Posts filed under 'bailout'
August 8th, 2009
A pair of columns I wrote nearly a year apart seem to be coming to a head these days.
A month or so ago, I wrote that it took nearly 70 years for Wall Street to unwind most of the regulations established by Franklin Delano Roosevelt’s administration in the throes of the Great Depression. It took fewer than 10 before the same bankers managed to bring the economy crashing down around us again.
More than a year ago, I wrote that Wall Street was inviting a hell of its own making by imploring the federal government for help before its vaunted institutions fell apart completely.
Uncle Sam did help, at which point many of its vaunted institutions fell apart completely. The government did succeed in propping up a select few.
From a Wall Street standpoint, that’s when the real problems began. Uncle Sam, you see, seems to share at least one characteristic of vampiric legend: Vampires can’t come into your house unless you invite them. But watch out if you do … they won’t leave until you’ve bled to death.
In the general panic of last year’s fourth quarter, inviting the demon inside seemed to make sense, especially considering the other monster stalking their halls: bankruptcy.
These days, however, safely tucked in the third quarter of 2009, with the financial waters calming, Wall Street has decided to thank its one-time benefactor politely and send it out of town. Fast.
Unfortunately, it can’t have it both ways — which is why the real hell for Wall Street is just beginning.
The Obama administration’s ambitious financial reform plans are irrefutably necessary. We’ve seen all too clearly what happens when financiers run amok, which is a fair representation of their behavior over the past decade or so.
And it’s a fair conclusion that government regulators, at the very least, didn’t take their jobs very seriously.
Granted, they may have been lulled into this position with the help of former Fed chief Alan Greenspan, who believed regulation of financial firms unnecessary because the firms would always act in their own best interests — which even I would assume doesn’t include outright failure.
So there is clearly a need to reinforce some of the regulations.
The heart of the reforms focuses on consumer protection, with a new agency providing oversight of credit, debit and gift cards, mortgages, overdraft protection, payday loans and a host of other consumer-focused instruments.
Banks and other financial firms will have to answer to stiffer rules, including the standards by which their capital is measured; some of the larger hedge-fund companies would be regulated; and the ratings agencies, which have undergone some intense scrutiny, would face more disclosure requirements and stricter standards.
I’ll admit, I share some of Wall Street’s “concerns” — a polite term that in this case means “frenzied panic” — over the proposed regulations. Anyone who saw bankers and financial types being grilled by various congressional committees this year knows what I mean.
But even vampires have to follow the rules. And the rest of us are safer for it.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
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.
April 18th, 2009
After spending most of the past decade dying by inches, Chrysler LLC bowed to its second bailout by the federal government to keep its heart beating — the financial equivalent of life support for the ailing automaker.
Sadly, though, even as its workers labor busily to keep the body alive and healthy, their efforts are largely symbolic at this point. The bankrupt automaker, in other words, is already brain-dead.
Of course, the company still has about 10 days to broker a deal with another automaker before the Obama administration pulls the plug and allows Darwinian theory to take over. And the only one audacious enough to try is Fiat Group SpA and its charismatic, driven leader, Sergio Marchionne.
Don’t get me wrong — I have nothing but respect for the 56-year-old Marchionne, who nearly single-handedly overhauled Fiat’s inept management structure, abandoned plans for apathetic, lifeless cars in favor of successful models like the hot-selling 500, or Cinquecento, and set about fixing its crumbling dealer network.
On the brink of bankruptcy when Marchionne took over, Fiat ended 2008 with $2.2 billion in profits on sales of $78 billion, and its operating margin was one of the best in the industry. Last week, the Italian automaker reported a 14.7 percent increase in March sales amid a 9 percent drop in European car sales — the only European automaker to see sales grow.
Obviously, the man’s doing something right. And few companies have needed brain transplants more desperately than Chrysler and its crosstown rival, General Motors Corp.
His brain would certainly be a welcome change at the former No. 3 automaker.
Still, I hesitate to get too carried away by turnarounds engineered by one man — even if this one man has racked up a fairly impressive track record.
If that man is taken out of the picture, what happens to the company in the long term — particularly one as committed to incompetence as Chrysler’s management has traditionally been?
And the proposed deal is curious, given the state of Chrysler these days. It needs money. Now. And the shotgun marriage involves no cash.
The money would come in the form of an additional $6 billion government loan.
Other than that, Chrysler would get almost nothing immediately. Except Marchionne’s brain.
Here’s hoping he’d stick it out long enough to make some real changes in Detroit.
