Category Archives: bailout

Holidays 2009: Distressed Asset Investment Letter

Dear Friends:

With year-end traditionally being a time to slow down and reflect, this post is intended to be a review of the past year, and a prognosis of sorts for what the transactional deal marketplace may show us in 2010.

However, slowing down and reflecting on this year only gives me that post-roller coaster sickness feeling. This was one of the most challenging years in business for most of us. Although it ended up being a positive year from a business standpoint, it required a wholesale reinvention of what we do, as most of our business models were affected by many polar opposite, sometimes unintended and varied influences that converged in a dizzying array of confusion. It was humorous to read that many prognosticators declared that the end of the recession was near, or even that the recession was behind us, because, contrary to the statistical reports showing declines in unemployment figures and upticks in consumer confidence, in reality the fundamental problems that grounded the economy in 2007 are not significantly different from those prevalent now. Other than runaway bank profits and the gilded age of Wall Street bonuses, our world is now as it has been for the past 2 years. We have made forward progress, but what the economic landscape has in store for us in 2010 will prove to be a mixing pot of small explosions that together will concoct a distressed asset stew full of nutritional values that we may only be able to sample if we have the coupons. Well, friends, we are the manufacturer of those coupons.

Let me try and catch you up on all that has happened in this busy year! Continue reading

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Government Intervention

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 The economic models of socialism, capitalism, and European-style socialized capitalism are under pressure given today’s economic realities.  In a global economy, where we are all inerconnected and inter-dependent, the reality of which model will be most effective in attending to our issues is murky at best.  John Byrne (Business Week’s publisher) sums it up best, “[t]his is the first financial crisis of the global age. There is no clear map to deal with it”.  When left to its own devices with minimal (or ineffective) governmental regulation it appears that the US capitalistic, free-market model can lead to short-sighted and self-serving decision making, that while fostering ingenuity, rapid development and competition can also lead to gluttony, abuse, and bottom-line fixations that are self destructive.  This over-inflation of the proverbial bubble, which of course will inevitably burst, tends to then eliminate a great amount of the progress and advances made by the capitalistic framework.  On the other hand, there is the socialized capitalism model that comes with increased government intervention, which I see as leading to less innovation, competition and growth, making it a minority shareholder in the global economy and allowing a purely capitalistic society to overtake it, and in doing so drag it into the bursting bubble. 

With our TARP $700 BN bailout fund, the first 1/2 of which went to partially nationalize banks, AIG, and temporarily bailout automakers, we seem to be proceeding full steam down the path of becoming France.  Moreover, Citigroup is essentially in government receivership.  Now, although I agree wholeheartedly with President Obama that the Wall Streeters (from technically bankrupt entities that have been propped up by taxpayer bailout funds) that paid themselves 2008 bonuses while receiving bailout funding are shameful and should be brought to account for their actions, the stance that our President is taking is a clear case of government dictating to private commercial entities how they should operate and compensate their employees, and that is about as close to socialism as we have come.  So what is the best way to go about this?  Is it necessary for the government to intervene to this extent or not?   I guess I am advocating for a managed (or regulated) capitalism as opposed to a socialistic capitalism.

Please comment.

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It’s easy to write about it, but hard to solve it

I suffer from this more than most.  Having been trained as a lawyer, I’m long at problem spotting, scrutinizing and critiquing proposed client actions, but short on prescribing the remedy — so here goes.  The economy is in a tailspin and much has been written about what caused it; why we are in the position that we’re in; and how long it might take to deal with these economic issues.  We seem to still be mixing the ingredients to come up with the formula, or as my colleague John Coe says, the “medicine” that will cure our ailments.  Before prescribing, however, we need to diagnose.  The government bailout plan, known by the catch-in-your-throat acronym “TARP”, initially diagnosed the cause as bad mortgages, and decided that this bad paper needed to be removed from the balance sheets of the banks.  TARP was a plan for the government to purchase these assets of unknown value from the financial institutions.  For those of us that knew that this economic mess wasn’t caused by, or relegated to bad mortgages, we knew that the diagnosis was wrong.  This ambitious plan, however, never exited the starting gate, as mark-to-market accounting, the enormity of risk created by credit default swaps, and the evaporation of institutional market cap forced the Treasury to move on to its next iteration of TARP.  In round two, the Treasury, as the administrators of TARP, focused less on the cause of the problem, and more on its consequence.  The deflation of the Dow enflamed the capital and reserves of major financial institutions, eviscerating the market’s confidence level, and lending began to tighten further, leading to a massive credit crunch that added to the swirling financial winds.  Forced to act to stimulate lending, ease the credit crunch and lift consumer confidence, the Treasury decided to hand money over to the banks, albeit disguised as a direct investment.  The Treasury seemed to manhandle all the major financial institutions to accept government capital whether they needed it or not, so as to shield from the market those among them that were more fragile, and actually in need of the bailout funding.  Consequently, the funding came without a government demand that banks lend that money.  Bankers were reluctant to lend out the capital they had received, and frankly who could blame them.  I see it as analogous to being stranded in the middle of a lake, in a rowboat without an oar while taking on water.  An outstretched hand offers you a plug, but not an oar.  The plug allows you to stop the boat from taking on water, but you still can’t get yourself to shore.  When a fellow stranded boater pulls up and offers to borrow your plug, collateralized by his oar, you are disinclined to do so, because that would risk unplugging your safety hatch.  It would seem preferable to wait it out to see if you can acquire an oar at a later stage knowing that you have plugged up your leak.  We need to diagnose the problem, or at least identify the areas where we went astray and start to put in place mechanisms to remedy the past behavior.   

This post does not pretend to offer a solution, but only attempts to offer a diagnosis. 

In my opinion, our real problem, is the manner in which we regulate the debt market, and the size of our debt.  The credit rating system as a regulatory measure is wholly inadequate.  We currrently use conflicted ratings agencies to evaluate businesses based upon the investment grade of their securities, or allow FICO scores to effectively be the sole determinant of creditworthiness for individuals.  A FICO score or a Moody’s rating should be one of several equally balanced factors, not the overwhelming determining factor.  By debt size, I refer to not just one type of debt, such as sub-prime mortgages, but this massive accumulation of debt that we cannot pay back, at least not by rolling it into new, exotic, derivative-laced, credit swap backed debt that expands in multiples the flow of capital funding, continually rolls the debt over, and never calls for its repayment.  Yes, we need credit to grow an economy, but we have morphed into a society where we live beyond our means, and capitalism will find a way to drive that desire to its natural point of explosion.  Our consumer-oriented society found a way to allow us to drive the car we couldn’t afford by leasing a fraction of its cost for a few years, and to do the same with almost everything else, including housing.  The bill was going to come due at some point, and now it has. 

Prior sentiment was that debt was acceptable, if you could manage it appropriately.  This was the mantra of the private equity kings during their leveraged buy-out frenzy.    The problem is that it’s like eating M&M’s — once you start you don’t know when to stop.  Now we have too much debt, and we can no longer roll it into newer, cheaper debt.  Rather we actually have to work it off.  Until we do that, I don’t know that any of these bailout plans can have the desired curative effects.  Yes, the outgoing Bush administration and the new Obama administration know this, just as they know that printing money and handing it out is not going to reduce our debt, and will, in fact increase it and give us long term problems; but in the short-term there is little else they can do.  In the longer term, we, individually, collectively, and as a nation need to spend only what we have available in actual cash.  I realize that the result of this is a contraction in spending , which adds to the recessionary dilemma, but the fundamentals have to be corrected before we can move beyond this.  I also realize that such a call doesn’t sell well in a recession, and it can’t be made by a politician –it could put a crimp in the ability to print the money to fund an Obama $830 billion stimulus package.  I, however, am not a politician and I don’t have the answers; I’m just a struggling consumer and a businessman looking for opportunity.