Washed It!

NEW YORK (CNNMoney.com) — Two companies that have received billions of dollars in aid from the U.S. government have been kicked out of the Dow Jones industrial average (INDU).

According to a statement released Monday, General Motors, which filed for bankruptcy on Monday, will be replaced by Cisco Systems (CSCO, Fortune 500); Citigroup (C, Fortune 500) will be replaced by The Travelers Companies (TRV, Fortune 500).

The changes in the Dow will go into effect on on June 8, according to Dow Jones.

GM shares opened for trading on the New York Stock Exchange after a brief delay Monday morning, but the NYSE says the shares will be delisted before trading begins Tuesday. GM has the right to appeal that decision.

GM stock plunged to 75 cents per share on Friday, its lowest level since the Great Depression. Shares of Citigroup dipped below $1 per share in early March but were trading above $3 on Monday.

General Motors became ineligible for inclusion in the benchmark indicator when it filed for Chapter 11 bankruptcy protection Monday.

“The parlous state of GM has left us with no choice but to remove it from The Dow,” said Robert Thomson, managing editor of The Wall Street Journal and editor-in-chief for all of Dow Jones, in a written statement. “A bankruptcy filing immediately disqualifies a stock regardless of a company’s history or its role as a cultural icon.”

The company taking the place for the bankrupt automaker is tech bellwether Cisco Systems, which is based in San Jose, Calif., and makes networking equipment.

“We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake,” said Thomson.

Thomson left the door open for the financial giant to be put back on the Dow when it stabilizes. “We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion – Citigroup is a renowned institution, not only in this country, but around the world.”

GM ends an 83-year run as a component of the Dow. The automaker was added to the index twice, first for 18 months in 1915 and then again on Aug. 31, 1925, according to the release from Dow Jones.

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The only current company with a longer history as a component of the index is General Electric (GE, Fortune 500). GE was initially included in the Dow in 1896 but was removed after a few years of fitful stops and starts. In 1907 it was relisted.

GM’s absence from the Dow marks the auto industry’s waning power and influence. And its replacement — a technology heavyweight — is representative of larger industrial evolutions. Cisco’s “communications and computer-networking products are vital to an economy and culture still adapting to the Information Age – just as automobiles were essential to America in the 20th Century,” Thompson said.

Citigroup joined the Dow in 1997, as Citicorp. Ironically, Travelers merged with Citicorp to form Citigroup in 1998, creating what was then termed a “financial supermarket.” Citigroup spun off Travelers in 2002. At the time of the 1998 merger, Travelers was a member of the Dow 30.

Dow Jones decided to add another financial company to the index in order to re-calibrate the index. When the Dow let go of American International Group in September, it replaced the insurance company with Kraft Foods (KFT, Fortune 500) because the financial sector was in so much turmoil.

“The selection of Travelers, a property and casualty insurance company, is intended to restore the financials industry to full representation in The Dow,” said Thomson.

Dow Jones said the changes won’t cause any disruption in the level of the index. A divisor is used to calculate The Dow from its components’ prices, which prevents any distortion in the Dow.

“In our judgment, the stocks until now helped the Dow Jones industrial average tell the daily story of the stock market,” said John A. Prestbo, editor and executive director of Dow Jones Indexes, in the written statement. “The extraordinary conditions of the severe bear market and recession kept these stocks relevant and representative for a longer period than might have been the case in more normal times.”

General Motors said Thursday that a group representing many of its largest bondholders had accepted a proposal offering up to a 25 percent stake in exchange for not opposing G.M.’s bankruptcy reorganization plan.

In a regulatory filing, G.M. also filled out many of the details of the reorganization plan, crafted under the eye of the Treasury Department.

G.M. confirmed that the government would provide more than $50 billion in bankruptcy financing to see the company through its Chapter 11 filing. What will emerge, through an asset sale known as a 363 transaction, is a newer, slimmer G.M. with about $17 billion in debt.

Under the terms of the deal, G.M. would sell itself in Chapter 11 and bondholders would receive a 10 percent stake in the newly reorganized company in exchange for about $27 billion in bonds. They would also receive warrants to buy an additional 15 percent of a new G.M., exercisable if G.M.’s value rises to certain levels.

G.M. said in the regulatory filing that the proposal depends on the government getting enough bondholders to make statements of support backing the terms of the swap. Without those statements, which are due by Saturday, the amount of stock and warrants for bondholders would be “substantially reduced or eliminated.”

The bondholder committee, which represents holders of about 20 percent of the bonds’ value, had already said they support the proposal, G.M. said.

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“The ad hoc committee of G.M. bondholders supports the revised offer from G.M. and believes that when contrasted with the alternative — uncertain and costly bankruptcy court litigation — that it represents the best alternative for bondholders in the current difficult and dire situation,” the group said Thursday in a statement.

Earlier this week, bondholders overwhelmingly rejected a debt exchange offer that would have swapped their bonds for 10 percent of the company’s equity. It is believed that G.M.’s bonds are held by tens of thousands of investors, ranging from institutions to individuals.

Thursday’s announcement came after German and American negotiators in Britain failed to agree on a crucial bridge loan to sustain Opel and the rest of the European operations of General Motors in the event of a bankruptcy filing, following a marathon negotiating session that stretched till nearly 5 a.m. Thursday.

But officials did manage to narrow the field of potential suitors for Opel to two companies — Fiat, the Italian automaker, and Magna, a Canadian auto parts giant. A Belgian private equity firm as well as a Chinese automaker were knocked out of contention.

NY Times

Mises Daily by Karen De Coster | Posted on 5/22/2009

The last remnants of the American free-market system are experiencing a quick death by strangulation. Perhaps the most disturbing casualties of government intervention are General Motors and Chrysler, two disgraced automakers that have gone from private ownership to the public trough virtually overnight. The US government has effectively grabbed a financial stake in each company while attempting to control the reorganization process without any constitutional authority to commence such actions.

The takeovers, which have occurred at breakneck speed, are alarming. A defining characteristic of economic fascism is the control of private property and business through a government-business “partnership.” This public-private alliance, while permitting private business ownership, is an arrangement that allows government to control and plan private industry. What we are experiencing from the schemers in Washington, DC is a planned capitalism, or soft fascism, that is being rolled out at an unprecedented pace.

One of the more disturbing actions on the part of the Washington establishment has been the blatant disregard for property and contract rights. First, consider the case of Chrysler. The government, while coming to the aid of a dying Chrysler, lobbed offers to its lenders, the bondholders. A group of dissident bondholders spurned the government’s offer that would have given them a minuscule stake in the company while the UAW received a majority ownership position.

In response, the president denounced the bondholders, publicly proclaiming their obligation to sacrifice and referring to them as “vultures” because they insisted on maintaining their rights as senior creditors. Chrysler’s bondholders, by law, are secured creditors, and they hold a senior ranking above unsecured creditors or shareholders in a bankruptcy or reorganization. Yet they were vilified and bullied for refusing to agree to a shoddy deal. Some of the holdout bondholders finally did buckle under; they dropped their legal challenge and agreed to the government’s lowball offer, but only because they were strong-armed by Washington’s bully tactics. Thomas Lauria, the attorney representing the group, stated that his clients weren’t able to “withstand the enormous pressure and machinery of the US government.” Thus the senior creditors were plundered while ownership was redistributed to the UAW, whose members are junior creditors. This makes a mockery of US securities law.

The bailout and ensuing appropriation of General Motors is no less tragic. The current restructuring plan calls for the US Treasury Department to have controlling interest in General Motors, which amounts to absolute nationalization. In GM’s headquarters in Detroit there is a cluster of bureaucrats from the government’s task force telling GM how to run its business. The task force, assembled by the White House, has the power to exercise significant control over product decisions. According to a GM news release, the Treasury Department will have the power to elect all of GM’s directors and control the vote on matters brought before the stockholders. Additionally, the bondholders who have funded the company are being offered a paltry piece of the equity of the reorganized company — another major blow against the sanctity of contract.

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Furthermore, the White House fired General Motors Chairman and CEO Rick Wagoner. When the executive branch intervenes in a private business and ousts management, bailout or not, it is a staggering violation of the American ideal of free enterprise. This sets a precedent for unlimited government trampling over the private sector. On March 30th, Obama said, “Let me be clear. The United States government has no interest in running GM. We have no intention of running GM.” If that’s the case — and we know it’s not — then why scoop up majority ownership?

The revolving door between Wall Street and the bowels of Washington are getting a workout. It’s the guys from Wall Street who run the government and the guys from government who run Wall Street. Only the guys from Wall Street – especially Goldman Sachs – who have taken over the Treasury Department are now taking over control of the domestic auto industry. You know what happened when they tried to run their own company, Goldman Sachs. How in the heck did I miss the part in the Constitution where powers were granted to the Treasury Department and its hired hacks?

Another notable abomination is the use of taxpayer dollars, on the part of the political establishment, to grant preferential treatment to one group of constituents — the unions — at the expense of each company’s creditors, the bondholders. Not only is this an illicit use of the executive office for political pandering, it’s a deliberate redistribution of wealth. It’s also a handsome payoff to the loyal unions, who have long been big supporters of the Democratic Party.

The GM and Chrysler takeovers are orchestrated political restructurings aimed at serving the larger interests of the US government. The apparatchiks on the Potomac have the authority to coordinate production in a manner that compliments their political and social agenda. The White House has not been shy about its ambitions for green policy and the future of American-made automobiles. This coup paves the way for big government to get its tentacles into an industry that will allow the feds to ram their socialist-totalitarian, green agenda down all of our throats.

Moreover, the Obama regime already announced that it is buying 17,600 green vehicles (hybrid sedans) from Detroit’s Big Three by June 1, using $285 million from the $787 billion stimulus bill. Representative Sander Levin, a Democrat from Michigan, stated, “The federal government’s purchase of thousands of hybrids and other fuel-efficient vehicles from the Big Three shows that our domestic auto industry will weather this current crisis and build the cars of the future.” But certainly, it shows nothing. If the car companies were capable of building the cars of the future that consumers want to buy, no bailout would have been needed, and the government would not have to place an enormous, personal order for automobiles in order to keep the assembly lines moving and inventory lots turning over. The only thing the mega-purchase “shows” is Detroit’s inability to sell its automobiles at bloated prices in the free market, thereby leaving the government to spend taxpayers’ money on goods they refused to buy on their own.

In fact, giving the kiss of life to two dead horses, GM and Chrysler, illustrates the futility at work here, considering that both companies have just announced there will be a considerable number of dealership closings all over the country. Chrysler plans to close about 800 dealerships while GM will trim back 2,600 dealers by 2010. The fact that GM is cutting back its dealerships to the tune of 42 percent speaks volumes about its bloated, bubble-fueled predicament. The government has been pouring billions into each company’s bailout bin in order to keep these inefficient, surplus dealerships around so that they could continue on their path of chasing invisible customers and not selling cars. The misallocation of resources has been staggering. Half-baked investment decisions, like these, are what we can expect from a politically anointed task force that will centrally plan the manufacture of automobiles.

$19 $15

As the Chrysler resuscitation continues and GM morphs into Government Motors, we can expect that the government will prepare to churn out its environmentally correct greenmobiles that the market has rejected over and over again. Freedom, choice, and capitalism will pay a dear price because a group of government bureaucrats, on the receiving end of political favors, will run a major sector of the US economy and foist a prescribed lifestyle upon American consumers.

The funeral bell is ringing a reminder of capitalism’s mortality. And I won’t dare touch on what happens when government-run automobile manufacturers perform like the post office or the DMV.

From the what-a-world department: Daimler AG’s $50 million investment in Tesla Motors this week means the San Carlos electric car maker is worth roughly half the value of the world’s largest auto manufacturer, General Motors Corp. With one roadster on the market and one sedan in prototype, Tesla, thanks to Daimler’s 9 percent stake, is valued at $550 million. GM sold 8.35 million vehicles worldwide in 2008; its market value as of Thursday was $1.17 billion, based on the closing stock price of $1.92.

“It’s sort of amusing,” remarked Daimler co-founder, Martin Eberhard.

Green throwdown: Faster than a speeding bullet, San Jose Mayor Chuck Reed’s office sent us the news that his city is now considered America’s greenest. At least Greentech Media says it is, citing Reed’s drive to bring 25,000 green tech jobs to San Jose, among other items in his 15-year “Green Vision” program. Special mentions go to Palo Alto, Berkeley, Greensburg, Kan., and Gainesville, Fla. San Francisco is little more than an afterthought in the online magazine’s list of 12. Its green cred: “More than half the city’s residents use public or alternative transportation to get to work.”

But hasn’t Mayor Gavin Newsom repeatedly told us San Francisco is the greenest of them all? “With all due respect to other cities, San Francisco is much greener than everyone else on this list,” Nathan Ballard, Newsom’s spokesman, e-mailed me. “Sure, mayors around the country have made a lot of pledges, but we have actually done the work.” Ballard says the city’s record on green building, recycling and reducing greenhouse gases is second to none. Newsom “would be more humble about it,” Ballard added. Right.

Check out Greentech Media’s list at links.sfgate.com/ZHEF.

Dark (green) horse: It should be said that this is about the 984th “green cities” survey that has crossed our desk in oh, about the past three months, so one shouldn’t treat it as gospel.

However, Reed, I’m told, takes his ambition to be the green leader very seriously. Thus, it was no surprise that he was on hand Monday at the ribbon-cutting on San Jose’s Santana Row for one of the first U.S. dealerships to sell Southern California-based Fisker Automotive’s plug-in hybrids. Coulomb Technologies, headquartered in Campbell, was also on hand for the installation of one of its electric car-charging stations. Newsom might humbly point out that San Francisco’s City Hall already has one of those.

Now if only Tesla Motors, flush with Daimler’s $50 million, would open a manufacturing plant, as it once said it would, in San Jose.

Satisfied customers: Of all the banks in California, Oregon and Washington, San Francisco’s Bank of the West ranks highest in customer satisfaction, according to the latest J.D. Power and Associates survey.

That’s the second year in a row for Bank of the West, a subsidiary of France’s BNP Paribas, with branches in 19 Western and Midwestern states. Not that California’s fifth-largest bank has escaped the woes of its peers. It recorded an $85 million loss in the last quarter, mainly because it raised its reserves to cover loan losses, primarily commercial.

“Prudent management,” said bank spokesman John Stafford, pointing to a Tier 1 capital ratio of 9.3 percent as an example of the bank’s sound fundamentals. Bank deposits also grew 12 percent compared with a year earlier. ( www.bankofthewest.com )

Down the hatch: Here’s a money-raising idea for our budget-challenged leaders. A 25-cent per-drink increase in California’s alcohol tax. Yes, it’s that dreaded TAX word, but the Marin Institute, San Rafael’s self-styled “alcohol industry watchdog,” says it would raise $3.4 billion.

A small recompense for the $38.4 billion the state lays out in connection with alcohol-related illnesses and lost productivity, according to the organization ( www.marininstitute.org). Alcohol tax measures are floating around the Legislature, but their prospects are murky at best.

You may have noticed, however, that the Senate Finance Committee just voted for a federal excise tax on alcohol and “sugar-sweetened beverages” to help pay for President Obama’s health care reforms.

Tips, feedback: E-mail bottomline@sfchronicle.com.

China emerges as world’s auto epicenter

America’s auto titans are dismantling their global empires. But across the Pacific, it’s as if the global economic forces that have pummeled Detroit never struck. Chinese auto sales are up, and this year China is projected to displace Japan as the world’s largest car producer.

Now, the auto world is buzzing that China’s auto industry may try to pick up the pieces of Detroit — at a bargain.

Chinese companies have tried to dampen speculation, issuing regulatory filings that deny bids to buy Ford’s Volvo or General Motor’s Saab. But there’s little doubt among analysts that Chinese automakers are interested in the United States and that Detroit’s automakers are interested in them.

‘Center of gravity is moving eastward’
The global auto industry is restructuring. Italy’s Fiat is on the verge of taking control of Chrysler. Last year India’s Tata Motors, already famous for its $2,000 Nano, acquired Jaguar and Land Rover.

And China’s auto sector has emerged as a threat to the long-standing pecking order. Earlier this year, Geely Automobile, one of China’s largest private carmakers, purchased an Australian drivetrain transmission supplier, a leading gearbox manufacturer. Weichai Power, one of China’s top diesel engine manufacturers, acquired a French diesel engine producer. Another Chinese company, BYD, which counts Warren E. Buffett as an investor, launched a mass-market plug-in electric car, ahead of GM’s anticipated Chevrolet Volt.

Detroit’s annual auto show in January was somber, but Shanghai’s show dazzled attendees with throngs of models, rock bands and light shows. This year, Nissan skipped Detroit and attended the Chinese event in April. Mercedes-Benz, BMW and Porsche all unveiled new-vehicle models in Shanghai.

“The center of gravity is moving eastward,” Dieter Zetsche, chairman of Daimler, told reporters at the show.

“When we look back 20 years from now, the year 2009 is likely to be viewed as the year in which the baton of leadership in the global auto industry passed from the United States to China,” Jack Perkowski, a Western transplant and former chairman of a Beijing auto parts company, wrote in his blog “Managing the Dragon.”

Hurdles ahead for exports to U.S.
Some of China’s bigger manufacturers, such as Chery Automobile, have trumpeted their intent to export Chinese-made vehicles to the United States in the next few years. To get there, they’ll need to revamp their products to meet stringent U.S. emissions and safety standards.

That’s no simple problem. Previous plans to ship Chinese cars to U.S. soil have crumbled. A company called Brilliance missed its goal of launching U.S. sales in 2009. BYD said it would introduce its cars to Americans in 2010, but has pushed their arrival to 2011. Other potential contenders have gone out of business or are struggling to stay afloat.

In 1994, Beijing released a plan to triple auto production by 2000 and reduce imports. The government lured foreign producers to bring their technology overseas and invest in Chinese auto parts firms. It aimed to modernize domestic manufacturing by creating joint ventures with foreign automakers such as GM.

As a result, China’s auto sales took off in 2000. In 2002, they crossed the 1 million mark. More recently, the numbers have taken a hit in the economic crisis, forcing companies to curb exports to countries such as Russia and Vietnam.

Stimulus, growing middle class spur growth
But after the industry pressed Beijing for a bailout late last year, the central government responded with subsidies and slashed the sales tax on small, fuel-efficient cars, spurring demand. And analysts say the expansion of the country’s web of roads and highways — part of an economic stimulus package — coupled with a growing middle class could fuel more sales for years to come.

In April, China’s vehicle sales jumped 25 percent, compared with a year earlier, to a record monthly high of 1.15 million units. It was the third consecutive month that China has surpassed the United States in sales.

GM, which has two joint ventures in the country, also hit a monthly record in April with its sales jumping 50 percent from a year earlier. The automaker plans to import cars from China starting in 2011, according to a GM plan circulating in Congress.

But in the United States, auto sales fell 34 percent last month. And GM, which has received $15.4 billion in U.S. government loans, says it is likely to file for bankruptcy protection.