About Patrice Sarath

The world’s cheapest car has been put on hold, as protests over Tata Group’s plans for a Nano plant in eastern India have been stymied by protesters and politics.

Although Tata plans to repurpose other plants to build  what it has billed as the world’s least expensive car (around $2,500), it had to nix plans for a production volume of 40,000 per month, instead settling for 10,000. The move could affect the price as well, since one of the factors allowing the company to offer the car at this price point was cheap land.

Although normally I would take umbrage at the forced change in Tata’s plans, the critics have a point. From an environmental standpoint, does India need more vehicles? Should it be moving farmers off their land and building factories?

The giant nation is beset by pollution, as are most countries with growing middle classes, and the Nano could exacerbate the problem in India. Another question is that of energy. Won’t 40,000 extra cars a month on India’s roads put pressure on the country’s energy supplies? What about the world’s oil markets?

India has been stepping up its oil development and exploration efforts as domestic demand has risen. The country is a net importer of oil, although it looks to be sitting on some fecund oil and gas fields of its own. The US isn’t the only country seeking energy independence — that could be India’s slogan as well.

The question is, is the increase in oil production going to fuel the Nano, or is the Nano (and increasing wealth that is causing rising consumption) fueling oil production? And if India is truly seeking energy independence, is a Nano in every garage the way to go about it?

Even though I would like countries to scale back their energy consumption, it’s hardly fair to insist that nations forego the conveniences of cheap energy that Americans and Europeans have enjoyed for more than a century. In general, the benefits of a sturdy middle class outweigh the disadvantages of consumption. So I hope Tata’s plan for a Nano plant gets the green light again.

And then, maybe next, Tata can tackle global warming. After all, is there nothing this company can’t do?

Add Wachovia to the list of banks that have agreed to buy back auction rate securities. Investors claimed that these securities were marketed to them as safe as cash, but when the market froze they became worthless.

New York State Attorney General Andrew Cuomo has been working hard to ensure that investors, including municipalities and government agencies, get their money back after the investments failed. This is a good thing, because banks should suffer the consequences of what may be fraudulent sales tactics. But it makes one ask, why were the securities sold as essentially risk-free in the first place?

I understand the concept of caveat emptor, but investors need more protection than a dealer’s word that an investment is safe and appropriate. Yes, there is the prospectus of course. But here’s the shocking news — most people don’t read them. Since these documents are written in as obfuscating a manner as possible, is it reasonable to ask if investment firms are hoping that people succumb to the MEGO (my eyes glaze over) effect?

And since the banking and financial services industries are so interconnected, even someone who diligently decides to avoid investments that he or she doesn’t understand (hey, it works for Warren Buffett) can’t steer entirely clear of risk-laden investments. Even putting your money in a savings account with a pitiful interest rate is placing it in a bank that invests in risky derivatives.

So it’s hardly fair to say, “Read the prospectus,” because these documents only appear to exist as a way for banks to cover their … assets.

What’s the solution? There’s always going to be a tension between risky investments and safe investments, and between what’s good for the buyer and what’s good for the seller. Tighter regulations, maybe plain English documents, and tougher consequences for dealers that cross the line from overzealous to illegal would help.

Because, seriously, we can’t keep having do-overs like the current situation.

In The New Yorker recently, an article discussed antibiotic-resistant bacteria, strains that are so resistant they make an MRSA infection look like a walk in the park. So what does this have to do with quarterly earning reports? Well, drug companies have, by and large, pulled out of antibiotic research because it’s not where the money is. When you have shareholders to mollify, you direct your research platform toward blockbuster drugs. No matter how much we are going to need new antibiotics, they will never be profitable for drug companies (especially since overuse is what got us into this mess in the first place).

Richard Syron, the CEO of Freddie Mac, recently allowed that even if he had acted on 2004 warnings that the company was underwriting very high risk loans, there was little he could have done about it.

“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things,” Mr. Syron said in an interview. But if Freddie and its sister, Fannie, had kept their underwriting standards tight, fewer bad loans would have been made and the subprime crisis could have been partially averted.

Never really healthy, the auto industry has been bleeding cash over the years, interspersed with short periods of remission. Now the cure — trucks and SUVs — has become the disease. Automakers grew too comfortable building for the “cheap gas” economy, even when interest was rising in hybrids and electric cars, and they marginalized their research in these new technologies. And that was before gas prices soared. Now they are playing catch up, but don’t expect changes any time soon. Gas prices have dropped a little, and the short-term mentality (i.e., quarterly earning reports) will come back into play.

The oil companies have been reaping record (some say windfall) profits. Each quarter as gas prices rise, so have their profits. Nice, huh? A port in the storm? But their business model is built on a non-renewable resource. Oil sands, offshore drilling, Arctic drilling … it doesn’t matter. The oil is going to run out. Instead of quarterly earnings, shouldn’t we be asking ExxonMobil and its ilk what their long-term plans are?

As Syron points out,  companies answer to shareholders. At what point do we require companies to answer to the rest of us? As long as a company’s success is measured in quarters, can our industries build the products and provide the economic stability that the we need for the long term?

The auto industry suffered another setback recently when several finance companies, some tied to automakers, others among the biggest names in lending, said they would get out of the lease financing business.

It turns out that lenders were having trouble selling previously leased vehicles when their leases were up. High gas prices and a generally weak economy were fingered as the culprits. So what had once been a fairly lucrative business was hit by the malaise Americans are feeling due to higher gas prices, higher grocery bills, and other pains in the wallet.

Chrysler started the run of bad news when it said that its financial unit would get out of the leasing business entirely. In response, JPMorgan Chase subsidiary Chase Auto Finance basically said, “Hey, don’t look at us.” The company announced it would not take on any new leasing business from Chrysler dealers.

Wells Fargo Auto Finance also exited the business, citing low volume in its quarterly earning press release. Ford Motor Credit tried a different approach — it raised the prices on its leases, presumably to discourage prospective customers and encourage them to buy instead.

The bad news kept on coming, as GMAC Financial Services attributed a nearly $2.5 billion loss for the second quarter in large part to its auto leasing operations.

Leasing won’t go away forever, but customers who love the idea of driving a new car every few years might have to wait til the market comes back. Either that, or get some of that spray stuff.

Banks are desperate to move CDOs, those dangerous collateralized debt obligations that are backed  by subprime mortgages, off their books. The problem is, who is brave, or stupid, enough to buy them?

In Merrill Lynch ’s case, that would be Lone Star Funds. But Lone Star was far from stupid — they agreed to the deal because Merrill Lynch funded most of the transaction. Lone Star Funds is buying the CDOs for $6.7 billion, and Merrill is financing the purchase up to $5 billion. It’s better than being on the hook for the estimated $11 billion that Merrill Lynch says the investments are still worth — a dubious estimate at best, since for all intents and purposes, the CDOs are worthless. Merrill Lynch is basically paying Lone Star to take them off its hands and its books. It originally valued the package at $30 billion (it’s hard to tell if that’s what it paid for the investments, since none of these figures are crystal clear).

What is Lone Star going to do with this hot potato? The company is no stranger to distressed assets. Those are its bread and butter. Maybe it’s hoping that the government’s bailout of Freddie and Fannie and the homeowner relief plan will stabilize the underlying mortgages and it won’t be left holding the bag. Most likely they will be collecting on the underlying debt. (Hey, it might just be a few pennies on the dollar, but after a while, it adds up.)

In the meantime Merrill Lynch still hasn’t extricated itself from these investments, it’s just moved them from one column to another. It’s a good move and a necessary one, but as the company is finding out, that’s one sticky hot potato.