Many complain about government borrowing and say that government should live within its means. But few complain about corporate borrowing. Shouldn't corporations live within their means?
From the semi-annual report of the AllianceBernstein Income Fund (Ticker AWF):
AT&T, 6.50%, due 2037
Ford Motor Co., 7.45%, due 2031
Citigroup, 8.50%, due 2019
Pacific Life Insurance Co., 9.25%, due 2039
Weyerhauser Co., 7.375%, due 2032
Borrowing does have its purposes, among other things having the capital for expansion or to smooth out cash flows. But how much borrowing is too much?
For example, Citigroup as of June 2012 had a debt to equity ratio of 3.024, that is, it owed bondholders three times as much as the value of shareholders' stock. See http://ycharts.com/companies/C/debt_equity_ratio. On the better side, General Motors had a debt to equity ratio of 0.3555. See http://ycharts.com/companies/GM/debt_equity_ratio. On the worse side, Ferrellgas Partners has a debt to Equity Ratio of 25.36. See http://ycharts.com/companies/FGP.
But why is Citigroup paying bondholders 8.50% when it pays savers 2% or less? See "Taking a Look At Citigroup's Latest Fixed-Income Prospectus", Rajiv Tarigopula, Seeking Alpha, 2012-07-11. Remember when savings and loans were required to pay 5% by law (which they used to justify not paying more)? And this 2% is not being paid for demand deposits, but three-month notes.
It gets even a bit screwier. Citigroup does offer a fixed-rate 15-year mortgage at 4.375 percent. So, it is borrowing at 8.50% to finance mortgages returning 4.375%. That doesn't sound like it's living within its means! See "Who Are the Best Mortgage Lenders for Bad Credit", Beth Lytle, eHow Contributor, no date.
