Friday, July 11, 2008

2008 Economics

A look at today's headlines in the business section:

Fannie and Freddie Shares Fall by as Much as 50 Percent - By STEPHEN LABATON and STEVEN R. WEISMAN 27 minutes ago Fannie Mae and Freddie Mac shares dropped nearly 50 percent in early trading on worries that the companies will suffer larger losses and default on debt.
It has become customary for the nicknames of these two organizations to be used as a matter of course. Fannie is Fannie Mae, or FNMA: the Federal National Mortgage Association. Freddie is Freddie Mac is FHLMC, the Federal Home Loan Mortgage Corporation. Both are government-sponsored enterprises (GSE), semi-public, or quasi-private companies which promote private home ownership in the US by buying mortgages, so keeping the mortgage market liquid. That is, these two GSEs buys mortgages from banks and other mortgage originators that lend money to people to buy their own homes. By buying the mortgages Fannie and Freddie allow lenders to get their money back, and so make other loans.
Recently, especially in the last six months or so, the mortgage market has collapsed. Banks and other mortgage originators, after overdoing their lending, have stopped lending. As a result of several factors, including fear and the perception of more and more things going wrong, the values of homes have plunged. Following, some people owe more on their mortgages than their houses are currently worth. In many such cases, borrowers have walked away from their mortgage obligations, further complicating things.

Fannie and Freddie have a lot of bad stuff in their books. Investors are fearful that the two GSEs will have to raise more capital in order to remain in business; investors are also fearful that the GSEs will not be able to raise more capital. Fear rules these days. In consequence, the shares of the two GSEs have plunged in value, falling precipitously, adding to the panic in the markets. And it is panic.

InBev and Anheuser Enter Friendly Talks - By ANDREW ROSS SORKIN and MICHAEL J. de la MERCED
The Belgian brewer InBev has raised its offer to $70 a share from $65, a person close to the talks said.
InBev is a Belgian-Brazilian company formed in the last couple or so years by combining Interbrew and Bev...something Brazilian. Now it wants Anheuser. The latter is fighting, and has gotten a couple of Senators to urge it remain American. But it will be bought out. The offer has exposed just how poorly the company has been run. To fight, Anheuser has announced a scorched-earth plan which includes mass firings of workers, taking on debt, and raising prices. All of those things will probably happen when it is taken over, but not just for the sake of fending off a takeover.

Oil Climbs Above $147 a Barrel - By THE ASSOCIATED PRESS Oil prices spiked Friday amid continued tensions in the Middle East and concerns of renewed violence in Nigeria.
147 dollars a barrel. After a pause earlier this week, oil has gushed up again. It is an unchecked run: the dollar is weaker than a bad cup of coffee; the US seems to be adrift; the financial markets are in panic. Bush leaving office can't come too soon, but won't happen soon enough. Paulson leaving will also be welcome: he seems almost a buffoon at times, toeing the party line, double-speaking, and getting absolutely nothing done. What we need in both the US and the world market is some forceful leadership. Bush doesn't know what that means, Pauslon clearly can't do it, and Bernanke seems to have indigestion.
Meantime, Bush and Cheney rattle their sabers (or is it their cages?), reiterating that the option of a military move against Iran can't be "taken off the table," and allowing Israel to bluff a military move. Once these two buffoons are gone, President Obama needs to get Omert by the ear and tell him to back off.
Profit Falls 6% at General Electric - General Electric said that its profit fell 6 percent in the second quarter, and that it has agreed to sell its Japanese consumer finance business for $5.4 billion.
Another case of mismanagement. GE has gone down the tank along with the general economy, unable not only to get good financial results, but also unable to get Wall Street's respect. In response, it is pulling ideas out of the air.
Citi Sells German Business for $7.7 Billion - Citi will sell its German retail business to France’s Credit Mutuel for $7.7 billion, it said on Friday.
Speaking of mismanagement, there is Citigroup. What a disaster. What needs be done with this behemoth is to dismantle it, focus it on a series of business markets, and kick it in the ass to get it going. The new CEO, Vikram Pandit, might do it. He has got some challenge.

UAL Sees Second-Quarter Charges Near $2.7 Billion - The charges at the parent of United Airlines relate largely to the impairment of goodwill, the company said in a filing with the Securities and Exchange Commission.
Airlines are bigger disasters than Citi, and that is saying something big. Perhaps the best solution would be to create one gargantuan airline by merging three or four current lines, firing all the executives, and making that company a subsidiary of Southwest or JetBlue, two of the only viable, and well-run, airlines in the US today.
Ashland to Acquire Hercules for $2.6 Billion - The acquisition would give Ashland, which makes that services the pulp and paper industry. chemicals and Valvoline motor oil, a major presence in the water treatment arena

There are good buys to be had, clearly, and not all economic activity has come to a standstill. That mangled subheadline is from earlier on Friday; currently the story reads: Ashland Inc, which makes chemicals and Valvoline motor oil, said Friday it would acquire peer Hercules Inc in a $2.6 billion cash-and-stock deal that would significantly boost its product offerings. The acquisition would give Ashland a major presence in the water treatment arena that primarily services the pulp and paper industry. It would increase the company's portfolio of specialty additives and ingredients.

Whether spanning markets, which used to be called building a conglomerate, is a good idea, remains to be seen. Citigroup, though significantly much larger, proves that the idea can prove to be disastrous. Yesterday, another takeover was announced: Dow Chemical Buying a Rival for $15.3 Billion
Toyota Scales Back Production of Big Vehicles - Toyota acknowledged that, like its rival automakers in Detroit, it misjudged the drastic swing in the American market away from larger vehicles.
Even Toyota is hurting; $147 a barrel of oil will do lots of damage to lots of people and lots of companies.

Government Rule Makers Looking at Pensions - Accounting rule makers started an ambitious project to force state and local governments to reveal the true cost of their pension promises.
Not a bunch of good news.

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