Risk Rap

Rapping About a World at Risk

Corporate Extinctions

A large meteor that hit the Yucatan peninsula 65 million years ago is considered one of the causal factors that led to the mass extinction of the dinosaurs. The theory gained wide acceptance after a photogemmetric satellite captured the image of the Chicxulub Crater centered just off the peninsulas northeast shore. The meteor theory seemed to solve the dinosaur extinction mystery of how a dominant species that ruled the earth for 200 million years can suddenly disappear. Apparently the theory suggests that the extinction happened more with a bang then a whimper.

Like the Chicxulub meteor, the economic crash of 2008 promises to claim a dramatic toll of corporate victims and drastically alter the landscape of the global capitalist system. The casualty list prominently includes some marquis corporate banking brands like Bear Stearns, Lehman Brothers, WAMU, Wachovia, Fannie, Freddie, Fortis, RBS, NorthernRock and threatens to claim the solvent souls of a UBS or Citibank. The State of California and the Sovereign State of Iceland are also endangered and the economic crisis may claim them as its biggest prize.

Hedge funds are quickly folding up shop. Morgan Stanley estimates that the AUM of the industry may shrink from $1.9tr to $900bn due to market losses and investor redemption and withdrawals. At its peak the global hedge fund industry was estimated to offer AIM products by over 6000 providers. By the close of the next year the size of the industry will be considerably smaller as capacity downsizes to serve less demand. Downsizing will also be the prevailing theme for community banks, RIA’s and CTA’s as excess capacity is worked out of the system through closures, consolidations and seizures. This contraction will effect industry service providers that sell services to the financial services market. Lawyers, accountants, IT providers and consultants will be hard pressed to maintain their book of business as the market for their services contracts.

Free marketeers and Social Darwinists may find it right and fitting that the financial services industry comprises the bulk of the corporate casualty list due to their culpability in nurturing this economic apocalypse and their proximity to the epicenter of the crash. The Hollow Men who led the US economic colossus to this dramatic self immolation however won’t have to fall on their swords. Their champion in the Treasury Mr. Paulson has swaddled them in a protective TARP so these masters of the universe can don superman capes to continue their selfless endeavor of saving the US economy from a total collapse.

Unfortunately the deadly meteor that almost liquidated the banking system is spreading outward to what some refer to as the real economy. Goldman Sachs’ indicates that the recession will shave a cool $1.3tr from the GDP. This will inhibit buying power by individuals, corporations and governments. Some economists fear that this will create enormous deflationary pressure prolonging the recession. Many see similarities with the Japanese recession of the 1980’s. That recession brought on by the burst of Godzilla sized real estate and equity market bubbles lasted for over a decade. Japanese central bankers cut interest rates to almost zero and the vicious downward spiral of the economy recovered as a result of SE Asian and North American market demand drivers that fueled tremendous export growth.

Retail is another sector that will be particularly hit hard by corporate failures. Industry statistics indicate that 14,000 retailers are expected to close their doors during the next year. US auto dealerships from the Big Three are expected to contract by 25%. The auto industry is a major hub of a large and intricate manufacturing supply chain and as such this sector will be hit hard with business closures as well. Construction, housing and domestic oriented leisure industries will continue to stagnate as the American consumer buying power evaporates. Not good news for an economy so strongly dependent on consumer spending.

Yesterday the National Bureau of Economic Research (NBER) announced that the economy went into a recession in December 2007. Its a bit funny that it took a year for the NBER to hear, feel and detect the Chicxulub Meteor that crashed into our economy. Today’s Employment Report from ADP indicates that the US economy shed another 250,000 jobs during the month of November. Now that the reality of the recession is upon us the corporate endangered species list will be a pressing problem and success metric that the Obama Administration will need to squarely address with any stimulus package he plans to enact to get the economy moving again. This actually bodes well for the passage of a rescue package for the Big Three Automakers. One thing is certain, urgent action is required or our economy will continue to go down not with a bang but with a whimper.

You tube video: Ranny Weeks and Orchestra: Out of Nowhere

Risk: recession, bankruptcy, solvency, rescue package, economic stimulus

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December 4, 2008 - Posted by | banking, bankruptsy, Bear Stearns, economics, Paulson, pop, unemployment | , , , ,

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