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Borrowing Levels Reach Record Proportions
In recent years, Americans have gone on an unprecedented borrowing binge
to purchase anything from stocks to vacations to groceries to federal
income taxes, sparking debate over whether the high numbers will hurt
the economy in the long run, according to The Wall Street
Journal. A record $4.5 trillion in debt has been accumulated by U.S.
non-financial corporations, which is up 67 percent in the past five
years. Household borrowing has risen nearly 60 percent to $6.5 trillion.
More debt has helped companies to expand and boosted consumer demand,
which has helped fuel economic growth. But many say they are alarmed
that consumers who may be the least able to afford more debt have been
adding the most to their borrowings, and many low-income consumers and
those with bad credit histories have been finding it easier to borrow
money. 'We've expanded our access to debt in dramatic ways, which is
wonderful for the country, and it's helped the economy,' said Diane
Swonk, Chief economist at Bank One Corp. in Chicago. 'But there's no
free lunch. The riskiest borrowers seem to be piling on debt, and we may
be building a house of cards.' 'The real debt problem is lower-income
people, who have been adding debt,' said James Paulsen, chief investment
officer at Wells Fargo Corp.'s Wells Capital Management unit. 'That's
what's scary to me.'
More mortgages are being financed with less than 10 percent down
compared to the 20 percent that was once needed to purchase a home, and
junk bonds have increased from $529 billion from $173 billion a decade
ago. However, some say that despite the increase in debt, the U.S. is
safer than ever from a serious debt crisis. Lenders can make money off
the loans by bundling them through securitization, so that if some of
the loans go bad, the defaulted loans would have a negligible effect on
the investors who buy the bundled loans. Even the most pessimistic say
that any backlash to the financial system from the heavy borrowing is
unlikely to be as bad as the economic turndown of the early '90s, and
banking lenders don't agree on the actual risks. But John Dolan of
Hyperion Capital warns that, 'were the music to stop, and the economy
hit a hard landing, those most leveraged would be in a precarious
position.'
Consumer Advocates Demand Bolder Type on Credit Card Rates
Consumer advocates, worried by the rise in bankruptcy rates, say they
want credit card firms to make it clear how much interest people pay on
credit card loans by using big, bold type to show the annual rate,
according to Reuters. But some experts say that using bigger letters to
show interest rate information will not necessarily prevent millions of
credit card holders from falling deeply into debt, and members of the
Federal Reserve's main credit card advisory panel have said they doubt
that it will make much difference. 'People shop for credit cards for
different reasons,' said Consumer Advisory Council Board member Gwenn
Kyzer. 'I am not sure if a font size increase will make a difference to
consumers.' The Advisory Council, whose members come from consumer
groups, communities and the financial services industry, said earlier
this month that firms should use large lettering to show the long-term
interest rates they charge consumers on their unpaid balances, and that
other terms must be written in 12-point type instead of the tiny letters
credits card firms often use, the council said. But Michael Kidwell,
vice president with Myvesta.org, formerly Debt Counselors of America,
said people were unlikely to notice the difference. 'They can put it in
fuchsia if they want to. People are not looking at it. They don't care,'
he said. 'If they want to increase the font size and it helps some
people that's okay. But for the majority of the people that we work
with, they are just concerned about the minimum payment.'
Ed Mierzwinski of the U.S. Public Interest Research Group said that
using larger type was only part of the solution to the bankruptcy
problem and he said the government should intervene to curb deceptive
marketing practices. 'The government needs to rein in credit card
companies,' he said. 'There are a number of problems with credit cards
causing consumers millions of dollars in excess fees and interest
payments. Bank regulators need to investigate complaints about deceptive
marketing practices, account balances and interest calculations.' What
is certain is that credit cards are big business in the United States.
CardWeb.com Inc., a credit card research company, says 506 million VISA,
MasterCard, Discover and American Express cards were in circulation in
the United States last year and the revolving balance of credit card
debt totaled $580 billion. Under the Fair Credit and Charge Card
Disclosure Act, companies must provide a table or box with 'clear and
conspicuous' information on terms and conditions, but that law did not
define the size of letters detailing interest rates, and consumer
advocates say credit card companies' disclosures are often confusing and
misleading. 'Because of ambiguous regulations, consumers have lacked the
information they need to comparison shop,' said Sen. Charles Schumer
(D-N.Y.). 'When a consumer receives a credit card solicitation it is
very easy to see the low introductory teaser rate. But even Sherlock
Holmes would need a magnifying glass to find the long-term interest rate
in fine print.' Credit card companies have had no comment on the new
proposals.
Telegen Completes Reorganization, Announces Common Stock Reverse
Split
Telegen Corp., San Mateo, Calif., announced today that it has
successfully completed its reorganization under its reorganization plan,
which was confirmed by the U.S. Bankruptcy Court for the Northern
District of California last Wednesday, according to a newswire report.
In addition, the company announced a 1-for-16 reverse split of its
common stock, effective last Friday. Shares of Telegen common stock
outstanding on this date will be exchanged for shares of new common
stock in a ratio of 16 shares of old common stock for one 1 share of new
common stock. The company said that shareholders will shortly receive
instructions for exchanging the certificates. Telegen produces
flat-panel display technology, telecommunications and Internet products.
Toysmart.com Seeks Court Approval for $1.5 Million in DIP
Financing
Bankrupt toy marketer Toysmart.com Inc. announced Monday it will seek
court permission to enter into a $1.5 million debtor-in-possession (DIP)
credit line with Paragon Capital Corp., according to a newswire report.
Having officially ended operations on May 19, Toysmart.com, whose
majority owner is Walt Disney Co. (DIS), agreed last week to the
involuntary chapter 11 petition filed against it by creditors on the
advice of consultant Stephen S. Gray of The Recovery Group,
Boston. The company said it is accepting bids for all remaining assets.
Micrografx Restructures, Examines Potential Financing
Sources
Graphics software maker Micrografx Inc., Allen, Texas, said Monday said
it would record an undetermined charge in the fourth quarter for the
cost of job cuts and other measures it has taken to restructure its
business, according to Reuters. The company cut has cut 74 U.S. jobs, or
about 40 percent of its U.S. workforce, most of which were made at the
company's headquarters. The company said it is continuing to look into
various financing methods to ensure it has the necessary capital
resources, including the potential sale of equity securities or the sale
or spin-off of certain assets, and said that its failure to do so could
could result in severe operational difficulties, such as additional
reduction in the scope of operations, or ultimately a forced
reorganization or bankruptcy. The company said the total amount of the
charges and the future effect of the restructuring actions will be
reported in conjunction with its fiscal fourth-quarter operating
results, currently planned for mid-August.
Court Voids $1 Million Order in Whitewater Criminal Case
A federal appeals court on Monday voided a $1 million restitution order
in a Whitewater criminal case but gave prosecutors a second chance to
collect it or an even larger judgement, according to Reuters. The 8th
U.S. Circuit Court of Appeals said deputies to former Whitewater
prosecutor Kenneth Starr had failed to prove that a 'sham bankruptcy'
plotted by former Arkansas Gov. Jim Guy Tucker and others had resulted
in a loss to the U.S. Treasury and voided the $1 million in restitution
a judge ordered when Tucker pleaded guilty in the case in 1998. 'The
government introduced no evidence as to tax loss,' the appeals court
said, adding that 'the government's failure to satisfy its evidentiary
burden requires us to reverse the district court's $1 million
restitution and to remand the case for resentencing.' But the appeals
court also said it calculated that Tucker could be liable for an even
larger restitution order. The case involves what Whitewater prosecutors
called a 'sham bankruptcy' concocted by Tucker, a former business
partner and a tax attorney, to shelter millions of dollars from the sale
of a cable television system in Florida in 1988 from capital gains
taxes. Starr discovered the scheme during his investigation of President
Clinton, who was Tucker's predecessor as governor of Arkansas. Tucker
resigned in 1996 after his conviction for fraud and conspiracy in a
second, unrelated Whitewater case.
Smart and Friendly Ceases Operations
Smart and Friendly, which produced CD storage devices including CD
recorders, CD-ROM drives and accessories, ceased daily operations in
late May after its assets were liquidated by Sanwa Bank California,
according to MacCentral. Friendly President and CEO Perry Solomon
reportedly took legal steps to stop Sanwa Bank from liquidating and
attempted to continue operations with a smaller staff, but by mid-May,
the company's assets were sold off, and its Chatsworth, Calif.,
headquarters were padlocked. 'It is questionable if Smart and Friendly
will ever be salvageable as a functioning company again,' reported one
source.
Emergency Steel Loan Board Approves $365M in Guarantees
The Emergency Steel Loan Guarantee Board, a unit of the U.S. Department
of Commerce, on Friday announced its decision to guarantee $365 million
in loans to four distressed steel companies. The loan guarantee board
approved a $110 million loan to Vineyard, Utah-based Geneva Steel Co.
from Citicorp USA, a unit of Citigroup. Geneva has been operating under
chapter 11 bankruptcy protection since February 1999.
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