Pragmatos

Felix Salmon.

The Return of the $70 Per Hour Meme

You might expect it from right-leaning commentators like Will Wilkinson. You wouldn’t expect it from someone like Mark Perry, who lives in Flint, Michigan. And you certainly wouldn’t expect to see it in the New York Times, from the likes of Andrew Ross Sorkin. But all of them are perpetuating the meme that the average GM worker costs more than $70 an hour, once you include health and pension costs.

It’s not true.

The average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM’s total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers.

Now that GM’s healthcare obligations are being moved to a UAW-run trust, even that fictitious number is going to fall sharply. But anybody who uses it as a rhetorical device suggesting that US car companies are run inefficiently is being disingenuous. As of 2007, the UAW represented 180,681 members at Chrysler, Ford and General Motors; it also represented 419,621 retired members and 120,723 surviving spouses. If you take the costs associated with 721,025 individuals and then divide those costs by the hours worked by 180,681 individuals, you’re going to end up with a very large hourly rate. But it won’t mean anything, unless you’re trying to be deceptive.

Tough something, anyway. Two good pieces from NPR Morning Edition making the case for Chapter 11. Go have a listen.

Bankruptcy Could Help Fix Automakers’ Problems

President-elect Barack Obama wants to give U.S. automakers federal funds. Critics say funding without conditions would be like pouring gas into a broken-down clunker. Paul Ingrassia, a former Detroit bureau chief for The Wall Street Journal, says bankrupty might be a better option. He tells Ari Shapiro that bankruptcy could open the door to badly needed changes.

Professor: GM Must Confront Financial Challenges

Advocates for the nation’s automakers are warning that the collapse of General Motors could set off a catastrophic chain reaction in the economy. Douglas Baird, a professor at the University of Chicago Law School, says in order to fix its financial problems, GM needs to confront its challenges head on. Baird tells Ari Shapiro that getting a bailout won’t solve the car companies’ problems.

Meanwhile, GM’s website offers me a great deal ($54,608.39) on a Hummer. Feed ‘em to the sharks. And the Chevy Volt? Gimme a break. I like the underlying series-hybrid technology, but look, this is GM. Surely somebody else will come and do it right.

No wonder GM expects to sell only 10,000 (at $40K a pop, it seems) … in 2010.

What Kevin Drum says. Especially that last bit.

Even Yet More on Credit Default Swaps

Admit it: you can’t get enough of credit default swaps, can you? Well, after yesterday’s post on the subject, a bunch of people insisted that I needed to read Michael Lewis’s latest piece in Portfolio right away, and since I’m a big Michael Lewis fan I got right on it. As usual, it’s great, so do yourself a favor and drink in the whole thing sometime soon.

For now, though, let’s focus just on the CDS part of Lewis’s piece. Here’s the backstory: a hedge fund manager named Steve Eisman, who believed the entire subprime house of cards was due to implode, wanted a way to bet against the market. So he shorted the stocks of subprime originators like New Century and Indy Mac and then looked around for even more targeted ways to make money on the coming collapse. The Holy Grail came from Greg Lippman, a mortgage-bond trader at Deutsche Bank:

The smart trade, Lippman argued, was to sell short not New Century’’s stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’’t known this was even possible — because until recently, it hadn’’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision… Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

But why was a bond trader recommending that Eisman short bonds in his own market? The answer came after Eisman had a conversation at an industry dinner:

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds… [But] not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’’t have anything to buy.’”

That’’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’’t enough Americans with shitty credit taking out loans to satisfy investors’’ appetite for the end product. The firms used Eisman’’s bet to synthesize more of them…The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

I still won’t pretend that I fully understand this. In fact, every time I read a story like this, it seems to get right up to the good stuff — “They were creating them out of whole cloth. One hundred times over!” — and then suddenly moves on. But I want more! I want an entire 10,000 word piece on how the combination of CDOs and CDS allowed Wall Street to magnify their underlying subprime losses so catastrophically. Instead, I just get a teaser and then the story meanders off in a more colorful direction.

Better than nothing, I suppose. And you should read Lewis’s entire piece regardless. But I still wish someone could explain in layman’s terms what this all means.