Baltimore – (TFN): All eyes and ears are on the Fed this week. With Bernanke in New York discussing potential new bubbles and the New York Fed getting heat for overpaying AIG’s many creditors, investors are having a tough time knowing exactly who to follow.

For those of you who hold up the “Fire the Fed” signs, move over. I am thinking about joining your camp.

First, the real bad stuff. According to Neil Barofsky, TARP’s special inspector general, New York’s Fed (under the leadership of Tim Geithner) failed to use its leverage as the top-banking regulator to tell AIG’s lenders to take less than they were owed.

Instead of taking an across-the-board “haircut” as Obama and Pelosi told us we all should, finance giants like Goldman Sachs, Merrill Lynch and Societe Generale said they want 100% of what they were owed.

The only holdout, UBS, said it would be willing to take 98%. But after tough looks from the guys from across the table, that offer was quickly rescinded.

According to Barofsky, the move cost the country billions of dollars and much, much more in confidence for the nation’s banking cops.

Thanks, Tim!

With that bit of news in today’s headlines, it is tough to find the confidence in some of the Fed’s latest plans to help pull the country from financial failure.

As the nation slowly recovers from last fall’s economic collapse, Bernanke and his troops at the Fed are now facing the difficult task of unwinding massive expansionary policies.

One trick discussed today is shortening the length of emergency loans from 90 days to just 24 days starting in January. It’s a pretty mundane move that will have little tangible effect on the markets.

But what could have a much larger impact, with much less transparency, is Bernanke’s recent discussion of paying interest on the reserves banks place with the Fed.

A popular move with many overseas central banks, the interest rates paid on reserves helps to establish a rate floor that regulators can gradually increase without raising overall interest rates.

Essentially, the move is a way of mopping up excessive liquidity without draining or lowering the water in a much larger pool of lending capital.

Like many things, the idea sounds great on paper, but so did letting the Fed negotiate with AIG’s trading partners and we now know how much that cost us.

Let’s face it. The markets like transparency and predictability. Anything less gives us what Friedrich Hayek called “malinvestment.”

As the Fed gets more and more creative in its efforts to boost the economy without creating deadly bubbles, transparency will go out the window.

Toss in growing political pressure from the folks from Washington and one thing is certain.

Anything the Fed does will cost you and I more money.

Jim Willie of the Hat Trick Letter notes that Bloomberg has filed a lawsuit against the Federal Reserve to force the Fed to give some details about where in the hell $700 billion went after disbursement from the TARP funds, a request and a lawsuit that the Fed is steadfastly fighting, tooth and nail.

Bloomberg.com reports it as “The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral”, which they think they are entitled to “under the U.S. Freedom of Information Act.”

The reason the Fed gives is that trade secrets are in there somehow! Mr. Willie says, “The USFed will continue to withhold internal memos as well as information about trade secrets and commercial information. Are you kidding me? TRADE SECRETS BY AN AGENCY HIRED TO MANAGE THE DOLLAR AND TREASURYS???”

It was with a degree of shock and alarm that I noted that the punctuation was 3 punctuation marks, which immediately puts me on High Alert Status (HAS) and identifies it as something more than simple puzzlement, like when people casually ask my wife, “Why in the hell don’t you kill your husband and make it look like an accident, or divorce him, or at least just get away from him and maybe have a chance at a happy life?”

But I am too busy right now to think about that, or even come up with some snotty answer that includes telling them all to “Kiss my butt!” because I am on my way to work. Believe it or not!

Normally, I would not be caught dead around here in the late afternoon like this, having neglected to come back to work after lunch, but a memo from my boss keeps preying on my mind as it is telling me to prepare a presentation to explain why my people lost so much money this year, why all my employees hate me, why all my customers are suing me, and to clear up certain “accounting irregularities” where it looks like I was charging greens fees to the employee pension fund.

Now, I find that I have a bulletproof defense, and I can’t wait to get back to the office to work on it; I don’t have to tell them anything! In fact, I laugh at them all, “Hahahaha!” because what they want to know are my personal Mogambo Management Trade Secrets (MMTS), and so I don’t have to tell them!

Unfortunately, while I am exactly like the Federal Reserve in that we are both total, complete failures at our jobs, mostly through sheer stupidity, the repercussions are quite different.

So why do Bernanke and the Fed get away with stonewalling, while I have to barricade my office door with office furniture to keep some foul-tempered security guards (Carl and Bullet Head) from getting inside?

Mr. Willie says, “The USFed is scared and on the defensive”, which describes my situation exactly, but the Fed seems to be predicating its actions on the notion, according to the law firm Levine Sullivan Koch & Schulz quoted by Mr. Willie, that “This is uncharted territory. The Freedom of Information Act was not built to anticipate this situation. That is evident from the way the Fed tried to shoehorn their argument into the trade secrets exemption.” Wow!

Another difference between the Fed’s situation and mine is that around here, the building is being evacuated and there are policemen with bullhorns telling me to come out with my hands up, and go with the nice men in the white coats who want to take me out for tacos and beer, while, Mr. Willie goes on, over at the Fed, “This case is worth watching, but strangely receives very little attention.”

“Strangely” is right! But a lot of strange things have happened recently, like how interest rates have recently been, literally, zero! And the 30-year US Treasury bond is yielding less than 3%, which implies mental illness, stupidity or corruption, or some of all three! This is insane!

And if history proves one thing, it is that insanity in things economic means buy gold, stupidity in things economic means buy gold, and corruption in things economic means buy gold.

Hey! This investing stuff is easy! Whee!

Source: Fed Refuses to Trade Secrets

“Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,” Treasury spokeswoman Brookly McLaughlin said in a statement.

No specific announcement of a bailout was made, as there is still time before General Motors Corp. (GM) and Chrysler LLC – the companies in most at risk of foreclosure – run out of cash. However, the White House made it clear that the government is ready to backstop the companies by using a portion of the funds allocated to its Troubled Asset Relief Program (TARP).

“The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry,” said White House press secretary Dana Perino.

The government has used roughly $335 billion into banks and insurance companies over the past two months, leaving about $15 billion of the initial $350 billion authorized by Congress for the TARP fund available for use. Treasury officials have been reluctant to make those funds available to the auto industry, however, as the money is still needed to backstop existing programs.

If the Treasury wants to tap the second half of the $700 billion bailout passed in October, the administration will first have secure Congressional approval.

A separate measure to grant the auto companies $14 billion in loans was approved by the House of Representatives last Wednesday, but failed to gain Senate approval.

“It’s over with,” said Senate Majority Leader Harry Reid, D-NV, after the Senate vote. “This is going to be a very, very bad Christmas for a lot of people.”

Democrats blamed Senate Republicans for the bill’s failure, and Senate Republicans, in turned blamed union labor.

“We’re hoping that the Democrats will continue to negotiate but I think we have reached a point that labor has got to give, if they want a bill they can get done,” said Senator Richard Shelby, R-AL.

Of course, the bill’s demise left President George W. Bush at a crucial impasse and with virtually no option but to open the Treasury coffers.

“The consequences of the Senate Republicans’ failure to act could be devastating to our economy, detrimental to workers, and destructive to the American automobile industry unless the President immediately directs Secretary Paulson to explore other short-term financial assistance options,” said House Speaker Nancy Pelosi. Action by President Bush is the “only viable option,” she added.

Detroit’s Big Three employ more than 200,000 people and support millions more U.S. workers indirectly through suppliers and dealerships. Their collapse could ultimately cost the economy more than 2 million jobs total. And that doesn’t count the estimated 1 million Americans – including many retired autoworkers – who rely on the U.S. auto companies for pension and healthcare benefits.

Ford Motor Co. (F), which has more cash at its disposal than both GM and Chrysler, has said it would not seek government funds, but still urged Congress to help its competitors because their systems of supply and distribution are so intertwined.

Source: White House Opens TARP to Auto Industry after Congress Fails to Approve Loans

Item: The bailout of Detroit went down in flames last night, but not because principled lawmakers devoted to the free market thought that management of the automakers should pass from weak hands into stronger hands via bankruptcy, as the Framers of the Constitution provided for.

No, it appears the Republican holdouts were more than happy to fork over the $14 billion, but only if the United Auto Workers agreed to wage cuts on the GOP’s timetable. In other words, the modern Republican party believes it’s government’s place to micromanage wages. (And let the record show the instigator of this scheme, Senate Minority Leader Mitch McConnell, was all for the bailout of the financial sector that Jim Rogers has declared bankrupt.)

Item: Laid-off workers at a company smash windows and computer gear. Workers at another company travel hundreds of miles to company headquarters to demand back wages. Taxi drivers fight with police in several cities, and even the cops gather as mobs to demand higher wages.

United States 2010? No, China 2008.

Item: Congresscritter submits a bill demanding the Fed, among other things, restore the M3 money supply figure it stopped reporting nearly three years ago. The congresscritter is… Dennis Kucinich?

OK, here’s something I can actually wrap my head around. The Federal Reserve just gave Bloomberg a big ol’ middle finger in response to Bloomberg’s Freedom of Information suit demanding to know who’s getting those $2 trillion in emergency loans, and what they’re putting up for collateral.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

Incredibly, this longish story never gets around to saying what the next step in the legal process is. So yes, I guess my mind boggles at that too.

Source: The Mind Boggles…

The bill clearly falls short of the $34 billion the Big Three were asking for, but should be enough to keep the automakers running through January, when the new Congress and Obama administration take the wheel.

As previously reported in Money Morning, there will be limits on executive pay, prohibitions for golden parachutes and requirements that the automakers get rid of their corporate aircraft and not pay dividends while loans are outstanding. The bill also provides a “car czar,” or presidential appointee, to oversee keep tabs on the companies’ restructuring efforts.

Of course, the bill is still awaiting congressional approval and there is cause to believe it may stall in the Senate.

Sen. Richard Shelby, R-AL, was a member of the panel that twice grilled Big Three CEOs and one of the bailout’s most vocal critics. Yesterday (Wednesday), Shelby threatened to filibuster the deal if it reaches the Senate.

It’s interesting to note that Shelby’s home state of Alabama, has built three foreign car assembly plants – Honda Motor Corp. (ADR:HMC), Mercedes-Benz and Hyundai – as well as a Toyota Motor Corp. (ADR:TM) engine plant, in the past 20 years.

Shelby’s efforts induced the formation of Boycott Alabama Now, a group that says it wants America to give Shelby a taste of what he’s doing to America. Such a boycott “will include any travel into the state well as boycotting the purchase of anything produced in any way within the state,” according to the group’s Web site.

Senate Minority Leader Mitch McConnell expressed reservations about the bill’s legislation and doubts it’ll garner enough Senate votes to pass. The state he represents, Kentucky, has a 7,000 employee Toyota plant, The Boston Globe reported.

Then there’s Tennessee, the only state with U.S., Asian, and European auto assembly plants. And in an interview with BusinessWeek, Tennessee’s Sen. Bob Corker seems to understand his colleague Shelby’s positions on the bailout more so than his own.

“It has not been an issue of local politics. For me there is no issue of local politics. I try and dig into these issues and present thoughtful responses to the situation. In defense of Senator Shelby, I knew where he was going to be on this issue before this ever arose,” Corker said. “He was against the Chrysler loans back in 1979. He was always going to be against this, as he was against the Wall Street bailout legislation. In his case, it’s not the politics of the auto industry. That’s just who he is.”

But Corker nailed the source of problem.

“Regardless of what happens this week, the legislation, if passed, is not going to move people to buy cars,” Corker said.

Auto Woes Extend Beyond the Big Three

Falling demand is something all carmakers can agree on, especially in Germany, Europe’s largest economy and the home of Europe’s largest carmaker, Volkswagen.

While all focus has been on Detroit’s Big Three, few have noticed that Volkswagen – like Detroit’s Big Three – is trying to bite off its own piece of a broad government bailout. In October, Germany’s parliament passed a $642 billion (500 billion euro) bank-rescue plan to stabilize the country’s banks. And Volkswagen has quietly sought government help for its financial services and banking units.

Premium carmaker BMW said it wasn’t sure if it would ask for similar help, Reuters reported.

That’s why it’s not accurate to assume bailout opponents share the same opinions on the bailout as foreign automakers. As Money Morning previously reported, it’s more than just Big Three employees on the line.

While the Big Three employ more than 200,000 people directly, they support millions more indirectly through suppliers and dealerships. The collapse of the Big Three could ultimately cost the economy more than 2 million jobs total. And that doesn’t count the estimated 1 million Americans – including many retired autoworkers – who rely on the U.S. auto companies for pension and healthcare benefits.

According to Germany’s VDA industry group, parts purchased by manufacturers account for 75% of the value of an average car, Bloomberg reported.

Here in the United States, as many as 60% of Honda’s U.S. parts suppliers are also major parts sources for the Big Three.

If a manufacturer’s major customer goes under, it too may scale back operations and therefore be unable to meet the manufacturing and shipping demands of another customer.

“You can’t underestimate what would happen when a large player collapses,” BMW Chief Executive Officer Norbert Reithofer e-mailed to Bloomberg. “That would impact the supplier structure and therefore the entire industry.”

The United States is also the largest market for most foreign automakers. Allowing one or all of the Big Three to go under would add millions to the running unemployment numbers and deepen the recession, making the U.S. market less likely to buy their cars.

Source: Auto Bailout Awaits Congressional Approval with Millions of Jobs at Stake

Ford posted a $2.98 billion operating loss for the quarter ended Sept. 30. Revenue fell 22% to $32.1 billion, forcing the Dearborn, Mich.-based automotive icon to burn through $7.7 billion in cash.

The automaker’s cash reserves dropped from $26.6 billion at the end of the second quarter to $18.9 billion at the end of September. If the company continues to burn cash at this rate, Ford will run out of money by April 2009.

“Cash burn is the No. 1 issue,” Rebecca Lindland, an analyst at IHS Global Insight Inc., said in an interview with Bloomberg Television. “We associate cash burn with General Motors. It has not always been a problem with Ford. That is potentially a new problem.”

Ford Chief Financial Officer Lewis Booth insisted that the company has adequate liquidity and said Ford is taking steps to fortify its position going forward.

“We’re comfortable with our liquidity,” Booth said. “We are putting in place a lot of actions to make sure we stay comfortable with our liquidity situation.”

Those measures include: Reducing inventory, eliminating merit-based pay increases for salaried employees in North America, cutting performance bonuses for salaried employees worldwide, and the suspenspending matching contributions to salaried U.S. employees’ 401(k) retirement accounts.

Ford will likely cut more jobs as well. Ford dismissed 1,500 salaried employees in the third quarter, after shedding 200 in the second quarter. The company hopes to reduce salaried personnel costs by another 10% by the end of January.

At the end of September, Ford had 22,600 salaried workers and 57,600 hourly workers in North America. That is a total of 80,200, a 41% reduction from 2005, the Detroit Free Press reported.

Cash Strapped GM Waves White Flag

General Motors is facing a similar dilemma. The nation’s largest automaker reported a third-quarter operating loss of $4.2 billion. GM also said that the amount of cash it has on hand fell from $21 billion at the end of June to $16.2 billion at the end of September.

GM said that it could very well run out of cash by year’s end.

“Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business,’ the company said in a news release.

“Looking into the first two quarters of 2009, even with its planned actions, the company’s estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs,” the statement read.

Like Ford, GM outlined a plan to boost liquidity with the goal of generating $20 billion in cash by the end of next year. The company hopes to cut capital spending to $4.8 billion in 2009 by delaying the debut of select vehicle programs, Bloomberg reported. GM will also save $1.5 billion by slashing its advertising budget and dealer promotion support.

The plan will also include job cuts. GM aims to cut 30% of its salaried-workforce expenses.

The company also has suspended merger talks with Chrysler LLC – a division of Cerberus Capital Management LP. While it did not specifically name Chrysler, GM said it was setting aside considerations for a “strategic acquisition.”

“GM is making a pretty direct plea for help,” Pete Hastings, a fixed-income analyst at Morgan Keegan Inc. told Bloomberg. “The message is, ‘We’ve done all the things we can do, and we need help. And if we don’t get help, fill in the blank.’”

GM, Ford, and Chrysler all asked to be included in the U.S. government’s $700 billion bailout plan, but were denied. They are currently seeking $50 billion in federal loans in the form of a package that would devote $25 billion to healthcare costs and $25 billion to aid general liquidity. Congress earlier this year approved a $25 billion loan program to assist in the development of more-fuel-efficient vehicles.

Detroit’s Big Three have also requested $51 billion (40 billion euros) in loans from the European Commission (EC).

“Either the federal government provides money for a bailout and lets the industry retool, restructure, and move ahead, or the industry dies,” Dennis Virag, president of Automotive Consulting Group in Ann Arbor, told Bloomberg Television.

Source: GM and Ford Burning Cash, Seek Emergency Government Loans