We've "scene" it all--The SceneExchange Blog

Should we make like the Europeans?

Unfortunately, I'm not referring to their lengthy vacations, but rather the "cash for clunkers" plan to juice car sales. Nearly one dozen European countries are hoping to spur car owners by subsidizing drivers who get rid of old cars for smaller, more fuel-efficient ones.(average subsidy, 1,000-2,500 euros)

President Obama has endorsed a similar plan--could it work here? In Europe it has exceeded expectations, leading to about 2 million cars rolling off the lots. Still, Americans favor higher-priced, larger cars when compared to the smaller, cheaper cars that the Europeans are driving. And, the plan wouldn't be enough to keep G.M. or Chrysler from bankruptcy, though it would help keep people employed (for now, at least).

France had a program in the nineties and it produced an initial bump, but was followed by a deep plunge. How can we be sure the initial positive impact would not end up back-firing in the long-run?

What do you think would getting extra money off the sticker price be enough to get you to trade in your clunker?

--Beth

The Saga of AIG - How Can One Company Take Down the World?

No insurance company in the world is in the news more these days than AIG. These are just a few of the headlines since March 1:

• AIG to Rebrand P&C Business, Sell Stake to the Public

• China Life Drops Out of Bidding for AIG Asian Unit
• AIG Meltdown Has Roots in Greenberg Era
• AIG Has $61.7 Billion Loss - New US Aid May Not Be the Last
• Ex-CEO Greenberg Sues AIG for Fraud

Bernake Defends AIG Rescue, Says US Had No Choice

We have all read and heard about the devastation that would befall the world's economy if AIG was allowed to go under, and the billions of dollars lent/given to AIG by both the Federal Government and the State of New York. But can one company really have such an impact on world finance?

Yes, it can, says The Motley Fool's columnists, when companies are heavily diversified and become and empire unto themselves. They refer to history, specifically, ITT, a company that started down the road to becoming a huge conglomerate in the 1960's, and owned everything from The Hartford Insurance Group to Sheraton Hotels. By 1995, amid disasterous financial results and scandal, the company had to be broken up. 

As Morgan Housel puts it:

Almost everyone underestimated how complex the intertwining relationships between Wall Street and Main Street were, and more importantly, the relationships between the global economies. China needed demand from American consumers; American markets needed capital from Chinese savers; consumers relied on that capital to fund a free-for-all real estate market; banks rerouted the proceeds into a secondary credit market that couldn’t care less about loan quality. It was a disaster waiting to happen, and as soon as one end of the self-fulfilling cycle shut off, the entire house of cards came crumbling down in a historic way.

Andrew Sullivan backs this up, agreeing that AIG did well in its insurance business, particularly personal lines. But Sullivan states three rules for insurance companies, only two of which AIG followed:

Insurance is terribly simple, as long as you follow the Three Rules:

1. Price your risk correctly.
2. Invest conservatively so you can pay out claims when they come due.
3. Don't do anything else.

Sit back and collect the spread. That's it, folks.

Seriously, that is it. Ask Warren Buffett, and he'll probably tell you that if you follow those three rules, you'll be fine. You won't be the biggest or fastest grower, but you'll be absolutely fine.

The problems come when you get greedy and aren't satisfied with the spread. And your greed can lead to certain actions that aren't stated anywhere in the rules, including:

• Diversifying into fast-money proprietary trading.
• Leveraging your company 11-to-1.

Neither of these is a goal of a well-run insurance company, yet AIG embraced both with open arms.

This isn't restricted to just insurance companies, by the way. I hope General Electric is listening.

-- Chrisa

Stimulus Plan Signed, Auto Team Established

It's official, the stimulus plan has been signed and the era of the Obama economic plan starts today. The only part of the plan affecting the automotive industry is the $1.7 billion portion allowing consumers to deduct sales taxes paid on new vehicles off their income taxes. It is predicted to generate 94,000 additional units in 2009 with an average rebate of $330.

The "cash for Clunkers" program was dropped from the final version, this would have given tax breaks to those that traded in less fuel efficient older vehicles and agreeing to have them scrapped.  A similar program is in effect in Western European countries giving consumers $3,200 if they scrap their old car, it is anticipated to generate 200,000 additional units in 2009.

Now on to GM and Chrysler's problems, as of this writing no "plan" has been submitted to congress even though Nancy Polaski and Barney Frank sent a letter Friday indicating "we trust you are going to submit a plan that identifies specific steps you will be taking while you are using our money".  GM is set to get an additional $4 billion and Chrysler another $3 billion.  In fairness, the final plan is not due until the end of March.

Both companies have stated they have had issues with the UAW in accepting concessions to stay out of bankruptcy.  The UAW applauds the newly appointed  "Task Force" to oversee the restructuring plans.  The "Task Force" replaces the original idea of a single "Car Czar" (here's a good WSJ article on the topic).  The committee is made up of senior administration officials, with Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers as the leads.  Other members have not been appointed as of this writing.

On a good note, they have hired Ron Bloom, a consultant who comes from the United Steeworkers of America, Ron will be overseeing most of the financial analysis.

In my opinion, there are too many hands in the fire at this stage. The "Task Force" is not even completed—and now we have added all these extra levels of involvement? Once Washington's group dynamics come into play, you can bet the whole process will slow down. Doesn't Tim have enough to worry about? Appointing a single "Czar" would have been a better decision to get this plan moving, give direct leadership to GM and Chrysler, and single accountability to the success. So here goes another $7 billion without a plan, I wish someone would give me just $1 billion; I could create some nice jobs and boost this economy with that!

--Alan