Speciality clothing retailer Eddie Bauer filed Chapter 11 today. Eddie Bauer had previously been through bankruptcy in 2003. A buyout firm has made an offer to buy the company, and is urging the bankruptcy court to hold a quick auction to determine if any other firm is willing to pay more.
Archive for the ‘Financial Collapse’ Category
Bankruptcy Watch – Eddie Bauer
Thursday, June 18th, 2009Bankruptcy Watch – Extended Stay Hotels
Monday, June 15th, 2009Extended Stay hotels, which operates 680 properties that cater to business people working away from home has filed chapter 11. Wachovia, Bank of America and Bear Sterns are each on the hook for about $1 billion each. Extended Stay employs about 10,000 people.
Lincoln Financial in trouble…
Monday, June 15th, 2009If you have a life insurance policy or an annuity with Lincoln Financial (or formerly Jefferson Pilot Insurance), you need to be paying attention and asking some questions of your state’s Insurance Commissioner.
Lincoln announced today that it is raising capital, including taking TARP funds. Lincoln is publicly traded and the stock dropped like a rock last September. The only plausible explanation for raising capital is they are facing questions about the solvency of their insurance funds.
Lincoln also happens to own 15 radio stations, but that’s secondary to the news today. They are a tiny portion of the assets of the company – last year, the wrote down the value of their Radio licenses by about $200 million.
Poking around in their 10-Q from March, the large majority of their assets are invested in Corporate bonds (think GM or Chrysler, perhaps). They also have significant investments in residential and commerical mortgages (the really safe stuff that you can never lose money on because real estate always goes up). Very little of their money is in government bonds.
In January 2009, Lincoln “purchased” a tiny Savings and Loan so that the company could qualify as a Savings and Loan and be eligible to particpate in TARP.
Lincoln’s stock symbol is LNC – the stock has dropped 7.2% today.
Bankruptcy Watch – Six Flags
Saturday, June 13th, 2009Six Flags has filed Chapter 11. This bankruptcy has widely been predicted since last summer when the $4+/gallon which resulted in large drops in attendance. The economic downturn hasn’t helped the situation. For now, the parks will stay open.
Taxing Inflation
Tuesday, June 9th, 2009The last time Democrats lost control of the economy was those wonder days of the Carter era, which it appears some are nostalgic for. My first mortgage in 1980 was 16 3/8 percent on a 20% down payment conventional loan. CD rates were approaching 20%. President Carter was telling us in 1977 we were running out of natural gas and oil, and the world would exhaust all proven reserves by the end of the 1980s.. Text here.
There was a wide spread belief that Jimmy Carter’s plan, based on the advice of his economic advisors, was to let inflation go wild with two goals.
First, it would decrease the real cost of paying for the existing national debt. We would be paying off US Treasuries in the future with dollars that were worth less. Screw the greedy people who had bought our US Treasury Bonds. (sound familiar yet?)
But more insidious was that uncontrolled inflation creates a windfall of tax revenue to the Federal government. Because the tax brackets are tied to income, inflating wages and expenses moved people into higher tax brackets without the government having to “raise taxes”. The second windfall was on capital gains – if you bought a house for $50,000 and sold it 10 years later for $200,000, you had to pay taxes on $150,000 “profit”, despite the fact that in real terms your house wasn’t really worth any more than it was 10 years ago. (*Yes, I know you could defer the capital gain if you bought another house).
So deliberately creating inflation can create a windfall for the government – or so the theory went. The problem of course is it’s only a theory. Unpredictable future inflation, and horribly high interest rates substantially slowed new investment. When Ronald Reagan slammed the brakes on this foolishness, it created a significant economic downturn in 1981 and 1982, but we got through it. Markets can fix themselves if they believe the future will be predictable.
Tim Geithner and Barack Obama were teenagers in the late 1970s. Perhaps they wish to repeat the mistakes of their fathers.
By the way, the head of the Federal Reserve starting in 1979 was a man named Paul Volker, who just coincidentally is heading Barack Obama’s Economic Recovery Advisory Board.
A day of change
Friday, June 5th, 2009US Treasury Interest rates are starting to accelerate up. The Geithner/Bernanke/Obama “let’s spend our way out of this” isn’t working. As interest rates go up, the fear will start to feed on itself.
If Interest Rates go up very much, companies that have sold Interest Rate Swap contracts are in serious trouble. Companies holding Interest Rate Swap contracts to protect themselves from increasing interest rates will be in serious trouble if their counter party fails. (think AIG)
The biggest loser today in the S&P 500 is ICE (Inter Continental Exchange), which is the place that trades in derivative contracts. ICE has been designated as the “magic pill” by Geithner as a the place where Swap Contracts can be turned into a tradeable commodity, backed by a central clearinghouse. But there is no entity that can possibly “guarantee” $562 Trillion in contracts – not even the U.S. Treasury. It isn’t going to work.
Acting in the way you would expect, as interest rates start to go up, money is starting to come back into the United States, and the dollar strengthened substantially after losing a lot of its value over the past few weeks.
And finally, the rule of law officially ended today . As was widely expected, the US Appeals Court refused to step in front of the speeding Chrysler “rescue”, and told the secured creditors to go pound sand. 100 years of procedures governing bankruptcy and property rights is out the window – Tim Geithner gave the company over to Fiat and the UAW for essentially nothing, plus threw in a big pile of money from the US Treasury,
*** Update ***
The pension plans have filed an emergency appeal to the U.S. Supreme Court to extend the stay at midnight Saturday night. The Supreme Court has until 4 PM Monday to slam on the brakes. The Fiat deal was deliberately written as an “emergency” that if it doesn’t happen on Geithner’s schedule, Fiat gets a financial windfall. I hope we learned something from the $700 billion emergency last fall.
The Showdown
Wednesday, June 3rd, 2009A Federal Appeals court has put the sale of Chrysler to Fiat on hold for 10 days. A group led by a pension fund in Indiana has filed suit that the Federal Government is breaking their own laws by putting an entity preferred by the government (the UAW health care fund) in front of the secured creditors, in violation of the way the bankruptcy law and decades of law say that bankruptcy law works.
The “Showdown” is whether the United States is going to continue to be a nation of laws, where everyone can make rational decisions based on knowing what the rules are and the government enforcing the rules. The alternative is government by decree and personality cult, justified by government designated “emergencies”.
The courts are supposed to be the checks and balances against a runaway President. The future of the country is at stake. If the Court of Appeals caves on this issue, then we have become Venezuela. Let’s hope the concepts put in place 225 years ago are stronger than the power of MSNBC.
Banking, Chicago style
Wednesday, June 3rd, 2009Having taken US Treasury TARP funds from Tim Geithner, and being subjected to his “Stress test”, several TARP recipients have surprised the U.S. Treasury by easily selling new stock and raised money in the past few weeks with the goal of paying back the TARP money, paying off their loan shark, and no longer being subject to the whims of President Obama and a Democratic Congress. How naive.
Bloomberg reports that the [US Treasury has moved the finish line], saying that what they said just a week ago for the firm’s capital requirements no longer applies, and the U.S. Treasury won’t allow the TARP money to be paid back.
Do banks have kneecaps?
Does anayone else hear the distance sound of the drums of war?
Repeating the same mistake
Wednesday, June 3rd, 2009A number of sources are reporting that GM and Chrysler’s new car sales are “better than analyst projections” – in the case of GM – only down 30% from last year, instead of the expected 39%. (See any “spin” there?)
So assuming that’s actually true, why the counterintuitive result of people returning to the showrooms of companies about to go into bankruptcy?
Here is my guess: One of the early companies that got the Tim Geithner “bailout treatment” was GMAC. GMAC makes car loans (mostly for GM cars). They borrow money using bonds and then use that money to fund car loans. GMAC got clobbered by the Federal Reserve forcing down interest rates – they had borrowed a -lot- of money for terms of up to 10 years and more (longer than a car load lasts).
When the Federal Reserve pushed down interest rates, GMAC ended up having to make loans for less than what they were having to pay for the money. The value of GMAC’s bonds began to drop, and as people started to worry that GMAC would never recover, the credit rating and price of the GMAC bonds became close to worthless, which then seriously hampered GM’s’ ability to sell new cars, to the point that GM was referring potential buyers to banks and other lenders instead of GMAC.
So one of the first things Paulson and Geithner did was to flood GMAC with cheap money, and combine the activities of GMAC with Chrysler’s financing company. In December 2008, The US Treasury injected $6 billion, and converted GMAC into a “bank” (GMAC having never paid into FDIC and not having any “deposits”). GMAC acquired a small bank to make that magic happen – it was named GMAC Bank, and now Ally Bank.
Remember the woman before the election who announced when Obama was elected that she would not have to pay her mortgage and would get a free car? People scoffed at how naive she must have been. The joke’s on us. Remember Oprah’s Free Chicken Dinner giveaway and how word spread so quickly within the community that there wasn’t enough free chicken to hand out?
Given Obama and Geithner’s obvious desire to manage failure, it seems very probable to me that they sent the word to GMAC to “just forget the credit scores” – we’ve got your backs – the same way the government “backstopped” Freddie Mac and Fannie Mae for home mortgages. So GM and Chrysler may be selling cars to people who can’t possibly qualify for the car loan in normal times, or at interest rates that don’t reflect the risk of repossession down the road.
Toyota’s sales were down 47% – they don’t have the luxury of ignoring credit risk. The more the government gets involved, the more they change the competitive environment. While they may not take over Ford, the competitive advantage that being financed by the government may ultimately drive you out of business – until a few years from now when GMAC is holding a worthless portfolio of uncollectible loans, and then we have a hole another trillion deeper.
Just like a woman can’t be half-pregnant, you can’t half-nationalize an industry.
Sovereign Funds Explained
Monday, June 1st, 2009You may have heard people on the news mention “Sovereign funds”, and some are pointing fingers at them as being the boogey man behind the global economic problems – especially people like Alex Jones. What are they and what do they do?
From time to time, people suggest that Social Security invest in stocks rather than putting money in the “Social Security” lock box. The Government would then own assets more substantial than an IOU from the U.S. Treasury. If they did that, it would be an example of a sovereign fund. They are pools of money that are owned by governments (or government agencies) to go around the world and “buy up stuff”. Much of the money in the funds is oil money. Here is [a list of the world’s largest sovereign funds]. Sovereign funds (in total) control about $3.6 trillion in assets. [Keep that number in mind when you hear the U.S. is going to run a $1.7 trillion deficit for a single year].
Secretary of Treasury Paulson last year told these funds to “Bring it on“, inviting them to buy up as much of America as they wanted. It’s very probable that the “Private Equity funds” in the United States that have financed much of the radio business are funded by these funds, either directly or indirectly. U.S. law prohibits foreign governments from owning FCC licenses, but if you put up the facade of an “American” Private Equity fund managed by a group of Harvard MBAs, that satisfies the legal requirement. If the countries are members of the WTO (like China), the presumption is that they can own U.S. Radio and TV stations, unless someone can make a case that they shouldn’t.
Congress is making noise about requiring more disclosure of where Private Equity Funds are getting their money. Pay attention to see if that gains any traction. With the US Government begging for money anywhere they can find it, it seems unlikely that anything will happen that might increase transparency or alienate sovereign funds.