September 22, 2008

Ctrl BG: A Shortcut to Financial News 9/22

It’s not about fashion, but the state of the economy is still something that concerns everyone and I just thought it would be interesting to have something a little bit different on this blog once in a while. I’m sure I’m not qualified to comment since I probably don’t have nor understand all the facts of the situation, but it never hurts to share some thoughts right? So here are some thoughts on the last tumultuous week.

Personally I was shocked by the events of last Sunday. I knew that Lehman Brothers was in troubled waters, but I thought it was only going to be bought out like Bear Stearns was, by Bank of America or Barclays. Never in a million years did I think that it would go bankrupt (perhaps a strategy by Barclays so then they can buy the Lehman assets they want on the cheap, as they are doing now?). Instead of bailing Lehman out, BofA bought Merrill Lynch instead that night. At that point, I was vaguely aware that ML was not doing so well, but I didn’t know it had reached this stage yet. Apparently a sudden “evaporation of liquidity” (whatever that means), does that to banks. Who knew BofA was so strong? As I recall, they were the first to be hit by the Credit Crunch last year, with their takeover of Countrywide (another Fannie/Freddie-esque home loan bank) and huge write downs and lay-offs. As it turns out, Countrywide might be a good buy after all now that the competition has been weeded out somewhat and BofA is as strong as ever with the financial backing of their commercial banking side. With ML joining their team, their investment banking side is also going to strengthen up- by a lot. All in all, it was quite a traumatizing Sunday. It was like saying that Gucci went bankrupt and Prada got bought out and merged with Coach- all in one day.

Everything went down like dominos after that. The stock markets worldwide went down. AIG and Washington Mutual struggled to stay afloat. It was a good thing that the government stepped in with an 85 billion dollar loan in exchange for 79.9% of AIG, when they did (after Goldman Sachs and JP Morgan balked at the idea). With their wide range of businesses (mutual funds, insurances etc) worldwide, it would’ve been devastating. It would be as if LVMH declared they were in trouble! I’m not sure how I feel about the government using tax payer’s money to save a private institution, but I guess somehow had to do it. Can’t let LVMH fall! As for Washington Mutual (a.k.a. WaMu), I don’t feel too much for them, since they’re not exactly a household name (for me anyway, a bit like not everyone knows who Bottega Veneta is), but they’re currently trying to auction off some parts of itself.

The two remaining independent investment banks, Morgan Stanley and Goldman Sachs, were also under attack against their business model this week, even though both posted higher than expected earnings (yes, I mean profits!). It appears that many people now believe that an investment bank cannot survive without a steady cash flow from a commercial banking arm. Throughout the week, both banks said that they were committed to remaining independent, repeating that it is not the business model but the execution that counts. However, Morgan Stanley has been under pressure the most. It is as if because people believe it will fall, they are making it fall by shorting their stock, pushing down their stock prices (and thus the SEC ban on the short selling of selected stocks for two weeks). They are currently in talks with the Chinese government for a large capital infusion (they are going to need a BIG one) and with Wachovia to merge. I think a merger between these two would more aptly epitomize, “Target acquiring Neiman Marcus,” as Leveraged Sellout had used for the BofA and ML merger.

On the other hand, I am a sucker for brand image and I cannot begin to fathom the possibility of GS giving into market pressure and merging with a commercial bank. It’s not as if they are doing very badly. They’ve consistently reported profits throughout the economic turmoil so far- even if it IS less so then years before. At least it’s not a loss! I’m sure that there may be write downs cleverly hidden in their balance sheet (for both banks!), but it cannot be nearly as bad as Lehman and ML right? Yes, I do realize I am beginning to sound a bit naive, but it would be like Hermes giving into market pressure and start mass producing Birkin bags with machines! Besides, shouldn’t it be innocent until proven guilty?

Towards the end of the week, the SEC finally stepped in to temporarily ban the short selling of selected stocks for two weeks (to stop the prices from tumbling down) and the government came up with a plan to deal with this whole toxic debt problem. I’m not sure exactly how this plan is supposed to work but it sounds like they’re going to use $700 billion to buy back all the toxic debts and give financial institutions a fresh start. Sounds like a good idea, they can't bail companies out one at a time as they fall after all, better to target the root of the problem. Not that I know where the government is getting that kind of money from (aren’t they already in debt from the war?) and what they’re going to DO with those bad debt once they buy it. Surely they cannot just dissolve it and let everyone who did not meet their mortgage payments off the hook? Why were people lending money to people who clearly cannot repay the loan to begin with?

Ok, now I’m heading into territory where I really do not have a good grasp on. So I’m going to shut up now and go back to admiring the runways of Milan fashion week. Just thought I’d give financial journalism/blogging a hand.

Scratch that. It seems that Target is not acquiring Neiman Marcus anymore but Hermes is going to start mass producing Birkin bags- in their own way. MS and GS both just got approval from the Fed to switch from being an investment bank to a bank-holding firm i.e. they are now allowed to open up their own commercial banks and take in deposits. MS will probably not need the Chinese capital infusion anymore either. There are now officially no more major independent investment banks in the US. What is it with Sundays and groundbreaking news?


Blogger emily said...

hey you know what. this is really well-written. you made it so concise and easy to understand. great job!

9/22/2008 10:53 AM  
Blogger Carolyn said...

the sudden evaporation of liquidity, is having no more liquid assets - like cash or easily salable inventory or stock or equipment.

my accounting seminar just discussed this - you did a great synthesis.

9/22/2008 12:10 PM  
Blogger Teresa said...

Nice summary! It's accurate (as far as I know, and I have been following this on and really connects with us fashion ppl. I'm going to quote you on "It was like saying that Gucci went bankrupt and Prada got bought out and merged with Coach- all in one day." That's a clever and hilarious analogy.

9/22/2008 1:47 PM  
Anonymous ally said...

Unfortunately someone had already beat me to the punch when you said you didn't know what liquidity was, which was coincidentally when I decided to stop reading this summation.

9/22/2008 8:00 PM  
Blogger j said...

this is a great post! we discussed current situation of the market last week in class; and i think you've got everything down! i loved all the references to the brands! very awesome piece!

9/22/2008 9:37 PM  
Anonymous Anonymous said...

This is the most important thing you have said:

"Why were people lending money to people who clearly cannot repay the loan to begin with?"

The Clinton administration and Congress, going back to 1999, encouraged lending to high risk entities under the guise of eliminating discrimination. This dangerous economic situation was already in place when our economy took a catastrophic hit on 9-11. I believe it was allowed to continue as economic stimulus during the aftermath of 9-11, when you saw large swaths of our economy, for instance the airline industry, sputtering and guttering out. What seems like irresponsibility may actually have been a necessity. The economy is stronger now and can more readily absorb a catastrophic meltdown than it could have in the first few years after 9-11. So if anyone wants to point fingers of blame, go back to 9-11.

9/22/2008 10:22 PM  
Blogger Knikki said...

All in all, it was quite a traumatizing Sunday. It was like saying that Gucci went bankrupt and Prada got bought out and merged with Coach- all in one day.

the best quote ever

9/23/2008 5:27 AM  
Blogger Amanda said...

Yes, the US is in serious debt, and many overseas banks have failed in the UK and Europe because of the lending to high-risk entities within the States, when they were competing. BBC was full of news of those banks being shut down or being absorbed by the UK government over the summer.

I know only sketchy details of Canada's situation, only that the government recognizes there is a serious meltdown within the economy, that steps are being taken, that banks are more closely monitored and that there are fewer banks instead of these little independent banks (which is obvious - you only generally find banks such as HSBC, Coast Capital, TD Canada Trust, RBC, Scotiabank, and BMO... occasionally a branch of an international chain like Bank of Scotland, but that's it). Not only that, but Canada isn't spending the same amount of money on the war, and even showing a surplus (hence the PM reducing taxes). There is a lot of worry here that the US will take advantage of Canada's softly-softly economic approach and safety net under a guise of international diplomacy, so the US financial crisis has been a news item - very similar to the way you've described it here - for nearly a year now.

I'm slightly worried to see that Americans do not actually perceive how much debt they are in... Some general numbers in the international media are, for example, that the US spends approximately $660 billion a year, when the entire world spends only $1.1 trillion, which means the US is spending approximately 60% of the ENTIRE WORLD's budget on warfare. There is a perception that the US economy is based on the arms race primarily, and that a very large amount of money is being made making, developing, and selling weaponry, and this is not helping the image.

Unfortunately, due to this, a lot of Americans will feel that, in terms of finances, a well-liked left-leaning President is NOT the way to go. Certainly whenever there is fiscal crisis the Conservative Party gets elected in Canada (which organises the budget, etc. and reduces taxes drastically), whereas generally the Liberals take charge (spreading peace and harmony until they are broke).

I do actually agree with the answer above about the lending money thing. Credit stimulates the economy - if I can borrow money to purchase a failing company and restore it, I am making money, paying more taxes, employing more people, etc.

9/23/2008 10:33 AM  
Anonymous The Conscious Snob said...

I enjoyed reading your summary, and the analogies were awesome. Hermes better not mass produce birkins!

9/23/2008 12:28 PM  
Anonymous Anonymous said...

Fashion is all you know. Just stick to that ok?

9/23/2008 5:54 PM  
Anonymous Anonymous said...

Exactly, Amanda; it was easy money and it did help the economy weather the post-9/11 downturn. But the brick wall was always out there, whether we hit it sooner or later. Later is better in this case because the security of the country has been strengthened. There has not been another attack on the US homeland since 9/11, and many have been thwarted. I really don't think President Bush is all that dumb. Dumb like a fox maybe. Give the guy some credit for keeping this country attack-free for all these years. Great topic BG--after all the economy is inextricably linked to fashion, obviously.

9/24/2008 12:18 AM  
Anonymous Lina Marican said...

Very well written article that helped sum up the entire fiasco with simply analogy :) I love your blog more than ever!!!

9/24/2008 11:24 PM  
Blogger Grace said...

I really felt that was a thoughtful and honest account of what's gone down in the last ten days. Thank you Amanda. The only thing I have to add is in regards to the $700 Billion bailout figure and what it means.

700 Billion dollars
divided by
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That's the only thing it *can* mean.

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