MONEY #3

The poor saps who bought houses they couldn’t afford and helped precipitate the sub-prime crisis have a lot in common with the titans of business who head toward bankruptcy? We tend to think that “ordinary” folks have no concept of reality, but that “business” does it better. Rubbish!

With the economy appearing to move toward positive ground, I wonder if the financial gurus, the seers and mavens are finally “getting it.”

I see no evidence that lessons have been learned. I see optimism based on statistics like rising car sales, due mostly to the “cash for clunkers” program and its European equivalent. France and Germany have both pronounced an end to the recession. Both have proudly announced a small increase in Gross National Product.

At the heart of the meltdown last year are the “toxic” securities - mortgage-backed securities that the ratings companies like Moody’s and Standard and Poor had given triple A ratings to. They were deeply flawed securities, but no one seemed to notice, as long as the housing market continued to soar. You could lend all kinds of money to people who were not properly screened, in some cases were almost criminally incapable of repaying a loan. “Criminal” may be too strong a word, except that the lending practices of many financial organizations were in fact based, not on documented proof that the borrower had the means to repay, but simple declaration of earnings – often totally false. But I am not going to chase the villains all over again. There’s been enough of that already.

The crisis was caused by a combination of greed and duplicity on the part of lenders, and naïve, gullible foolishness on the part of the borrowers. So it is those millions who were persuaded, coaxed, cajoled into borrowing money. The credit crisis was due to borrowing by idiots.

But wait. The number of failing or nearly failing companies are not run by naïve or gullible or financially childish executives. Look at a company on the edge of failure, just as you look at a poor soul with a mortgage worth more than the house that carries the mortgage. The companies borrowed all they could – believing that the economy has only one way to go – up. The rush to expand and to do takeovers was financed by borrowed money, and that money was loaned by “clever” people who believed that the company could afford the burden of debt. Until – until the economy turned sour and all the pro formas and financial and forecasts went down the drain.

These are not dumb-ass naïve underfinanced home-buyers. There are tycoons of business, industry and commerce. You need look no further than a company like CanWest Global which is crumbling under a mountain of debt. The debt might have been serviced if revenues had remained high. But hard times came. Revenues dropped. The company could not service its debt.

I shouldn’t single out one company. If you check the financial pages for failures or impending collapses, you will invariably find that the company was simply too optimistic and borrowed far too much. Even sadder, the financial organizations and private capital funds were lining up to lend the money.

All I am saying is that it is not simple folks who lack financial “smarts.” It is the educated. It is the financially intelligent, who are also feckless adventurers whose hunger for expansion has put them into bankruptcy court,

I don’t know the details of the soap company in Toronto that went bankrupt, leaving employees who were on strike stranded. I thought Unilever was an international company with very deep pockets. Do I guess correctly that this Toronto Lever Brothers plant where they make Dove soap, was bought by someone else? And might I be right in presuming that the buyer of the company went into debt to make the purchase? Would I be further wrong if I believed their business could not survive a financial meltdown? Not only the workers suffer, but the people who hold the bonds now have wallpaper.

I remember when Olympia and York, the skyrocketing multi-billion dollar company owned by the Reichmans, went bankrupt. They say the Canary Warf project did them in. I say hubris did them in. They borrowed at the lowest possible rate, which meant short term obligations, but when those instruments came due, the Reichmans had no money. Corporate greed? Long term debt might have cost more, but it would not have come due in the shirt run.

I am now in far deeper than I intended to be. All I can say, as a non-economist, is that it is not just poor saps buying homes they can’t afford. It is bright, astute, financially astute business people who have cut their own throats.