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Wednesday, September 26, 2007

A Big Deal





So it probably was a ploy to look tough…

GM, UAW Reach Contract Agreement, Ending 2-Day Strike (Update6): “-- General Motors Corp. reached an historic contract agreement with the United Auto Workers, ending a two-day strike and taking $50 billion of future health-care obligations off GM's books.

The four-year accord may transform the competitive landscape for the U.S. auto industry, allowing the Detroit automaker to operate with a cost structure closer to that of its Japanese rivals. Should the deal be approved by GM workers, Ford Motor Co. and Chrysler LLC will seek similar cost-cutting UAW contracts. GM rose 6.8 percent in early trading.”

Since this is a ‘pattern’ settlement, Ford and Chrysler will get similar deals. The deal does look very good for the ‘big three’ and is going to be a tough thing for UAW members to swallow. Ultimately it is a win-win in the sense that this settlement increases the probability of survival and reform for everybody involved; GM, Ford, Chrylser and the UAW.

The difficulty now lies in determining how much of this good news will be offset by the continued weakening of the US economy. After all, a car purchase is one of the easier things to postpone for a year or two. Especially the more expensive, gas guzzling SUV and truck types that are the bread and butter of all three…

Speaking of durable goods:

U.S. August Durable Goods Orders Fall 4.9%; Ex-Transport Down: “Orders for U.S.-made durable goods fell in August by the most in seven months, raising concern business investment will soften.

Demand for products meant to last several years fell a greater-than-forecast 4.9 percent after a revised 6.1 percent gain the prior month, the Commerce Department said today in Washington. Excluding transportation equipment such as airplanes, orders declined 1.8 percent after a 3.4 percent gain.”

While bad, this data series is notoriously nasty and therefore requires a good number of data points before we can start to make arguments about trends…

“The drop in demand followed the biggest jump in almost a year, testament to the data's inherent volatility, economists said. Still, with housing in long-term decline and access to credit more costly and difficult, industrial demand may cool even as exports climb and inventories remain lean.”

Carlyle Capital Assets Fall 24% Amid Debt Selloff (Update1): “Carlyle Capital Corp., the publicly traded credit fund backed by private-equity firm Carlyle Group, fell 24 percent in August as it sold assets and global debt prices declined.

Carlyle Capital's net assets dropped to $642.1 million from $843.5 million at the end of July, according to a monthly financial statement obtained by Bloomberg News. The decline wiped out 61 percent of the $327.8 million in capital that the Guernsey, U.K.-based fund raised in the previous two months.”

OUCH. The problem now is determining what the economic effects will over the coming months and years of these funds being bailed out by their sponsors because those will SUCK UP A LOT OF USEFULL CAPITAL. While Carlyle is a private equity group banks are facing the same problems with their own funds, conduits and SIVs. You may go to the bank for a mortgage, line of credit or business operating line of credit… any credit really, and find the bank less than enthusiastic about lending to you because they would rather allocate their capital to save their asses first over making new loans… Can you say CREDIT CRUNCH?

Subprime Panic Freezes $40 Billion of Canadian Commercial Paper: “On Baffin Island in the Arctic Circle, Baffinland Iron Mines Corp. almost missed its window to ship provisions to workers before winter arrives. The delay came not from the weather, but from a sudden freeze in the market for short-term debt 2,000 miles south in Toronto.

Baffinland ran short of funds to pay for food, fuel and drilling equipment after investing in commercial paper that borrowers couldn't repay. Without the money, the company had to arrange an emergency line of credit before shipping lanes froze over.”

Those are some of the very real and practical consequences of a CREDIT CRUNCH.

“Investors fled Canada's asset-backed commercial paper, paralyzing the C$40 billion market for debt that carried the highest credit ratings, after losses from home loans to people with poor credit histories roiled global credit markets.

AMBAC, FGIC, May Need More Capital If Subprime Losses Worsen: “Bond insurers, including those owned by AMBAC Financial Group Inc. and FGIC Corp., may need to raise capital to maintain their top credit ratings if losses worsen on subprime mortgage securities, Moody's Investors Service said.

Under what Moody's called its most stressful scenario, losses on securities backed by subprime mortgages could reach 14 percent, causing AMBAC, FGIC, Security Capital Assurance Ltd. and CIFG Assurance North America Inc. to fall short of the capital needed to keep their Aaa ratings. The most likely source of losses would be from guarantees on collateralized debt obligations, which may be backed by subprime mortgage securities. The stress test is higher than Moody's expected loss rate of 10 percent under which the guarantors experience no material losses.”

Things are about to get far worse for the ‘bond insurers’. Considering they based their insurance pricing schemes on flawed and faulty models there is no way that reserves are adequate. That much at least is obvious.

“MBIA Inc.'s bond insurance unit would remain adequately capitalized, despite its exposure to CDOs backed by subprime mortgage-backed securities, Moody's said.”

Well, I’m just going to throw out the fact that Moody’s sucked at building and using appropriate models for its ratings of these slippery little derivatives…