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October 29, 2008
Lending Crunch Hits Consumer Credit
Cards
After years of flooding Americans with credit card offers and generous
credit lines, lenders are sharply curtailing both, the New York
Times reported today. The pullback is affecting even creditworthy
consumers and threatens an already beleaguered banking industry with
another wave of heavy losses after years in which it reaped near record
gains from the business of easy credit that it helped create. Lenders
wrote off an estimated $21 billion in bad credit card loans in the first
half of 2008 as more borrowers defaulted on their payments. With
companies laying off tens of thousands of workers, the industry stands
to lose at least another $55 billion over the next year and a half,
analysts say. Currently, the total losses amount to 5.5 percent of
credit card debt outstanding, and could surpass the 7.9 percent level
reached after the technology bubble burst in 2001.
href='http://www.nytimes.com/2008/10/29/business/29credit.html?_r=1&oref=slogin&ref=business&pagewanted=print'>Read
more.
Commentary: A Detroit
Bankruptcy Better Than a Bailout
Angling for an additional taxpayer investment in the firm that would
result from a merger of General Motors and Chrysler, the government
should avoid funding a GM-Chrysler deal, according to a commentary in
today's Washington Post. Auto makers are pointing to the
government's bail out of the banking industry, arguing that $10 billion
in taxpayer dollars could be invested to rescue the domestic auto
industry and the millions of workers and retirees who depend on it. As
reported by Reuters, GM and Chrysler would have the Treasury invest $3
billion directly in the newly merged automaker in exchange for preferred
shares with warrants, as with the banks. The government would take over
$3 billion of the company's pension obligations. To deal with the
industry's short-term liquidity problem, the government would also
commit to buying $4 billion in commercial paper issued by the new
company. However, even with a government-financed merger, the companies
are going to have to shrink by at least 25 percent to reflect the
realities of a shrinking market and much-reduced market shares,
according to the commentary. That translates into the direct loss of an
additional 40,000 jobs and the indirect loss of several hundred thousand
href='http://www.washingtonpost.com/wp-dyn/content/article/2008/10/28/AR2008102803264_pf.html'>Read
more.
GMAC to Get Government Help on
Commercial-Credit Access
GMAC Financial Services, the troubled financial arm part-owned by
General Motors Corp., will get federal help to access the locked-down
commercial credit markets, the Wall Street Journal reported today. GMAC
said today that it was recently granted access to a new short-term
funding facility created by the Federal Reserve to help alleviate the
ongoing credit crisis. The Detroit-based company is struggling to get
access to funds amid a national credit crunch, and has tightened
standards under which it will grant auto loans in any effort to stave
off further losses. GMAC has been working to move away from commercial
paper and increase other funding sources, such as bank lines, the
company said. The company had about $1 billion globally in commercial
paper financing at the end of this year's second quarter, down from $1.4
billion at the end of 2007.
href='http://online.wsj.com/article/SB122528249230879889.html'>Read
more. (Subscription required.)
Business Owners, Bankers Weigh in on
SBA Authority
Small business owners and bankers at a House Small Business Committee
hearing yesterday urged Congress to take action to ease the Main Street
credit crunch by expanding the Small Business Administration's authority
to guarantee bank loans, CongressDaily reported. Stephen
Wilson, the CEO of LCNB National Bank in Lebanon, Ohio, said that
community banks such as his had the capital and desire to make loans,
and that an increase in the $1.5 million limit on SBA loan guarantees
would do a lot to free up money for small businesses. 'This is exactly
the time when the SBA should step forward and take a larger role,' said
Wilson, who represented the American Bankers Association. A rise in the
guarantee limit was also recommended by Women's Chamber of Commerce CEO
Margot Dorfman. 'We need to get the lines of credit back where they
were,' she said. Dorfman further testified that many small business
owners resented the federal bailouts of big companies.
Congress Seeks Bank Data on Use of
Bailout Funds
Congressional investigators yesterday demanded that the
nation's nine largest banks prove they are not using an emergency
infusion of $125 billion in taxpayer funds to lavish their executives
with wealthy bonuses, the Washington Post reported today. Rep.
Henry A. Waxman (D-Calif.), chairman of the House Committee on Oversight
and Government Reform, noted that before the infusion, the banks had
spent or allocated $108 billion on employee compensation and bonuses for
the first nine months of 2008, nearly the same amount as last year. 'I
question the appropriateness of depleting the capital that taxpayers
just injected into the banks through the payment of billions of dollars
in bonuses, especially after one of the financial industry's worst years
on record,' Waxman wrote in a letter to the banks.
href='http://www.washingtonpost.com/wp-dyn/content/article/2008/10/28/AR2008102803483_pf.html'>Read
more.
Financial Firms Near $700 Million IPO
Suit Settlement
Morgan Stanley and Credit Suisse Group are among dozens of financial
firms nearing a settlement of more than 300 lawsuits accusing them of
rigging initial public offerings during the boom in technology stocks a
decade ago, Bloomberg News reported yesterday. The settlement is likely
to be for less than $700 million, less than a quarter of what a
plaintiffs' attorney said that the banks proposed at one point and a
fraction of the $12.5 billion originally sought by investor lawyers
after the collapse of the bubble in technology stocks. The case stems
from the boom and bust of the technology stock market in 2000. Investors
in hundreds of companies that went public claimed that underwriters
including Goldman Sachs Group Inc. and Merrill Lynch & Co.
manipulated the IPO market for tech firms, whose value soared to record
heights before collapsing. More than 20 banks and other financial firms
denied wrongdoing.
href='http://www.bloomberg.com/apps/news?pid=20601103&sid=aEMmgREEP.z0'>Read
more.
Levitz Bankruptcy Converted to Chapter
7
Bankruptcy Judge Robert E. Gerber has ordered
the bankruptcy case of Levitz Furniture Inc. holding company PLVTZ Inc.
to be converted from chapter 11 to chapter 7, Bankruptcy Law360
reported yesterday. Judge Gerber cited the company's lack of a workable
disclosure plan and the absence of opposition from the debtor's
attorneys as reasons for the conversion. PLVTZ Inc. must issue a final
report in 30 days and list unpaid debt incurred during bankruptcy within
15 days. Albert Togut of Togut Segal & Segal was
appointed as interim chapter 7 trustee for the case. A Dec. 17 meeting
is set for the newly converted case.
href='http://bankruptcy.law360.com/articles/74539'>Read
more. (Subscription required.)
Marcal Paper Files Third Amended
Chapter 11 Plan
Marcal Paper Mill Inc. has filed a third amended chapter 11 plan and
disclosure statement, creating a liquidating trust for the $121 million
it netted from selling its assets to stalking-horse bidder NexBank SSB,
Bankruptcy Law360 reported yesterday. The bankrupt paper towel
maker filed the statement and plan Monday in the U.S. Bankruptcy Court
for the District of New Jersey. Marcal filed for bankruptcy in November
2006, citing increased costs of natural gas, electricity and steam. The
privately held, family-owned company had more than $165 million in
assets and more than $200 million in liabilities at the time of its
filing. Read
more. (Subscription required.)
International
IMF Agrees to $25 Billion Rescue
for Hungary
The International Monetary Fund, the European Union and World Bank today
agreed to a $25.1 billion economic rescue package for Hungary to bolster
confidence in its economy hit by the global financial crisis, Reuters
reported. The IMF said that it had reached an agreement with Hungary for
a $15.7 billion loan program (12.5 billion euros), while the European
Union stood ready with an additional $8.1 billion in financing and the
World Bank another $1.3 billion. The IMF loan will be disbursed over 17
months. It is the biggest international rescue package for an emerging
market economy since the start of the current global crisis and is the
first for an EU-member country. Last week the IMF approved a $2.1
billion deal for Iceland and a $16.5 billion program for
Ukraine.
href='http://www.nytimes.com/reuters/world/international-hungary-imf.html?ref=business&pagewanted=print'>Read
more.
Iceland Raises Interest Rate to
18 Percent to Defend Currency
Iceland's central bank raised its benchmark interest rate by six
percentage points to 18 percent as the country looks to rescue its
currency, the Wall Street Journal reported today. Iceland,
which depends heavily on imports, desperately needs a functioning
foreign-exchange market so Icelanders can use their kronur to buy euros
or dollars, and the goods that they need. Iceland's central bank said
its increase-which more than reverses a 3.5-percentage-point cut made
two weeks ago-was a condition of the IMF, which last week reached a
preliminary accord for a $2 billion loan to the island nation.
href='http://online.wsj.com/article/SB122518671406575643.html'>Read
more. (Subscription required).
Sterling Airways to File for
Bankruptcy
Icelandic-owned budget carrier Sterling Airways A/S said
it will file for bankruptcy after it was unable to raise financial
support for a restructuring program due to the collapse of the Icelandic
financial system, the Associated Press reported today. Sterling said it
was hit in 2007 by a slowdown in the market and rising fuel prices, and
the airline started accumulating large losses this year. It implemented
a restructuring program to reduce the fleet and staff, which was planned
to take full effect next year. However, the funding for the program
vanished when the Icelandic owner was hit by the crisis in the country's
href='http://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102900114_pf.html'>Read
more.
Investors Align Funds to Buy
Alitalia Assets
A group of Italian investors yesterday approved a plan to
inject €1.1 billion ($1.4 billion) into a new holding company that
aims to purchase the assets of the insolvent Alitalia SpA and relaunch
the carrier, the Wall Street Journal reported today. The new
company Compagnia Aerea Italiana (CAI), has made a preliminary offer to
buy Alitalia's slots for take-off and landing as well as its newer
planes and merge them with smaller local rival Air One SpA. The decision
to capitalize CAI eased concerns that the offer from Italian investors
could collapse as credit conditions tighten, leaving the cash-strapped
former flag carrier and its 18,000 employees stranded in bankruptcy
protection. The airline entered receivership in late August after years
of failed attempts by successive Italian governments to turn around
Alitalia's money-losing operations.
href='http://online.wsj.com/article/SB122523798158078163.html'>Read
more. (Subscription required.)