What a difference a year makes. A year ago the banks came crawling to Washington begging for a massive capital infusion to avoid an Armageddon of the global financial system. They sent out an urgent SOS for a $750 billion life preserver of tax payers money to keep the banking system liquid. Our country’s chief bursar Hank Paulson, designed a craft that would help the banks remain afloat. Into the market maelstrom Mr. Paulson launched the USS TARP as the vehicle to save our distressed ship of state. The TARP would prove itself to be our arc of national economic salvation. The success of the TARP has allowed the banks to generate profits in one of the most prolific turnarounds since Rocky Balboa’s heartbreaking split decision loss to Apollo Creed. Some of the banks have repaid the TARP loans to the Fed. Now as Christmas approaches and this incredible year closes bankers have visions of sugar plum fairies dancing in their heads as they dream about how they will spend this years bonus payments based on record breaking profitability. President Obama wants the banks to show some love and return the favor by sharing more of their balance sheets by lending money to small and mid-size enterprises (SME).
Yesterday President Obama held a banking summit in Washington DC. Mr. Obama wanted to use the occasion to shame the “fat cat bankers” to expand their lending activities to SMEs. A few of the bigger cats were no shows. They got fogged in at Kennedy Airport. They called in to attend the summit by phone. Clearly shame was not the correct motivational devise to encourage the bankers to begin lending to SMEs. Perhaps the President should have appealed to the bankers sense of patriotism; because now is the time that all good bankers must come to the aid of their country. Failing that, perhaps Mr. Obama should make a business case that SME lending is good for profits. A vibrant SME sector is a powerful driver for wealth creation and economic recovery. A beneficial and perhaps unintended consequence of this endeavor is the economic security and political stability of the nation. These are the worthy concerns of all true patriots and form a common ground where bankers and government can engage the issues that undermine our national security.
The President had a full agenda to cover with the bank executives. Executive compensation, residential mortgage defaults, TARP repayment plans, bank capitalization and small business lending were some of the key topics. Mr. Obama was intent on chastising the reprobate bankers about their penny pinching credit policies toward small businesses. Mr. Obama conveyed to bankers that the country was still confronted with major economic problems. Now that the banks capital base has been stabilized with Treasury supplied funding they must get some skin into the game and belly up to the bar by making more loans to SMEs.
According to the FDIC, lending by U.S. banks fell by 2.8 percent in the third quarter. This is the largest drop since 1984 and the fifth consecutive quarter in which banks have reduced lending. The decline in lending is a serious barrier to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations. The TARP was intended to spur new lending and the FDIC observed that the largest recipients of aid were responsible for a disproportionate share of the decline in lending. FDIC Chairman Sheila C. Bair stated, “We need to see banks making more loans to their business customers.”
The withdrawal of $210 billion in credit from the market is a major impediment for economic growth. The trend to delever credit exposures is a consequence of the credit bubble and is a sign of prudent management of credit risk. But the reduction of lending activity impedes economic activity and poses barriers to SME capital formation. If the third quarter reduction in credit withdrawal were annualized the amount of capital removed from the credit markets is about 7% of GDP. This coupled with the declining business revenues due to recession creates a huge headwind for SMEs. It is believed that 14% of SMEs are in distress and without expanded access to credit, defaults and bankruptcies will continue to rise. Massive business failures by SMEs shrinks market opportunities for banks and threatens their financial health and long term sustainability.
The number one reason why financial institutions turn down a SME for business loans is due to risk assessment. A bank will look at a number of factors to determine how likely a business will or will not be able to return the money it has borrowed.
SME business managers must conduct a thorough risk assessment if it wishes to attract loan capital from banks. Uncovering the risks and opportunities associated with products and markets, business functions, macroeconomic risks and understanding the critical success factors and measurements that create competitive advantage are cornerstones of effective risk management. Bankers need assurances that managers understand the market dynamics and risk factors present in their business and how they will be managed to repay credit providers. Bankers need confidence that managers have identified the key initiatives that maintain profitability. Bankers will gladly extend credit to SMEs that can validate that credit capital is being deployed effectively by astute managers. Bankers will approve loans when they are confident that SME managers are making prudent capital allocation decisions that are based on a diligent risk/reward assessment.
Sum2 offers products that combine qualitative risk assessment applications with Z-Score quantitative metrics to assess the risk profile and financial health of SMEs. The Profit|Optimizer calibrates qualitative and quantitative risk scoring tools; placing a powerful business management tool into the hands of SME managers. SME managers can demonstrate to bankers that their requests for credit capital is based on a thorough risk assessment and opportunity discovery exercise and will be effective stewards of loan capital.
On a macro level SME managers must vastly improve their risk management and corporate governance cultures to attract the credit capital of banks. Using programs like the Profit|Optimizer, SME’s can position themselves to participate in credit markets with the full faith of friendly bankers. SME lending is a critical pillar to a sustained economic recovery and stability of our banking system. Now is the time for all bankers to come to the aid of their country by opening up credit channels to SMEs to restore economic growth and the wealth of our nation.
You Tube Music Video: Bruce Springsteen, Seeger Sessions, Pay Me My Money Down
Risk: banking, credit, SME
Is Sarah Palin the friendly and ever so lovely face of a new American Peronism? Is her resignation from office as Governor of Alaska the first step and necessary precondition of her coronation as titular head and leader of a new political party? Does it signal her desire to lead a movement that embraces the growing number of disaffected middle class Americans perplexed about their plunging standard of living and growing obsessively angered with insolvent and impotent government institutions inability to arrest the decline?
Everyday the institutions of government and constitutional law are being delegitimized by raucous Tea Partyers, abortion doctor assassins, family focus fanatics and political miscreants waving birth certificates screaming that they want their country back. We wrote about this back in October. Please allow me to quote from our McCain’s Know Nothings post of 10/11/08.
“Sarah Palin’s masterful use of the rhetoric of division and suspicion “who is Barack Obama?” has stoked the ugly side of America’s political angst. The lipstick wearing attack dog has done her job well. She has skillfully tapped into voter sentiment that is frightened about their economic security, fed up with the self serving lies of our political leaders and furious about their powerlessness to exercise control to stop the radical changes occurring in their lives. The stasis of Bush Republicanism is being washed away in a tsunami of world events that is accelerating the pace of change and cultural transformation. Palin promises to change our inability to arrest the changes that are overwhelming Americans. Sarah’s minions just want it to stop. They want it to go away. They want it to stay the way things always were. America is on top. God is in his heaven and all is right with the world. They will accept nothing less then our full entitlement to the birthright of our American Exceptionalism; and unlike Easu we will not sell it or be tricked out of it by a fast talking Jacob that goes by the name of Barack.”
Sarah, “the barracuda” has a whole mythology springing up about her even as her pronouncements concerning vigilant hockey momdom (daughters teen pregnancy), pit bull fighter to the end (resignation as governor), irascible maverick (support of bridge to nowhere), impeccable governance ethics (improper use of state government funds) all paint a very different portrait of the super girl from Alaska. Her identity as the all American girl, who worked, rose and battled an establishment with nothing more then moxie and good old values has captured the hearts, support and imaginations of “real American’s” willing to fight against those seeking to undermine the values and ideals of our uniquely God blessed land.
Palin’s timely resignation stole the limelight from the Michael Jackson funereal spectacle; a nonstop orgy of media affectation that refused to let MJ’s troubled soul depart in peace. Sarah’s announcement was a perfect foil and counterpoint to the ghoulish parade. Sarah’s photo op complete with overall fishing waders offered conclusive proof of how the still Governor of Alaska was working hard serving the needs of her constituents as her abandoned term of office was coming to a close. Sarah’s image of pulling in the nets bursting with sockeye could not have provided a more dramatic contrast to seeing MJ’s body bag being offloaded from a helicopter and placed into a ambulance for a trip to the Los Angeles morgue. It confirmed for her followers that Sarah’s way is filled with truth, light and a great catch as she stood beaming at the center of attention of a country obsessed with celebrity and a media that affirms their personal ethos du jour.
One of the reasons cited by Sarah for her resignation was that she was constantly under attack by the establishment. Sarah’s victimhood elicits empathy and a deep sense of identification from her countrymen. Middle America’s sense of victimization is quickly becoming its defining pathos. Home foreclosures, job losses, bankruptcies, community instability and spiraling taxes are combustible issues ripping apart the social fabric of America’s middle class. The crushing pain is being expressed in a growing chorus of cries that Sarah’s political antenna is accurately attuned to. In turn, Sarah’s minions understand and validate her victimization that they believe she will overcome and triumph if she remains true to real American values. Persecuted Christians exhausted from the prolonged war on Christmas feel her pain. Family value proponents that yearn for a constitutional amendment to define marriage so as to exclude civil rights for the LGBT community are down with Sarah. Uber patriots who are convinced that terrorist lurk in the quiet shadows just off Main Street remain willing to cede their civil rights. They also express a solid conviction to prosecute endless global wars as the only means to eradicate the terror threat staunchly stand with Sarah. Real American’s who live in a geography of anywhere USA that is not urban; or resides in an existential state of multicultural exclusion support Sarah. Those who are terrified by the hard edges of modernity and the difficult manageability of our complex society are arming themselves to the teeth to protect themselves from its ghostly specter take a cue from gun toting Sarah. And as Sarah’s supporters scream “drill baby drill” as a rallying cry to defend an expiring mode of life based upon the insatiable and unsustainable consumption of natural resources requiring the imperial projection of power and environmental degradation mindlessly shout “Sarah, Sarah, Sarah”.
Sarah, our self styled, self proclaimed maverick. American’s steep themselves in the mythology of the outside gunslinger taking on established power elites to effect change. But I sense an alarming correlation that is closer to Leni Riefenstahl’s “Triumph of the Will” then Hemingway’s “The Old Man and the Sea”. Individualism counts and boldness wins out in the end in Sarah’s political morality fairy tale. But I see little in the actual trajectory of her career or her political pronouncements that suggest that she is an unconventional politician willing to lay it on the line to take principled stand against the power elite. Sarah’s principled stances are driven by political opportunism rather then courage.
Yes, Sarah is a perfect victim. White, hockey mom from the rural region. Liberal elite city slickers hate her for who she is. But as Sean Hannity is fond of saying, “let you hearts not be troubled” because as the world continues to hate America for it’s values Sarah remains on watch. She is a sentinel of our arsenal of democracy protecting the common folk, Joe six packers and wannabe plumbers. This woman who rose to heights in this male dominated world got great legs, sports a nice dew and is quick with a wink and a smile. She has seduced America and as national dissatisfaction grows with governmental institutions unable to address economic malaise and cultural deterioration, nationalistic sentiment and Sarah’s popularity will rise. Unlike our current President, Sarah is American to the bone. Palin’s physical place of birth may have been Idaho; but her resignation as governor may have born her again as a new political force to be reckoned with.
You Tube Music Video: Madonna, Don’t Cry for Me Argentina
Risk: politics, Peronism
BearingPoints Chapter 11 filing represents a watershed type event.
The filing by the global consulting firm BearingPoint puts it on life support or at the very least in an intensive care unit. BearingPoint the bulge bracket consulting firm that was spun off from KPMG due to regulatory mandates concerning the separation of accounting and advisory businesses is in serious trouble. It has been struggling under a mountain of debt and the bankruptcy filing will give the firm protection from creditors while it seeks to reorganize its business.
BearingPoint’s filing is an interesting metaphor about the deflation of intellectual capital. Ideas, creativity, knowledge, productivity and innovation are some of the words that that we closely associate with intellectual capital. Once we may have even thought this form of capital to be immune from the vicissitudes of the banality of markets. I surmise that the recent business cycle exposes that idea as based more in our narcissistic prejudices then the cold objective realities of efficient markets. As we witnessed radical capitalism’s continued drive of extreme rationalization through monetization we discovered the price of anything but seriously lost sight of the value of everything.
During the 1990’s I remember always being impressed and astonished by the reports of the rising productivity of the American workforce. Year in year out the rising productivity was the proud boast and confirmation of American managerial brilliance. But today that claim looks spurious at best. Rethinking this proclamation may reveal this was accomplished not by brilliant management innovation but by outsourcing operational functions to subsistence based economies; and some artful balance sheet wizardry that aligned business performance ratios to maximize shareholder returns; particularly senior managers whose stock options were critical design considerations as to how those ratios were engineered. Indeed if productivity is a proxy for innovation, the productivity of American capitalism was outpacing the most aggressive predictions of Moore’s Law. True technology contributed to massive gains in productivity but in many ways was an economic rent seeking agent that enabled a flawed economy to sustain itself through over leveraged economic and misdirected intellectual capital.
Today we are confronted with the evaporation of massive social wealth that the IMF estimates to be almost $4.1 trillion in the financial service sector. I suspect a good portion of this value was carried on the balance sheet as good will. And anyone that has been living close the plant earth the past couple of years can attest to how the good will of corporations has been severely discounted. Perhaps this wealth never really existed and as the saying goes “you can’t lose what you never had”. We can take comfort in that and perhaps we can look on the bemused folly of central governments eagerly trying to stimulate economic growth to levels of our recent unsustainable past. I must admit that my sympathies and conviction stand with the Keynesian but I am beginning to wonder if they are chasing the long tails of ghostly economic shadows cast by AIG’s worthless CDS franchise. Once considered a revolutionary innovation cooked up by the finest minds of the capital markets financial engineers are now perplexing conundrums wrapped in a riddle and remain valuation Level Three FAS 157 mysteries.
To be sure intellectual capital deflation is a huge subject. I must also admit that this blogger lacks the time, skill and brain power to elucidate and articulate the numerous nuances and depth this assertion deserves and requires. I guess we could sum it up in a sound bite like the “dumbing down of America” but I believe that merely addresses the race to the bottom marketers skillfully cultivated to gobble up a greater portion of that ever fickle and fluid market share pie. In a way the deflation we speak of turns this dumbing down on its head and now claims the purveyors of fine ideas and clever tactics devised by the corporate marketing geniuses who were able to enrich themselves by conceiving the brilliant plans to convince us to buy so they can sell as much useless junk to as many people as possible.
The monetization of intellectual capital by incorporated consultants are increasingly becoming inefficient. New technologies that are enablers of strategic thinking has large consultancies disappearing into the computing cloud. Large bull pens of gray matter are inefficient as innovation in small firms are more efficient purveyors of thinking large to solve small problems or thinking small to solve larger problems. The large corporate dinosaurs that protected bloated bureaucracies enmeshed in group think stasis increasing showed an inability to be agents of innovation. They boldly proclaimed best practices to justify and position themselves in the executive office but now that the large corporations have been decapitalized their value creation mantras dissipated as markets capitalization fell.
In appears that the bulge bracket firms viability were dependent on knowledge transfer initiatives to underdeveloped economies to support outsourcing; and rent seeking business models dependent on regulatory mandates of Sarbanes Oxley, GBLA, COBIT, EURO conversions, Basel II, Y2K, PATRIOT ACT, HIPAA, FISMA etc etc. Their business models profited from significant business drivers of the past two decades the reallocation of capital to emerging markets and the guarantee of market protection due to governmental regulatory mandates. In both instances value creation from the deployment of intellectual capital proved to be unsustainable.
Consider the financial services industry and hedge funds. Hedge funds claim to offer uncorrelated investment products but most of the hedge funds performance fell in lock step with the market index averages. Investors pay premiums to participate in absolute return strategies offered by hedge funds. Fund managers make the claim of absolute returns based on their superior insights that their intellectual capital confers on their investment strategies. Last year that claim was demolished to devastating effect.
Newspaper publishers are also experiencing a decline in the portfolio value of their intellectual capital. But many believe that it is more of a question of their antiquated business model and once they figure out how to Googlize their business model to sufficiently monetize its intellectual capital shareholders will once again be rewarded with an appreciation in its investment and the true value of their intellectual capital will be realized.
The markets are dramatically changing. Today the question is not so much about ideas and strategy its a question of execution. Just as in the recent past it was about raising capital and acquiring assets now its about making informed capital allocation decisions and liquidity. Its true you need the target to shoot at but you also need munitions, a good scope with adjusted cross hairs and a gun. The value proposition of consultants is quickly becoming marginalized.
Its a poor business model. It scales poorly, its racked with inefficiencies, its built on protected markets and knowledge segregation. Now that those barriers are falling and more and more MBAs are out of work the value of this form of intellectual capital continues to fall.
Consultants all to often are beholden to their process biases. They find it difficult to get out of the box and routinely ask their engagements to climb into the box with them. That said it is an absolute necessity that business redefines its business model to address current market realities. It needs to do so with dispassionate dispatch and it needs to create a unique value proposition that differentiates the brand and adds identifiable alpha in an expanded value delivery chain.
Its a big challenge that many professional services firms need to confront. Our firm went through that transition 6 years ago. We went from a strategic sound practices consulting firm to a product creation and marketing firm dedicated to the commercial application of sound practices. For Sum2 creating value was a very different value proposition then delivering value. The need to build equity in our business was our principal concern. Building and marketing tangible product value is how you create a sustainable business model.
Corporations are becoming disenthralled of their self perceived cleverness. Many believe that major investments in applied intelligence create a culture of insularity that hedges all risks and builds enterprise value. In the past it allowed executives to hide behind a wall of opaqueness. They bought the best and brightest minds from our esteemed business schools convinced that this treasure of intellectual capital would protect them. They believed the digital blips of risk models to be sparkling Rosetta Stones containing the secrets that unlock the mysteries of effective risk management, value creation and business sustainability. The codified results of these algorithmic exercises are revered as holy Dead Sea Scrolls that offers the protection of an supernatural mojo. This is the thinking of a bankrupt brain trust.
You Tube Video: Nena, 99 Luft Ballons
Risk: Group Think, sustainable business model, value creation
The practice of selling food additives laced with salmonella bacteria makes it difficult to win back the trust of customers that had been so grievously violated.
PCA’s actions to knowingly ship contaminated products that have resulted in nine deaths and have sickened 637 people in 44 states. PCA’s salmonella laced peanut paste has contaminated 2,226 processed food products. A full list of recalled products can be found on the FDA website. These potentially criminal acts by PCA’s management has demolished the PCA corporate brand making it impossible to continue as a going concern.
The Chapter 7 bankruptcy filing will liquidate the company. This strategy will protect the PCA shareholders in the privately held firm from the significant legal liability that this event has created. It does not however protect PCA’s company management and accomplices that knowingly shipped contaminated products from potential criminal prosecution. Criminal persecution of those involved should be pursued and if anyone is found guilty punishment must be severe.PCA released its contaminated product into a large and extensive supply chain. Many leading brand food processing manufacturers that use PCA’s peanut paste as an ingredient in their packaged goods products have suffered severe reputational damage to their product and company brands. Though PCA’s corporate liability may be mitigated with the bankruptcy filing, aggrieved consumers will continue to have have legal recource by filing suits against the major consumer product companies that are still in business. This could make for a record breaking class action product liability suit.
Unfortunately this tragic occurrence could have been prevented. PCA’s actions demonstrate a disturbing ambivalence toward effective sound corporate governance practices. Companies that willingly sacrifice risk management and ethical business practices for the sake of short term profits consistently undermine corporate sustainability. All may not result in a dramatic corporate implosion like PCA. But ultimately the song of corporate liquidations remains the same. Unemployment for workers, aggrieved consumers, community desertion, tortured consciences and and in some instances criminal prosecution.
You Tube Video: Fairfield Four, Lonesome Valley
Risk: corporate goverance, ethics, risk management, legal
A salmonella breakout that has been traced to peanut products marketed by the Peanut Corporation of America (PCA) is an unfortunate and severe example of a company with poor risk management, weak corporate governance controls and questionable ethical business practices. In most instances poor risk management and corporate governance violations primarily victimizes the company that fails to institute them. In the case of the PCA, unsound business practices has unleashed a deadly viral bacteria into a vast consumer market. Since its outbreak in October the salmonella infection is believed to have claimed the lives of 8 people and has sickened over 500. PCA violations will also cast a long shadow on the vibrant US peanut growers and processing industry.
A brief examination of some of the public disclosures that have come to light concerning the PCA speaks of a telling breakdown in sound risk management practices. These disclosures also hints at potential instances of fraud to cover up lax controls and compliance violations cited by FDA and State of Georgia food safety examiners.
The PCA had been cited for violations and lax operational controls during past inspections by regulatory agencies. Inspectors found evidence of roach infestation and mold in the production and storage facilities. Inspections also revealed that product quality had been compromised due to a degraded manufacturing process and improper maintenance of the operating facility. After bringing this to the attention of company management PCA executives sought out food testing companies that would provide results to indicate that product quality met federal safety standards and were safe to ship.
Utilizing industry standard risk analysis tools like the Profit|Optimizer would have revealed several breaches in sound risk management practices at PCA. Lax operational controls, poor facilities and the evasion of corporate governance practices will likely put PCA out of business due to the damage its actions have done to company product brands and reputation.
Problems and risks associated with process manufacturers like PCA add layers of complexity to determine product risk due to its role as a supplier in an intricate and expanded supply chain for processed consumer food products. The melamine contamination of Chinese milk products and the mortgage backed securities market crisis provide examples of how product liability and consumer risk is leveraged due supply chain complexity. The pervasiveness of products that use the peanut paste manufactured by PCA is very similar in many respects. Cookies, ice cream, crackers and other products are subject to recall. Some of the companies affected by PCA’s contaminated products include premium consumer product and brand marketing companies like Kellogg, General Mills, Jenny Craig, Nuti-System and Trader Joes.
Severe product liability events like this unfortunately also cast aspersions on an entire industry. Associations like the American Peanut Council are most concerned that the poor manufacturing practices and product quality standards exhibited by PCA will reflect on how consumers view the industry as a whole. It is a valid concern for the industry association and it must demonstrate to the regulators and consumers that its membership is committed to sound manufacturing practices, product quality and corporate governance excellence. This is not a PR problem. Nor is it a problem born from an industries anathema to regulatory control or a problem unleashed by some renegade industry member. Industries and their representative associations must also help address sound risk management and corporate governance excellence as a cultural issue that is endemic to its membership. Then industry excellence becomes synonymous with product quality and consumer satisfaction.
In all the FDA uncovered 10 violations and has published its report and carries a full listing of recalled products and other resources on the FDA website.
You Tube Video: Dizzy Gillespie’s Big Band, Salt Peanuts
Risk: product, operations, regulatory, reputation
AMONG the mountains I wandered and saw blue haze and red crag and was amazed; On the beach where the long push under the endless tide maneuvers, I stood silent; Under the stars on the prairie watching the Dipper slant over the horizon’s grass, I was full of thoughts.
Great men, pageants of war and labor, soldiers and workers, mothers lifting their children–these all I touched, and felt the solemn thrill of them.
And then one day I got a true look at the Poor, millions of the Poor,
patient and toiling; more patient than crags, tides, and stars;
innumerable, patient as the darkness of night–
and all broken, humble ruins of nations.
Carl Sandburg, Chicago Poems
The laid off United Electrical Union workers who took over their shuttered Chicago workplace to receive separation compensation due them under the Federal WARN Act have been offered a settlement by Republic management. According to breaking stories, The Bank of America and JP Morgan have created a fund that will provide each Republic worker 8 weeks pay, any accrued vacation time and a continuation of health and welfare benefits for the next two months.
We thank the banks for making the funds available to redress the just grievance of the Republic workers. Unfortunately the close of this incident signals the beginning unemployment for the 300 Republic workers. In this economy the availability of well paying jobs will be difficult to secure. We wish them well in their search. We once again commend the Republic workers for standing up for their rights. Their steadfast commitment in the fight for justice is a courageous example of speaking truth to power and a lesson that power concedes nothing without a struggle. You are the salt of the earth. You are a light to the world. Thank you.
We wish the Republic workers a holiday filled with abundant joy.
You Tube Music Video: Pete Seeger, Union Maid
Risk: labor unions, bankruptcy, credit, unemployment, banking,labor unrest
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