Ignoring the Lessons of the Past

On the anniversary of the collapse of Lehman Brothers, President Obama urged Wall Street to learn 'the lessons of Lehman' and not repeat the same mistakes.

There are many who are suggesting that Wall Street has not learned the lessons of Lehman, opting instead to fight any new regulations that might impede lending, borrowing, investing or any other business the banks are involved in.

What lessons should have been learned? What lessons have been learned?

Large banks CAN and Do fail.
Re-packaging junk and calling it AAA doesn't change reality.
Being highly leveraged in high-risk securities is dangerous.
Investing in complex derivatives that you don't understand is downright foolish.

However, what has probably been learned is this: if Big Banks get into trouble, the government will bail them out.

Without the bailouts, the crisis would have been massive. With the bailouts, the lesson is not learned.

Caught between a rock and a hard place.

GM going bankrupt and Chrysler all but finished

Mark Zandi, Chief Economist of Moody's Economy.com says GM will file for Chapter 11 protection and that Chrysler will broken up and sold to other companies.

Basically, Ford will remain the sole American auto manufacturer...at least on the current scale. GM will come back as a 'shadow of itself'.

What is most interesting is Zandi's final point about the lesson in all of this: if you have a fundamental problem in your business, it's better to fix it sooner rather than later.

GM was running a massive debt before the recession. All that has happened is that those companies that were poorly managed and in poor financial health have now been exposed.

The question is this: will other companies in other industries learn anything from this?

Fighting the Economic War

Friday, March 6, 2009

The Department of Labor announced today that unemployment has risen to 8.1 percent, higher than expected and the highest rate since 1983. A staggering 651,000 jobs were lost in February bringing the total job losses to 4.4 million since December 2007.

Back in December I had been predicting unemployment would rise to over 9 percent by the end of 2009 and it appears that, unfortunately, we are on track. Some economists are predicting 10 percent by the end of 2010. One wonders if this will turn out to be a conservative prediction.

Factor in that several analysts are indicating the massive bailout for GM will not be enough to save the troubled Auto manufacturer from bankruptcy and we are definitely going to see the unemployment figure jump as the domino effect takes place across the North American auto industry.

Don’t forget to add in the continuing slide in real estate prices (how many millions of homes have mortgages worth more than the value of their house?), and the predicted additional defaults and we have the recipe for disaster. Are we in a deep recession or a depression?

Any thoughts on how we can get out of this mess? What can companies do to reduce expenses and minimize job losses?

P Moorcroft
www.mgps.com