As IF Times

link UPDATE 1-GM to acquire AmeriCredit for $3.5 bln | Reuters.

Unless you happen to be paying attention, this news item would be just another of those boring finance stories.  If you whittle the story down to the basic elements, then an amusing scenario becomes more obvious. 

As some may recall, not too long ago, General Motors wound up in a bit of a financial pickle.  The short story is, they were not selling enough cars at  prices that people were willing  to pay for their products.  Not that they didn’t make good products, it was just that for a similar amount of  money, many other manufacturers offered arguably better products.  General Motors was saddled with a legacy of costs that eventually overwhelmed the company.  Principally, the main culprits were the very generous pay and benefits packages given to working and retired employees.   You would often hear the joke that GM was more of an extended care and benefits company than an automobile company.

So along with large debt payments to bondholders, GM was unable to pay it’s bills with the income from car sales.  Luckily, the federal government  decided that the fate of GM was tied to the fate of many workers and therefore America.  They would be bailed out of their financial woes.  The amount of money involved was so big that only governments had the might to write the big cheque.  Ultimately with all of the restructuring, the government OWNS GM.  So now, GM is now Government Motors, or the people’s car company.  This solved a short term debt problem, but the company still had to sell cars. 

Since the economy overall is still not as robust as the administration would have you believe with unemployment still ratcheting upwards, people didn’t have the capacity to finance car purchases.  Ironically, many of the unemployed became that way because GM and Chrysler were forced to close down hundreds of car dealers throwing those people out of work.  Todays’ news is that GM will spend $3.5 billion dollars to buy a company involved in the financing of cars.   Not just anybody, but particularly people with ‘subprime’ credit.  Hmm, this sounds oddly familiar.  In case anyone noticed, the money used to purchase AmeriCredit is actually government money, or public money.  So in essence, the public is subsidizing other people to buy cars that they otherwise couldn’t afford with their own money.  I think in real life, that’s called a circle jerk.  Nevertheless, the UAW union at GM, also a major stakeholder post restructuring, have managed to keep their members employed albeit at the expense of everyone else.  Bernie Madoff in his ponzi schemes at least bilked the rich.  In this latest government scheme, the people who can least afford to pay are getting roped in.

This is but the first of these types of ingenious rescue schemes to see the light of day.  In scenarios throughout the country, the same dilemna will surface again as public pensions for teachers,postal workers, firemen, police etc have to be funded.  An agency will have to be established in order to offer financing to people who cannot otherwise afford teachers, fire or police protection: some means of allowing people to pay money regularly in order to recieve these services…hmm how to do that…if only there was a way…

link Timothy P. Carney: Goldman rallies for Obama in Wall Street ‘reform’ | Washington Examiner.

This will be interesting.  The general media will not understand that this is the story of the year, bigger than Tiger and yes, even bigger than Kate Gosselin on Dancing with the Stars. 

It appears that Goldman Sachs will be HELPING the administration with reforming Wall St practices!! They are coming out in favour of restrictions on capital use, of use of leverage and certain activities that would place banks in conflict with customers. 

!!! 

You can’t make this stuff up.  Goldman has long been the gold standard on the street, always making the most profit, being involved in the best deals and having the most connected top level people.  In fact the top finance people in the cabinets of many of the previous administrations look like an alumni roll call of ex Goldman people.  All the other banks on the street emulated Goldman’s business models, to the degree that they could and when Goldman created a profitable market space, the others were soon to follow. 

The big bonanza came when Goldman went public in the eighties which allowed not only much much larger pools of capital from which to lever their trading and investment positions, it also allowed the formerly careful partnership the ability to be less scrupulous about the degree of leverage employed in its banking activities.  A prudent person may leverage their postion say, 5 to 1 in order to achieve returns.  From accounts brought to light by books such as The Big Short, leverage was allowed to climb to 30 to 1 in some cases. 

Not to say that this is neccessarily imprudent, because that would be Monday morning quarterbacking, but it was the asymetric risk reward aspect discussed in earlier pieces that led to the  eventual damage to the financial system.  As of now, it’s only speculation as to whether this was imprudence borne of benign management ignorance or recklessness resulting from questionable practices.  In other words, they were either not smart enough, or TOO smart.

Either way, it appears illogical to engage them in searching for fixes. Why don’t they hire Bernie Madoff to advise them?  He’s about as expert as anyone and we know he’s not doing anything for the next 25 years.

link Freud, Art Star Prices May Surge 30% This Year, Survey Says – Bloomberg.com

If I painted a portrait of some flowers in a vase, it would obviously give me some pleasure. Presumably, those of my friends with any taste would agree and compliment me on my artistic genius. The really nice ones might even deign to insult me by offering money for this masterpiece. Apart from my towering reputation in the art world, the price of the painting would be determined mainly by what value the buyer would ascribe to owning this piece of timeless genius.

Value and beauty is in the eye of the beholder as the old saying goes and so it’s difficult to peg a price for any piece of art. If we extrapolate this logic to works in the art world created by the well known masters such as Van Gogh, Cezanne, da Vinci etc etc, then the price of art should reflect the genuine desire of the purchaser to enjoy the particular piece of work. Since the artists named are long dead, scarcity comes into the calculation of price since Vinny can’t just whip off another Sunflowers by the weekend.

What has happened in the art world is that enjoyment of art is completely removed from the value and pricing of art. It’s highly doubtful that any purchaser can sit in a chair, gaze intently at Sunflowers by Van Gogh and derive $60 million dollars worth of pleasure from it. After 30 minutes or so, anyone would be tempted to see what’s happening in the football game on TV.

No, the value, or more correctly, the pricing of art is controlled by a small cabal of Dealers such as Sotheby’s, Christie’s and others who determine thus on behalf of clients with money to spend. So, think about this, not only do they set the price for art work, they also get a commission for selling them at auctions or galleries. That’s a nice gig. Imagine sending the husband out to get something to fill the wall in the east foyer and he comes back with a $25 million dollar Cezanne, which is a heck of a deal because the dealer assured him that the price will appreciate by 30 percent over the next 18 months or so. As discussed earlier, one can arguably justify the price based on scarcity value.

In most modern galleries however, it’s unlikely that original works of the great masters will be available for such purchase. More likely they will be the works of someone a little more pedestrian but whom the dealer assures shows great promise. In reality, the money changes hands not because the blue in the artwork happens to complement the periwinkle in the foyer, but because the dealer has blessed the piece as a good investment. The enjoyment factor has almost nothing to do with it. The job of the dealer is to describe the piece with eloquent prose in order to assuage the purchaser of his good judgement, but really, the art is only bought…to be sold, sometime down the road.

Post the Bernie Madoff ponzi scandal, it’s absolutely fascinating that money will bid up the price of ‘art’ solely based on the say so of a very small band of people on the inside. As the article opines, when a dealer says that prices will rise by 30 percent, it’s very believable because they are on both sides of the market. It’s the ultimate game of musical chairs.