Chris Dodd's Financial Regulation: Be Carefull What You Wish For

Includes: MTLQQ, TM
by: Jim Delaney

As Chris Dodd prepares for retirement, possibly to his 10-acre plot on Inishnee Island on Galway Bay (a story for another day as while it is part and parcel of the seedy side of Washington I can’t, for the life of me, figure out how to work the CDS market into it), he will attempt to bring a financial reform bill that can actually pass both houses. The bill was originally intended to fix every last thing that was wrong with Wall St., the credit card companies, the mortgage industry and a whole host of other businesses whose raw material and finished product is the $ sign.

As time passes and emotions cool, Dodd’s bill is having a tougher and tougher time reaching the finish line. This has been decried by some as evidence that no meaningful regulation will be enacted and we will be that much more vulnerable to the next bubble, pop and crash. I will leave out the part here that if the regulation that existed prior to 2007 was enforced as intended and not by those who hoped to eventually work for those they were regulating, we probably wouldn’t be where we are today.

Financial reform, with all of its populist trappings makes for great headlines but the recoil from draconian change is also being seen in other areas of the economy. It gets less play because it is more Main St. than Wall St. but it goes equally as far in leaving whatever inefficiencies that existed before the crisis in place during the still evolving recovery.

Example 1 is General Motors, otherwise known as Motors Liquidation Company (OTC:MTLQQ). During the Congressional inquiries and the subsequent bailout it was decided that Mo-Liquid’s product line needed to be rationalized along with its dealer network. Very profitable SUVs were to be cut and “government subsidy required to break even” electric cars were to be produced instead. On the dealer side about 1,100 were slated for closure representing about 2,000 showrooms.

The intended moves showed a clear path to profitability for a company whose marketing campaign compares it to apple pie, the most American of metaphors.

The list of 1,100 got a lot shorter recently as 660 dealers were told they were getting a reprieve and could continue to sell MTLQQ’s cars and trucks.

To put all of this in perspective for you, the company formerly known as GM had about 5,500 dealers last year which sold an average of 376 cars each. Pre-accelerator-problem Toyota (NYSE:TM) had 1,452 dealers in the states last year each which sold about 1,219 vehicles each.

I don’t believe I’m going too far out on a limb here in thinking that the gas-pedal problem can be fixed relatively easily while the problems embedded in an inefficient dealer network will be a lot tougher to address.

The cries against using government money to bail out Wall St. still echo in the media while the monies used to keep GM afloat are deemed a patriotic attempt to save an American icon. What is interesting is that Wall St. was profitable last year and has, for the most part, paid back the funds received from Uncle Sam. GM couldn’t say that last year and it might not be able to say it after 2010 either.

John Q. Public obviously prefers the emotional lift associated with demonizing Wall St. than concerning himself about wasteful taxpayer financed initiatives to subsidize inefficiency. As they say, be careful what you wish for.

There are no CDS contracts traded on MTLQQ since the entity was formed out of the bankruptcy of GM. GMAC, the financing arm, is quoted in the CDS market and the benchmark 5-year closed at 408bps last night, closer to the 365bp level seen on Jan14th of this year than the 2051bp level seen on April 1st of 2009. MTLQQ has hovered around $0.60 for quite a while now sans a few blips up and down based on news that something might have changed only to be realized later that it hadn’t.

Enjoy the weekend.