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Congress just announced that if the automobile industry comes up with a restructuring plan by December 2nd, it could discuss an industry bailout in December. For now this means, no bailout until next month at the earliest. In the last three months, the industry has burned through $18 billion in cash. And Congress does not want to provide taxpayer money to the industry unless it can figure out how to transform itself.

I guess the CEOs will need to work over the Thanksgiving vacation if they have any hope of getting taxpayer money. But as I posted, there's a way that General Motors Corp. (NYSE: GM) could follow a six step restructuring plan to save $16 billion. If its two smaller competitors could come up with a similar plan, there's a good chance that the industry could cut itself back to a profitable core.

I am relieved that Congress has reached this decision because I do not like the idea of throwing taxpayer money into an industry that will not change the way it operates and thus will keep coming back to Congress asking for more money every time it gets close to running out. By putting the pressure on the industry to reach its own restructuring plan fast -- Congress can test the mettle of industry leaders. This will help determine whether the industry is capable of saving itself.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in GM securities.

Based on October wholesale and consumer price reports, July 2008 marked a shift from inflation into full-blown deflation. This has much to do with the declining price of oil, which in turn is related to the collapse of speculative buying of oil while shorting the dollar; the decline in demand resulting from a global downturn; and the failure of producers to cut supply fast enough.

However, as I posted, there's a vicious cycle underway which leads to:

1. Excess inventory,
2. Price cuts,
3. Capacity and job reductions,
4. Less spending power,
5. Lower demand -- followed by a return to step 1.

And with jobless claims at 542,000 and the price of oil down below $50, it's pretty clear that this cycle is well underway. What can the Federal Reserve do to turn this vicious cycle into a virtuous one? It is likely to cut the Fed Funds rate to zero or very close to it -- 0.25% -- in January. But in a 2002 speech, Bernanke said that there are other ways the Fed could try to boost overall demand, which would reverse the deflationary cycle.

Berkshire Hathaway Inc. (NYSE: BRK.A) stock fell 12% on Wednesday -- dropping by $11,550 in one day. The stock has not fallen this much on a percentage basis since the 1987 crash. (It fell 18.51% on October 19, 1987 -- down $720 that day to $3170.) Last month, Warren Buffett was advising Americans to back up the truck and buy stock. Since then, Berkshire has lost 30% of its value and the S&P 500 has tumbled 14%. This does not inspire confidence.

Last December -- when Berkshire peaked at $151,650 -- I questioned whether the stock was overvalued. But I did not think it would fall to its $84,000 Wednesday close (BRK.A is falling again today -- over 8% to $77,000).

Buffett has since made deals to buy stakes in General Electric Company (NYSE: GE) and The Goldman Sachs Group (NYSE: GS), which don't look so great now. He did get a nice 10% yield, but the conversion prices of the warrants he took on were much higher than their current prices -- $22.55 and $14.45 for GE and $115 and $55.18 for Goldman, respectively.

As a Citigroup (NYSE: C) shareholder I know that Saudi Prince Alwaleed bin Talal made a killing back in 1991 when he backed up the truck and bought shares of Citi at what was then a low price of $10 a share -- $2 adjusted for splits. He is no doubt unhappy with the 90% drop in the value of the stock since its September 2000 peak of $57.50. Now he's trying for a repeat of his previous success by boosting his share of Citi from 4% to 5%. Unfortunately, it won't work this time.

Alwaleed's stock holdings have plummeted. For example, his Riyadh-based Kingdom Holding Co. has lost 63%, wiping out $13 billion in value. Citigroup, his largest holding, has fallen by more than 75% since January 15, when Alwaleed increased his stake. His concept that Citi is dramatically undervalued does not hold much water. The reason for that is that given its complexity and exposure to derivatives, off balance sheet entities and Level 2 and 3 assets -- which total $36.8 trillion, $1.2 trillion, and $1,195 billion (88.6% of total assets) respectively -- Citi is impossible to value.

Meanwhile, the steps that Citi has taken are not going to be enough to help it survive. Sure it has raised $75 billion by selling assets and equity stakes since December and plans to cut 52,000 jobs. But Citi has only $98.6 billion in common equity, and unfortunately, an 8% decline in the value of those Level 2 and 3 assets will wipe that out. Things are not good for Citi and that does not bode well for Alwaleed or Citi's other shareholders.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock.

Banks around the world have been raising capital in the last few months. If the market is efficient, then the cost of capital for these banks should tell us something about how risky they are. Based on the relative cost of capital of banks in the U.S. compared to those in France, Germany and Switzerland, the world's riskiest banks are right here in the good old USA. The safest banks? French ones.

How so? Here is the rough (due to different capital structures) after-tax cost of capital for the banks in different countries:

• U.S.: Morgan Stanley (NYSE: MS) is paying a 17% interest rate and Goldman Sachs Group (NYSE: GS) pays almost 17%
• UK: Barclays pays 16%; HBOS, Lloyds TSB; and Royal Bank of Scotland pay about 12%
• Germany: Commerzbank pays 10%
• Switzerland: UBS's interest rate is relative bargain of 9.9%
• France: BNP Paribas, Societe Generale, and four others pay the lowest rate -- 5% -- for their capital

Maybe there's some sort of trading opportunity to short U.S banks and go long French ones. C'est la vie!

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing, will be published by Portfolio on December 26, 2008. He has no financial interest in Goldman or Morgan Stanley securities.

Harvard is an easy target for the woes of our economy. Its business school produced George W. Bush, the fellow who's presided over the current economic catastrophe, and Rick Wagoner, the CEO of the largest automobile maker who's led its stock down 95% in the last eight years and now wants $25 billion worth of taxpayer money to keep the millions rolling into his bank account. But Harvard had these folks for just two years, so it's tough to blame the school for the current predicament.

However, with $36.9 billion in assets (as of June 30), Harvard also has the largest endowment of any university. And thanks to its big exposure to very illiquid interests in venture capital (VC) and private equity (PE) firms, Harvard leads a growing list of limited partners (LPs) which are selling stocks and those very illiquid interests in order to come up with the cash needed to fulfill their capital calls to these partnerships.

This requires some explaining. VC firms raise money from limited partners such as wealthy individuals, foundations, pension funds, and endowments. But the LPs don't write checks up front -- instead they hold onto their cash and must write a check when the VC calls and asks for the money when the VC is on the verge of making an investment. The problem for many LPs like Harvard is that much of their stock portfolio is locked up in hedge funds and these illiquid VC and PE interests.

I sure am tired of writing about bad news. That's why I was happy to read this morning that the consumer price index (CPI) tumbled by a record 1% in October. In the last 61 years, there has never been a bigger monthly decline in the CPI. The cause? You guessed it -- a huge drop in gasoline prices.

But wait, there's more. Core inflation -- the Fed's favorite measure, which excludes "volatile food and energy" prices -- also declined for the first time in 25 years. The core consumer inflation decline was 0.1%. The numbers are not a big surprise after yesterday's wholesale inflation report.

The drop in prices across the board is great news for people with money. After all, it means they can spend less of that money to buy what they need. But the reason for the drop in prices is very ominous for the future of the economy. That's because companies have overproduced and they now have excess supply gathering dust on their shelves and showrooms.

Thanks to what former Enron CEO, Jeff Skilling, called bad "optics", some top Wall Street executives announced that they're foregoing their normal seven figure bonuses. But I think I am being generous in estimating that those potentially symbolic gestures will only shave a few billion off the Wall Street bonus pool for 2008. We could still be paying $20 billion in bonuses this year.

How so? After buying $159 billion worth of preferred stock in 24 banks, I have not seen any evidence that the Treasury required the banks to lend it out. There is nothing stopping the banks from using the money for paying bonuses. And while the original estimate of 2008 bonuses was down 20% from 2007 -- to $26.6 billion -- I am thinking that eliminating executive bonuses could lead to at least a $6 billion lower figure -- particularly if this cut provides bank CEOs leverage to reduce the amount of bonuses paid to lower level people.

So far, top executives from Goldman Sachs (NYSE: GS), UBS AG (NYSE: UBS), Deutsche Bank, and Barclays have said they will skip their bonuses for 2008. Ironically, the ethically challenged UBS has the most interesting idea -- starting in 2009, it will be able to claw back bonuses in the years after their award with a third paid immediately, while the remainder will be put into a participant's account and can be reduced if there is a loss at the division or the whole bank. I started proposing an escrow account along these lines in October 2007.

Prudential Financial (NYSE: PRU) used to have an advertisement offering consumers a piece of the rock (Gibraltar). Now Hank Paulson's $810 billion Troubled Asset Recovery Plan (TARP) has replaced Pru's rock. Insurance companies around the world are angling to buy a Savings & Loan (S&L) so they can apply for some of that money. So I think it's time to create a mutual fund that will be used to buy an S&L so that the average citizen can get some of that money as well.

Not only are U.S. insurance companies on the hunt for an S&L, there's a European insurer seeking some of our tax dollars as well. The U.S. insurers seeking an S&L include Hartford Financial Services Group (NYSE: HIG), a life and property insurer that has been hit by investment losses, Genworth Financial (NYSE: GNW) and Lincoln National (NYSE: LNC). And the European insurer in question is Amsterdam's Aegon AG, which wants to buy Suburban Federal Savings Bank.

I've been too patient waiting for my share of the TARP. Here's an idea that will make it affordable for the average taxpayer to buy an S&L so we can apply for some of that money -- which is really our money -- as well. We should start a mutual fund and once it has collected enough cash, the fund could purchase a little S&L and then apply for some of that TARP money. With banks, insurance companies and automobile manufacturers getting their piece of the TARP, it's our turn now.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

General Motors Corp. (NYSE: GM) should get government help with financing in Chapter 11 once it restructures in a pre-packaged bankruptcy. A restructuring would jettison GM's management team, cut labor costs, close unprofitable dealerships, and toss overboard GM's money-losing product lines. Taxpayers should not pay the salaries of people who can't operate a profitable business.

Here are six steps of a proposed restructuring that could save $16 billion a year:

• Allow GM to merge with Chrysler -- but only if Cerberus, which owns Chrysler, sees its equity wiped out -- to save $7 billion in annual costs;
• Dump unprofitable brands -- Cadillac, Chevy and Buick (it is popular in China) would be the surviving GM brands. All the others -- Saturn, Pontiac, GMC and Saab -- would be sold to interested buyers or shut down. This would save $5 billion a year;
• Close related dealerships -- this would cut $4 billion annually;

2008's economy can be divided into two parts. The first is the period between January and July when oil prices ran up to $147 thanks to a speculative trade to short the dollar and buy oil and other commodities. The second part is the post oil's July peak where oil prices have featured a 60% to $55. Today's wholesale price report shows what happens to prices when supply exceeds demand and banks stop lending money to traders trying to profit from anticipated inflation.

Today's wholesale price report is a doozy. The Producer Price Index (PPI) fell 2.8% in October -- much more than the 1.8% decline economists had anticipated. The PPI decline was fueled (pun intended) by a 12.8% decline in energy prices in October. And as long as those energy prices keep falling, inflation will be in full downswing mode. (I am happy to report that I won my bet that gasoline would drop below $1.99 a gallon in Eastern Massachusetts by February -- I went to a station Sunday that charged $1.97.)

But there's more to it than simply declining oil prices. The entire economy was producing goods and services based on an assumption about demand that depended on easy access to debt. By shutting off the debt flow, goods are simply too expensive for consumers and businesses to pay the price. This means businesses will cut back on production and slash prices to clear their shelves of inventory. Then they'll shut down factories and lay off workers. And the lower demand from those poorer former workers will start the cycle anew.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

It looks like the automobile industry is being led like a turkey to the slaughter as we approach Thanksgiving. While companies like General Motors Corp. (NYSE: GM) have been working overtime to produce a fleet of statistics to bolster their case for a Washington bailout, it's clear that President Bush and the Republicans are eager to wield a sharpened ax on its ever-more vulnerable neck.

The pre-bailout buildup follows the same narrative structure as the one for the Iraq war and the $810 billion bank bailout bill. With the Iraq War, the specter of a mushroom cloud was dropped on our unsuspecting heads. With Paulson's plan for a reverse auction to buy toxic waste, it was the threat of heavenly retribution. And now, the auto industry is promising 2.5 million lost jobs and $200 billion in government costs -- up from $125 billion last week -- if Washington does not bail it out.

The political forces lining up against the automobile industry appear more powerful than those who want to bail it out. While congressional Democrats want to divert $25 billion from Paulson's plan to bail out the auto industry, Bush and the Republicans oppose the idea. And until January, they appear to have the upper hand.

General Motors Corp. (NYSE: GM) needs $2 billion a month to operate. It just made a token gesture to raise some of that capital on its own. But it amounts to very little -- sort of like spitting green into a sea of red ink.

How so? GM will sell a 3.02% stake in Suzuki worth $230 million. That amounts to 4% of the $6 billion that GM needs to operate every quarter. Now the estimated cost to the government of GM's failure has spiked to $200 billion.

This just goes to show you what a good negotiator GM is. If you owe the bank $1,000 and can't repay, it's your problem. But if you owe $200 billion, it's the bank's problem. Since banks can't afford to bail out GM, us taxpayers have become GM's bank. Where was GM's board while its current CEO drove the stock down 95%? Too late now.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in GM securities.

The leaders of the 20 largest economies (G-20) met in Washington over the weekend and emerged with an unsurprising and uninspiring list of prescriptions for the global economy. The markets are down in Europe and opened lower in the U.S.. The missing ingredient here is effective leadership.

It's good that the G-20 meeting had a generally cooperative spirit. But its joint communiqué rehashes conventional wisdom about the solutions to the current crisis: economic stimulus, tighter regulation, better monitoring of risk, tighter disclosure. Beyond agreeing to meet again, however, there was nothing concrete that came out of the meeting that would give me confidence that the G-20 is going to help the current situation.

What's missing is leadership that recognizes the unique nature of the current problem. Currently, leaders seem to be acting as though people want quick action and they seem to be assuming that the current crisis will respond to the same tactics that should have been applied during the Great Depression.

Vikram Pandit, Citigroup (NYSE: C)'s CEO, is set to announce an even bigger round of job cuts this morning. (This round may supercede the potential 10,000 layoffs announced last Friday.) Will these cuts help revive Citi? No. But they may lower its cash burn rate by $50 billion in 2009. And investors are not impressed, sending its stock down 2.2% in pre-market.

Citi's 53,000 job cuts would represent a 14% cut -- yielding a total workforce of 300,000. Citi may also decide on canceling management bonuses -- a move led by Goldman Sachs (NYSE: GS). Let's hope that these bonus cuts affect the entire industry -- not just top management. After all, the Treasury has already given $159 billion to 24 leading banks and it would be a shame to see that money going to pay bonuses to people who got us into this mess.

Meanwhile, Citi is posed to raise rates on its credit card customers. Citi, which had 182.7 million open card accounts card customers in the third quarter, has told as many as 20% of them that their rates are being raised by an average of three percentage points. Credit losses in Citi's global card division rose over a third to $1.59 billion in the third quarter of 2008.

Now, thousands of Citi workers will pay with their jobs.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock.