Sunday, January 18, 2009

Farewells from Free Market Business

Your favorite stores seem to be evaporating, and while taking advantage of the Final Sales can be easy on total shopping funds, it's making us all a bit queasy. It's more than ominous to watch former large store buildings sitting empty. It's obvious that jobs have disappeared and the market for employees is getting more difficult.

Locally, we had the sad sight of obviously marginal employees standing at the roadside, holding signs for Circuit City's meltdown, waving people in to rifle the diminishing stocks. That has happened before for other businesses, a few times, but this store was almost new.

Business loans of course were enjoying the same extreme laissez faire atmosphere that home loans were, almost a year ago now. The same flaws are showing up in those loans, although from business reporting in our media you would never have suspected it. Ironically, we see that now we're getting those catchup news items.

With the economy in the tank, companies are doing all they can to stay afloat. For many, though, even the most desperate measures have not been enough.

Former giants in American business have recently tilted into extinction. Circuit City announced Friday it would follow Linens 'n Things and Sharper Image into liquidation and sell its assets. Over the next two years, analysts say, countless other businesses will simply fade away.

"This is now an unprecedented time as far as how bad things have gotten," said Scott Peltz, managing director of RSM McGladrey, a consulting firm that helps turn around troubled companies.

The number of business bankruptcy filings rose sharply in 2008, with 31 percent more companies looking to liquidate -- instead of just restructure their debt -- in the third quarter than in the first.
Many businesses are paying dearly for the easy terms under which they borrowed money just a few years ago. During the height of the debt craze in 2006 and 2007, lenders let borrowers take a holiday before having to pay down the principal. They also allowed companies that couldn't meet interest payments to add those payments onto the principal. Those types of loans were recent innovations, said Colin Blaydon, director of Dartmouth's Center for Private Equity and Entrepreneurship. Such "covenant light" loans allowed companies to default later than they would have in years past, but when they did, they were worse off.

Debt financing also grew more complicated in recent years, as multiple layers of creditors were added, said George Singer, a corporate bankruptcy lawyer in Minneapolis. Although creditor agreements can help avoid disputes, creditors can find themselves at odds among themselves. Those first in line to collect may push for liquidation and a faster payday, while second-tier creditors, seeking to increase their chances of collecting, may want to work out new terms instead.

The growth of investment vehicles that contain bundles instead of 'transparent' investments has been allowed by the last twelve years of deregulation. The supposed pro-business atmosphere has been touted endlessly by the more farfetched of the investment brokers, I suspect because if they are operating without warnings of danger ahead, investors are more inclined to get in too deep. The losses aren't good for anyone, however, despite carnival barker types thinking they were raking in lots of shills. As things fall apart, they fall apart for all of us.

Incidentally, investors found out in very recent years that there is a big downside to owning stock without being inside the boardroom; business ownership could get board approval to stock buys dated at times when stock prices were low, so that they made instant profits at the expense of the outsider investors. It's known as backdating', and deregulation gave it free hand.

Taking the money and running hasn't worked out well for those of us who are part of the U.S. economy. As happened in the last depression, though, things look good for those who are able to hold onto diminished assets while things shake out. When the economy revives, as it will, the ownership segment will be better off than ever.

It is incumbent on the incoming administration to make sure that the burden, responsibility, and benefits, are share equally.

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Anonymous Anonymous said...

In Augusta, Maine we have lost Linens & Things, are loosing Eastern Mountain Sports (a great little outdoors retailer), and Circuit City will close its doors by the end of March. I wonder how many others (rumored is: Eddie Bauer, a couple of cellphone stores). It is really scary, because it just increases the demand for public assistance and the a lowering of the each of these employees who are loosing their job wage and their feeling of independence.

People are not talking about the increases that will occur in the laid off workers of alcohol abuse, spousal/child abuse, bankruptcy, loosing homes and all the other human toll that is happening when our neighbors are loosing their jobs.

It is not the big corps that are being affected so greatly it is the common working person. That person you see on Main Street - every day.

It makes me sad, but we have a new beginning on Tuesday - a least I hope we do.

8:13 PM  
Blogger Ruth said...

And it's Tuesday, we're celebrating the new day, hopeful for better lives for everyone.

7:25 AM  

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