Accuracy in Media

From CNN:

“A senior administration official briefing reporters said he expects that GM and Chrysler officials will be signing the loan papers to access the cash later Friday.

Ford Motor Co. is in a better financial position than GM and Chrysler and is not included in the loan plan…

An additional $4 billion may be available in February, the Bush administration said.

The loans are designed to stabilize the two automakers through March, at which time they must show they are financially viable.

“If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury,” a White House statement on the loans said.

GM has warned it will fall below the minimum amount of cash it needs to continue to operate without $4 billion in federal loans before the end of the month. Privately held Chrysler said it will need $4 billion or it also will run out of cash early next year.

Financing will be drawn from the $700 billion Troubled Asset Relief Program, the fund set aside in October to bail out Wall Street firms and banks, according to the White House.”

As mentioned previously, some scholars believe this violates the TARP legislation, although the GAO has testified that this route is possible under the law.

Ford did not partake of the bailout.

The New York Times apparently attributes the announcement to a sharp rise in stock prices, as does the Associated Press. From the NY Times:

“A bailout for Detroit translated into a bounce for Wall Street.

Stocks rose in early trading on Friday, minutes after President Bush announced plans to shore up the auto industry with an infusion of government money for General Motors and Chrysler, the two most troubled car makers.

At 10:30 a.m., the Dow Jones industrial average was up by 147 points or about 1.7 percent while the broader Standard & Poor’s index was 1.9 percent higher.

General Motors stock jumped 16 percent on the news while shares of the Ford Motor Company were 7.8 percent higher. Chrysler is not publicly traded. Shares of other car makers like Toyota and Honda and auto-parts manufacturers were also higher Friday morning.”

As you can see here, stocks did rise precipitously following the announcement, but given the ongoing stock volatility of the past few months, isn’t it a little soon to declare “mission accomplished”?

James P. Stewart of the Wall Street Journal writes,

“In a sense, your fellow investors have already bestowed it. Their recent panicky buying and selling and their extreme risk aversion has driven market volatility to unheard-of levels. The standard measure of this, the Chicago Board Options Exchange’s Volatility Index, or VIX, hit an all-time high this fall. This, in turn, has driven prices on stock options to extremes that are beyond anything in my memory. At these prices I can’t imagine being a buyer. But for sellers, it’s quite an opportunity to sell options and pocket the cash.”

 




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