Consumer debt is out of control

According to figures released by Equifax and reported by the WSJ, household liabilities in delinquency or default rose to $1.15 trillion in June representing 10% of liabilities, up from 9% in March and 8% in December 08. That is quite an alarming rate of increase!

GM Bankruptcy

GM filed for bankruptcy this morning. The reported total assets of $82.3 billion on a consolidated basis, with total debt of $172.8 billion. A member of the Dow 30 Industrial Average, GM will be replaced by Cisco Systems Inc.

GM at lowest price since 1933

Picking at the carcass?

Three WSJ stories:
Renault interested in Saturn
China's Geely Auto bidding for Saab
Fiat is stepping up plans to buy Opel

The Single Biggest Destruction of Wealth Nears End

Time Warner shares were up as much as 7% Wednesday after the company said in a regulatory filing that it expects to spin off one or more parts of AOL to stockholders, which would remove the biggest piece of uncertainty for investors in the world's largest media company. "Although the company's board of directors has not made any decision, the company currently anticipates that it would initiate a process to spin off one or more parts of the businesses of AOL to Time Warner's stockholders, in one or a series of transactions," Time Warner said in a filing with the SEC. CEO Jeff Bewkes said on a conference call that the company plans to announce its plans for AOL "very soon."

Opel likely to be sold with GM getting no cash

GM is getting ready to give up its controlling interest in Europe's Opel in return for a promise that the buyer would put equity into a new company formed to own the operations. The acquirer would be expected to pay at least $652 million for the automaker, but all of the money would be invested in Opel with GM getting none of it. [Source: Financial Times]

Oracle Buys Sun

Oracle said it will buy Sun Microsystems, creator of widely used Java software, in a cash deal worth $5.6 billion that unites two of Silicon Valley's most storied technology companies. The total market value of the deal is $7.4 billion, or $9.50 per share, including Sun's debt and cash on hand. The deal with Oracle comes shortly after IBM ended its own bid to buy Sun. For Oracle, the acquisition fills a crucial gap in the company's so-called middleware business. The inclusion of Java as well a Sun's Solaris operating system for mainframe computers will enable Oracle to offer corporate customers a full suite of software and hardware products to address virtually all their technology needs. CEO Larry Ellison says Java is the "most important software we've ever acquired."

Edited to add: At its peak Sun Microsystems was valued at $121 billion

Brother, can you spare $27?

In November 1996, I made an IRA contribution of $1100 and purchased shares in two mutual funds in the amounts of $600 and $500. Those shares with all earnings reinvested are today worth $591 and $482.

1 in 9 homes empty ... NO, NOT REALLY

A widely disseminated story illustrates just how math-illiterate our reporters and editors are.

1 in 9 housing units vacant

The actual statistics (FROM THE SAME STORY) are...

Fourth-quarter 2008 vacancy rates for all types of housing:
Rental: 2008: 10.1%
Homeowner: 2008: 2.9%

First of all, this includes RENTALS. Secondly basic arithmetic would point out the fact that the real number would have to fall somewhere between 10.1% and 2.9%, which can't possibly be 1 out of 9. But in any event 1 in 34 is the true headline, but I guess that wouldn't have quite the same shock value. No wonder the press is dying.

Ten principles for a Black Swan-proof world (Nassim Nicholas Taleb)

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. It is the asymmetry of the bonus system that got us here.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products.

6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html?nclick_check=1

[Thanks to MPC for the link]

Muni Bonds May Face Downgrade

Moody's assigned a negative outlook to the creditworthiness of all local governments in the US, the first time it had ever issued such a blanket report on municipalities.

[Thanks to MPC for the link]

Mark-to-fantasy

Reports are coming in that FASB, as expected, has voted to relax the fair-value accounting rules, essentially allowing banks to mark securities to a model rather than to market prices. This is being done in response to a blatant threat by Congress that if FASB did not relax the rules, Congress would do so by legislation.

Macy's Loses $11.40 per share

Macy's revised its fiscal 2008 results to a net loss of $4.8 billion, or $11.40 a share, from a net income of $280 million, or 66 cents a share. The dramatic revision is due to a pre-tax goodwill charge of about $5.5 billion which it had previously detailed in its fourth-quarter earnings report. The department store company said the goodwill impairment estimate may be further adjusted in the first quarter. "The non-cash write-down of goodwill is expected to have no impact on the company's business, bank credit agreement or bond indentures. The primary causes for the goodwill impairments are the deterioration in the general economic environment and the resulting decline in the company's share price and market capitalization," Macy's said in a statement.

Ticking Time Bomb

From today's WSJ: Commercial real-estate loans are going sour at an accelerating pace, threatening to cause tens of billions of dollars in losses to banks already hurt by the housing downturn. The delinquency rate on about $700 billion in securitized loans backed by office buildings, hotels, stores and other investment property has more than doubled since September to 1.8% this month, according to data provided to The Wall Street Journal by Deutsche Bank AG. While that's low compared with the home-mortgage delinquency rate, it's just short of the highest rate during the last downturn early this decade.

BE to sell off substantially all of its business

BearingPoint (the former KPMG Consulting), which had submitted its required quarterly financials late for six consecutive quarters and filed for Chapter 11 bankruptcy protection on February 18, 2009, announced that it reached an agreement to sell most of its Public Services practice to Deloitte. It also signed a non-binding letter of intent to sell most of its Commercial Services practice to PricewaterhouseCoopers. For those unfamiliar with BearingPoint's business, those are the two largest of the company's three operating units. Only global services remains, and it will probably be carved up between the Big Four.

Berkshire Hathaway and General Electric lose AAA ratings

Fitch lowered Berkshire's rating and S&P lowered GE's rating (which it had held since 1956!) last week. There are only four untainted AAA ratings left: ADP, Johnson & Johnson, ExxonMobil, and Microsoft. (Pfizer's rating is on review for possible downgrade due to borrowing related to its purchase of Wyeth).

I don't think "thriving" means what they think it means

More than 24 million Americans shifted in 2008 from lives that were "thriving" to ones that were "struggling," according to a massive study by Gallup and Healthways. At the start of 2008, as the recession was beginning, slightly more people were "thriving" than "struggling." By the end of the year, after an economic meltdown that began with the subprime mortgage crisis, Americans by an overwhelming 20 percentage points were "struggling" rather than "thriving," 58%-38%. The remaining 4% were "suffering," in more dire straits.

[Source: USA Today]

World Economy Will Shrink

The World Bank predicts the global economy will shrink this year for the first time since World War II and sees trade at its lowest point in 80 years.

Edited to add a second story on the same theme:
http://www.marketwatch.com/news/story/Global-economy-shrink-2009-World/story.aspx?guid=%7BA4197684%2D5183%2D4E8C%2D8436%2D8F5E9EC99F1B%7D

Scholes Advises ‘Blow Up’ OTC Contracts

Myron Scholes said regulators need to “blow up or burn” over-the-counter derivative trading markets to help solve the financial crisis. The markets have stopped functioning and are failing to provide pricing signals, Scholes, said. Participants need a way to exit transactions and get a “fresh start.” The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over. One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”

[Thanks to CP for the link.]

No Gains for 43 Years

Adjusting for inflation, the Dow is basically where it was in 1966.