Thu Feb 19th, 2009 at 02:47:53 AM EST
The Anglo-American banking system is collapsing all around us. Each day brings a new revelation. Insane executive pay packages to reward substandard management practices, leading to predictable systemic financial failure and implosion of the businesses they poorly led. Credit then freezes, as no one in a position of fiduciary trust trusts anyone else in such a position. Since credit is the grease which has smoothed the edges of the present global expansion, the credit freezes squelches economic activity far and wide, leading to mass lay-offs, or if you are "lucky," wage cuts, reduced pensions and benefits, and an all around increased sense of vulnerability.
No one is immune. The Americans and their Anglo-allies in London may have driven this credit boom predictably off off a cliff, but theirs was, as in transportation, a hub and spoke operation, and it isn't only the hub taking a beating. So are the many spokes, with unpredictable effects far afield from the collapse itself. It is therefore not surpising, in retrospect, that the Japanese and the Germans also pursue the same logic of downwardly spiraling economic prospects.
And, of course, none of our elites are accountable for their crimes, war or economic.
So you're saying, "sure Redstar, I get all this, I read the news same as you. It's Anglo-disease or so other neo-liberal rot, but what are we to do?" The short answer, increasingly finding a refrain in the words of Nobel Prize winners Stiglitz and Krugman, not to mention Doctor Doom himself, is one word: Nationalisation.
"Sure," you're saying, "I heard that too, but I don't have a pig in the pot, little debt, I rent my place, the banks aren't my problem. I mean, sure, I want the bastards to give back the money they stole, but how does this effect me other than my rage? Let `em go bust and the hell with them. It's not in (insert name of your country)'s cultural values to nationalise anything, that's so mid-20th century.
In short, the reason why you should care whether the government runs the banks: your job depends upon it, as does that of a number of those close to your.
from the diaries - afew
During the credit-fuelled boom of the 1980's till 2007, and expecially since the mid-1990's, a concurrent boom in corporate debt drove asset prices, business valuations and consequently, business balance sheets through the roof. Big corporations went to debt markets to "find the optimal capital structure," (a business euphemism for lowering the corporation's taxes), and Alan Greenspan's monetary policy, mimicked throughout the neo-liberal world, made it ever cheaper for corporations to do so. Greenspan's friends, the investment bankers on the Street or in the City, underwrote it all, enriching themselves ever more in the process, and smaller pockets of hyper wealth funneled their cash into the game, via so-called "Private Equity," buying up whole swathes of the neo-liberal economic base, companies large and small, on the promise of cheap, bountiful credit, bi-partisan (in US and UK, at least) approved strategies of tax and social-responsibility avoidance. In the process, revenue and EBITDA multiples representing the price the wealthy were willing to pay each other to take assets off each other's hands, went through the roof. A same company worth $30 million in the US in 2002 could easily fetch thrice this five years later, financed, of course, through highly levered deals by a willing banker somewhere. Not unlike certain California or Marbella real estate.
You see, it wasn't just real estate that had a bubble.
Where does your job come in? Simple. Each time a bank loans a company money, it attaches strings. Those strings are called Covenants in English (and, actually in French too, since the City has overtaken all of our finance words). There are three common covenants: Leverage Ratio, Interest Coverage Ratio, and Fixed Charge Ratio. Without getting overmuch into the details, the general upshot is that each require steadily improving, or at least, stable, profit margins. Which is hard to do when the economy is expected to decline by 5-10% in 2009 in most of the OECD.
So, how can the managers of your company, and the shareholders they exclusively represent, address tightening covenants in a collapsing economic environment?
Well, they can just break those covenants. But, the problem here is that, the bank therefore contractually can call the loan and, at the very least, not even operating advances will be extended.
If you cannot renegotiate the loan for a hefty price in upfront fees and increased interest payments (and, as a company with decidedly declining profitability prospects, why else would you have broken the covenant?!, this is like refinancing your mortgage right after your spouse lost his job), there's always bankruptcy. Or, they could always buttress their balance sheets, as the banks are doing with your tax dollars today, by going back to wealthy shareholders who, though they are still insanely rich, are smarting from how much they've already lost in 2008.
Needless to say, that's not Anglo-Saxon corporate management's style. There's an easier way to avoid this problem, and that's by not breaking the covenant in the first place. "Great," you're saying, "well let's get about it then". The problem is, there's only one viable way for most companies to not bust their covenant terms. By firing you.
This, as much as anything else hitting the news today, explains wave after wave of may layoffs hitting every industry in the neo-liberal world today. That's right, the banks who are taking your tax money are also squeezing the companies you work for and in the process, leading to your future (or maybe already present) unemployment.
I'll let you guess how generous your government will be with your unemployment benefits. Hint, your balance sheet won't get the same stabilization funds as RBS or Goldman Sachs. Not under the present regime, anyhow.
There is only one way. Thatcher had it right. There is no alternative.
Unfortunately for her legacy, she badly got the system wrong.
Nationalise the banks, change the management, forgive all covenant transgressions until the end of the crisis, and above all, when it's all over, keep them nationalised.