Financial thoughts

The CEOs of the leading automakers were back before Congress Thursday, arguing for a larger bailout than they asked for just two weeks ago, and hoping to undo the damage they did to their case at the earlier hearings.

The executives of General Motors, Ford Motor and Chrysler LLC generally faced less hostility from members of the Senate Banking Committee than they did at their last hearing two weeks ago.

But they still heard a lot of tough questions from members of the Senate Banking Committee, and the bailout push clearly faces an uphill battle for approval, even though it is now more urgent for the automakers to get help.

"All of us up here appreciate that inaction is not an option," said Sen. Christopher Dodd, D-Conn, the chairman of the committee, at the end of nearly six- hour long hearing. "We’re also not about to write a check and just hand it over."

Dodd said members would work with House and Senate leadership in the next few days to try to get a vote. He also voiced hope that either the Treasury Department or Federal Reserve would provide stopgap funding to the Big Three.

But so far, the Bush administration has opposed Treasury becoming involved. Dodd said the Fed had not responded to a letter he sent seeking help from the central bank. The Wall Street Journal reported Thursday that it was unlikely the Fed would give any financial aid to the automakers.

The three automakers are now asking for up to $34 billion in federal loans, up from their earlier request for $25 billion in assistance. Two of them, GM (GM, Fortune 500) and Chrysler LLC, are warning they could run out of the money they need to operate before the end of the year without immediate help.

This time GM CEO Rick Wagoner, Ford (F, Fortune 500) CEO Alan Mulally and Chrysler CEO Robert Nardelli drove fuel-efficient hybrids to Washington, rather than flying in on corporate jets as they did two weeks ago.

Ford and GM have since announced they would sell their jets. And all three CEOs have agreed to cut their pay to $1 a year if they get the federal help they are seeking.

After presenting plans to Congress Tuesday that detailed how they would use loans to return to profitability, each company warned of tremendous damage to the economy if they are forced to file for bankruptcy due to lack of help.

In prepared testimony Thursday, Mulally quoted an estimate from Goldman Sachs that said the impact to the economy from failures could be up to $1 trillion.

Several members of the committee, particularly Republicans, challenged the assertions of the auto executives, however.

"I’ve read the plans and re-read the plans," said Sen. Bob Corker, R-Tenn. "I still believe there are many things that will be difficult to work out without chapter 11 [bankruptcy]."

Sen. Mike Crapo, R-Idaho, suggested that if federal loans are approved, a federal oversight board should be given the same kind of powers as a bankruptcy judge to impose changes in contracts and debt holders. None of the automakers said they would be opposed to this.

But getting approval for the loans may still be a tough sell. Even the Democratic leaders of the House and Senate who are in favor of help for the automakers have refused to commit to calling the outgoing members of Congress back next week to vote on an auto bailout.

Congressional leaders are concerned that public opinion has turned strongly against help for the automakers.

Protesters briefly disrupted the hearing Thursday, chanting "the bailout is a sell-out!" and urging Congress to use money to help the poor and food banks, rather than the auto companies.

A CNN/Opinion Research Corp. poll of nearly 1,100 Americans conducted earlier this week found 61% oppose a bailout, while only 36% support it. Even in the Midwest, home to most of the automakers’ remaining plants, 53% of those polled opposed federal help.

That was a stunning reversal of polls taken before the CEOs last trip to Capitol Hill. A poll Nov. 11 and 12 conducted by Peter D. Hart Research Associates found 55% supported federal assistance for automakers at that time, and only 30% who believed they should not get federal help.

Corker called GM’s plan "a nice first step" but he said that the company’s debt levels are unsustainable at any level of sales. He also argued Chrysler is just trying to get the loan to stay in business long enough to be bought by another automaker.

"There is no sane person who thinks that all three companies can survive," Corker said payday loans online.

Nardelli challenged that assertion, saying Chrysler would be able to stay independent if it gets the loan. He said the company’s discussion in its turnaround plan of benefiting from further consolidation could include alliances instead of an outright merger.

GM and Chrysler were in merger talks earlier this year but GM said last month that it ended discussions with Chrysler because of the need to deal with its own cash crisis. But both Nardelli and Wagoner said Thursday they wouldn’t rule out a merger in the future, even though they were not looking to do such a deal at this time.

In his prepared remarks, GM’s Wagoner acknowledged the criticism of him and his fellow Big Three executives.

"It’s fair to say that last month’s hearings were difficult for us, but we learned a lot," he said. He said the companies revised their plans since then and accelerated their cost-cutting efforts.

"We’re here today because we made mistakes, which we’re learning from; because forces beyond our control have pushed us to the brink," Wagoner said. "Most importantly we’re here because saving General Motors, and all this company represents, is a job worth doing."

United Auto Workers union President Ron Gettelfinger joined the CEOs in asking for help. He pointed to concessions that the union agreed to in the 2007 labor contract as well his promise made Wednesday that the UAW would work to give the automakers additional concessions. But he said the burden of saving the automakers shouldn’t fall on the union and its members alone.

"If the federal government can provide a blank check to Wall Street, it should be able to provide a temporary bridge loan to General Motors, Ford and Chrysler," he said.

Nardelli stressed that one reason it’s important to help the Big Three is because the companies are making great strides in hybrid and electric vehicle technology.

He argued that keeping the U.S. automakers afloat "would insure that we don’t trade our dependence on foreign oil to a dependence on foreign technology."

But Sen. Richard Shelby, R-Ala., the ranking Republican on the committee, repeated his earlier opposition to helping the Detroit automakers.

He said the increase in the money being requested by the Big Three is a sign that the automakers can’t give good assurances that federal loans would be enough to solve the problems facing the industry.

"If you made this presentation to get a bank loan, I suspect any sensible banker would systematically reject your request," said Shelby.

Mark Zandi, chief economist of Moody’s Economy.com, joined the CEOs in urging passage of the loan package. He said the economy is too vulnerable at this moment to weather the damage that would be caused by a failure of one or more of the companies.

But Zandi cautioned that car sales are likely to stay very low due to rising job losses, tight credit as well as an unsustainable level of sales from earlier in the decade. He cautioned that an auto turnaround could eventually cost between $75 billion and $125 billion.

"The automakers have come forth with a reasonable plan to restructure their business, but the $34 billion might not be enough for them to become viable again," he said.

Zandi said he would expect the automakers to be back before Congress late in 2009 for additional money.

But he said that even if the Big Three were to get $125 billion in loans and default on them, that would be cheaper for the federal government than the cost that automaker bankruptcies would cause since a failure could lead to lost tax revenue, increased Medicaid and unemployment payments.

"It’s not a close call," he said about the cost of a bankruptcy. "It’s not even in the same universe. A bankruptcy at this point in time would cataclysmic for the economy."

In his opening comments, Dodd spoke forcefully for some kind of assistance for the auto industry. He said that allowing the automakers to go bankrupt would be the equivalent of playing "Russian roulette with the economy."

Dodd added that despite mistakes made by the automakers, GM, Ford and Chrysler had all done more than banks and Wall Street firms to show they deserve federal help.  

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The fate of General Motors and the rest of the Big Three may soon be decided in Washington.

With that in mind, here’s a crazy question: Is it time to make a contrarian bet on a comeback for GM, Ford and some of their beleaguered parts suppliers? In other words, is it time to buy American?

A few brave souls are starting to think so.

Jason Tyler, director of research operations for Ariel Capital Management, an institutional investment firm based in Chicago, said that GM (GM, Fortune 500), Ford (F, Fortune 500) and other companies with strong ties to the U.S. automotive industry could make sense as short-term trades.

That’s mainly because he thinks the odds are now higher that the Big Three will get some sort of bailout from Washington.

"For investors that have a high risk appetite, there is bound to be a couple of automotive stocks that will do ok in the next few months," Tyler said.

Brad Sorensen, director of sector research at Charles Schwab, agreed that there is reason to be slightly more optimistic about the future of GM and Ford.

Sorensen cited House Speaker Nancy Pelosi’s remark late Tuesday about bankruptcy not being an option for the Big Three as a sign that the companies will likely get some form of federal assistance.

"It appears Congress is unwilling to allow the major auto manufacturers to enter bankruptcy. That provides some confidence about their future," he said. "GM and Ford have beaten up so much that once you take bankruptcy off the table, if investors wanted to play a high-risk, high-return game, it might make sense to look at the stocks."

It’s worth pointing out that both Tyler and Sorensen used the term "high-risk" to describe Ford and GM. Even though shares of Ford are down 60% this year and GM’s stock has plunged 80%, it’s probably premature to say that either company has a wide open road to prosperity ahead of them.

Tyler cautioned that even if GM, Ford and Chrysler get some loans to keep them afloat for now, it’s not as if a bailout will end Detroit’s woes.

"The Big Three may be on pace to get more capital but that won’t solve the industry’s long-term problems. It just may buy them some more time," Tyler said.

With that in mind, Tyler said the only automotive stock that his firm owns is Japanese car manufacturer Toyota Motor (TM) cash advance loan. Tyler said he likes Toyota because he believes the company has done a better job of producing cars that people want to buy and has proven it can generate healthy returns on investments.

And Sorensen said Schwab has GM and Ford both rated as a "D" on a typical A to F grading scale. That’s obviously not good. He said that a bailout may help but that loans to the Big Three won’t do anything to help stimulate demand for cars.

"The biggest problem for the automakers right now is tight credit and a deteriorating economy. How quickly that changes will tell the tale for their recovery," he said.

Still, even though GM and Ford may still be considered too risky to make long-term bets on just yet, another fund manager thinks there is a good buying opportunity in at least one of the Big Three’s top suppliers.

Ed Maraccini, a portfolio manager with Optique Capital Management in Milwaukee, said his firm owns auto-parts manufacturer Magna International (MGA) and would be comfortable buying more at current levels. The stock has plummeted 66% this year, largely due to the Big Three’s struggles.

But Maraccini said that Aurora, Ontario-based Magna has been unfairly punished by investors and that the market is overlooking that the company has broadened its base of customers and also has a healthy balance sheet — $2.4 billion in cash and just $685 million in debt.

"Magna has been successful in diversifying its business away from Detroit. The Big Three will always be important but Magna has a growing part of its revenue coming from BMW and Daimler," he said. "The company is in a stronger position to weather the downturn than its competitors."

Of course, any investment in the automotive industry — domestic or foreign — is an incredibly big gamble. So nobody should go out and put a huge amount of money into the sector, especially if you don’t have the stomach for more volatility.

But now that the Big Three have at least finally presented a plan for a recovery, the downside in many of the auto stocks might be limited from here on out.

Sure, the industry may be stuck in neutral for a long time. But that’s better than being stuck in reverse.  

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Islamic banking can no longer claim immunity from the global financial crisis now that it is hitting the industry’s main source of funding and property values in the Gulf Arab region.

The industry escaped the immediate fallout from the crisis as its ban on interest and its lack of structured products prevented it from investing in the assets that turned toxic for conventional banks.

In a report issued last week debt rating agency Moody’s said Islamic financial institutions in the Gulf showed strong resilience during the global financial turmoil, but that they are not risk-immune due to a shortage of liquid instruments and the lack of an Islamic interbank market.

The ratings agency expects growth in Islamic banking assets to slow sharply in 2009, to around 10 to 15 percent from a range of 20 to 30 percent this year.

Islamic banks now stand in the same firing line as their non-Islamic counterparts, facing a slump in equities valuations and a slump in Gulf real estate, to which they are heavily exposed.

Even though Islamic banks avoided the speculative investments and complex financial instruments that derailed Western banks, their balance sheets still show a mismatch between assets and liabilities, and they depend more on short-term maturity liabilities than conventional banks.

At the end of 2007, only 10 percent of Gulf Arab Islamic banks’ liabilities were bonds and other long-term liabilities, compared with 23 percent at conventional banks, according to McKinsey & Company credit report.

“There is a need to diversify our funding sources, we still typically depend on retail deposits,” said David Pace, chief financial officer at Bahrain-based Unicorn Investment Bank.

As liquidity has dried up in a region spoiled by high oil revenues, Islamic banks need to diversify their products and better manage the cash they have on their balance sheets.

Islamic hedging products, derivatives, liquidity- and risk-management tools are all in early stages of development.

“If derivatives are used to mitigate risks, they are viewed positively,” said Muneer Khan, partner and head of Islamic banking at law firm Simmons & Simmons.

He said practitioners and scholars are increasingly open to more aggressive hedging structures.

These would be of particular importance for project finance, a key banking business in the Gulf Arab region that still has a large number of infrastructure projects in the pipeline.

But developing new products is an arduous process, as Islamic scholars need to approve their compliance with Islamic Sharia law, which is open for interpretation.

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Wal-Mart - expected to benefit this holiday season from its deep discounting in a tough economy - had its Black Friday marred when an employee was trampled to death as thousands of people rushed through the doors at the opening of the store in Valley Stream, N.Y.

Police said the man, identified as 34-year-old Jdimytai Damour, was a temporary employee who lived in New York City’s borough of Queens.

In addition, police officials said a pregnant woman was taken to a local hospital, but was expected to be released Friday.

Video footage showed as many as a dozen people knocked to the floor in the stampede of people trying to get into the Wal-Mart store, according to Nassau County Police detective Lt. Michael Fleming. The employee was "stepped on by hundreds of people" as other workers attempted to fight their way through the crowd, Fleming said.

"We expected a large crowd this morning and added additional internal security, additional third party security, additional store associates and we worked closely with the Nassau County Police," said Hank Mullany, Wal-Mart’s vice president for the Northeast, in a statement. "Despite all of our precautions, this unfortunate event occurred."

"Our thoughts and prayers go out to the families of those impacted," he added, saying the company is cooperating with authorities in their investigation. (Full story)

Around the nation, shoppers descended upon Wal-Mart (WMT, Fortune 500) en masse in hopes of scoring Black Friday discounts. From New Jersey to Dallas, there were reports of hundreds of shoppers lining up before stores opened, looking for $2 DVDs and flat-panel TVs priced just under $400 quick loans.

At the Fairfax, Va., location, the scene was social. Hundreds queued up before doors opened at 5 a.m., with some having arrived the night before in order to be among the first to shop.

"We skipped Thanksgiving dinner," said 30-year-old Arash Habiezadeh.

Wal-Mart, which operates more than 4,100 U.S. stores and 3,100 international locations, is expected to be a big winner this holiday season as its discounts resonate with budget-conscious shoppers. The company has been aggressively courting customers by lowering its prices and introducing holiday-gift sections in stores.

"Even with the economy, you’ve got to go with the deals," said Robert Balboni of Centreville, Va., while loading his shopping cart with a 42-inch flat panel TV, a portable DVD player and a Philips 2GB MP3 player.

Wal-Mart has already shown signs of benefiting from the economic slowdown. Same-store sales, or sales at retail stores open at least a year, gained 2.4% in October, beating the company’s own forecast.

Overall, the U.S. retail sector is expected to endure one of its worst holiday seasons in years. Sales are projected to climb just 2.2%, according to the National Retail Federation, making it the weakest sales gain in six years.

– The Associated Press, CNN’s Christina Cinnici and CNNMoney.com senior writer Parija B. Kavilanz contributed to this story. 

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