Thursday, October 09, 2008

Bail out of the real sector too!

I quoted in my post yesterday (Rethinking government ownership) from an article in FT that urged government to extend its ownership to the real sector as well. The writer needn't have worried: it's already happened in a small way in the US.

Somewhat unnoticed in the current financial storm, the US has extended a $25 bn loan guarantee to the Big Three in the automotive sector- General Motors, Ford and Chrysler. The Economist reports:

The Big Three have been hit by petrol prices pushing towards $4 a gallon, by more demanding federal fuel-economy rules and by the credit crunch wrecking consumer finance. But the federal government came to their aid this week when George Bush signed an energy bill that includes $25 billion in loan guarantees to ease their pain. Supposedly this is to allow the Big Three to retool their factories to produce more economical vehicles.....

The rules are still being worked out, but the deal means that car companies—blessed with the government guarantee—should get loans with an interest rate of around 5% rather than the 15% they would face on the open market in today’s conditions.....

The logic of bailing out Wall Street is that finance underpins everything. Detroit cannot begin to make that claim. But, given its successful lobbying, can it be long before ailing airlines and failing retailers join the queue?

On a related note, Goldman Sachs is not the only firm to benefit from legendary investor Warren Buffett's munificence. GE is getting a timely infusion of $3 bn from him. It can use the money given the problems arising from GE Capital:
Most of GE’s recent problems have come from its financial arm, GE Capital, which it has belatedly decided to shrink somewhat. As well as some exposure to subprime mortgages and problems in its vast credit-card portfolio, there are growing concerns about its exposure to commercial property, which has been pretty solid so far but is vulnerable to a sharp economic downturn. Investors have also worried about what would happen to GE’s hybrid industrial-financial business model if it lost its cherished triple-A rating. Happily S&P, one of the leading rating agencies, said Mr Buffett’s investment and the decision to raise more cash reinforced the triple-A rating.

1 comment:

Deep said...

Your blog is a great read.

We're currently running a blogger contest on our website, thought I'd drop a comment to see if you're interested in joining in and sharing your thoughts on managing personal finance or investing.