GM announced on Friday that the company will close 20 of its North American plants and is considering filing for Chapter 11. Chrysler LLC is slated to close 29 plants and lay off 53,000 workers effective immediately. And, though Ford Motor Company CEO Allan Mullaly told a Congressional committee that his company does not face what he called “near-term liquidity issues” which have slammed GM and Chrysler, he still has his cap in hand for $9 billion of Treasury-sponsored credit, should the industry worsen.

Detroit’s cognoscenti maintain that allowing the Big Three to fail could put more than half-a-million unemployed factory workers on the streets and disrupt other industries that supply or benefit from the auto industry. Nobody wants to see unemployment rates climb beyond 6.7 percent. But the automakers seriously overestimate their importance to the American economy.

The auto industry did not just get the stuffing kicked out of it overnight: it’s been unraveling for years. In an interview with the Wall Street Journal, Patrick Anderson, chief executive of East Lansing, MI-based Anderson Economic Group, said that “Michigan has been in a seven-straight year recession. The state’s unemployment rate for non-farm jobs is at 9.7 percent.  Even Michigan’s health care industry has begun to show signs of slowing.

And, amazingly enough, the sky has not caved in.

Detroit’s automakers say that it is unfair for Treasury to bail out the banks on one hand while it leaves the auto industry to suffer. And they have a point. But while it is true that many of the major players in the mortgage fallout did receive a Treasury-sponsored bailout through TARP, there was at least the possibility that, somewhere down the road, the toxic assets that have ruined their balance sheets would have been worth something one day. But Ford Motor Company and GM, which have long since been overshadowed by Japanese automakers such as Honda, at least in terms of popularity, have been poorly managed for decades. And there is no sign from Detroit that management will magically improve.

It would take something at least as revolutionary as the invention of the wheel to turn Detroit around. And, certainly any money that they receive will only be used to cover expenses such as payroll, not for research or development of new technology.

Detroit will suffer greatly if the Big Three do not get an immediate capital infusion. And, frankly, suppliers around the country will most likely go out of business if these companies are allowed to fail. But there’s an aspect of common sense that, so far, only Senator Mitch McConnell has touched on: Throwing money at a bad investment does not make it a good one.

“Very few of us had anything to do with the dilemma that they have created for themselves,” McConnell said of Detroit’s automakers. “We simply cannot ask the American taxpayer to subsidize failure.”

Clearly, Wall Street ripoffs are only getting more outrageous, and Madoff’s crimes have had the farthest reach of all.

Billions Lost in Former Nasdaq Chairman's Pyramid Scheme

At the end of last week, former Nasdaq chairman and money manager Bernard L. Madoff was arrested for running a firm that lost billions of dollars through a pyramid scheme.  Although such scandal is not new to Wall Street, Madoff might hold the dubious honor of committing the largest fraud in financial history.  And the details are emerging rapidly this weekend.

The SEC orginally investigated Madoff in 1992, but ended up clearing his name, and have been caught off-guard by news of Madoff’s Ponzi scheme.  In an affadavit written for federal agents, Madoff said his fraud totaled about $50 billion.  Bernard L. Madoff Securities gave its earlier investors returns with money from later victims, rather than actually investing the money.  The scheme worked until the firm was hit with about $7 billion worth of redemptions by early December.  Similar schemes usually quickly collapse, but Madoff’s fraud looks to have gone on for years.

Madoff did not run a hedge fund, but managed accounts for investors inside of his security firm.  If the investors’ portfolio had, like hedge funds, been held at a bank or brokerage firm, outside auditors could have checked that the fund existed.  Instead, only Madoff looked at the clients’ accounts that he processed, with the exception of a tiny auditing firm in NYC.  He attracted investors through his reputation, and they put billions of dollars into funds that then invested in Madoff’s firms. According to the Wall Street Journal, the money manager tried to exude an aura of exclusivity, and marketed himself through an ‘A-list’ of prominent investors.  His emphasis on an invitation-only policy for investors, and targeting of country clubs generated new customers for his Ponzi scheme for years.  Madoff was referred to by some investors as the “Jewish bond,” who consistently paid returns of 8 to 12 percent per year, ‘no matter what.’

While Madoff was a winner for many years, there are now many losers.  They include Yeshiva University (Madoff was even chairman of their board), a Jewish charity that lost its $7 million endowment and plans to lay off its workers and shut down, as well as prominent Jewish families in Florida and New York.  

Originally, Madoff started his firm with money he made 50 years ago working as a lifeguard in Queens.  His firm was a major driver in the growth of the Nasdaq by persuading brokers who primarily traded on the NYSE to do more Nasdaq training.

How did Madoff get caught? Redemptions.  In the first week of December, Madoff’s scheme collapsed when clients asked for $7 billion in redemptions.  According to Time, Madoff met with his sons last Wednesday and told them his firm was a fraud, and called it “a giant Ponzi scheme.”  When the sons called a lawyer, the lawyer alerted federal authorities about the fraud.  By this time, Madoff was virtually bankrupt.  He had planned to give the remaining $300 million that his firm had to family members and employees, but it looks like that scheme will have to be worked on from jail.

From Investopedia:

A persuasion tactic used by an authority (i.e. Federal Reserve Board) to influence and pressure, but not force, banks into adhering to policy. Tactics used are closed-door meetings with bank directors, increased severity of inspections, appeals to community spirit, or vague threats.

It would be nice if it worked. Consider these three news events from the week:

• Ecuador defaults on its foreign debts, leaves investors in the lurch.

• Despite a Freedom of Information request, the Fed still refuses to say which banks they loaned $2 trillion to, and what kind of tricky collateral they  accepted in return.
• The Bush Adminstration retreats from its old position on the auto bailout, and is now considering using TARP funds.

In each case, the persuasion tactic didn’t matter because actors are unpredictable.

Sure, the The Dark Knight is a near definite Oscar winner. But it also may be a key to boosting Time Warner’s earnings and future stock performance.

Back in July I wrote a web story for Crain’s that the film’s record success in the box office had brightened Time Warner’s profit expectations enough for the company to potentially meet its full-year forecast.

At the time UBS AG analyst Michael Morris said the movie had done well enough to give Time Warner similar returns to the total $891 million made by Spiderman 3.

The Dark Knight exceeded those projections reaching $1 billion in box office sales last month.

That gave the Warner Bros’ parent company a much needed boost.

Time Warner reported better than expected third-quarter earnings in November. Yet the media giant cut it’s full-year forecast due to severance charges at Time Inc. publishing and restructuring charges at New Line Cinema, Reuters reported on Nov. 5.

Now they are planning to re-release their big hit in January.

I haven’t checked Mike Morris’ recent projections, but it will be interesting to see the financial results and how much they influence Time Warner’s outlook.

The company’s stock, which took a plunge at the end up September, bottoming at $7 a share on Nov. 20 has started to regain its momentum since. Perhaps The Dark Knight will keep Time Warner shares from falling again — at least throughout the film’s DVD and Blu-Ray release.

Provided by ABC News

The next bubble: bonds.  This week, investors parked their money in an investment with absolutely no return. They poured $30 billion into four week T-bills at zero percent.  (At this rate, the government will have plenty of cheap cash to build all the bridges, roads, tunnels, highways and roads it wants—too bad fewer Americas will be able to afford cars to take advantage of all the new infrastructure). Now back to the original point: the demand for bonds has also ballooned in the secondary market, which has pushed yields down to 1929 lows.

The gaping trade deficit and prospects for a protracted and painful recession don’t seem to faze bond-buyers because the market considers U.S. government debt the safest investment in the world. If it turns out not to be, the thinking goes, we’ll all have much bigger problems.

Sound familiar? That’s because it is. At the peak of the buying spree for then-Triple A rated subprime mortgage securities, a common response to skeptical investors was that the majority of homeowners wouldn’t default, and if they did, we’d have bigger problems. Then came the bigger problems: the collapse of Lehman, a worldwide panic in the financial markets, historic level of unemployment, skyrocketing foreclosure rates and the possibility of another depression.

There are signs, however, that some investors are questioning the U.S. government’s ability to make good on all its debt. “The cost of buying protection against deteriorating creditworthiness is surging for every nation; five-year swaps on the U.S., for example, trade at about 66 basis points, a six-fold increase in six months,” according to Bloomberg.

There are countless differences between the sub-prime lending frenzy and the surge in demand for U.S. debt. For one, the U.S. dollar is the world’s reserve currency, which ensures a ready market for U.S. dollars. Additionally, the government has signaled that it will print as much money as it needs to get through the financial crisis. None of this means that the U.S.’s triple-A credit rating is safe. The prevailing view in the market is that the rating won’t change. If that assumption changes, the Treasury bond market will crash.

Then we’ll all have bigger problems. Again.

Check it:

In a piece called “Infrastructure Finance Jobs to Surge under Obama,” A.E. Feldoman, a consulting firm, writes that Obama supports legislation already in the pipeline to create a National Infrastructure Bank.

If the bill passes, the new bank “would encourage local public agencies to ‘partner’ with private-for-profit entities to develop projects worth at least $75 million each.”

Just in case you’re wondering what the Democratic leadership thinks on the issue, consider Speaker Nancy Pelosi’s love letter to the National Council on Public Private Partnerships:

House Democrats in the New Direction Congress are committed to robust public investment in public transportation. In addition to this commitment we must also look to innovative public-private partnerships to fund our increasing infrastructure needs. Private investment is playing an increasingly larger role in public infrastructure and we must continue to offer innovative solutions at every level of government to face our transportation challenges.

It is getting harder lately for companies to reemerge from Chapter 11, true. For example, this year Circuit City and Linen N’ Things were forced to liquidate when they couldn’t find a white knight.  Such a Chapter 11-is-the-new-9-scenario could be especially disastrous if the autos went under, and would drag their suppliers under the bus too. We can and should avoid this.

But giving a company like GM a blank check just because its CEO Rick Wagoner has ditched his jet and gone to Quiznos, well that’s a recipe for disaster as well.

There is another way. The government could sponsor the automaker’s bankruptcy. This way they win more concessions than with a bailout. Andrew Ross Sorkin lays out the plan.

“Taxpayers shouldn’t fork over a cent until shareholders are wiped out, management is tossed out and the industry is completely reorganized,” he wrote.

What say you all?

Actually it’s been spectacular.

Meriwether, now 61, resigned from Solomon Brothers in 1991 after a subordinate of his tried to corner the market in two-year U.S. Treasury notes. He informed superiors of the infraction, but it wasn’t reported to the Treasury until much later. An investigation found illeagalities at the firm and Meriwether agreed to a three-month suspension and a $50,000, but never declared his innocence or any wrongdoing as a superior.

After a few years pursuing golf and his love of horses, Meriwether returned in 1994 with the founding of the hedge fund Long-Term Capital Management. The high-profile fund attracted money from celebrities, top pension funds and Ivy League endowments. In the first few years, the fund made solid returns. But by 1997, the firm had made huge bets on Russian government bonds and when the Russian government defaulted on its bonds in 1998, Long-Term Capital’s losses were in the billions of dollars. The fund eventually lost more than $4 billion in four months had was bailed out by as group of investment banks and the Federal Reserve. The fund folded in 2000.

But with Long-Term Capital’s collapse still fresh in investors’ minds, Meriwether was able to start another hedge fund, JWM Partners LLC, in Greenwich, Connecticut, in 1999. The fund has done relatively well, growing from $400 million of initial capital to $2 billion today. But according to Bloomberg News one of the firm’s funds was down 24% earlier this year.

INTERESTING LIAR’S POKER FACT CHECK

In this 1998 piece by the NYT’s Gretchen Morgenson, she reports that the famous scene at the beginning of Liar’s Poker, in which Meriwether challenges John Gutfreund to a $10 million-game of liar’s poker is inaccurate.

People who have never met Meriwether may remember him as the man featured at the start of Michael Lewis’s book, “Liar’s Poker.” As recounted there, Meriwether supposedly challenged John H. Gutfreund, then the chairman of Salomon Brothers, to up the ante from $1 million to $10 million in a game of “I dare you” played with serial numbers on a dollar bill. Gutfreund, no pansy himself, walked away, according to the book.

This story almost certainly helped forge the romantic view of Meriwether as a Wall Street cowboy, willing to make a bet that even his rich boss shrank from. Only trouble is, it never happened. According to people who were there, it was not Meriwether who made the challenge. It was John O’Grady, a gregarious and blustery Salomon partner who ran technical support for the traders. O’Grady died in 1989. ( Lewis was traveling and not available for comment.)

According to those who know him well, the story is also out of character, because Meriwether only made the most calculated of bets, both personally and for the firm. He loved to bet on Chicago Cubs games, for example, but would not do so until he had first received the weather report to see which way and how hard the wind was blowing at Wrigley Field. That way he could better guess how the Cubs home-run hitters might do against the opposing pitchers. “These weren’t big bets,” said a person who had knowledge of them at the time. “He just liked to have a lot of things he could analyze.” More often than not, he came away a winner.

Note: This was an assignment to speak to Meriwether about the relevance of Liar’s Poker to today. Meriwether, through his assistant at JWM Partners, declined to comment.

Enough, already.

At first, I thought the bailouts were necessary. But, I really never want to hear the “word of the year” again. Especially not for the auto industry.

I reached my breaking point with The Big Three about two weeks ago, when it was reported that each of the CEO’s made their trip to Washington D.C. via private jet.

“Wagoner’s private jet trip to Washington cost his ailing company an estimated $20,000 roundtrip. In comparison, seats on Northwest Airlines flight 2364 from Detroit to Washington were going online for $288 coach and $837 first class.

After the hearing, Wagoner declined to answer questions about his travel.”

$20,000? Are you kidding me? That could be someone’s salary for an entire year. These men clearly let their companies fall into the position they are currently in . . . and I (or any other tax payer) shouldn’t be footing the bill.

And, I’m not the only one that thinks this way. A new article released today from Forbes show that only 20% of Americans think that it’s very important for President Obama to give loans to the auto industry.

As far as financial companies go–though I think helping them is more necessary than helping the auto industry–I think Citi’s bailout last week should be the final straw.

I am sick of the government bailing out people and companies because their poor choices led to poor results. I agree with the woman who called into CNN, as seen in the clip below: