The Government Accountability Office, Congress' investigative arm and watchdog, said the U.S. Federal Reserve and the U.S. Treasury have the authority to bail-out the Big Three automakers, marketwatch.com reported Thursday.

Gene Dodaro, acting head of the GAO, said the Fed and Treasury could provide loans to the struggling U.S. automakers under an emergency loan designation.

The above ruling conflicts with the view of U.S. Treasury Secretary Henry Paulson, who has said that the $700 billion in TARP funds administered by the Treasury Department can only be used for financial companies.

However, Dodaro said the TARP legislation "is worded broadly enough" to allow Treasury to lend money to General Motors, Ford, and Chrysler, marketwatch.com reported.

Shares of GM (NYSE: GM) fell 33 cents to $4.57 while Ford (NYSE: F) fell 4 cents to $2.81 on Thursday at mid-day.

In another sign that the credit crunch has not disappeared, the Port Authority of New York and New Jersey received no bids from investment banks to underwrite a taxable note offering.

The Port Authority was trying to sell $300 million worth of three-year notes, backed by revenue streams, Bloomberg News reported. The Port Authority operates airports, river crossings, and certain transit systems in the New York metropolitan area and has a strong credit rating. The agency is also rebuilding the World Trade Center site, including the new Freedom Tower.

Economist David H. Wang was apoplectic about the failed offering. "This is unbelievable," Wang said. "It's a ridiculous situation, frankly, and something has to be done to free-up these credit markets. This is the financial equivalent of Warren Buffett not being able to get a $20 million loan."

State, cities, and other taxing districts have had trouble selling bonds through advertised bidding, after institutional investors pared-back their appetite for fixed-income securities -- and just about every other asset class -- as the financial crisis intensified in September. In tandem, investment banks have balked at bidding for certain debt, sensing insufficient client demand, Wang said.

Last week, Bank of Montreal (NYSE: BMO), one of Canada's oldest and largest banks, reported growth in its fiscal fourth-quarter earnings. But it may be the only one that does, as at least two of the Canadian banks scheduled to report fourth-quarter numbers this week have already released preliminary results that warn of lower earnings due to debt write-downs and trading losses.

Analysts surveyed by Thomson Reuters expect Toronto-based Canadian Imperial Bank of Commerce (NYSE: CM) to post earnings 42.6% lower than a year ago, or $1.28 per share. CIBC beat estimates by a penny in the third quarter, but missed by a penny in the period before that. The bank faces a class-action lawsuit related to investments in collateralized debt obligations consisting of U.S. subprime mortgages. Shares have climbed 20.7% from a recent 52-week low of $39.52, but are down 37.8% in the past three months.

Toronto Dominion Bank (NYSE: TD), Bank of Nova Scotia (NYSE: BNS), and Royal Bank of Canada (NYSE: RY) are expected to report more modest earnings declines of $1.01 per share, $0.73 per share, and $0.83 per share, respectively. All three Toronto-based banks topped estimates in the third quarter. Toronto Dominion and RBC have recently announced plans to offer shares in order to raise capital. Toronto Dominion and Scotiabank have been trading near 52-week lows, and their share prices are down around 39% in the past three months. But only Toronto Dominion has a consensus buy recommendation from analysts.

In the quarters ahead, new autos may not be the only inventory item piling up.

A 'really big ticket item' -- new commercial airplanes -- may start piling up, as well. Boeing and Airbus may end up with as many as 200 new planes without buyers in 2009 because airlines are unable to obtain funds to pay for them, due to the credit crunch.

In the second half of 2008, banks and other sources of capital decreased lending to airlines -- and to just about everyone else, it seems -- on concerns the loans won't be paid back. Other banks are decreasing lending primarily as a means of rebuilding damaged balance sheets.

The lending cutback may create a funding gap of about $65 billion at Boeing next year, and a $20 billion gap at Airbus. Boeing Capital Corp., the airplane manufacturing giant's financing unit, is expected to make $1 billion in loans to customers in 2009.

Yesterday's election marks the end of a string of economy-destroying ideas that stretch back to 1980. America rejected the idea that it's right to run a government of the rich for the rich. It figured out that when you cut taxes for the top 1%, run record deficits, double the national debt, and eliminate regulation, you don't get trickle down, you get meltdown. Barack Obama's election means that these ideas are history.

What will replace them? Obama has already discussed economic stimulus, middle class tax cuts, mortgage modification, a moratorium on foreclosures, infrastructure spending, wider health care coverage, and investment in alternative energy.

But the 43rd president left Obama with a challenge -- to figure out the underlying problems with the current financial system and rebuild it in a way that will work in the short and longer term. Obama must come up with new ideas on which to rebuild the crumbling ruins he's inheriting.

To do that, he will create a team of experts from both parties. That team should analyze the sources of the problems that beset the economy and financial system. And it must agree on principles which can be used to craft legislation that will rebuild the financial system. As I've posted, I believe what they'll find is the need to create a system that ends securitization. limits leverage, delivers transparency, ties compensation not to deal size but to long-term profitability, and builds firewalls between markets around the world.

One of the characteristics of the current housing crisis is that it is an avalanche. As it heads downhill it picks up speed. The longer it goes unsolved, the harder it will be to fix. Foreclosures continue to increase. Prices continue to fall. As unemployment moves toward 7% and above, those numbers are not going to improve.

Odd then, the no one in the federal government can stop fighting over how to fix the problem long enough to come to a quick solution and begin to fix the situation before a catastrophe turns into a cataclysm.

According to The Wall Street Journal, "The FDIC has been developing a proposal, which some estimate could help between two and three million homeowners." It is less clear what the administration wants to do, but it is concerned that baling out homeowners will encourage some people to default on mortgages to get a handout.

The White House is right when looking at the small picture and wrong when it looks at the larger one. Some cheaters and scoundrels will use a program to help enrich themselves. But, it is likely that the number of thieves will be much smaller than the millions of people who have legitimate problems staying in their homes. While details which are relatively unimportant in the scheme of these hold up a plan, the rest of the system heads down the toilet.

Penny wise, and pound foolish.

Douglas A. McIntyre is an editor at 247wallst.com.

Sears Holding Corp. (NASDAQ: SHLD) may have enough capital to get the inventory it needs for its stores during holiday season, but the chain now needs to worry about whether its potential customers will have access to credit.

According to Bloomberg News, Home Depot (NYSE: HD), Sears, "and other retailers may lose as much as 8 percent of their holiday sales this year because lenders and stores are clamping down on financing."

For a company struggle as much as Sears, that much damage to sales could cause the company to close hundreds of stores and put tens of thousand of people out of work. Along with all of its brands, Sears has 3,800 stores and 337,000 employees. If its average store loses close to 10% of sales, weaker ones in the states hardest hit by the recession could lose 15% or 20%.

Sears might offer more credit to customers, but it risks that a large part of them will default or delay payments as the economy gets worse.

The Sears problem is an especially good example of what happens when a large economy goes into a flat spin. As revenue at companies drops due to falling consumer spending, those firms have to layoff workers to make ends meet. Those workers, in turn, are no longer consumers and their loss of spending power hurts GDP even more.

Sears is a weaker retailer then some, and the chances that it will have to downsize to survive are very high.

Douglas A. McIntyre is an editor at 247wallst.com.

One of my relatives works in construction. Bags of material needed to make concrete have lately been piling up at his job site because no one is mixing the stuff. That's yet another sign of the slowing economy and the impact it's having on people. Today's expected dramatic selloff in the stock market is another.

Investors used to gasp when they saw a triple-digit decline in the Dow Jones industrial Average. Now, as one of my friends recently noted, it's "another day at the office." It's not that people like huge declines; they have grown accustomed to living in a constant state of dread.

Today is no exception. Trading, which was limited in the pre-market, is going to be awful. Call it "Frantic Friday" or "Freaky Friday." Fear is ruling the day again. Investors are not acting rational. Blah, Blah, Blah. You have heard it all before. The only questions is why the world appears to be coming to an end today.

My colleague Peter Cohan points out that markets in Asia and Europe have been tanking. Even Canada, which largely avoided the subprime crisis, is guaranteeing up to C$218 billion in bank debt to match the bailouts offered by other countries. Remember, Canada's banks were recently recognized as being the most stable in the world. This underscores the nervousness of investors.

Despite having lots of cash – and little debt – shares of Blackstone Group LP (NYSE: BX) have collapsed along with the other financials. Over the past year, the stock price has plunged from $29.38 to a recent low of $6.88.

But the firm's uber dealmaker, Stephen Schwarzman, is getting optimistic. At the Super Return Middle East conference, he gave a presentation that extolled the benefits of the US's ambitious – and expensive – plan to get things back on track. Yes, he thinks it's a good idea for the Feds to become equity holders in some of the top US banks.

So, why is this die-hard capitalist turning into a government supporter? Well, I guess the globalization of finance requires new approaches. In fact, Schwarzman mentioned that it was critical that the recent interventions have involved a variety of governments.

What's more, by having a strong government backstop, institutions will have a comfort level with counterparty risks. In other words, it's a good bet that we'll start seeing some risk taking again. And, for Schwarzman, it should also mean a re-emergence of buyout activity, which has been virtually frozen over the past few months..

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity, a valuation website

Analyst Michael Molnar of Goldman Sachs took a harsh tone on the solar sector today, slashing his opinion to Sell on both First Solar, Inc. (NASDAQ: FSLR) and SunPower Corp. (NASDAQ: SPWRA). Specifically, First Solar was slashed to Conviction Sell from Buy, while SunPower was dropped from Buy to Sell. In a note to clients, Molnar explained, "We strongly believe that SunPower and First Solar are two of the best solar companies in the world and that both will be part of the growing solar industry for years to come. However, in our view, even these companies will face headwinds in a market that is oversupplied with modules."

Specifically, "the risk of oversupply in the solar market will soon become a reality as considerably less generous demand subsidies take hold just as a wave of supply and tight financing hit the market," said Molnar. He added, "We believe that liberal subsidies of the past in markets like Germany and Spain are unlikely to be replicated in the future, given fears of their ultimate cost in a bad world economy."

As a whole, Goldman maintains a "cautious" view of the solar sector -- and the brokerage firm isn't alone. Piper Jaffray also weighed in on solar firms today, with a warning that higher credit costs could reduce average selling prices by an additional 6%. "The renewables industry depends on access to credit, and for the moment, the credit market remains closed," Piper stated. "We believe the cost of capital on renewable projects will increase due to higher bank financed interest rates, larger spreads, and more upfront fees." For 2009, Piper Jaffray predicts that companies' average selling prices will fall by 15% to 21%.

The U.S. Treasury's $700 billion bailout bill is winding its way through the Congress.

To say the situation is dynamic and fluid would be the understatement of the year. The Congress, led by U.S. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and U.S. Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, is likely to propose and obtain substantial changes in the legislation, changes it believes will better protect the U.S. taxpayer and more efficiently deploy the. funds allocated.

The American people, if public opinion polls are an accurate gauge, are skeptical of the plan at best, and at worst view it as rewarding large financial institutions and other companies whose flawed practices both perpetuated and magnified the crisis.

In addition, with an election up ahead in about a month, Congress (particularly the 435 representatives and 35 senators up for re-election) will be especially sensitive to public opinion, with many not wanting to go against it for fear of being voted out of office.

Is the bailout bill a solution?

With the above as a backdrop, BloggingStocks Wednesday asked three economists, David H. Wang, Richard Felson, and Peter Dawson, for their policy recommendation.

The State of New York has proposed to start regulating credit default swaps owned by investors trying to protect bonds they own, Bloomberg News reported.

The plan won't apply to credit default swaps purchased by speculators, i.e. swap owners who are trying to profit from an increase/decrease in a borrower's creditworthiness, New York Governor David Paterson told Bloomberg News. Paterson also urged the federal government to follow New York's lead and regulate the rest of the credit default swap market.

Credit default swaps are contracts designed to protect against or speculate on default. CDSs pay the buyer face value if a company fails to adhere to its debt. Hedgers typically use them to guard against bond losses. However, speculators use them as an active investing/trading tool in an attempt to profit from a company's / issuer's credit worthiness.

Economist David H. Wang told BloggingStocks there's an upside and a downside to increased regulation of the $62 trillion CDS market.

"On the one hand, we do need a central regulator in the United States to verify that those selling credit default swaps can in fact pay the swap holder if there is a default claim," Wang said. "The system for swaps was jeopardized when AIG could not pay all claims, and could have resulted in contagion, which prompted the federal government's loan."

Just call it an endorsement of a collective security policy where 'you go first.'

That was how one economist characterized the G-7 group of finance ministers' stance toward the U.S. Treasury Department's proposed $700 billion intervention to stabilize the financial system.

In a conference call statement, the G-7 - - Germany, the United Kingdom, France, Japan, Italy, Canada, along with the U.S. - - said, "We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan to implement a program to remove illiquid assets that are destabilizing financial institutions," The Wall Street Journal reported Monday(subscription required.)

However, none of the other six G-7 members will adopt a program similar to the U.S.'s, German Finance Minister Peer Steinbrueck told reporters in Berlin after the call, Bloomberg News reported Monday.

Economist Peter Dawson told BloggingStocks Monday the G-7's stance is half-hearted, in his interpretation. "In its general statement, the G-7 is on-board with the [U.S] Treasury's program but [German Finance Minister Peer] Steinbrueck's comments are disappointing. Steinbrueck, or another G-7 representative should have followed up with 'and we stand ready to assist the United States and other nations with fiscal measures to support the above goals, if needed, etc.,' " Dawson said. "Right now, the G-7's tone is 'go forth U.S., but we're not getting in the pool right now, the water's too cold.' Given the G-7's complicity in causing the problem and their systemic interest, a more-engaged statement should have been issued regarding fiscal policy options."

Cites AIG's 'interconnectedness'

For example, Dawson said the G-7's corporate involvement in American International Group's (NYSE: AIG) is evidence item 'A' for stronger G-7 involvement. "G-7 companies, banks, and institutional investors benefited from AIG's credit default swaps and related products, and would be hurt by a systemic failure. Since they are parties to the problem, they should also bear some of the costs of the reforms and bailout," Dawson said. "But right now their stance is 'Go ahead U.S. We back your spending your money, but not ours.' That's an inadequate response from our G-7 associates."

Oil surged back over $100 Friday after traders sensed the U.S. Treasury / U.S. Federal Reserve's plan to stabilize the financial markets by buying-up distressed / bad mortgage debt could very well boost inflation, increasing the attractiveness of oil as an inflation hedge.

Oil rocketed up $4.91 to $102.79 per barrel Friday morning. The other major energy commodities also jumped Friday. Unleaded gasoline rose 9 cents to $2.57 per gallon, heating oil climbed about 10 cents to $2.88 per gallon, and natural gas gained 11 cents to $7.72 per million BTUs.

Energy Trader Jim Dietz told BloggingStocks Friday slowing global economic growth that's likely to slow the increase in global oil demand is the oil market's long-term concern, but short-term the focus is on inflation.

"I haven't seen the details of the [U.S.] Government's plan yet but there's three ways we can pay for it. We can increase government spending, print money, or sell government bonds," Dietz said. "The first two can increase inflation quickly, the last one, not as quick, but either way, there will be some increase in inflation, which is why traders are buying oil. Inflation now will jockey with global growth concerns to determine the direction of oil's price."

Cautious optimism. A step forward. A ray of light.

That was the stance currency traders took earlier Friday toward the U.S. Treasury's and U.S. Federal Reserve's plan, The New York Times reported, to move distressed/bad assets from the balance sheets of American financial institutions into a new government institution in order to check a U.S. credit crunch that by most all accounts was expanding into a global financial crisis.

"It's likely to mean higher inflation and certainly higher taxes in the United States and a further decline in the dollar, at least over the next six months, so the plan has its risks. But considering the freeze that was likely to grip the capital markets it's probably the best of a poor choice set," currency trader Andrew Resnick said.

Dollars rises on proposed government initiative

The dollar rose sharply across the board on word of the U.S. Government plan, which has the tentative consent of the U.S. Congress, following a special meeting Thursday night on Capitol Hill; Congress is expected to debate legislation for the program next week, Bloomberg News reported Friday. The dollar rose about 1 cent to $1.4213 and $1.8060 versus the euro and British pound, respectively, and about 2 yen to 107.50 versus Japan's yen.

Resnick said that in addition to the removal, over time, of distressed/bad debt -- much of it mortgage-related -- the Treasury's/Fed's plan to use $50 billion from the U.S. Government's Exchange Stabilization Fund to insure money market funds for a year is maintaining liquidity in credit markets and "will reduce the fear that's sort of come to take on a life of its own."

"First we had the attack on Lehman [Brothers], which many people feel could have survived if people continued to do business with them. Then there was the massive decline in the shares of Goldman Sachs and Morgan Stanley, two solid firms. When it started to spread to money market funds, with people pulling their money out on rumors and innuendo, everybody on the trading desks said, 'This is absurd and totally irrational. Something has to be done to stop this [expletive] nonsense,' " Resnick said. "Well, the federal government did something."