 35 plants of G.M. and Chrysler would probably be cut by half.

Then the auto workers, whose benefits are off the charts.

G.M. currently employs about 8,000 people who actually don’t come to work. Those who do go to work are paid about $10 to $20 an hour more than people who do the same job building cars in the United States for foreign makers like Toyota. At G.M., as of 2007, the average worker was paid about $70 an hour, including health care and pension costs.

Those costs are already coming down slightly because of a renegotiated deal with U.A.W. last year, but not nearly enough.

Part of the problem is summed up by comments like this one in The Detroit Free Press, made by Kandy O’Neill, 39, an assembler at G.M.’s plant in Lake Orion, Mich., where she builds the Chevy Malibu and Pontiac G6. “I think we’ve given enough,” she said about the cuts to her salary and pension plan.

“Everybody wants to come down hard on the workers,” she said. “Nobody knows what we do inside there but the people who work there. It’s hard. It is not an easy job.”

When you read a line like that you might sympathize with her, but then you realize that nothing can be accomplished without bankruptcy. Ms. O’Neill: your company is asking the taxpayers — many of whom don’t have health care coverage — to pay your salary and health insurance.

And then we need these companies to agree to serious, strict enforcement of gas mileage standards. They should be producing the cleanest cars on the street. We may lose hundreds of thousands of jobs in this industry in the near term, but with the right kind of innovation, we should have millions of new jobs in the next 10 years.

Finally, we need to kick out management. That Rick Wagoner, chief executive of G.M., can say with a straight face that he still deserves to run this company is laughable. It would be impossible for him to put in place the serious changes that need to be made because he carries too much baggage. He’d have to undo years of his own neglect.

After all that is agreed, and only then, the government should come in with what’s known as debtor-in-possession financing to help the company through the bankruptcy process. Ideally, the government would be a “seed investor” and others would join it.

The goal should not be to keep these companies from filing Chapter 11, but from filing for Chapter 7 — which would mean liquidation.

With the debt market virtually closed, this is the time the government can come in and try to help. But to jump in front of the train now, without the requisite changes made to the industry first — which we all know can’t be done without Chapter 11 — would be foolish.

The automobile industry has argued that bankruptcy will be a disaster for the industry; that people won’t buy vehicles while they’re in bankruptcy for fear that the warranty won’t mean anything. There’s a fix for that too. The government should establish a warranty insurance fund that would insure the warranties of all G.M. and Chrysler vehicles bought while the combined company is still operating under bankruptcy protection. The cost to taxpayers should be next to nothing, assuming the company survives and can takeover the warranty obligations.

The government also should consider using some of the money for the financial industry rescue not to save the companies, but to retrain employees in the Detroit area and help promote development of new industry. A lot of people complain about the role of government in business and free markets. But it is hard to complain about efforts to make the nation’s workforce more employable.

Barack Obama, on “60 Minutes” Sunday night, said that government assistance must be “conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan.” He said, “So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere.”

Take note, Mr. Cervone: that bridge is called Chapter 11.