June 6th, 2009 04:26pm
Annette LaCross
I suspect that we’ll start hearing some good news from banks in the second and third quarters.
After a year of staggering quarterly losses, mostly because of the suddenly ponderous weight of residential and commercial mortgages and mortgage-backed securities, we’ll start seeing gains.
At least I hope we do. If not, we’re in for a really bad year.
But my optimistic projection isn’t because I believe we’ve passed some kind of magic hour in the financial industry, after which earnings and profits mysteriously climb back into the black. Nor is it because banks have suddenly remembered how to, well, run a bank.
Rather, it’s because a change has been made to the rules of accounting, in this case a relatively obscure rule known less-than-affectionately as mark-to-market.
Mark-to-market accounting requires banks to price assets on their balance sheets according to what you can sell them for on the open market.
The banking industry pressured Capitol Hill relentlessly this year because mark-to-market forces it to lower the value of such assets as derivatives, even though many of the loans that back those bonds have yet to default and perhaps never will. But each quarter, those losses amplified the bottom-line losses at a number of the nation’s largest banks, wiping out their capital.
When the bottom fell out of the securities market last fall — and remember, the edges were beginning to fray more than a year before that — a mortgage-backed bond worth $10 million at the height of the bubble became worthless almost overnight, effectively wiping out the bank’s $10 million. The market had literally evaporated.
It required the bank to post the loss and scramble to raise more capital to cover it.
And this was a market worth trillions of dollars, with every bank, investment house and hedge fund in the world participating.
You can see why the banks were so bitterly opposed to the idea — the longer they had to post these assets as losses, the closer to collapse they came.
And you can see the reason for my rosy outlook.
Banks had the option of adjusting their first-quarter results to reflect the change to the mark-to-market rule. And if you’ll recall, the stock market reacted with wild abandon when so many of the nation’s big banks posted better-than-expected results.
But remember, the banks aren’t conducting business differently. They’re just changing the way they crunch their numbers.
So do the first-quarter numbers better reflect the state of the banking industry? Or should we trust the results of the past four or five quarters, before the rule was changed?
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
May 23rd, 2009 02:46pm
Annette LaCross
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 09:44pm
Annette LaCross
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 06:14pm
Annette LaCross
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.
April 30th, 2009 10:21pm
Annette LaCross
This week’s least newsworthy moment came Thursday, when President Barack Obama announced that Chrysler LLC was filing for bankruptcy and Chrysler’s long-awaited deal with Italian automaker Fiat Group SpA had been signed.
The Chapter 11 bankruptcy filing was as inevitable as the sunrise. All of the competing interests tugging at Chrysler’s remaining assets demanded it — a company as large, as old and as far-reaching as an automaker is left almost no other choice.
And for the most part, it’s what everybody wanted.
The Obama administration won’t commit to a lifetime of financial bailouts for Chrysler, which is, for the most part, what it would be accepting if it allowed the company’s restructuring plan to go through without bankruptcy.
Not to mention that Obama wanted to get as far away from the United Auto Workers union — the unions are among Obama’s strongest allies and, arguably, one of the interests holding the most sway in the White House — as he can before it had to demand greater concessions than those the union approved earlier this week.
Fiat likes bankruptcy because it makes it much easier for the company to pick and choose what it likes from the company’s assets. It can essentially separate the company into two piles — good assets in one, “bad” assets in another — and take only those it wants.
Chrysler’s bondholders, which ultimately forced the automaker’s hand, like the bankruptcy idea, too — they’d just prefer the automaker liquidate its holdings. While most of the more than 45 investment banks and hedge funds, which hold nearly $7 billion in Chrysler debt, indicated they would accept the government’s offer of $2.5 billion, a few held out.
In Chapter 7, or liquidation, those bondholders would be among the first to get paid — and would likely walk away with far more than the paltry $2.5 million the government was handing out.
That led Chrysler right to bankruptcy court.
For Obama, it’s good news. It means he will be able to deflect criticism — for the next 30 to 60 days, at least, which is when the company is supposed to emerge from this “surgical” bankruptcy — to the greedy bondholders who broke the back of the brave American car company.
Left behind, of course, are the workers at Chrysler and its supplier plants, who found out rather abruptly Thursday that they’ll be out of work for the next 30 to 60 days while the automaker figures out how to be a) bankrupt and b) owned by Italians.
Then again, it’s also enough time to retool a few plants to produce re-badged Fiats.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
April 18th, 2009 04:25pm
Annette LaCross
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.
April 18th, 2009 04:25pm
Annette LaCross
Call me a pessimist. (Everyone else does.)
But I just can’t bring myself to feel exactly bullish about the news from last week, when euphoria gripped the country as stocks ticked upward and interest rates ticked downward.
It was a great week for the Obama administration, which took advantage of near-record-low mortgage rates to tell every American homeowner to refinance their home loans.
“We are at a time where people can really take advantage of this,” President Barack Obama said last week.
It made my hair stand on end.
Granted, I tend to be a little gun shy. But I’m a big believer in the “fool me once” philosophy.
And Obama’s remarks sounded an awful lot like former President George W. Bush’s throughout the early — and increasingly euphoric — days of the decade.
Back then, of course, the prevailing wisdom was that everyone needed to own a house. In 2002, Bush announced an aggressive program to provide down payment assistance, increase the supply of affordable homes, increase support for self-help homeownership programs and simplify the buying process.
He also told the real estate and mortgage-finance industries (back when we had them) to increase the number of minority homeowners.
“Five-and-a-half million families by 2010 will own a home,” he said triumphantly at the time. “That is our goal. It is a realistic goal.”
Was it ever. Briefly, at least.
Ever since, I’ve been fairly bearish about declarations from my federal government. For sure, it’s a great time to refinance. Of course, in 2002 (and in the five years after), it was a great time to buy a house.
So a few glimmers of possible improvement here and there are hardly enough to convince me that a global economy mired in a recession for more than a year is finally “starting to level off,” as The Associated Press proclaimed happily last week.
Especially when I hear something like this:
“The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall … we can be reasonably confident that that is going to end within the next few months and we will no longer have that sense of a free-fall.”
That’s Lawrence Summers, one of Obama’s top economic advisers.
So much for euphoria.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
April 18th, 2009 04:25pm
Annette LaCross
Among the many object lessons to be learned from the financial crisis, one or two come through loud and clear:
If you’re going to sin, sin big. And take a lot of people down with you.
Disgraced financier Bernard Madoff, for example, didn’t do it right. Sure, he took lots of people down with him, but in the end, he was the only one standing when it was time to pay the piper.
If, on the other hand, you’re Maurice Greenberg, who for 38 years ran American International Group, you can testify to Congress — with a straight face — that you had nothing to do with AIG’s financial peccadilloes because you left in 2005. And, apparently, get away with it.
In other words, all manner of transgressions will be forgiven, or at least overlooked, in this new era as long as enough people have been damaged.
If Madoff had only managed to make the major financial institutions on Wall Street complicit in his Ponzi scheme, he’d probably be getting a bailout, not a jail sentence.
Are you too big to fail, even though you helped mire the global economy in a recession worse than any in recent memory? Get trillions of dollars in bailout money from the federal government.
Bought a house you can no longer afford? You could get a bailout of your own. And even if you don’t qualify for the Obama administration’s program, so many homeowners are either in trouble or under water that you may suddenly find yourself with a little more leverage when approaching your banker.
If your lender balks, however, and your last resort is bankruptcy or foreclosure, you probably shouldn’t lose sleep over your credit score, either. After all, a foreclosure or bankruptcy filing this year or last won’t bear the same weight as one in 2005.
Even the vaunted New York Stock Exchange is re-evaluating how to delist companies. To protect itself from a wave of delistings, NYSE Euronext approached the Securities and Exchange Commission about relaxing its requirement that companies listed on the New York Stock Exchange maintain a share price of more than $1. Nasdaq OMX already suspended its minimum-bid price and market-cap requirement.
And I’m sure there’s plenty more to come. Hopefully, this won’t be the only lesson learned from the economic comeuppance of 2008.
But recessions keep coming back to haunt us, no matter how many times we’ve been through them. It makes me wonder how long it will take us to forget this time.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
March 28th, 2009 07:53pm
Annette LaCross
There seems to be a financial Bad Cop/Bad Cop scenario playing out these days.
And I’m not sure which is worse.
On the one hand, the federal government is telling me not to worry because it’s keeping an eye on my money — and not just my taxpayer dollars. It’s also keeping a close watch on banks these days.
This, of course, is the same federal government that has racked up a multitrillion dollar deficit and spent most of the last two quarters sprinkling free money — our money! — over Wall Street like so much pixie dust.
It’s not exactly confidence-inspiring.
In the meantime, the country’s tottering financial institutions are telling me not to worry because they’re keeping my money safe — in between shouts of “nationalization!” at the top of their lungs to keep Bad Cop No. 1 from spending any more time than absolutely necessary in their midst.
(“Any more time than absolutely necessary,” by the way, is code for “just long enough to hand out more pixie dust.”)
As I suspected, the financiers of Wall Street — Bad Cop No. 2 — opened themselves up to a hell of their own making last year when they begged the government for a little monetary intervention … undoing nearly two decades of fierce lobbying for looser regulations in the process.
They’re getting their intervention. With a vengeance.
Last week, Treasury Secretary Tim Geithner rolled out his plan to impose stricter standards on financial institutions, the derivatives market, and hedge and private equity funds.
In other words, the federal government — and by extension, taxpayers, many of whom can’t balance their own checkbooks — are now firmly entrenched in the banking business.
So who should be watching your money?
Like I said, I’m not sure which is worse.
The financial sector is contritely pointing out its expertise in money management — forget that little subprime mortgage issue that collapsed the global economy. It has learned its lesson, its titans claim.
And the federal government, which isn’t quite sure where all its pixie dust is, just wrapped up a banner week in which it first bowed to popular rage by excoriating the Obama administration, Geithner and American International Group executives — then meekly backing off at the realization that it needs the financial sector to help solve the financial crisis.
That leaves us taxpayers — presumably those who have balanced their checkbooks at least once.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
March 21st, 2009 07:56pm
Annette LaCross
If there is one thing a decade of easy lending creates, in addition to financial markets that are either paralyzed or collapsing, it’s a sense of entitlement.
It began with the carefully cultivated notion that money no longer needed to be earned — indeed, it was free. It no longer belonged only to an elite class of people we could only envy.
Suddenly, we were, all of us, rich. We needed only to ask and piles of money appeared before us.
So we asked, delighted to find ourselves in lifestyles to which we were completely unaccustomed, to learn that our parents were wrong when they told us money didn’t grow on trees.
At some point, such abundance became less a novelty, more a perquisite. It was nothing more than what we deserved, after all.
Today, with the economy derailed and any sort of recovery months or years away, we find ourselves dancing around a grim reality we don’t really want to see.
To forestall facing it, we have resorted to asking two questions over and over. The problem, of course, is that they’re the wrong questions.
We are first demanding — after all, we have every right to demand answers when our right to free money has been violated — the identities of the culprits responsible. These days, we seem comfortable pointing to various executives at failed insurer American International Group because of the billions of dollars in bonuses they were given.
And when they become old news, as they inevitably will, we’ll find someone else — someone even more responsible. Probably the federal government, always a good scapegoat because we are so accustomed to letting Uncle Sam take over when the going gets tough.
The second question — I get this one a lot — is when this is going to be over. It took me a few frustrating attempts at an answer before I realized what the real question is: When am I going to be rich again?
These are the wrong questions because we are determined to not hear the answers, which are, in a nutshell: 1) We are. 2) Not for a while.
We felt rich because we saddled ourselves with so much debt, which lenders are loath to approve these days. We forgot it wasn’t real money — that real money, sadly, must be earned. But we are desperate to clutch our illusion of wealth close. Why wouldn’t we? We liked being rich.
But the longer we put off accepting the answers, the more it will prolong the inevitable realization: There’s no such thing as free money.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
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