Sunday, 12 April 2009

Macro-Level Trends - JP Morgan-Chase & Chrysler - When "Social Activism" Hurts the Economy.

As the issues at the heart of the US Autos malais snowball and the tri-partite stake-holders, consisting of the VMs, the UAW and Investors, seek to understandably defend their positions, the danger of illogical cognitive entrenchment within certain quarters grows.

This appears to be the recent case where US social activists have called for a boycott of JP Morgan Chase. The protest centres around the bank’s opposal to the government proposal/demand that it should cancel a large portion of Chrysler's debt to theoretically keep the embattled Detroit carmaker afloat.

The activism of the Firedoglake blogsite and Progress Michigan, an advocacy group, argue that JPMorgan - as a recipient of billions of dollars in taxpayers’ money - has a duty to help save jobs at Chrysler.

What is not understood by these people is that Wall St, like it or not, is the economic heart and engine of the country and portions of the world - even today in its depleted state. Unlike Chrysler's case - where it could be argued that in a market of over-capacity it is not a 'core' or financially viable entity and deserves to be treated as Lehman Brothers was - JP Morgan-Chase acts as a major artery to the financial heart.

Thus objectively the needs and rationality of public assistance funding is very different indeed. JP Morgan-Chase's case maintains systemic harmony, whilst Chrysler's public assistance (esp without FIAT intervention) effectively keeps the unviable entity on life-support.
The activist groups have urged JPMorgan clients to transfer their accounts to a local bank or credit union, and to cut up their Chase credit cards. One member of a Facebook group set up by the activists commented on Thursday that "if [JP Morgan] wants our money, they’d better do what they can to save our jobs".

Such overt 'socialism' may at first impression appear worthy by its sentiment, but given the true complexities of the US economy, is ultimately ridiculous, short-sighted and myopic. JP Morgan-Chase's primary duty of care is not to Chrysler's UAW members, but to the dual 'wards' of its investors and the broad US populous & beyond, developing its own strength as a financial intermediary. A role as critical entity between (state-guaranteed) public depositors, business depositors, the financial markets and on the counter-side those businesses and people that have respective growth and consumption plans - thus the prime actors of the economy.

Of course negotiations between the bank and the government are on-going, but an overly steep "haircut" regards the Chrysler debt holdings would undermine the banking company, its banking peers and their shareholders. Banks presently need to show as strong as possible Balance Sheets and P&Ls if they are to lead other industrial sectors and the rest of the economy out of this worrisome period for all.

That is not to say that it should not abstain from such a 'haircut", but simply that it should not leave itself exposed to catch a consequential head-cold. Thus a ratio-rate and other options must be agreed, but debt-holders across the US would be done a dis-service if that "hair-cut" was too severe.

Such an action would severely dismay those who are now buying debt in the raft of troubled US comapanies and so keeping them liquid and trading. This critical body of domestic and foreign institutions, PE and individuals today see corporate notes and bonds as not the generally 'risk-free' instruments they used to be (given today's poor ratings) but as last ports of call before retrenching from the markets altogether; which would result in a further collapse of the economic framework - one that would be irreversable.

The government previously proposed that JP Morgan-Chase and its peers Citi (@ $1bn), Goldman Sachs and Morgan Stanley (@2.5bn) accept approximately 29c on the $, which given their top-tier lien status and secured assets was obviously unnacceptable - and seen as simply a 'low-ball' negotiating ploy by Washington. Since then negotiations have upped the the dollar ratio rate and suggested debt for equity swaps - but realistically the short-medium term equity value of Chrysler 'as is' is debatably worthless (ie Marchionee's 'no cash' proposal offer).

So the banks may be happier to see a bancruptcy outcome and seizure of tangible and goodwill assets; knowing that such assets would be greatly prized by South Korean, Chinese and Indian auto-firms from Tier2 suppliers through to ambitious VMs, acquisitions undertaken individually or as a broader consortium. So too the highly-liquid world of eastern 'transactional agents' such as eastern SWFs and PE which are presently cash-rich and hunting for underpriced asset opportunities with obvious exit strategies.

Given the UAW's realistic 'minimal-clout' position within the Chrysler restructuring discussions, as the lower-tier beneficiaries it may find itself in the ironic positioning of seeking to quell those 'social activists' who may have greater success within the latter GM negotiations given GM's size and comparitive historical social responsibility.

Ultimately, no-one would want to disbar the right for free speech, it is after all a central tenant of US democracy. But such complex matters demand more understanding and attention than simplistic banner-waving, air-wave chatter and cyber-chatter. All parties face a hard task of turning America around, but that can only be done on the basis of a strong hub. And that 'financial fulcrum' is the banking sector. The longer it is malnourished, the longer the US's economic and social pain.