Archive for May, 2009
May 23rd, 2009
Federal regulators kept their word last week, seizing Florida-based BankUnited, the biggest bank failure this year, one that puts the Federal Deposit Insurance Corp. on the hook for around $5 billion.
The feds set a Tuesday deadline and waited for bidders to come forward, but the pool was limited. Even given the state of the banking industry these days, BankUnited had dug itself into a pretty deep hole, including a loss of more than $1 billion in 2008.
And, when regulators moved in Thursday, the bank was handed over to a group of private-equity firms.
Pay attention, folks. I can’t help but worry that a fox has again been put in charge of billions of chickens.
It was unavoidable, really. The feds have so far resisted significant investment from private-equity firms in the banking industry. But the companies have been circling weakened financial institutions like sharks, looking for their opening.
To be sure, there are some advantages to giving private equity a seat the banking table. It would allow collapsed institutions access to the $400 billion to $600 billion in equity money, advocates say. In BankUnited’s case, the group of private-equity managers agreed to pump $900 billion in new capital and acquire more than $20 billion in deposits and assets.
But the Federal Reserve has some problems with the idea of private equity owning banks. So do I.
Private-equity firms, by their nature, are risk-takers.
They’re informally known as the gravedancers of the economy — scooping up struggling companies by using a lot of debt and little cash, reorganize (known informally as “layoffs”), then sell to someone else, pocketing the profit.
Consider, for example, the risks taken by Cerberus Capital Management, the private-equity firm that took over Chrysler and an ownership stake in GMAC Financial Corp.; both have needed billions in federal bailout money to keep the doors open. Or Sam Zell, the billionaire Chicago investor who grandly swept Tribune Co. into bankruptcy within two years.
And the Fed is still trying to patch up the industry after one of the worst financial crises in history. I’ll forgive them for not being altogether sure that these guys will be the best stewards of other people’s money.
So far, eager private-equity players have managed to work around the Fed’s rules — the sale of IndyMac, the failed California thrift, worked the same way as that of BankUnited. A group of private-equity firms each bought up to their legal limit, with each firm’s piece adding up to 100 percent of the bank.
Here’s the problem: Banks are supposed to be boring, staid and stuffy institutions managed by well-modulated executives. That they got themselves into trouble by acting more like casinos is one of the things that got us here.
And private-equity companies like casinos better because they make more money faster.
It strikes me as a marriage bound to fail somebody — probably the bank’s customers.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
May 16th, 2009
I thought I’d worked it out of my system, this bitterness against Chrysler and General Motors, the corporate fathers of the Midwest that first sustained, then disappointed, then betrayed me.
I thought I’d finally accepted that decades of dominating market share hid emasculated but egotistical management, which bred companies committed to inefficiency, waste and, apparently, bankruptcy.
But the hits just keep on coming. Last week, the two began gutting their dealer ranks, eliminating franchise agreements at nearly 800 Chrysler and more than 1,000 GM dealerships.
And now I’m frustrated all over again.
It’s a business model that tends to shave off the bottom line, as same-brand dealerships in the same town compete for the same customer, each one offering a sweeter deal to get him through the door. Particularly in this market, where new-car sales make up about a quarter of overall vehicle sales.
I don’t disagree with the move — and it’s only the opening salvo. For far too long, the domestic automakers have allowed their dealerships to proliferate, chasing a dream of market share that has eluded them for decades. GM, which once cornered 51 percent of the U.S. market, has plans to cut 40 percent of its 6,000 or so dealers before all’s said and done.
A drop in market share to 22 percent, which GM notched last year, does tend to get noticed — even though the automaker would have probably continued its slavish devotion to bad business practices if the recession hadn’t forced it to beg for money from the federal government.
It makes me want to bite someone. But I’ll settle, once again, for more civilized questions for these two titans of industry: What took you so long? How could you break faith with all of us like this?
By putting off tough decisions — allowing the union to stuff worker contracts with the legacy costs that are crippling them, bloating their dealership stock, refusing to see consumers who would abandon truck and sport utility vehicles — they are on their knees. Where they belong.
And they took the rest of us with them, as they must. The tens of thousands of blue- and white-collar workers on the unemployment lines is only one of the human costs they are inflicting.
The hit to local car dealerships, with their commitment to the towns and cities in which they ply their trade, will be much more far-reaching. Baseball teams, soccer clubs, golf outings, charity walks — all of them made possible in some way with the help of these dealerships.
The carnage continues.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
May 2nd, 2009
Mother Nature, it seems, hates being left out.
Whenever an economic crisis of unparalleled ferocity grips the planet, she seems particularly determined to get a little piece of the action. (For some reason, Major League Baseball likes to be involved, too.)
Ladies and gentleman, may I present swine flu.
As if our latest Great Recession isn’t enough, along comes Mother Nature and one dilly of a flu bug. Like the economic crisis, it is spanning the globe. And it stands to intensify the economic fallout of the financial meltdown — at least, if history is any indication.
In the 1930s, as the Great Depression threatened to strangle the economy, the Great Plains states disintegrated. Almost literally.
The Dust Bowl took root after the severe drought that began in 1931. From Kansas to Texas, one of the world’s largest wheat-producing regions became an arid wasteland in less than two years. The exodus began for farmers and their families. It lasted most of the decade and stymied most early efforts to stabilize the economy.
In 1989, when the federal government finally stepped in to resolve the savings-and-loan crisis that had plunged the economy into a recession, Hurricane Hugo ravaged the Carolinas just before an earthquake roiled the San Francisco Bay area, postponing the start of that year’s World Series for 10 days.
Clearly, Mother Nature is trying to make some kind of point.
I could argue, of course, that it’s less the meddling of Mother Nature than the complete inability of the public to remember the recession, thus almost ensuring a next one. Besides, Mother Nature never takes a break — the SARS outbreak in Asia was in 2004; the tsunami that ravaged Indonesia was in 2005. And those were terrific years, economically speaking.
Still, it all seems a little too coincidental to me, especially considering her role as the culprit behind the Dutch tulip bulb bubble of the 1630s.
Her timing is a little off sometimes. One of the most significant earthquakes of all time, according to the U.S. Geological Survey, rocked San Francisco in 1906. It wasn’t until the next year, which found the country mired in a deep recession, that John Pierpont Morgan rallied his rival bankers to pony up their own money to stave off the Panic of 1907.
And lest you forget, the Cubs won the World Series that year.
Even Mother Nature can have an off year now and again, but nothing like the Cubs.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
