Business life: My finance news blog

Tesla Motors turned profitable for the first time in July, when the electric car manufacturer shipped a record 109 vehicles, the company said Friday.

A surge in sales and reduced manufacturing costs of Tesla’s Roadster 2 sports car helped boost the company to $1 million in earnings and $20 million in revenue.

"There is strong demand for a car that is unique in offering high performance with a clean conscience," said Tesla Chief Executive Elon Musk, in a prepared statement. "Customers know that in buying the Roadster they are helping fund development of our mass market electric cars."

The Roadster has a range of about 244 miles per charge — the first production electric vehicle to cross the 200-mile mark, according to the press release.

The Roadster is the only highway-capable electric vehicle for sale in North America or Europe, and the company says it is faster than a Porsche and twice as energy-efficient as a Toyota Prius cash advance.

In June, privately owned Tesla borrowed $465 million from the Department of Energy to fund development of an all-electric sedan called the Model S — slated to sell for $49,900, or about half the price of the Roadster.

Tesla has also partnered with Daimler to develop an electric version of mini vehicles called Smart cars. The company said it plans to launch a test fleet of 1,000 electric Smart cars in late 2009.  

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Some young adults have lost faith in the stock market after watching their parents and grandparents suffer declines over the past decade.

But investors just starting out can actually benefit from the carnage if they jump in and keep buying, according to a study of returns after bear markets.

That can be a tough sell.

Many people who came of age in the 1930s, the last decade when markets suffered such big losses, were so burned they swore off stocks for more conservative investments such as bonds and Treasurys.

Others who did invest in stocks traded actively in an attempt to avoid losses, an approach that Jim Coryea of Denver favors.

Coryea, 23, who has been investing since age 19, said he lost faith in the buy-and-hold strategy after his mother took a 40 percent hit to her portfolio.

"That sealed the deal for me in not believing in a long-term focus," he said.

What many may not realize is that the stretch from 1999 to 2008, measured by average annual losses, has been harder on investors than even the period from 1929 to 1938. The S&P 500 lost 1.4 percent a year on average in the past decade versus 0 lowest fee payday loans.9 percent in the Great Depression.

"You have to educate yourself enough to understand this is a silver lining for you," said Christine Fahlund, a senior financial planner with T. Rowe Price. "You will go through bull-market cycles when those shares will be worth more."

The biggest gains historically have gone to investors with the stomach to buy in bear markets. A $500 investment per month across a 30-year period starting in 1929 and through the Great Depression would have grown to $1.9 million, according to Price research.

By contrast, someone who started out in one of the most comfortable periods to invest, 1950 to 1959, made only $809,036 at the end of 30 years.

Coryea said turmoil in the market had reduced the desire of friends his age to invest in stocks. And he remains skeptical of the recent rally. For the long term, he worries about massive debts the government has accumulated. "There is no silver bullet to get us out of this."

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or tried to turn in — to get their Cash for Clunkers deal.

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Obama: 200 days in office

When he became the 44th president on Jan. 20, Barack Obama inherited the worst economic crisis since the Great Depression. After 200 days, here’s a look at the progress he’s made toward a recovery.

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Cash for Clunkers cars list: Top 10

These are the most popular cars purchased under the Cash for Clunkers program.

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NEW YORK (CNNMoney.com) — President Obama ended his first 100 days in office amid hopes that both General Motors and Chrysler Group might both still avoid bankruptcy. In his second 100 days, he created a new U.S. auto industry.

The reshaping of GM and Chrysler through bankruptcy is essentially complete, and the Treasury Department holds large stakes in both companies.

There is arguably no segment of the economy where the administration has had greater impact than in the auto sector. And there’s also no accomplishment that surprised experts more.

"It was a remarkable feat, and it surprised a lot of people," said Dave Cole, chairman of the Center for Automotive Research, a Michigan think tank.

Some critics aren’t convinced that a speedy bankruptcy was the right thing to do. Chrysler filed for bankruptcy April 30 and was out of bankruptcy on June 10. GM filed for bankruptcy on June 1. It emerged from Chapter 11 protection on July 10.

During the government-directed reorganizations, both companies shed tens of billions of debt and made deep cuts in their bloated dealership network, despite efforts by some members of Congress to protect the dealers.

But Jeffrey Manning, managing director at investment bank Trenwith Securities LLP, argues the companies would have been better off if the bankruptcy process took as much as nine months or a year credit reports free. That way, the companies may have been forced to make even bigger changes to their operations.

Manning said the government’s ability to convince bankruptcy judges in the two cases to accept that its plan was the only alternative, despite objections from some creditors, was a shock and could cause problems for the two automakers and other companies down the road.

Manning said lenders are going to be more wary about lending money to companies that are viewed as politically powerful, such as automakers, airlines and aerospace and defense manufacturers, for fear that they won’t have the same protections in bankruptcy that they once did.

"Borrowing is going to be more expensive," Manning predicted.

Too soon to say if bankruptcies worked

Regardless of whether the reorganizations fail or succeed, one thing is certain: the Obama administration will either get all the credit or all the blame.

By paying for the rescue with funds from the Troubled Asset Relief Program originally set up to fix the nation’s banking system last fall, the White House was able to reshape the auto industry without any action by Congress.

The rescue came at a significant cost to taxpayers. The Treasury Department poured $19.4 billion into GM and $4 billion into Chrysler before their bankruptcy filings and is unlikely to get much, if any, of that money back.

Still, Treasury agreed to give another $30 billion to GM and $8 billion to Chrysler to fund their operations during and immediately after the bankruptcy process, loans that it hopes will be mostly be repaid through the sale of stock in both firms at some point in the future.

But at the very least, experts said that the fact that two of Detroit’s Big Three are now beholden to the government for their survival allowed the White House to push for greater changes in the auto industry.

Automakers went along with tough new fuel economy standards the administration laid out in May. But Obama’s push for a greener auto industry included a major carrot as well. The government-financed Cash for Clunkers program helped jump start U.S. auto sales in July.

One thing both the critics and the supporters of the two reorganizations agree upon is that it is much too soon to declare either effort a success.

"The story is not over yet. We don’t know how it ends," said Tom Libby, president of the Society of Automotive Analysts, who said the administration deserves a log of credit for the changes put in place and the pace at which it achieved the change.

"I think it’s a major feather in the cap for the administration," he said. "It’s something the management should have done over the last 20 years."

Manning is not as confident that enough was done to solve the industry’s problems.

"Chrysler and GM took a lot of baggage with them out of bankruptcy, and they both have a lot of operational challenges," he said. "Until I can see evidence of strong consumer demand, I’m not optimistic."

Talkback: Do you think Obama’s forcing of GM and Chrysler into bankruptcy will help save the U.S. auto industry? Share your comments below. 

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Lawmakers are quickly learning that "too big to fail" may be too complex to legislate away.

The issue of determining which financial firms are worthy of a government rescue, which first took hold when the credit crisis intensified last fall, has been a subject of persistent — and divisive — debate.

Top regulators at the Treasury Department and Federal Reserve were widely criticized after making the difficult decision to let Lehman Brothers file for bankruptcy, while stepping in more than once to bail out insurer AIG (AIG, Fortune 500).

The topic has taken center stage in Washington recently as the debate on regulatory reform picks up speed on Capitol Hill.

One of the biggest challenges facing lawmakers, experts argue, is determining which companies are so important that their downfall would have disastrous implications for the financial system and entire U.S. economy.

In addition to AIG, the government has propped up big banks such as Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) with multiple capital injections.

Each bank has received $45 billion from the Treasury Department as part of the Troubled Asset Relief Program, or TARP. Taxpayers now own more than a third of Citi following a conversion of part of the government’s preferred shares into common stock.

At the same time, the Obama administration looked the other way when the smaller commercial lender CIT (CIT, Fortune 500) was teetering on the brink earlier this month.

But determining who makes the cut shouldn’t be based simply on size, said Peter Wallison, a fellow in financial policy studies at the American Enterprise Institute. He noted that even small, seemingly innocuous firms can pose a risk to the financial system.

"The major problem with ‘too big to fail’ is that we don’t really know when an institution is too big to fail," said Wallison.

The notion of creating of a list of systemically important institutions appears to have the backing from the Federal Deposit Insurance Corp. and the White House, but there have already signs of a pushback from Congress.

Rep. Barney Frank, D-MA, whose House Financial Services Committee will likely impose a heavy hand on any forthcoming regulatory legislation, warned earlier this week that creating such a list would encourage the very problem that regulators have sought to stamp out.

"It would be kind of a license to do well because people would think you couldn’t fail," he said.

Many have cited the implicit government guarantee behind mortgage giants Fannie Mae and Freddie Mac as helping to fuel problems there. Because there was a widely-held belief that regulators wouldn’t allow Fannie and Freddie to collapse, the two firms took on sizeable risks during the housing boom.

Fannie and Freddie eventually grew to such mammoth proportions that the government was ultimately forced to seize control of them nearly a year ago to prevent them from completely going under personal business cards.

Mechanics and the market

But even if lawmakers are able to agree on who is and isn’t too big to fail, there are several other complicated issues for Congress to consider.

One nagging question is determining just how to let a failed financial institution go under without causing a major disruption to the financial system. Many blamed the lack of such a mechanism for regulators’ inability to dismantle AIG last fall once they learned just how grave the insurer’s health was.

One leading proposal would entail creating a system similar to how the FDIC handles failed banks. In such cases, the agency takes control of a failing institution, often with a buyer already in place for all of its assets.

Bipartisan legislation put forth this week by Sen. Bob Corker, R-Tenn. and Mark Warner, D.Va., would effectively allow the FDIC to do the same thing with large, complex financial firms that are organized as bank holding companies.

Still, there are questions about whether money should be set aside in the event a systemically important company goes under and how to fund such a reserve.

Taking a page from her agency’s own playbook, FDIC Chairman Sheila Bair proposed last week that a fund paid for by large financial companies be created in order to avoid needing more bailout money from the U.S. taxpayer.

But this plan would likely meet plenty of resistance from those who would bear the biggest costs, the financial services companies themselves.

George Kaufman, a professor of finance and economics at Loyola University Chicago, added that lawmakers would also need to decide whether firms be charged before, or after, a troubled institution goes under.

"If you do it [afterwards] then you let the guilty party escape without paying," Kaufman said.

Regardless of how the issue is resolved, it is clear that the government needs to find some way to let major financial firms go under without feeling as if they are putting the economy at risk.

"We must find ways to impose greater market discipline on systemically important institutions," Bair told lawmakers last week. "Unfortunately, the actions taken during the past year have reinforced the idea that some financial organizations are too big to fail."

Talkback: Should the government allow even the largest financial firms to go under or do you think there is such a thing as a bank that is too big to fail? Share your comments below. 

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Trust in business has rebounded from 10-year lows in the United States, but the majority of Americans still do not count on corporate America to do what is right, according to a survey released Thursday.

The Edelman Trust Barometer found that 48% of U.S. respondents trust businesses to do the right thing, up from 36% who said that in January, but still below 59% at the beginning of 2008.

The survey also found upticks in business’ reputation in France, India and Germany, with declines in the United Kingdom and China.

"Trust in business is on the way back, but we’re still in the middle of the game," said Richard Edelman, president and chief executive of Edelman, a public relations company cash advance no faxing.

The survey, conducted from May 26 through July 3, was based on telephone surveys of 1,675 adults aged 25 to 64 in six countries. Respondents were screened to be college educated, have a household income in the top quartile for their country and to follow the news. 

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After two years of pumping money into the financial system to keep the economy afloat, Fed Chairman Ben Bernanke will have to reverse the process or risk an opposite problem: inflation.

After much anticipation, he announced in July the Fed’s "exit strategy" from its vast intervention, declaring it will happen "in a smooth and timely manner."

It’s reassuring that Fed officials are aware of the inflation risk, but their program is unlikely to succeed. Much research shows that it takes about two years for anti-inflation policy to work. That means the Fed needs to start now and stick with it.

I do not doubt the Fed’s ability to control inflation; however, history warns that we should be skeptical of the Fed’s willingness to sustain the program when pressured to abandon it by so many powerful forces: Congress, the Obama administration, the business community, and labor unions.

Sustaining the program requires accepting a temporary medium-term increase in unemployment and interest rates and maintaining a degree of independence that this Fed has not shown.

I am skeptical too about the adequacy of the program that the chairman proposed. The Fed has to remove most of the remaining $700 billion increase in bank reserves that it supplied in the past year before the banks use them to increase money growth.

The Fed has two responses.

One is that many of the reserves will disappear as banks and others repay the special-purpose loans that followed the Lehman bankruptcy last September. While the Fed’s balance sheet has started to shrink, much of that reflects reduced demand for credit because of the weak economy — and it won’t bring about the needed increase in long-term rates.

The second part of Bernanke’s program depends on a power the Fed acquired recently. It can now pay interest on bank reserves, so it claims that banks will willingly hold more reserves to earn interest instead of lending. But how much more will banks hold? Surely less than the $500 billion or $600 billion of excess reserves.

Once the economy recovers, banks will start to lend to their customers and attract new ones instant cash advance. The Fed must be willing to let lending and bond rates rise as banks reduce their reserves. Many influential voices will complain that letting rates rise will prolong the recession.

This problem repeats the experience of 1966-67, 1969-70, 1973-75, and other times. Outside pressures on the Fed increased when the unemployment rate reached about 6.5% or 7%, well below its current or prospective level. That ended the anti-inflation commitment.

There is only one exception: the Volcker disinflation of 1979-82. Paul Volcker was the most independent chairman in the Fed’s modern history. When President Carter interviewed him, Volcker told the President that he would follow a less inflationary policy than his predecessors. To his surprise, Carter said, "That’s what I want." The change reflected a major shift in public opinion. For the first time the public told pollsters that inflation, which reached 17% at one point, was the most serious economic problem the country faced.

In the 1980 presidential election, the public chose Ronald Reagan, who promised to end inflation. Unemployment rates rose above 10% and shortterm interest rates reached 20% during the disinflation. But in less than two years inflation fell to about 4%. Gradually we entered a long period of stable growth, mild inflation, and short recessions that lasted until 2006.

Are the Obama administration, Congress, and the public willing to tolerate high nominal interest rates and higher unemployment? Very unlikely. The chairman has stated "at some point … as economic recovery takes hold, we will need to tighten monetary policy."

But since he and his colleagues don’t see that point being reached anytime soon, by the time we get there it may well be too late.

Allan H. Meltzer is the Allan H. Meltzer University Professor of Political Economy at Carnegie Mellon and the author of A History of the Federal Reserve. 

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