John Wolkonowicz of IHS Global Insight Anaylzes Chrysler's Future
Friday, April 24, 2009SUSIE GHARIB: The scores are out. The nation's biggest banks found out today whether they passed or failed the government's stress tests. But the American public won't get the official results until May 4. Meanwhile, regulators released a 21-page document detailing the guidelines they followed in conducting the tests and how the process measured the health of 19 financial institutions. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: While big banks got their grades today, regulators gave the rest of the world a sort of study guide for the stress test. The document provides some detail about how the banks were evaluated. Standard & Poor's Mike Thompson says that was enough to provide reassurance about the process.
MICHAEL THOMPSON, MANAGING DIR., STANDARD & POOR'S: It's very credible and I think that -- if all the information is correct and accurate and been verified, I think the marketplace will probably take it at face value and I think it's very credible.
GERSH: Regulators stressed the nation's 19 largest banks are all now well capitalized, though some might need to raise more money to weather a deeper recession. Under the stress test, regulators say they are examining everything from bank trading positions to loan portfolios. It's a detailed look at the books, showing everything from credit cards and mortgages to commercial loans, including credit scores and the geographic distribution of borrowers. The next step is to test loan performance in an economy where growth is flat next year and unemployment tops 10 percent. Banks that don't have the resources to withstand that economy will be required to beef up their capital. Regulators did not disclose how big that capital buffer should be or the assumptions they are making about loan losses. Banking experts like Gerard Cassidy say that's critical.
VOICE OF GERARD CASSIDY, MANAGING DIRECTOR, RBC CAPITAL MARKETS: If it comes out that they think the home equity loan losses over a two-year period will be 3 percent, people will say, you know, though the mechanics and the methodology were accurate, the number you're using on losses is too easy -- too light. So the test is really a failure.
GERSH: Regulators are not stress testing the books using current market prices for so- called toxic assets. And former Federal Reserve senior staffer Vince Reinhart says that's better for banks.
VINCE REINHART, SR. FELLOW, AEI: They are not asking banks to say, oh, the markets mark down the value of those assets a lot, how much are they worth in the market today? They're saying just how much income and loss will generate from you holding these loans.
GERSH: More details about how much money banks need to raise is expected the week of May 4. By then, we may no longer be calling this a stress test. The tough economic assumptions regulators made when they started this process months ago now look a lot like the consensus forecast. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: Chrysler's in the midst of a major stress test, racing toward a government-imposed deadline to ink an alliance with Fiat by Thursday or go bankrupt. That's deal's contingent on steep concessions from Chrysler's unions and lenders. Today, the lenders offered to take almost a 50 percent loss on the near $7 billion they're owed, but Treasury wants them to do more. Jeff Yastine talked with John Wolkonowicz, senior auto analyst at IHS Global Insight and asked him about the odds of a Chrysler bankruptcy.
JOHN WOLKONOWICZ, SR. AUTO ANALYST, IHS GLOBAL INSIGHT: I think there's probably about a 75 percent chance of bankruptcy at Chrysler.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: And elaborate for us on that. Why 75 percent?
WOLKONOWICZ: I think Mr. Marcione (ph) at Fiat, who I think is still very interested in joining up with Chrysler, I believe he would prefer Chrysler to be cleansed through a bankruptcy so that the bad assets of Chrysler are removed before he gets involved with Chrysler.
YASTINE: So do you think at this point that Fiat representatives there at the table doing all the negotiating, they're just sort of either laying back and letting this thing happen? Do they have any reason at all to move forward on this thing before the next Thursday's deadline?
WOLKONOWICZ: No, I think they probably have already come to an agreement with the government on how this is going to come down. Originally the government had said that Chrysler had to have a formalized agreement with Fiat in order to continue to get government funding after the 30th of April. But you know the government does not really want Chrysler to go away and I think that Mr. Marcione has done some negotiations with the government and with Chrysler and I think they will most likely do a quick bankruptcy to cleanse Chrysler of undesirable assets.
YASTINE: And speaking of going away, we see reports now that Pontiac may be sold or shut down by General Motors? What do you think of that possible headline there?
WOLKONOWICZ: I have heard the same thing. I don't think there is any chance it will be sold. I think it will just be shut down. That's a classic General Motors brand. It would be a little hard to remove it in peoples' minds from General Motors. But GM needs to prune brands both for the government and for the point of being able to have adequate marketing money left for the brands they still have and adequate product development money left for the brands they still have.
YASTINE: General Motors also received about $2 billion or will receive $2 billion in TARP money. What kind of bankruptcy possibilities do you put on GM? Their deadline is June 1st?
WOLKONOWICZ: I think it's very low probability of a bankruptcy at GM because in a way I think GM is too big to fail. We've heard a lot of talk about these quick rinse bankruptcies that can be accomplished in as little as 15 days. But when you throw in a company the size of General Motors into one of these quick bankruptcies, it may not be so quick after all and there are a lot of problems that can develop within a bankruptcy that can quickly cause the bankruptcy to get out of control. I think that the government just doesn't want to take that risk and their prime program at this point would be to try to do a restructuring without forcing GM into bankruptcy.
YASTINE: John, in about 20 seconds, just give us the delineation, Chrysler going into bankruptcy, GM too big to fail. Why?
WOLKONOWICZ: Exactly. GM is quite a bit larger than Chrysler and the impact on the economy, given that the economy is in such a weakened state, if GM were to fail, I think it would be catastrophic.
YASTINE: All right, John, appreciate your time on the program.
WOLKONOWICZ: Good to be with you.
YASTINE: Our guest John Wolkonowicz, senior automotive analyst at IHS Global Insight.
