Silicon Graphics makes high end servers for business and government customers – their niche in the computer business was high performance graphics systems like those used for Computer Aided Design (think car companies)
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Bankruptcy Watch – Silicon Graphics files Chapter 11
Wednesday, April 1st, 2009Getting ready for the G-20
Wednesday, April 1st, 2009On the eve of the meeting of the World’s 20 most important economic powers in London, President Obama is signalling that he believes the best course of action for GM is bankruptcy, with a new Board of Directors appointed by him running the company (and probably owned by the UAW employees).
Globalism (as represented by the G-20) is a very divisive topic in Europe and large and possibly violent protests are expected. A year ago, Candidate Obama was greeted in Europe as if he was the Second Coming of the Messiah – this week he appears in the role of the leader of the country that many point to as the cause of the economic collapse (never mind it was European banks who bought the Credit Default swaps from AIG with no gun pointed to their head).
This will be the first serious test of President Obama’s skills on the world stage. Germany, England and others are already in finger pointing mode and looking for someone to blame. Many believe that President Obama will “accept blame” for the entire mess “caused by George Bush” (ignoring that Tim Geithner was the head of the NY Federal Reserve Bank at the time)
The world’s leaders will not be impressed if Obama is just reading scripts from a teleprompter. This is his chance to convince the world he has substance or prove that he is a clueless Chicago A.C.O.R.N. street thug with no clue how the real world actually works.
No matter how it turns out, this is a very important week for your future.
Chicago Sun-Times files chapter 11
Tuesday, March 31st, 2009Having most of the country’s major newspapers going under with the current political and financial environment will not be a good thing. In addition to the Chicago Sun Times, the parent operates another 59 newspapers.
Geithner’s Waterloo
Monday, March 30th, 2009Sunday, the US Government told Rick Waggoner – the CEO of General Motors – that he no longer has a job. The government automobile rescue commission has declared that the viability plan is not workable.
Tim Geithner has declared that the problem with the economy is that he hasn’t done enough, not that he has done too much. At the same time, he is lashing out at banks for being unwilling to take on additional risk.
Markets in Asia responded by dropping over 4%. Futures suggest the same will happen here. If you didn’t already sell to take advantage of the recent upswing, you probably missed your chance.
Geithner is now trapped by the reality that the hedge funds are not going to fund his latest toxic solution plan since Congress did the 90% AIG tax thing to punish those working hard to unwind the company. Add to that the threat of “taking over” the same companies by decree of the Federal Reserve Board of Governors (which has no jurisdiction over anything except its members), and Geithner is in a real dilemma. If he makes nice with the hedge firms and seeks to protect them from populist retaliation for making big profits by rescuing the banking system – he could face the rath again of those who want his head on a platter. If he doesn’t shield them, they won’t voluntarily help.
No wonder nobody wants to work for him.
Bankruptcy Watch – Charter Communications
Friday, March 27th, 2009The long suggested bankruptcy filing of Charter, the country’s 4th largest Cable TV company has happened – they filed chapter 11 to avoid its responsibility to repay its bond holders today.
Paul Allen of Microsoft fame will still control 35% of the voting power of the company even though he only owns 7% of the stock.
Interest rate swaps and you
Wednesday, March 25th, 2009Most of the press about the current crisis points to Credit Default Swaps (CDS), but there is another type of “swap” that may end up blindsiding us – the Interest Rate Swap contract. What is an interest rate swap and how would it affect you?
Let’s say your local water district needs to raise about $100 million to build a new sewage treatment plant. The district doesn’t have that kind of money, but does have a revenue stream to pay off borrowed money. Typically in the past, how this would have been handled is an underwriter would create a bond offering, sell them as fixed rate municipal bonds via competitive bidding and then the revenue would pay the bonds off over 20 or 30 years.
Enter the “hot shot” investment banker… [these are hypothetical numbers to explain what an interest rate swap is and to explain the concept]. The banker from New York says to the unsophisticated local politician…. I have a deal for you – it’s not that old fashioned bond thingy that nobody uses any more. You need to borrow $100 million. If you do this as a fixed rate offering, you’ll need to pay 7% interest. Rather than do that, I can get you the money at 5% (LIBOR + 3%), and save you $2 million a year in interest. (assuming LIBOR = 2%)
If the borrower has a clue, they will say “Hold on a second – LIBOR is a variable interest rate. If interest rates go back up, we’ll have to pay more interest. If LIBOR goes above 4% we’ll end up paying more for a variable rate loan than if we had sold fixed rate bonds. (assuming that 7% was even a real number)
Enter the Interest Rate Swap – the hot shot banker says “Have I got an answer for that. I can arrange with an insurance company (think a company like AIG) that will guarantee this won’t happen. Here is the deal – you pay them 5% up front ($5 million) and they will guarantee to pay you Libor +3% and you agree to pay them 5% if LIBOR goes back above 3%. We’ll just add the 5% to the loan and in a couple years the savings will pay that premium – it’s a win-win deal.
So how could that possibly go wrong? “Counterparty Risk“… the Interest rate swap agreement is only worth something if the seller stays in business. If the swap seller is unable to honor the agreement (let’s say AIG declares bankruptcy), then the buyer is now left with a variable rate loan for $105 million at LIBOR+3% without the “hedge” in place to protect it from rising interest rates. It’s pretty likely that over 20 or 30 years that LIBOR will float back up and the revenue won’t cover the interest and water rates will have to go up, or if the interest payments aren’t met, then the bank can force new higher rates onto the agency due to the default.
The seller books an upfront fee as complete profit and looks very profitable, and the contingent liability of what they might have to pay in the future might be zero, or it might be essentially infinite (how high could LIBOR go in 30 years?).
The really bad part of this is that once local governments became aware of interest rate swaps, some of them were talked into acquiring interest rate swaps in the secondary market as the guarantor. Say the company in the example finds another city that will take the swap off their hands by giving them $1 million (to fill a budget hole) and they get themselves completely off the risk and book a $4 million pure profit. When the deal falls apart, that $1 million in “free” money could quickly turn into $500 milion in real liability.
That’s how this could bite you – if someone in your local community is playing around in the interest rate swap market way over their head, thinking they found a source of “free” money to fund their own pension plan.
*** Update March 25th 2009 ***
Guy in charge of setting the rules for Municipal Bonds underwriting realizes it was a mistake to not prohibit local government agencies from playing in the interest swap market. Jefferson County is expected to file for bankruptcy. You want goverment running your health care?
Showdown
Tuesday, March 17th, 2009Congress – in order to deflect attention from their stupidity – is talking very stridently about the executives of “their” company AIG.
These are incredibly stupid actions. While the folks getting the bonuses may have played a role in the losses, threatening them is extremely stupid. These are the only people who have the skills to unwind this mess. One click of a button (or failing to click a button after they quit) and they can make the entire global economy lose $75 trillion.
The problem was that the government stepped in to bailout a failed company, not that the employees want their earned income. The reason that there are bonuses at all is that Congress imposed a “salary cap” on “executives” and forced companies to pay employees based on performance. If you don’t pay the “executives” what they were promised, they -will- leave AIG. Will Chuck Schumer now force them to continue to work for AIG without paying them?
Fascism has arrived and it is bi-partisan.
Bankruptcy Watch – Primus Telecom
Monday, March 16th, 2009Primus has ownership interests in 23 transoceanic fiber-optic cable systems in Europe, North and South America, and the Asia-Pacific region and offers internet and phone services in Canada, Australia and Brazil. The strong US dollar has hurt sales and their debt is demonimated in dollars.
Geithner addresses the G-20
Saturday, March 14th, 2009Forbes has text of speech here
The Dictator of Treasury is in Europe to talk about Global Governance of the financial markets with his couterparts in the Group of 20 largest economies in the world
Bankruptcy Watch – 6 Flags
Saturday, March 14th, 2009It’s widely reported that the folks who run all those amusement parks will file for Chapter 11. Perhaps when people don’t have a job, they won’t spend $40 for a one day ticket to ride roller coasters?