Total Breakdown of Responsibility

All Fall Down

By THOMAS L. FRIEDMAN

I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.

Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibi lity, government regulation and financial ethics.

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic. But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be uninte nded consequences — many, many, many.

Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.

“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”

Lewis also tracked down Steve Eisman, the hedge fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them,20like Long Beach Financial, owned by Washington Mutual.

“Long Beach Financial,” wrote Lewis, “was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.”

Lewis continued: Eisman knew that subprime lenders could be disreputable. “What he underestimated was the total unabashed complicity of the upper class of American capitalism... ‘We always asked the same question,’ says Eisman. ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up,’ Eisman says.”

That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins. I used to say our kids will pay dearly for this. But actually, it’s our problem. For the next few years we’re all going to be working harder for less money and fewer government services — if we’re lucky.

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China is America's Only Banker

In order to finance our stimulus deficits, China MUST buy U.S. debt. Insecurity for us. Read this good Newsweek piece:

November 22, 2008
A Path Out of the Woods

We need China to see that its interests are aligned with America's. If not, things could get very, very ugly.

By Fareed Zakaria

For weeks the world has eagerly awaited word from the Obama transition team about the people who will head up the next American administration- the new secretaries of state and Treasury, the attorney general. But one of the more crucial positions in the Obama administration probably isn't going to be filled for months and will likely get little attention when it is—the post of U.S. ambassador to China.

Everyone knows that China is a major power and our representation there is important. But right now, we need Beijing like never before. China is the key to America getting through the worsening economic crisis. The American ambassador in Beijing (OK, this is a metaphor for all those officials who will be managing this relationship) will need to make sure that China sees its interests as aligned with America's. Or else things could get very, very ugly.

There is a consensus forming that Washington needs to spend its way out of this recession, to ensure that it doesn't turn into a depression. Economists of both the left and right agree that a massive fiscal stimulus is needed and that for now, we shouldn't be worrying about deficits. But in order to run up these deficits—which could total somewhere between $1 trillion and $1.5 trillion, or between 7 and 11 percent of GDP—someone has to buy American debt. And the only country that has the c ash to do so is China.

In September, Beijing became America's largest foreign creditor, surpassing Japan, which no longer buys large amounts of American Treasury notes. In fact, though the Treasury Department does not keep records of American bondholders, it is virtually certain that, holding 10 percent of all U.S. public debt, the government of the People's Republic of China has become Washington's largest creditor, foreign or domestic. It is America's banker.

But will the Chinese continue to play this role? They certainly have the means to do so. China's foreign-exchange reserves stand at about $2 trillion (compared with America's at a relatively puny $73 billion). But the Chinese government is worried that its own economy is slowing down sharply, as Americans and Europeans stop buying Chinese exports. They hope to revive growth in China (to levels around 6 or 7 percent rather than last year's 12 percent) with a massive stimulus program of their own.

The spending initiatives that Beijing announced a few weeks ago would total almost $600 billion (some of which include existing projects), a staggering 15 percent of China's GDP. Given their focus on keeping people employed and minimizing strikes and protests, Beijing will not hesitate to add tens of billions more to that package if need be.

At the same time, Washington desperately needs Beijing to keep buying American bonds, so that the U.S. government can run up a deficit and launch its own fiscal stimulus. In effect, we're asking China to finance simultaneously the two largest fiscal expansions in human history—theirs and ours. They will probably try to accommodate us, because it's in their interest to jump-start the American economy. But naturally their priority is likely to be their own growth.

"People often say that China and America are equally dependent on each other," says Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics. "But that's no longer true. China has two ways to keep its economy growing. One way is to finance the American consumer. But another way is to finance its own citizens, who are increasingly able to consume in large enough quantities to stimulate economic growth in China. They have options, we don't. There isn't really any other country that could finance the American deficit."

In his fascinating new book, "The Ascent of Money," Niall Ferguson describes the birth of a new nation after the cold war. He calls it Chimerica—and it accounts for a tenth of the world's land surface, a quarter of its population and half of global economic growth in the past eight years. "For a time it seemed like a marriage made in heaven," he writes. "The East Chimericans did the saving, the West Chimericans did the spending." The Easterners got growth, the Westerners low inflation and low interest rates.

Like Stiglitz, Ferguson believes that China has options. "They will certainly try to keep American consumption going, but if it becomes clear that it isn't working, they do have a plan B," he said to me last week. Plan B would be to focus on boosting China's own consumption through government spending and easing credit to their own people.

"The big question today," Ferguson said, "is whether Chimerica stays together or comes apart because of this crisis. If it stays together, you can see a path out of the woods. If it splits up, say goodbye to globalization."

In recent years the most important and difficult ambassadorial posting has unquestionably been the one to Baghdad. Over the next decade, the toughest and most crucial assignment may well be in Beijing.

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Debtor Nation

Almost two years ago, Peter Schiff, author of The Little Book of Bull Moves in a Bear Market, predicted that the financial markets were heading for crisis. At the time, he said, "We're on the verge of a major, major recession that's probably going to start by the end of this year, maybe early next year. The housing market is just beginning to unravel. We're seeing the tip of the iceberg here.”

In fact he went on to compare the economy to the Titanic, then added, “I am here with the lifeboat trying to get people to leave the ship.”

According to Schiff, investors believed asset prices, real estate prices, and stock prices would go up indefinitely. But, as you know, it was a bubble. Now, markets are correcting for these imbalances.

The housing glut with no buyers, the collapse of the mortgage & debt markets, which about to spread to commercial real estate, student loans, credit card and auto debt, the implosion of 40-to-1 leverage in financial derivatives instruments, credit default swaps with no underlying collateral, the freezing of the credit market, all have combined to bring us to the brink of an economic collapse, not just a financial crisis. For the past several years there has been a whole phony economy which is now collapsing around us--people thought we had a real economy and we didn’t. Instead, Schiff says, we had a bubble. All we did was borrow trillions of dollars from the rest of the world & we blew all the money on consumption. Now we cannot pay the bills. The asset bubbles that were inflated by reckless monetary policy are deflating around us and we are going to have to rebuild a viable economy, & it20won’t be easy to do. A lot of companies will go bankrupt & a lot of people will lose their jobs. During the deleveraging process, we have to go back to a sane economy where we actual make things.

As a consequence, we are setting up a major run on the dollar. We have to pay for our imports. We like these consumer products but how do we pay for them? As a nation we are broke. We cannot expect the rest of the world to produce all this stuff & then give them nothing in return. We have to be able to export to pay for our imports. Manufacturing goods is real wealth, but we have foolishly dismantled the industrial base of U.S. and sent manufacturing jobs overseas in a relentless race to the bottom seeking the cheapest labor markets (outsourcing), all with a misguided eye to short term profits at the expense of long-term economic gains (wealth creation). We manufactured ourselves into becoming the wealthiest nation in the world, and now we have consumed ourselves into bankruptcy.

We cannot expect people in other countries to do all the heavy lifting, nor can we expect the world to make all t he sacrifices, to do all the saving, to do all the production, and we just step up and eat the fruits of their labor. It does not work that way. The world is finding out that we cannot pay back our bills, and this phony economy is unraveling.

The dollar is rallying not because of fundamentals. The rally is temporary; it cannot last and the dollar is going to collapse. Look at the trillions and trillions of dollars that are being hoarded by foreign central banks. Importantly, China has announced it wants to do a $600 billion stimulus package. How are they going to finance it? They will start selling treasuries and they will stop lending us money. China has become America’s banker, and if it would stop buying our debt and lending us money, the United States would face disaster. The world has learned this valuable message: don’t lend America any more money.

The United States could not have maneuvered itself into a more dangerous position of dependency, completely against self-interest, and that we did it for the love of things (often junk), and spending beyond our means, is stupefying. We traded away our economic security for….nothing of any consequence, certainly nothing of comparable value. That a smart nation would do such a thing is astonishingly incomprehensible.

*****

Does Wall Street's meltdown presage the end of the American century? Many commentators have warned that the past weeks' financial mayhem signaled a major political setback for the United States as well as an economic one. "Why should the rest of the world ever again take seriously the American free-market model after this debacle?" a leading British journa list asked Niall Ferguson. This crisis, he argued, was to economics what the Iraq war was to U.S. foreign policy: a fatal blow to the credibility of American claims to global primacy

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To the New Administration: Have Past Crises Taught us Anything?

A scholar who has studied the relationship between political and financial fortunes suggests that we take a good, hard look at the aftermath of the Great Depression -- and learn.

By Jon Markman

American banking titans Citigroup (C, news, msgs), Goldman Sachs (GS, news, msgs) and Morgan Stanley (MS, news, msgs) are each down 30%-plus this month despite emergency rescue efforts by two branches of the federal government and the infusion of tens of billions of taxpayer dollars.

They are down 75% for the year despite executives' protests that business is fine. They are down despite massive job cuts and asset sales to save costs, and the personal endorsement of everyone's favorite rich uncle, Warren Buffett. They are down even though they have plenty of cash flow and millions of customers, many of whom are the envy of other banks the world over.

Investors must be nuts, right? I mean, they must not have gotten the message that the Treasury and the Federal Reserve will use all means at their disposal to recapitalize the banking system. They didn't see the memo that says the feds have never failed in their efforts to pump the system full of money until it bursts like a piñata, spilling profits in every direction.

Yet according to research by Niall Ferguson, a Harvard professor of economic history, there is ample reason for investors to thumb their noses at the conventional wisdom: All that taxpayer money is acting more like embalming fluid than artificial respiration, he says, keeping the banks looking eerily lifelike while they stiffen.

Turning Japanese

"You can stick money into every orifice of the big banks -- their mouth, their nose, their ears, wherever -- but if they can't make loans because they have to reserve against=2 0future losses, and if they won't make loans because there's a recession, it won't do any good," Ferguson says. "If they can't lend, there's no money multiplier -- they're stuck, they're zombies. It's Japan all over again."

That sounds about right. It's the night of the living dead on Wall Street these days, a few weeks past Halloween, as the horror of asphyxiated credit that has plagued Japan since a debt bubble burst in 1990 is playing out all over again here. While it's bad enough that our banks aren't lending and private fund managers are shunning corporate bonds, it's doubly concerning because U.S. policy experts have sworn they would never repeat Japan's mistakes.

Ferguson, a fellow at Stanford and Cambridge universities when he's not lecturing at Harvard, is not surprised to see this fate befall U.S. banks because he has documented a similar set of circumstances that played out in a dozen financial crises of the past 10 centuries. In his new book, "The Ascent of Money," he tells how the bipolar moods of the credit cycle -- the expansion and contraction of money and lending -- explain much of the political history that is more widely studied.

Every time governments and bankers figure out how to create money from thin air -- or out of the ground, for that matter -- they get carried away, running a thousand miles an hour until they hit a brick wall. Then the old world of finance shatters into a thousand pieces, and despite the best efforts of the smartest minds at the time, it takes many years, at best, for institutions and psyches to heal.

It happened in the 15th century after Spain discovered silver in South America and used it to finance endless wars that ended in ruin. It happened in the 1870s when U.S. banks suffered a depression after railroad and agricultural financing went bust. And it happened in Japan in the 1980s when loans on real-estate speculation went bust.

Ferguson observes that the experts of each era swear they will never repeat their predecessors' mistakes, yet they always end up making new errors of hubris and find that some old missteps are unavoidable. The U.S. Treasury and the Fed both know, for instance, that one key error made in the 1930s was the passage of a set of protectionist laws that prevented a free exchange of goods among countries, and they have overtly sworn to prevent that from happening. Yet20at times of stress, new populist leaders always emerge, and they find it politically useful to blame foreigners for the country's economic problems and try to protect jobs in the homeland.

A global race to the bottom

Ferguson says he recently appeared on a CNN show hosted by anti-immigration demagogue Lou Dobbs and found the scorching critique of free trade, bankers and immigration to be eerily similar to screeds that ultimately led Congress to pass the Smoot-Hawley Tariff Act in 1930. That law backfired by smashing world trade and catalyzing a decade-long depression.Think history can't repeat?

• President-elect Barack Obama pledged during his campaign to withdraw from the North American Free Trade Agreement until he has a chance to overhaul it.
• Leaders of the top 20 world economies met in Washington, D.C., last weekend and emerged with no firm plan to coordinate on interest-rate cuts or currency balances.
• Russia has sworn to prevent its banks from making good on obligations to the United States and the EU.
• And Ecuador's president has said he would ignore "illegitimate" Wall Street claims for bond repayments.

Ferguson says that if history is any guide, the next steps taken by countries in an attempt to revive domestic economies will be to weaken their currencies. This makes exports cheaper, boosting sales, but it cannot be done by every country at the same time, or chaos ensues -- and sometimes land grabbing.

"We will have a race to the bottom as every country tries to avoid depression," Ferguson says.

Policymakers throughout history have found few good choices once the unwinding of debt, known as deleveraging, replaces debt creation as the central theme of global trade. Debt buildup is a raucous party that makes borrowers happy and rich on paper; debt unwinding is a wake that leaves ex-borrowers bummed and truly poorer. Because the Fed has probably not figured out how to outlaw the credit cycle, we might think of the last 25 years as rock 'n' roll and the next decade as Mahler.

Japan has been able to withstand the past 18 years of extremely slow growth or contraction without social unrest because it was already a homogenous, orderly welfare state in which people were avid savers and accustomed to living in small apartments. Ferguson expects the transition to a credit famine in the United States to be a lot harder.

Although there won't be Hoovervilles, a dust bowl or ex-executives selling pencils, he says, there could well be a lot of angry nationalism and disorderliness as Americans shake their fists at Wall Street and Washington, battle each other, bristle at the world and learn unhappily to save instead of borrow.

Ferguson concludes that "unless we're careful, it'll be the late 1930s re-enacted," by which he means a path to world war. Yet he's optimistic that policymakers will avoid that mess by learning from history that they must cooperate instead of isolate.

"We have to stare at this possibility and say, 'Oh, my God, we cannot go there,'" he says. Let's hope the market gods are listening.

Fine print

GEOPOLITICAL CONSEQUENCES OF THE CREDIT CRUNCH:

"Does Wall Street's meltdown presage the end of the American century? Many commentators have warned that the past week's financial mayhem signaled a major political setback for the United States as well as an economic one. 'Why should the rest of the world ever again take seriously the American free-market model after this debacle?' a leading British journalist asked me [Furgason] last Thursday. This crisis, he argued, was to economics what the Iraq war was to U.S. foreign policy: a fatal blow to the credibility of American claims to global primacy..."

To learn more about Ferguson's views, visit his Web site. He's a prolific and good writer; check out his journalism. Learn more about Japan's post-1990 depression here and here and here

Recommend Niall Ferguson's new book: The Ascent of Money

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Cannot help but wonder....Had Al Gore Been President these last 8 years...

May be of Interest, this Interview with Al Gore
November 23, 2008
Fareed Zakaria GPS

ZAKARIA: We've all talked endlessly about the historic nature of Barack Obama's election. But there was another historic election not so long ago -- the year 2000, the election in which Vice President Al Gore was declared the president-elect, at least for a while.

There are many who wish that Al Gore's temporary victory had lasted longer. But as we all know, the story ended differently, and for the former vice president, perhaps happily. He got busy saving the planet, making an Academy Award-winning movie, and then winning a Nobel Peace Prize in the process.

And he's not done yet.

Al Gore, welcome.

AL GORE, FORMER U.S. VICE PRESIDENT, NOBEL PEACE PRIZE WINNER: Well, thank you, Fareed.

Winston Churchill once said, early in his career after he lost an election, someone said that was a blessing in disguise. He said, "Damned good disguise."

(LAUGHTER)

ZAKARIA: Let me ask you about this election. Do you think -- you're a student of American politics, obviously -- is this a great realignment? Do you think that historians will look back on this election as the moment that the era of Republican supremacy ended?

GORE: Well, I think it is a realignment. But I'm not sure that it falls neatly into the categories that we call Democratic and Republican.

I think it's partly a generational realignment. This was never a close election among voters who were under 30. It was a landslide among the younger voters.

And I can barely contain my excitement about his election. I just think that it's a fabulous new development.

And you know, for those in your international audience, which is quite large, I want them to know that right after the election, Republicans who had campaigned strongly against Barack Obama were interviewed everywhere in the United States right after the election, saying, "I'm so proud of my country."

You know, regardless of the differences over issues and politics, this was a watershed election that really just gave every American a feeling of great pride in our nation's ability to transcend our past and redeem the revolutionary promise of our Declaration of Independence that every human being is created equal. And it's electrifying to redeem that declaration.

ZAKARIA: Do you think that Biden should maintain the vice presidential structure that Dick Cheney has put in place? You know, a lot of people feel Cheney has effectively changed the nature of the vice presidency forever, that these institutional aggrandizations of power never shrink.

How should Joe Biden think about the vice presidency? GORE: Well, the -- I mean, I don't think that's going to happen, because that's really a function of what the president wants.

And I hesitate to comment on Bush and Cheney, because I've recently begun to fear that I'm losing my objectivity on them.

(LAUGHTER)

But actually, if you look at the history of the vice presidency -- it's a very arcane field of history -- it was Walter Mondale who really elevated the office to what it is now. And I learned a lot from him in designing a partnership with President Clinton.

And I think Dick -- I think it's good to have an active, powerful vice president who can help the president carry a lot of the burden.

ZAKARIA: You just don't think that person should be Dick Cheney.

GORE: Well, not only that. I think that the nature of the delegations in this present administration were unhealthy for the country.

But there's a way to do it right that will give Joe Biden a huge amount of power and influence, which I think he should have. And one of the many things that I admire about President-elect Obama is that he is comfortable and confident in sharing the limelight, sharing responsibility.

And I'm certain that you'll see Joe Biden playing a very active and productive role. He's a terrific guy. He has an enormous capacity, as you know, and I think -- not only in foreign policy, which is one of his specialty areas along with law enforcement and justice and so forth -- I think he's going to have a lot of influence across the board.

ZAKARIA: You worked with Hillary Clinton for eight years.

GORE: Yes.

ZAKARIA: Do you think she'd be a good secretary of state?

GORE: I think she'd be very good at it. I don't know what the current status of that is, but I think she would be very effective. Sure.

ZAKARIA: Let me ask you about what's going on in Washington right now. You're watching the auto industry ask for a massive bailout.

This must tug at different sides of you. I mean, as a Democrat, you must have some sympathy for the unions, and for the plight of people who are going to be laid off. On the other hand, as the world's foremost environmentalist, you must look at the U.S. auto industry as having been too late and insufficient in its climate -- in its efforts on energy.

Would you bail out the auto industry?

GORE: Well, I think the whole industry should be transformed. It's really tragic that General Motors, for example, allowed Toyota to get a seven-year head start on the hybrid drive train in the Prius that is now positioned to really be a dominant feature of the industry in this century.

I personally believe that the U.S. auto fleet should make a transition as quickly as possible toward plug-in hybrid electric vehicles. I think that the twin problems of the climate crisis and the economic crisis can both be addressed by investing in a transformation of our energy and transportation infrastructure to focus on renewable sources of energy.

And at the same time, our security vulnerability to a potential cutoff of the world's access to Persian Gulf, Middle East oil should be addressed, at long last, without delay. And shifting to electric vehicles instead of petroleum vehicles is the best way to do that.

ZAKARIA: If you look at the situation right now with oil prices down to $50 a barrel -- the lowest in two or three years -- are we back to a familiar cycle where once the price of oil gets back down, the impetus for these alternate energies will dissipate?

GORE: Well, I don't think we're going to fall for it this time.

And I was very impressed with the language used by President- elect Barack Obama in his "60 Minutes" interview. He used a phrase that I hadn't heard before, that I think summed it up really well.

(BEGIN VIDEO CLIP)

PRESIDENT-ELECT BARACK OBAMA: We go from shock to trance. You know, we -- oil prices go up, gas prices at the pump go up, everybody goes into a flurry of activity.

And then the prices go back down, and suddenly we act like it's not important, and we start filling up our SUVs again. And as a consequence, we never make any progress.

(END VIDEO CLIP)

GORE: We cannot allow ourselves to be vulnerable to that anymore. We should learn from history.

ZAKARIA: When you look at the challenges facing the United States, particularly in foreign policy -- you've studied some of these issues for three decades. Iraq -- you warned early on that the war would be, would probably be very difficult, very expensive and were against it.

Do you think that the United States should get out as fast as President Obama had -- President-elect Obama -- has campaigned suggesting?

GORE: Well, I warned that the invasion would go smoothly, and then the aftermath would be difficult. And I like the phrasing that Barack Obama has used. We should get out as carefully and thoughtfully as we got -- as the ...

ZAKARIA: The opposite ...

GORE: ... as the opposite was true in going in.

And I think that, in his discussions with General Petraeus, when he was there -- Joe Klein had a great article in TIME Magazine that captured part of the dialogue. I'm sure you saw that. I thought it was very impressive.

And I think that people should have confidence that he is going to fulfill his pledge to get American troops out of Iraq as soon as it's feasible to do so safely -- and that he will do it in a very thoughtful and careful manner.

ZAKARIA: What about Afghanistan? A war that seems to be going badly, the Taliban seem to be regrouping. What should we do there?

GORE: Well, I think we have to play the whole keyboard. I think that, first, we need more military personnel there. And one of the concerns that I raised back when I opposed the invasion of Iraq was what it was going to do to our efforts in Afghanistan.

We should have learned from the aftermath of the Soviet experience in Afghanistan. We should have been all over that situation and make sure that transition went well.

And great nations don't go from one half-finished task, lurching to something else. We should have stayed there, and we should have done it right at the time. It's going to be more difficult now.

But one of the elements we need are more troops on the ground. But we need more than military activities. I think we have to have activities across the board. We have to open dialogues in places that might feel uncomfortable.

But we have to be clear-eyed about the nature of the government that we're dealing with there. We have to pay very careful attention to what's going on in the border areas and the tribal areas, and our relationship with Pakistan. It's an immensely complex problem.

But I do think that it's not an insoluble problem. I think that if we try to solve it only with military force, it might be insoluble. But I do think that, if we use all the tools available, this can be resolved.

ZAKARIA: And we will be right back with Al Gore.

(COMMERCIAL BREAK)

ZAKARIA: And we're back with Al Gore.

One of the solutions to the problem of climate change and the problem of CO2 emissions has often been presented as clean coal, that what we should be doing is essentially making coal emit many fewer -- you know, much less CO2 -- through various ways of capture and sequestration.

But in a "Wall Street Journal" article, you seem doubtful. You don't think this is a good idea?

GORE: Well, I think if they can do it, it is a good idea. But what I am greatly concerned about is that they talk as if it's already here.

And as a practical matter, what many in the industry are proposing is to go forward with the construction of thousands of new coal-fired generating plants, on the assumption that they will at some point be retrofitted with this technology that does not yet exist.

There is not a single, large-scale demonstration plant anywhere in the United States. There is one in the North Sea that the Norwegians are running. There's one in the Algerian desert that BP is running. And they show some promise. But it is not anywhere near a stage that justifies building new coal-fired generating plants on the promise that it'll soon be available.

If the industry can make good on its promise, then I'm all for it. But it's beginning to resemble something that the auto companies did for years.

Every few years they would show the cars of the future that run on hydrogen, or whatever, and it's going to be magical and pollution- free. And they put them in the showroom, but then they never build them. And you just keep cranking along. And it's led to a disaster for that industry.

We cannot allow an illusion to be the basis of a strategy for human survival. We are really facing a very serious existential threat to the future of human civilization.

And I know that language sounds shrill and dire, and people instinctively say that that can't be so. But it is so.

And the scientific community, the IPCC -- the Intergovernmental Panel on Climate Change ...

ZAKARIA: Which are thousands of scientists.

GORE: Three thousand of the very best scientists in the world from 130 countries, who have studied this for 20 years, and have issued four unanimous reports, the last of which said the evidence is unequivocal -- unequivocal. We have to act.

ZAKARIA: One of the key objections that President Bush has always had to the Kyoto Protocol, and to all that kind of climate change activism, was you're leaving out China and India. And if you leave out China and India, you're not going to solve the problem.

GORE: Yes.

ZAKARIA: You started to work on this issue, to try to convince the Chinas and Indias of the world that this is their problem, too.

GORE: Yes. I just came back from China two days ago. And as you know, I'm on my way to India after the holiday, and looking forward to it.

China and India, and other developing countries, all have exactly the same excuse for not moving on the climate crisis. Their common excuse is, "Wait a minute. The United States hasn't done anything. It's the wealthiest country in the world, the natural leader of the world. Why doesn't the U.S. act?"

And I think that when the U.S. acts, it will be by far the most effective way to improve the odds that China and India, and other smaller developing economies, will also act. They know that it's in their own interest to tackle this problem.

ZAKARIA: What about India? Talk about India, where you're going, and what you're going to do.

GORE: Well, I'm very excited to be hosting Live Earth India on December 7th. And all of the greatest stars of Bollywood are going to gather in your hometown, Mumbai. And a lot of the greatest Western artists are coming over to join, as well.

You know, the Indian government now subsidizes kerosene -- probably the dirtiest fuel you can use. But they need alternatives. And these solar lanterns and solar cookers are very cost-effective. And we're doing everything to raise money for it -- and to build awareness.

ZAKARIA: Let me ask you about this election, finally. If you had one piece of advice to Obama, to consolidate these forces of realignment, what would it be? How should he govern? From the center, from -- you know, you hear all this advice given to him.

GORE: Well, again, you know, just as with the categories that we label Democratic and Republican, I think center, left, right -- you hear this a lot. It's almost a cliche to say we need to move forward, not left or right. But in fact, that is the case. And I think he has an awfully good, innate sense of that.

I feel, you know, me offering him advice doesn't feel right, because he's doing so well. But if I did offer him advice I would say, make more of the thoughtful, long, expository speeches, because in this new media age, people are listening.

Maybe they don't get through all of the television and radio outlets. Maybe you'll still have only a little sound bite. But people are downloading these speeches now, if they're good ones.

You know, it's remarkable that the paid advertisement, the 30- minute paid advertisement that he had four or five days before the election, was one of the highest-rated programs of the year.

And I think people are now hungry for a thoughtful treatment of how we can solve the problems that we face. And I would go back to that strength. And I'm sure that he will without me advising him to do so.

ZAKARIA: And if you want a thoughtful discussion with Al Gore, you can download this one. Al Gore, thank you very much.

GORE: Thank you.

ZAKARIA: A pleasure.

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Next Steps for the Auto Bailout

Today, Congress told the Detroit CEOs to return in the first week of December with business plans that show how the bailout money would be spent and how their businesses would return to profitable viability. Hopefully, the bailout would be conditioned on demonstrating such viability. Most likely, the $25 billion honey pot at the Department of Transportation that was previously approved to help the auto companies meet fuel efficiency standards (one does wonder why we have to pay them to do that, isn’t it their job to produce fuel-efficient vehicles?), would be stripped of those regulatory green requirements and just handed over to them, providing them a bridge to Obama’s administration and a Congress that awaits to give out more taxpayer billions.

Here are two other suggestions to the unashamed CEOs: First, as a measure of immediate & ongoing conservation of your precious but dwindling cash reserves, without delay liquidate your private corporate jet fleets and return to Washington aboard commercial airline flights. Then apply this rule of tightwad frugality to all corporate decisions up and down the management line. Second, lead by accepting $1 in yearly salary, the way CEO Lee Iococca did the last time Chrysler was bailed out. (Oh, and third, cancel the dividend & bonus payouts until return to profitability.)

The 1980 Chrysler bailout offers an historical context for the current Detroit dilemma. Back then, Chrysler’s CEO Lee Iacocca, known as a product innovator responsible for the Ford Mustang, had been brought in to help fix Chrysler in 1978. He lobbied Congress for a bailout, and in January 1980 $1.5 billion bailout in federally guaranteed loans was signed into law. Chrysler repaid them three years later.

``Lee Iacocca had a clear plan to return that company to profitability,'' said Peter Morici, a business professor at the University of Maryland. ``These guys do not.''

Senator Charles Grassley, an Iowa Republican, said in a letter yesterday to the three auto leaders that they should follow Iacocca's example and cut20their own pay. Iacocca took a $1 yearly salary and his executives as much as 10 percent salary cut-back after the bailout.

Current Chrysler CEO, Bob Nardelli, alone among the three, said he would accept $1 per year in salary if it would help Chrysler obtain its $7 billion share of a proposed $25 billion automaker rescue package. Nardelli said he would make that gesture in response to a question from Sen. Jon Tester, D-Montana, who said sacrifice by Lee Iacocca in 1979 helped Chrysler Corp. win a $1.5 billion loan guarantee.

Looking Back at the 1980 Chrysler Bailout
[Posted By Barry Ritholtz On November 20, 2008 @ 9:00 am]

The current no-strings-attached bailout demands of the Big 3 stand in stark contrast to the 1980 Chrysler deal. Regardless, the subsequent decades post-bailout reveal the deal wasn’t particularly good for either the industry or the firm’s employees.

In the 1950s, Barron’s described the Detroit automakers as the big two and a half – with Chrysler, the perennial sales laggard, as the half. When the oil embargo hit, Chrysler suffered the most of the Big Three.

By the mid-seventies, the company was hemorrhaging cash. Chrysler lost $52 million in 1974, and a record $259.5 million in 1975. As smaller, less expensive and more fuel-efficient from Japan and Europe gained increasing market share in 1970s, Chrysler found itself in an ever-deepening hole. It looked like they might have to declare bankruptcy.

As soon as the energy crisis ended, it was back to business as usual. 1976 was a hugely profitable year: the company’s net income was $422.6 million. 1977 was profitable, but less so: $163.2 million net income. By late 1978, they were running in the red again, losing $204.6 million. The fall of the Shah of Iran and a new U.S. Oil embargo sent prices higher once again. By 1979, Chrysler was looking at its first billion dollar annual loss.

Management decided it was time to visit their Uncle Sam

The Chrysler bailout was everything Lockheed was – its predecessor in the bailout timeline by 9 years – and more. It was bigger and more expensive. Lockheed had loan guarantees worth $250 million dollars; Chrysler’s were for six times that amount,. The rationale for the rescue of Lockheed, the country’s biggest defense firm, was national defense. With Chrysler, it was the economy, and saving 200,000 jobs in the U.S.

But the big difference between the two was that the Chrysler rescue package was much more complex. The terms of the Chrysler loan guarantees required an additional $2 billion in commitments or concessions from: “its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments. ”

The Chrysler bailout of 1980 was not quite a pre-packaged bankruptcy reorganization. It left the company with the same management team, the same union contracts, the same pension obligations, and the same health care coverage ; all the bailout did was buy the company a few more years. Indeed, the pre-bailout industry looked almost identical to the post-bailout industry. None of the Detroit automakers, Chrysler included, received any long-term benefits from the bailout.

Chrysler survived, but a slow necrosis gradually handed over the dominance of the U.S. automobile market to the Japanese, Koreans, and Germans. In 1980, Detroit had a ~75% market share of autos sold in the U.S. For the first time ever in May 2008, that number slipped under 50%, and it is now down to ~48%.

You read that right, the majority of automobiles sold in the USA are no longer vehicles made by U.S. companies.
The UAW.’s membership suffered even more than Detroit’s market share. It peaked in 1979, a year before the bailout, when the Union had over 1.5 million dues-paying members. 25 years later, UAW membership had fallen by two thirds — down a million to 538,448 (2006).

And, year-over-year totals are still falling. From 2006 to 2007 (the most recent full year of data ) the union saw its membership decrease yet another 14% –down another 73,538.
~~~
Had Chrysler been allowed to fall into bankruptcy, it’s not too difficult to imagine a vulture investor obtaining all of the aforementioned assets, and putting them to good use. Just picture a refurbished Chrysler Corporation – newly recapitalized, minus the onerous labor contracts, pension obligations, and healthcare overhead. Its new owner would have been free to pursue new manufacturing methods, new automobile designs, even new markets – with all the advantages Chrysler itself had, but without the defunct company’s baggage.

A post bankruptcy Chrysler would have been as leaner, meaner and more cost-efficient, and maybe even more fuel-efficient machine than the rest of Detroit. Surely, they would have been willing to take chances on some new designs that broke free of the stodgy boring cars put out by Detroit in the 1970s and 1980s.

Not only would Chrysler have been much more competitive in the U.S. and world markets, its mere existence would have forced GM and Ford to streamline their own processes, improve their vehicles in terms of attractiveness, mechanical reliability, and fuel efficiency.
~~~
Down Below 50% “Detroit 3”U.S. Market Share 1986 –June 2008
(Sales of Detroit 3 N. American “owned”production)



Source: Center for Automotive Research







Article from The Big Picture: http://www.ritholtz.com/blog Copyright © 2008 The Big Picture. All rights reserved.

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Auto Bailout Hearings A Public Relations Car Wreck

"Flying in on my private jet plane to get my Auto Bailout"

The House cancelled a planned vote on the auto bailout today, and the Senate is putting off tomorrow’s vote as well. It was revealed during the bailout hearings before The House Financial Services Committee (chaired by Barney Frank) that the three CEOs from GM, Ford, and Chrysler turned up on private jets! This might have been the strongest argument for why the Big Three should not be given a blank check for $25 billion.

A public relations car wreck, somehow this shocking revelation came to crystallize the 40 years of mismanagement and miscalculation which, combined with the economic downturn, has reduced the 17 million vehicles the industry used to sell per year down to 10 million per year, while production just keeps on going, glutting miles of parking lots with new cars standing20unsold all over the country. Meantime, both Honda & Toyota are building new plants in the U.S., and in Alabama three foreign automakers profitably employ 27,000 people, while Volkswagon is building a plant in Chattanooga.

The U.S. auto companies are facing an immediate financial debacle. GM is desperate, with a current cash burn rate of $6.9 billion per quarter it could run out of cash by year’s end. The CEO fat cats who have run the auto companies into the ditch flew into Washington to ask for a $25 million bailout in individual private luxury jets, disembarking with tin cups in their hands, as if showing up at a soup kitchen in a tuxedo. It looked suspicious; have we seen the future? Couldn’t they have flown on commercial flights, or at least jet-pooled? Are these the right people to make the hard decisions about downsizing and restructuring the bloated, dying auto industry?

Each Gulfstream and Lear jet costs $35 million, and GM operates a fleet of 8 private jets. The Detroit-Washington-Detroit roundtrip cost on these gas guzzlers is $20,000, compared with $300 on a commercial flight. Should a company on the verge of bankruptcy ditch the jets as part of its dire cost-cutting measures, along with the wasteful carbon output of using the THREE jets? While not illegal, it might be unethical, and certainly flies in the face of common sense. It just looks bad.

This extravagance is incongruous for the CEOs that claim they are running out of cash, and they look tone deaf. This is how they live while talking about the sacrifice of closing plants, dealerships and laying off workers, never thinking of personal sacrifice or thriftiness. Some members of the House Committee were irate with the arrogance of these CEOs (with $30 million annual salaries) embarrassingly showing in televised hearings beamed around the world that they just don’t get it. Why reward the guys who have been brain dead on what they are supposed to do?

At the hearings it was clear that the managers are leadership failures, with no plans to restructure their inefficient, failing companies, no plans for transformation in a pre-packaged bankruptcy, no plans for the economic downturn, no plans for anything except getting the $25 billion on which they focused like a laser. Their business model is a failed model and it is not going to cure the systemic problems----the bloated payrolls and work force, the 7000 dealerships that would cost $1 million per dealership to close, the lack of efficiency and innovation, the redundancy. But if they could get it now, the $25 billion could be a bridge to Obama’s February democratic administration & a Congress that will then give them more taxpayer billions, estimated by some like Senator Richard Shelby to go as high as $200 billion or more on the backs of taxpayers, with discussions swirling around the political considerations of jobs and union jobs rather than the viability of the business model.

Without a viable business plan, the Big Three auto companies have become just a pension obligation masquerading as a car business; a financing industry rather than a manufacturing industry, turning a marginal profit while charging high prices.

The public is being asked to invest in something it has already decided by its purchasing power is not worth buying---both the cars and the companies’ stock.

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Bail Out Auto Companies?

U.S. auto executives warned Congress on Tuesday that their industry was teetering on the brink of disaster as they pleaded for a $25 billion aid package despite political opposition to another multibillion-dollar government bailout in the absence of giving any evidence or assurance that they have a viable business plan for the future; and without requiring a game plan that shows that they are not just buying time and what they are going to do to become competitive within their industry. Taxpayer dollars sho uld only go to companies that can show viability and a willingness to make tough decisions to restructure themselves so that they can be successful for the long term.

The hearings came a day after Senate Democrats proposed to bail out the ailing industry with $25 billion in loans.

Rick Wagoner; CEO of GM, Robert Nardelli, head of Chrysler (owned by private equity firm, Cerberus), Alan Mulally, CEO of Ford Motors, Ron Gettelfinger, head of the United Auto Workers union; Michigan Sen. Debbie Stabenow and economist Peter Morici all testified on Tuesday.

For the first time, the CEOs confirmed how much they are asking from the government. General Motors is seeking between $10 and $12 billion, Ford is seeking roughly $8 billion and Chrysler would get $7 billion. "We are willing to provide full financial transparency, and welcome the government as a stakeholder -- including as an equity holder," Robert Nardelli, the head of Chrysler, told lawmakers. He said that without immediate financial help, the company may lack sufficient capital to continue operating and that Chrysler looked at a prepackaged bankruptcy and other alternatives before deciding to apply for the federal funds.

"We are in a very fragile situation," he said.

Lawmakers complained that many of the industry's problems were self-made, citing their past reliance upon gas-guzzling trucks and SUVs and opposition to tougher fuel efficiency regulations, and intransigent labor unions. Sen. Richard Shelby, an Alabama Republican and a member of the committee, has called the automakers "failed models" and said they should file for bankruptcy. “A lot of people think you've already failed, that your model has failed, that you're here to get life support," he said.

Criticizing the bailout, Kentucky Republican Sen. Jim Bunning said the proposal "is not a serious one." "Detroit's basic problem is that they created a business model that doesn't have a snowball's chance in hell of surviving in a global economy," said Sen. Lindsey Graham, another Republican from South Carolina. Legislation under consideration by U.S. lawmakers would provide funding on top of $25 billion of loans approved earlier this year for the companies to improve their technologies and create a line of more fuel-efficient vehicles. (What, we have to pay them to compete by instituting good business practices, something they needed to be doing to survive as part of their business plan over the last four decades??)

The part of the plan that seems to have gained the least traction is the idea of using a portion of the $700 billion Troubled Asset Relief Program (TARP) for the automakers. Treasury Secretary Henry Paulson said during a House Financial Services Committee hearing that while it would not be a good thing to let an automaker fail, the $700 billion fund should not be used to prevent such a failure.

“The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization," Peter Morici, economist at the University of Maryland, testified. "It would be better to let them go through that process and re-emerge with new labor agreements, reduced debt and strengthened management.” Bankruptcy, because of its transparency and its oversight, as a system, requires that management justify itself and its business plan. Ironically, that type of scrutiny generally doesn't exist outside of the bankruptcy process. And the one thing both opponents and proponents of the bailout agree on is that bad management has brought the auto industry to this point. They will either reemerge with the company strengthened, with stronger balance sheets and lower labor costs or they'll emerge as reorganized companies with new ownership, new management and they'll go forward.

And critics of the automakers say Chapter 11 is a reality whether they get taxpayer loans or not. They believe the industry is so badly managed that it's a question of bankruptcy now or later. Morici added that, "I would suggest if you give them $25 billion this month, they will be back." " I don’t see what’s in the history of the automakers that leads anyone to believe that a $25 billion dollar loan isn’t just throwing good money after bad," says Karen Finerman.

The government would take warrants for shares in exchange for aid, which would come with limits on executive compensation and a prohibition on the payment of dividends. But Congress should impose strict conditions on these loans, maybe insist that management be turned out. So far, however, there hasn't been any meaningful conversation whether any of that is going to happen---Congress is just talking about giving them the money.

Taxpayer dollars should only go to companies that can show viability and a willingness to make tough decisions to restructure themselves so that they can be successful for the long term.

The problem is that these CEOs say they need cash urgently, that their cash flow has dried up, but it is not the responsibility of the United States Congress or taxpayers to provide cash flow for a company that is either failing or is very badly distressed. For years GM, enabled by Michigan legislator-advocates, has lobbied Congress to fight fuel-efficiency standards instead of making the cars Americans want to buy. It made gas guzzlers instead, building the SUV on a truck bodies exempted from fuel efficiency standards. It has clung to a non-viable business model while its Japanese competitors in the U.S. have built profitable, lean, enterprises and eaten Detroit’s lunch. GM has 8 brands while Toyota has 3 and Honda 2. GM had an unbelievable 7000 dealerships in the U.S., while Toyota has 1500 and Honda 1000. And the compensation differentials just strangle: GM pays its workers 65% above what Toyota and Honda pay ($77 per hour compared to $44), and it pays its workers salaries even when it must idle a plant. Moreover, Detroit’s Big Three are crushed by the legacy burdens of healthcare & retirement pensions.

If taxpayers give GM or the others money now, that money will disappear by February. What we need to do here is a prepackaged, government sponsored bankruptcy (GSB) that requires following, as preconditions to receiving taxpayer funds:

1. Let GM merge with Chrysler, consolidation will reduce costs by billions.

2. Then bankruptcy will allow GM & Chrysler to close plants, eliminate brands, shed dealerships.

3. Only managed bankruptcy can allow restructuring and reducing of union contracts.

4. Kick out management, Board of Directors and Rick Waggoner.

5. The new company needs to agree to the imposition of new gas mileage standards.

Then, and only then, can we, the taxpayers & the government, agree to put up money to make sure that Detroit actually emerges from bankruptcy. Bankruptcy is a highly developed system that has existed a long time in this country for the purpose of restructuring troubled companies. It would be foolish to help them outside of this venue.

On behalf of the American people, we need to bring into a room all the smart people who know more about cars than anybody else in the world and try to figure out the least wasteful most efficient way to solve the problem. It is disappointing to not have seen a more sophisticated response from the Senate hearing today, other than “Give us the money.” It is like these auto companies are crack addicts & the Congress is giving them money and saying, “Don’t use too much of the crack,” without even trying to curtail the behaviour at all.

Bottom line: Any solution must lead to long-term, sustainable viability of the automobile businesses.

The Detroit CEOs will testify before the House Committee tomorrow.

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Interview with Tom Friedman

Recommended Reading:
Hot, Flat and Crowded by Tom Friedman, who was interviewed tonight on Larry King:

KING: We stay now with Thomas Friedman, the "New York Times" columnist, three-time Pulitzer Prize winner, author of the new bestseller ,"Hot, Flat and Crowded, Why we Need a Green Revolution and How It Can Renew America." Specifically, Tom, what is a green revolution?

FRIEDMAN: Well, the basic argument here, Larry, is that the world is getting hot, global warming, flat, the rise of middle classes all over the world, from India to China, from Russia to Brazil, and crowded, over population. The world has gone from 2.8 billion people when I was born in 1953 to 9.2 billion by 2053. So in that kind of world, Larry, whoever is the leading country in producing clean power, clean energy, clean water, all these clean technologies, I believe is going to have a huge competitive sustainable advantage.

I call it the ability to out-green your competition. And I believe that country has to be the United States of America. We need to give birth to this new industry. We need to own this new industry. I call it ET, energy technology. As Jeffrey Immelt, the head of GE likes to say, Larry, if you want to be big, you have to be big in big things. The biggest thing coming down the road is ET. I believe in the next administration, in the next eight to 12 years, we need to make sure we lay the foundation for that industry. That's what the book is about.

KING: Who is ahead now?

FRIEDMAN: Who is ahead now? Different countries have different slices of it. One out of every three wind turbines of the world are made and sold from Denmark. Japan is great in energy efficiency. Europe has a lot of effective energy efficiency products going. We are the laggards. We are not in a leadership position. We need to be. Larry, the chance of our kids enjoying the standard of living we had if we don't own this next great global industry, ET, the way we owned It, information technology, I would say it is about zero.

KING: How did we get in this fix?

FRIEDMAN: Well, because year after year we never put in place the price signals we needed, a gasoline tax, a carbon tax, that would have stimulated the innovation around this industry. That's where the problems of the auto industry that we were just talking about meet the whole question of the energy technology industry. What all of the countries that are leading this industry, Larry, today have in common, whether it's Japan, Denmark, is that they put in the price signals. They have given a long-term fix durable price signal.

I was just in Houston today. I saw gas at 1.77 a gallon. That's going to kill the wind, solar and cellulosic Ethanol industry, unless the next administration is ready to put a price signal in.

KING: Let's say all your ideas are put in place, what are we going to look like?

FRIEDMAN: What we look like? What would we look like in 20 years? We have something I call in the book, Larry, the energy Internet. It is when IT meets ET. We would have a lot of clean generation of electrons, going into a smart grid, going into a smart home, where all your appliances would basically day trade automatically for electrons for you, fed into a smart car that would charged at night with electricity, and drive 100 miles on electricity and never have to fill up with gasoline. That's what it would look like.

I know it sounds like science fiction, don't fetch it too far. All these technologies exist today, Larry. They just don't exist at the speed, scope and scale we need.

KING: Will red China go -- You've give a lot of attention to China in your book because They're the largest. Will red China become green China?

FRIEDMAN: I think the Chinese are going to have to move down this road. They're waiting for us. They're really watching us, kind of hiding behind us now. When they see us move, I believe you'll see them move. I used the image in the book -- To me, China today is like the movie "Speed," where the terrorists take over a bus and if it goes under 50 miles an hour, it blows up. China is kind of like that bus, Larry, if their economy grows under eight percent, it could blow up. Their big challenge is they've got to change their engine from a dirty coal burning engine in that bus to a clean electric hybrid while the bus is going 50 miles an hour.

It's the greatest show on Earth. It's going to be a huge challenge. They are following us. And I think when we lead, they will follow.

KING: Suppose we become more hot, flat and crowded, what's the end result?

FRIEDMAN: Well, it's not a world you particularly want to live in. You know, small changes in global average temperature can have a huge effect. I call that chapter in my book "Global Weirding." It's a term kind coined by Hunter Lovins from the Rocky Mountain Institute. We're not going to have global warming. Global warming sounds so nice. To a kid from Minnesota, Larry, global warming, that sounds like golf in February. That's not what we are going to have. The hots are going to get hotter. The dries are going to get longer. The wets are going to get wetter. The snows are going to get thicker. The most violent hurricanes could become more numerous. That's what it will look like.

KING: Two part question: how did the Bush administration do in this area and what do you expect of the Obama?

FRIEDMAN: I think we wasted eight years, Larry. We had a president who could barely get the word c -- c-- conservation out of his mouth. He basically was uninterested in a gasoline tax. He was uninterested in putting in place, I believe, the real regulation standards and price signals that could have launched a green revolution. He should have put a Patriot Tax in place right after 9/11. Gas was 1.69 that morning a gallon. And if he had done that, I think we'd have been in a different place today. And by the way, the auto companies would have been in a different place today.

I have high expectations for the Obama administration. President Elect Obama has talked about this issue a lot. But the key thing will be whether he is ready to put in a price signal. You are just not going to get a clean resolution if clean fuels are so expensive and dirty ones continue to be so cheap. You have to find a way to work that problem, make the dirty fuels more expensive and then give people a break on payroll tax, make it revenue neutral, but get people focused on working, cut taxes on working, and get them focused on using fewer dirty fuels and raise taxes on those.

KING: If you can get people like T. Boone Pickens coming your way, is it possible to turn this country around?

FRIEDMAN: Boone Pickens is a friend of mine and I think Boone is really typical of the new coalition around this issue. It's people who understand green is not liberal, tree hugging, sissy, girly man, unpatriotic, vaguely European. Green is geo-political, geo-strategic, geo-economic, patriotic, capitalistic. Green is the new red, white and blue. And there are plenty of conservative patriots like Boone Pickens who understand that, who don't think it's not smart to be sending 700 billion dollars a year, brought every year, to people who have drawn a bull's eye on our back. God bless them.

KING: Can you remember, Tom, how you got interested in this topic?

FRIEDMAN: I got really interested -- Actually, I got hired by the "New York Times" as an energy reporter back in 1981, in fact. But the big shift for me was really post 9/11. It was really seeing what happened with our energy purchases, seeing how our energy purchases have been empowering petro-dictators all over the world. It's poisoning geo-politics. It's really reversed the whole fall of the Berlin Wall Democratic trend that was initiated in 1989.

Then it really converged a few years later with the whole climate issue. And the combination of the rise of the climate issue, the geo- politics of this, and finally the need, Larry, to give birth to a new industry that our kids will be able to basically enjoy a higher standard of living off -- we have to give birth to that new industry. We can't just bail out the economy. We have to build it up. The way you do that is by giving birth to a new industry that in a world that is hot, flat and crowded, everybody will need green tech clean power.

KING: Are you optimistic?

FRIEDMAN: I'm cautiously optimistic. I have been to -- danced at a lot of weddings with people who told me they were really serious about this issue. I heard what President-Elect Obama has said. I think he's enthusiastic about it. I know the people that have working for him on this issue. I think they're serious, credible people. I'm from Minnesota and we're like the people in Missouri, show me.

KING: What's your next book?

FRIEDMAN: My next book is "Hot, Flat, Crowded and Busted."

KING: You're already working on it?

FRIEDMAN: No, not yet. But I think that the whole economic situation we're in right now is really going to dominate the next four years. That's really what I'm thinking about right now. I think, you know, we've been talking about the next secretary of state, will it be Mrs. Clinton or somebody else? I can tell you this, Larry, the next four years will be a lot more about General Motors than General Petraeus, and they're going to be a lot more about managing weakness in the world than managing strength. The next secretary of state is going to have to be up to that challenge.

KING: We only have 30 seconds. Every time I read you, you're somewhere else. How do you decide where you go?

FRIEDMAN: I just kind of follow my nose and get an instinct and intuition where I think the news is. Right now, Larry, you know what, I'm right here, because I think the story of America is the most amazing, compelling and, obviously, the most important story in the world right now. I don't want to be anywhere else.

KING: You're the best. Thanks, Thomas. Hope we do many more. Thomas Friedman, "New York Times," three times Pulitzer Prize winner, new book, a major best-seller already, "Hot, Flat and Crowded; Why We Need a Green Revolution and How It Can Renew America."

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Cramer Against the SEC

Today, the Securities and Exchange Commission ( Chairman Christopher Cox) filed a civil suit accusing Mark Cuban (Dallas Mavericks owner who made billions selling an internet streaming company, Mamma.com, to Yahoo) of insider trading in Mamma.com back in June of 2004. Cramer gave a great (and amusing) rant against the SEC tonight, lambasting its outrageous indifference to its duty to regulate:

1. Credit Default Swaps, eh, who cares?

2. Spreading rumors to wipe out whole firms like Lehman Brothers & Bear Stearns, oh please why not?

3. Allowing AIG to run wild doing whatever it wants with no disclosure, no problemo.

4. Letting banks hide trillions in bad loans, big deal.

5. Getting rid of the uptick rule to allow bear raids, brilliant.

6. Batching inanely-issued mortgages into impenetrable baskets letting the brokers make a fortune while gaffing clients with them. Sounds like a good idea.

7. Not prosecuting fail-to-deliver strategies allowing short sellers to run amok, seems fair.

But going after Mark Cuban for dumping stock in Mamma.com after he got a tip from management that it was to do a very dilutive equity deal, here the SEC drew the line; it drew the line on all the chicanery that has gone on in the last four years of its ignominious stewardship. On this day, the SEC stood up and said NO MORE, because on this day it decided to train its guns on Mark Cuban for trading in Mamma.com

Just wish the SEC would bring a case against the endless deception and subterfuge, even malfeasance, we have seen this year. Maybe the SEC would bring a case against someone who took down Lehman or Bear Stearns, against dodgy Wall Street gangsters who brought down the Western financial world.

But this is the first time we have heard from the SEC in a while, and it is a stunner, because of how completely and utterly irrelevant it is to all the financial smokescreens it has passively endorsed with its total failure to pursue those who have hidden trillions in losses and lied repeatedly about them.

Mark Cuban is a terrific sideshow.

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The $700 billion Bailout Morphs to $5 Trillion & No Transparancy or Oversight

The $700 billion bailout plan has so far failed to get credit flowing freely again. And tonight, new evidence there's a complete lack of oversight of this massive Wall Street bailout. One estimate now, saying the bailout will eventually cost as much as $5 trillion, almost twice the entire federal budget. The incompetence and stupidity expodes the brain.

It just looks like for decades the United States government has been lurching from one blunder to another until we finally are engaged an irreversible downward spiral. It is imperative that we, the people, get a lot smarter, and very fast, about how to run our government, or we will forfeit our great nation and exemplary democracy (as well the our home, the earth).

How far have we fallen: American Democracy was the innovative invention of the 18th century, that people could be ruled by their own wishes and make their own destiny. It became the great advancement of the 20th century, at which beginning democratic nations in the world were only10%. Our great and bold founders gave so much careful thought, intellectual capital and brave sacrifice to form a completely original model for human self-governance. It makes my heart thump to think about them and what they created, what they thought about, cared about, wrote about and fought for, the loftiness of their purpose, the heritage they bequeathed; but then the heart aches with how we have perverted our noble inheritance into a venal pursuit of money, the lobbying for self-interests, the lowest common denominator in place of the greater good---- all that would be unrecognizable to those principled men. That is the tragedy, that in all important respects, we have squandered our noble inheritance. We have not only run our economy and global financial system into into the ditch, but we have also run our aspiring democracy and civilization into the ditch too, and with greed, hubris, and reckless disregard, turned a pristine planet of fabulous primordial habitats and species into a fetid, moribund wasteland. I feel really ashamed for my part in this degradation and the horrible loss inflicted on the innocent species for whom we are charged as guardian-protectors.

Please think about this as you read the following Partial Transcript from Lou Dobbs Tonight November 13th, 2008 (bold added for emphasis):

DOBBS: Indeed, that $5 trillion bailout may in fact be reinventing these free markets.

President Bush struggling to deal with this crisis and the number of home owners in danger of losing their homes is soaring. The number of foreclosures skyrocketed by 25 percent in the year to October. Nearly a million families have lost their homes to foreclosure since the housing crisis began in August of last year.

The highest foreclosure rates are in Arizona, Florida and Nevada. Top senators today demanding the nation's banks do much more to help home owners facing foreclosure. Those senators are criticizing as well the Treasury Department and the Federal Reserve for not disclosing critical information about the massive bailout of Wall Street.

By some estimates, the bailout could eventually cost taxpayers a staggering $5 trillion..

(BEGIN VIDEOTAPE) LISA SYLVESTER, CNN CORRESPONDENT (voice-over): The banks haven't been doing their job, according to members of the Senate Banking Committee. Instead of loaning money given under the bailout program, the senators say some financial institutions are hording the cash. And as more homes head to foreclosure, patience on Capitol Hill is running thin.

SEN. CHRISTOPHER DODD (D), CONNECTICUT: We wanted to see more progress from your friends in the financial sector. More progress in foreclosure mitigation, in affordable lending and in curbing excessive compensation. And if that progress is not forthcoming, then we are prepared to legislate.

SYLVESTER: Others criticize the lack of transparency. Banks have received the money with few strings attached. An inspector- general who is supposed to oversee the bailout program has not been appointed. And the Federal Reserve has denied a Freedom of Information Act request from Bloomberg News to disclose which firms have received $2 trillion in emergency loans, money that goes beyond the bounds of the federal bailout. And the Fed will not say what collateral banks had to put up.

STEPHEN MOORE, WALL STREET JOURNAL: We don't know where the money went. We don't what the criteria is for spending it and we don't think that there's a transparency that the public should demand when this money -- this kind of money is being spent.

SYLVESTER: Banks are reluctant to share with the public the fact that they need government help. They fear a stigma. If customers worry the institution is in trouble, it could lead to a run on the bank. The Financial Services Roundtable, an industry trade group, saying quote, "we offer transparency, but we believe to protect against contagion and possible negative reaction from consumers and investors, that sensitive information should be protected." One congressman says the public has the right to know.

REP. JEB HENSARLING (R), TEXAS: But we are talking about hundreds of billions and frankly, if you look at it closely, trillions of dollars that are being used and really used in a secret fashion.

SYLVESTER: Lots of taxpayer money on the hook. Few answers.

(END VIDEOTAPE)

SYLVESTER: The Federal Reserve would not comment on the complaints of transparency, citing an ongoing lawsuit that has been filed to compel the agency to release more information. We also contacted the Treasury Department, but officials did not return phone calls or e-mail -- Lou?

DOBBS: So there is no transparency or even a suggestion on the part of either the Federal Reserve or the Treasury Department that they want to be interfered with by the public's right to know?

SYLVESTER: Well indeed. You know, Lou, this is -- we're talking about and you can't emphasize this enough. We are talking about trillions of dollars here. And that, you know, a lot of lawmakers saying we don't know which banks are getting this money.

We don't know what they're putting up as collateral. And so they're saying -- how can we continue to justify giving this money if we don't even know if it's going to go for any good here?

DOBBS: Well there's another issue, too, and that is that without disclosure of what is happening with taxpayer money, this no longer is a democracy and we are no longer free people. And that may be the -- the direction, the determination of the Federal Reserve and this Treasury Department.

But it's about time that somebody, some elected official somewhere in Washington, D.C. decides that it's time to reassert at least the basic tenet of democracy in this society of ours.

Executives from the four banks at today's Senate hearing today insisted that none of the bailout money that they're receiving goes towards staff bonuses. The executives from Wells Fargo, Bank of America, Goldman Sachs and JPMorgan Chase promise that the bailout money will be used for loans for what they call credit-worthy borrowers.

There was no explanation about how they could tell the difference between taxpayer money and the rest of the money. Goldman Sachs CEO Lloyd Blankfein did not attend today's Senate hearing. He sent one of his underlings instead.You may remember that back in February, "The New York Post" Liz Smith reported that Blankfein had said at a dinner that this economy is doing just fine, despite all the evidence to the contrary and arguing with me on the issue.

Well another highly-compensated CEO, Bob Nardeli (ph), also a self-styled genius at Chrysler, tonight is appealing for an urgent government bailout of his company. This is the same Bob Nardelli who received a severance package worth more than $200 million when he was fired from his previous job, as CEO of Home Depot. He didn't do too well there, either.

Nardelli was appointed to his job at Chrysler by the company's owners, the rather private, some would suggest overly private investment firm, Cerberus. Shares of Chrysler vehicles have plummeted over 35 percent over the past year. But they're a private company, so you can understand why a lot of people are eager to put public funding into their company.

One reason for the worsening condition of our automotive industry is the commitment of successive administrations to something that I guess we could call faith-based economic policies. So-called free trade has devastated our manufacturing industry in this country and caused millions of middle class Americans their jobs and their quality of life. Ines Ferre reports now on the latest trade deficit.

(BEGIN VIDEOTAPE)

INES FERRE, CNN CORRESPONDENT (voice-over): The total U.S. trade deficit in September went down by almost 4.5 percent, compared to August. But our deficit with China soared. More and more Americans are out of work, almost 10 million now. And fewer goods are made in the USA.

LLOYD WOOD, AMER. MANUF. TRADE ACTION COALITION: Literally, millions of opportunities for middle-class jobs have gone offshore. And until you actually start producing more in the United States, you're not going to create the middle-class jobs.

FERRE: Democrats in Congress are now pushing for a bailout for the near-bankrupt big three auto makers to prevent millions more jobs being lost. But so far, there's little indication the plan in Congress will stop the auto makers outsourcing more of their work, especially parts.

ALAN TONELSON, U.S. BUSINESS & INDUSTRY COUNCIL: (INAUDIBLE) U.S. content are not insisted upon, if they're not mandatory, Detroit and also big American parts makers will continue to go offshore and the benefits to the U.S. economy from any bailout package will be much less than is widely expected.

FERRE: The U.S. Business and Industry Council says in 2006, U.S. manufacturers imported about a third of their steering and suspension parts. The same for engines and engine parts. And almost 46 percent of lighting systems were brought in from abroad.

(END VIDEOTAPE) FERRE: And the trade balance in manufacturing is so bad that just to give you an example, between January and September of this year the U.S. imported almost five times the amount of cars that it exported.

DOBBS: It is -- it's a very unhappy equation. We use the expression balance. It's outright a deficit. Even though the economists like to talk about a balance. We haven't been near a balance in so long in this country. What is the reaction?

I mean what is -- anybody saying about the suggestion that so long as we're off-shoring so much of the production, and in this country, for Chrysler, for General Motors, for Ford and outsourcing so much of the parts work, what is the direction? Anybody talking about changing the rules here?

FERRE: Well and that's the thing. If these companies get a bailout, then would there be any kind of strings attached saying you need to create this amount of jobs, you need to have this amount of parts, American-made parts. And not just with that industry, but also all the manufacturing industries.

DOBBS: Yes, it's amazing to me how many of the so-called geniuses who have been saying that outsourcing is not a big problem. Off-shoring is not a big problem. Now that we desperately need a manufacturing base that has been reduced -- and this is important for everybody to know.

The manufacturing employment levels in this country are now at the same level as 1942. This country, we talked about the energy, energy independence. We have an absolute dependency on foreign producers in so many areas of our economy, it's staggering.

Tonight there are new doubts that the car makers will be receiving a federal bailout, at least soon. Senate Banking Committee Chairman, Senator Chris Dodd, said he doesn't believe there are enough votes in the Senate to pass a bailout for Detroit. The senator said he doesn't know a single Republican who supports the bailout.

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Bailing Out the Auto Industry

Although failure of the U.S. auto industry hardly poses the same systemic threat of global financial meltdown that the financial system does, nevertheless it seems that Barney Frank & Congress are pushing ahead for another bailout. Here is another excerpt from LOU DOBBS TONIGHT, on CNN November 12, 2008:

DOBBS: Rising tensions on Capitol Hill tonight over whether to bail out the automobile industry. House Financial Services Chairman Congressman Barney Frank is drafting legislation right now to give the car makers $25 billion of emergency aid in return for a government stay. Republicans, however, increasingly concerned that federal government bailouts are completely out of control. Kate Bolduan has our report from Capitol Hill.

(BEGIN VIDEOTAPE)

KATE BOLDUAN, CNN CORRESPONDENT (voice-over): Democrats are ratcheting up pressure on President Bush to go along with bailing out the American auto industry, despite fresh push back from congressional Republicans and the White House.

REP. BARNEY FRANK (D-MA), FINANCIAL SERVICES CHAIRMAN: We will pass the bill and then he can decide to veto it or not.

BOLDUAN: Barney Frank, chairman of the House Financial Services Committee, is the man tapped to craft the automaker bailout bill. According to a Democratic aide, the new bill will include a provision giving taxpayers an ownership stake in the automakers, raising the question of whether the government will demand reforms. A bill could be ready as early as Tuesday, perhaps $25 billion coming from the Wall Street bailout package, money Frank says is needed.

BARNEY: In its weakened question that the economy is in, a total collapse of the American automobile industry would do more damage than not doing anything.

BOLDUAN: This may make next week's lame duck session one last showdown with President Bush. Conservative Republicans are finding it hard to stomach the idea, coming hot on the heels of a string of government rescues.

UNIDENTIFIED MALE: Members of Congress all have these voting cards. Right now, we're using them as credit cards.

BOLDUAN: Republicans like Alabama Congressman Spencer Bachus ask, where do the bailouts end?

REP. SPENCER BACHUS (R), ALABAMA: And I'm afraid if we don't answer the question very soon, when does this stop? That it's going to stop when we run out of money. If we don't, I think the American people will simply rise up and stop us.

(END VIDEOTAPE)

BOLDUAN: Now one big question is what will happen in the Senate. Democrats maintain a slim voting majority here, and there is some skepticism among Republicans, but it's still unclear if there's enough opposition to block this new bill, Lou.

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Lobbyist Feeding Frenzy for Remaining TARP Funds & No Accountability

Do you get the impression that nobody in the government knows what to do, that they are just trying one thing after another to see what fix might work to stem this economic collapse? This improvisational drama is really scary. And billions of taxpayer dollars are being dropped out of helicopters still with no oversight, transparency or accountability. And now there is a feeding frenzy as lobbyists jockey for the remaining 60 billion of unspent TARP funds. Here is an excerpt from LOU DOBBS TONIGHT, November 12, 2008 (bold added for emphasis):

DOBBS: An astonishing reversal by Treasury Hank Paulson today on that huge trillion dollar bailout of Wall Street. This after Secretary Paulson's outright fear mongering back in September when he said the purchase of toxic assets, the only way to save our banking system from collapse. Lisa Sylvester has our report.

(BEGIN VIDEOTAPE)

LISA SYLVESTER, CNN CORRESPONDENT (voice-over): Treasury Secretary Henry Paulson making a dramatic u-turn from the plan he sold Congress and the American people back in September.

PAULSON: We said the right way to do this is not going around and using guarantees or injecting capital.

SYLVESTER: But today, that's exactly what the Treasury secretary is doing. The Treasury Department has already pumped nearly $300 billion into U.S. banks. Paulson now wants the Treasury Department to expand the program, injecting capital into the markets for credit cards, auto and student loans. Paulson also announced he's scrapping the cornerstone of his original plan to buy up toxic bank assets. PAULSON: When we went to Congress, illiquid assets looked like the way to go. As the situation worsened, the facts changed.

SYLVESTER: Paulson didn't say what facts changed, and he doesn't seem to be looking back.

PAULSON: I will never apologize for changing an approach or a strategy when the facts change.

SYLVESTER: Critics say Paulson doesn't appear to have a solid plan in place.

PETE SEPP, NATIONAL TAXPAYERS UNION: No one is really driving this policy bus. People are just all sitting in the back yelling to go this direction or that and they're hoping that they won't run into something and crash the entire thing.

SYLVESTER: Much of the first installment has already been spent, but instead of loaning the money to unclog the credit system, many banks are holding on to it.

STEPHEN MOORE, WALL STREET JOURNAL: We still have a crisis in the banking industry, and there's no evidence that that 300 billion that has already been spent has had an efficient effect in terms of getting the financial markets working again.

SYLVESTER: There's not a lot of transparency or accountability either. The bailout package passed by Congress called for a special inspector general to oversee how the money is being spent. That position is still vacant.

(END VIDEOTAPE)

SYLVESTER: Congress also called for a joint House/Senate oversight committee, but because lawmakers are out of session, that's not up and running, so at this point Secretary Paulson has a lot of room to maneuver, make changes, spend billions, without much oversight. And we should mention for financial institutions that want a piece of the bailout, the application it's only two pages long, incredibly -- Lou.

DOBBS: Two pages. Do they have to sign it or anything --

SYLVESTER: They do have to sign it, but you know as many people have pointed out, the credit card applications are longer than this. Now they say that this is a preliminary application, but we are talking billions of dollars here. And again, two pages long. That's the preliminary application.

DOBBS: Do the taxpayers get some sort of reward points if they provide a bailout for something like American Express or one of the credit card companies?

SYLVESTER: You know it is not even clear if taxpayers will ever see a dime of this money. I mean and that's what several of these taxpayer groups like the National Taxpayers Union, they see that this is just throwing money -- that it doesn't even -- there's no sign that it's actually going to work and no sign that taxpayers will ever get this money back, Lou.



And lobbyists and special interests in a feeding frenzy in the nation's capital, trying to win a share of the government's massive bailout, is anyone looking after the interests of the American people? Is there such a thing as our national interest that anyone recognizes at least in Washington, D.C.?


DOBBS: More and more businesses are joining financial institutions seeking a big government bailout. Lobbyists and special interests all looking toward Washington to give their clients a piece of the federal money, but no one seems to be looking out for the interests of American taxpayers as Ines Ferre reports.

(BEGIN VIDEOTAPE)

INES FERRE, CNN CORRESPONDENT (voice-over): The list of ailing companies running to Uncle Sam for a handout keeps growing. American Express, which turned itself into a bank, is now reportedly asking for $3.5 billion. Expect more to come.

STEVE ELLIS, TAXPAYERS FOR COMMON SENSE: We don't print enough money to bail out every section of corporate America and at the end of the day, some companies are going to go under, some are going to fail, and some we're going to support, but clearly, the taxpayers are going to be at risk for the foreseeable future.

FERRE: Of the $700 billion approved by Congress, Treasury has spent most of the initial $350 billion on banks and AIG. There's now a scramble for the 60 billion left. Lobbyists in Washington are swarming around the money pot. Congresswoman Marcy Kaptur voted against the bailout bill twice.

REP. MARCY KAPTUR (D), OHIO: Those lobbyists have a lot of money behind them and that the ordinary citizen on whose back this bailout price tag has been placed have nobody lobbying for them, but their members of Congress, and we need to get that workout money out now, down into the communities that are being affected.

FERRE: Critics say the bailouts can't continue.

PETER SCHIFF, AUTHOR, "CRASH PROOF": They're in a bus and they're driving for a cliff. And either we're going to drive off the edge of the cliff or we're going to turn course. If we continue on this current policy path, we are going over that cliff.

FERRE: With the American taxpayer along for the ride.

(END VIDEOTAPE)

FERRE: And some say that the frenzy to get a slice of the bailout money is undermining the original target of the rescue package, to get banks lending again and eventually trickle the money all the way down to Main Street -- Lou.

DOBBS: And I go back to what I said over a year ago and that is we should be trying trickle-up economics here, dealing with the issue of the housing crisis, dealing with the issue of millions of families facing foreclosure here and let that money flow up to the institutions that would receive it and improve their balance sheets.

But this bailout is going to everyone, and now, as we've reported, Barney Frank is getting ready to provide money to the automobile industry. We did a quick check. The market cap of both General Motors and Ford now less than $6 billion. It's incredible.

FERRE: And the thing is the definition of who's getting this money keeps expanding and expanding. So the question that people have is well when does it stop? And when do you say, let's pause for a second and assess ourselves?

DOBBS: And it also raises the question of why in the world is Hank Paulson Treasury Secretary, displaying the incompetence that he has over the course of this crisis and frankly before.

Well GE also participating. Of course we wouldn't want anybody to be left out of the bailout. Their financial unit will be receiving some of that federal bailout money. GE Capital saying it's eligible for government backing of $139 billion of its debt. GE Capital's business that includes credit cards and real estate lending has been hard hit by the credit crisis. Nearly half of GE's earnings in fact originate with its finance business.

House Republican leader John Boehner today demanded that the Federal Reserve tell the American people just who is receiving $2 trillion of emergency loans from the Federal Reserve. Boehner said in a statement that the Fed should comply with the Freedom of Information Act request filed by Bloomberg News.

The congressman said quote, "They must begin providing lawmakers and taxpayers all information about how they are using federal tax dollars."

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