Can't corporations live within their means?

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.

Tort reform: for whom?

One of the big pushes for "conservatives" is tort reform, but it seems they are only concerned with individuals suing large corporations and winning seven figure judgments (millions).  Have you noticed these same critics rarely call for tort reform of one corporation against another?  Or multiple corporations judgments won by multiple corporations? On the order of ten figures (billions)?

This is the judgment that was made against Visa, MasterCard, and several banks in favor of many merchants.  The judgment: 7.25 billion dollars!  See "Visa, MasterCard, banks in $7.25 billion retails settlement", Reuters via Yahoo! Finance, 2012-07-13.  Where is the cry for tort reform in this case?  But if that is not enough, Target and Wal-Mart have chimed in that the judgment is too lenient!  It is not changing a "broken" system.  See "Wal-Mart opposes proposed settlement on credit card fees", Rueters via Yahoo! Finance, 2012-07-27.

I haven't worked out the exact numbers, but if a credit card company charges merchants two percent on card transactions, pays the merchants within a week, and collects from the cardholder within a month, it is charging about 12% interest or better.  Considering that almost all the credit card processing is done by computer rather than an army of clerks transcribing charge slips, the processing costs per transaction are fractions of a cent.  Oh, and another place all the jobs have gone.  What a money machine!

Government inefficient, business efficient? Hah!

The following is the second message that I've sent in the last two days to Wells Fargo; Wells Fargo manages shareholder reinvestment accounts for Allete.

Once again you are emailing me that "A new Allete, Inc. tax form has been posted to your account", and once again that form is for the 2009 tax year, identical to the one I received a year ago, and at least twice this past few weeks.

The 2010 Form 1099 should have a larger amount than the 2009 form because I have the dividends reinvested.

I think I'll post this business inefficiency to my blog: http://magree.blogspot.com

Isn't Wells Fargo one of the banks involved in improper foreclosures?  A Google search for "wells fargo foreclosures" yields "Judge Rejects Wells Fargo Foreclosure Documents Again", Daily Finance, Abigail Field, 2010-12-10.

I'm glad that I long ago paid off my truck loan with Northwestern Bank (now Wells Fargo).  At least they couldn't repossess it from me for some obscure technicality; I sold it.

Our free market system: Free to lie and cheat

Much of the financial crisis was created by thousands of banks and loan officers throughout the country.  It was getting more important to originate loans and then sell them to others.  The more loans originated, the more money the loan officers and their banks would get.  They didn't have to worry about risk because the buyers of the loans assumed the risk.  Because the loans were packaged and sold again, the end buyers had no idea of the risk.

One of the ways to originate more loans was "stated-income".  Either the borrower was allowed to state any income needed to get the loan or the loan officer encouraged the borrower to overstate the income.  The actual income was not verified in either case.

See "I Worked For A Major Mortgage Company, And What We Did Was Criminal", Michael David White, Business Insider, 2010-04-22.

Many think that any action by government to curb excess is interference in the "Free Market".  Would any professional sports team play without referees and umpires?  I doubt it.  All the teams of a league pay into a pool to pay for the leagues referees and umpires.  Managers and players may complain about individual decisions, but  doubt they would like to settle any disputes themselves.

Let's think about government as a referee in the sport of business.  One branch of government sets the rules.  Another, independent, branch of the government enforces the rules.  A third, also independent, branch settles disputes about the rules.  Corporations and individuals pay taxes to support government as a referee.

What would the "free market" be like without these systems of rules?  Would Apple go to war against Palm if Apple felt Palm was infringing on its patents.  Would the Beatles and their fans go to war against Apple because the Beatles felt Apple was misusing their trademark?

And what about individual citizens, should the "free market" be allowed to defraud, maim, and kill people in the name of bigger profits?  With no recourse to their government for the citizens to redress these grievances?

There is no easy answer to what is too much government and what is too little government.  We have too many people thinking that all government is taking the "people's freedom" away.  And we have too many people thinking that government is not doing enough to protect the "people's freedom" from "rapacious corporations".

The problem with "financial products"

Back in the mid 1960s, a member of our church invited us to breakfast with one of his business associates. His sole purpose was to sell us a "financial product" that they were selling. Just the name "product" raised red flags for me. A product is something you can touch.

Maybe the term "financial product" was created to give substance to services or financial documents that could be bought and sold.

Now it appears my caution of over forty years ago has shown itself to be extremely prudent. "Financial products" became more and more complicated, cut apart, resold in other arrangements, becoming more and more removed from the reality of the agreements that created them in the first place.

Bob's Bank knew Harry Homeowner and could vouch for him. Bob knew better than to lend money to Dan Deadbeat. However, Fred Fast didn't care about Dan's credit because he could sell the loan to Super Bank who would sell it to Mega Bank who would sell it to … None of these knew anything about Dan Deadbeat or that he had already missed four payments. They only had the word of the person or institution further down the sales chain.

And like the tulip bulbs with grossly inflated prices finally had no buyers, these "financial products" with grossly minimized risk suddenly had no buyers. Those who had sold their tulip bulbs and bought no more probably had their proceeds in golden guilders. I wonder where those who sold their "financial products" and bought no more have their proceeds.

I was going to write that at least one could touch the tulip bulbs, but I wouldn't be surprised that the only thing bought and sold was promise of delivery of certain kinds of tulip bulbs.

So, if someone offers to sell you a "financial product", thank them for the breakfast and go your own way.

The House of Cards came tumbling down

The newspapers and the blogosphere are filled with commentary pointing blame for the credit crunch all over the place - Federal government forcing banks to loan to high-risk people, greedy investment bankers who gave themselves big bonuses for just moving money around, house buyers signing for loans they couldn't pay in the end, the media, the conservatives, the liberals, and...

I think that, yes, blame can be spread far and wide, but all of these malefactors had the same basic premise: loaned money can be bought and sold.

The beginning premise sounds simple. A local bank lends money to someone for some purpose. At a certain point, the bank has no more money to lend except for what dribbles back in as loan payments. To raise more money, the bank sells its loans to a larger entity. But the larger entity can only do this far so long. In order to buy more loans, it has to raise more money. So it sells its loan to a larger entity. Where does it end?

If house prices keep going up, it never ends. But prices will not keep going up. Either everyone who wants a house has one, or prices go so high that fewer people are willing to buy houses. So, prices go down, sometimes very rapidly.

Sometimes prices drop so rapidly that people would rather stop paying their loans than pay more than their house is worth. Of course, if they walk away from one house, they will have a hard time buying a house of much less worth. That further reduces the number of qualified buyers further reducing the prices of houses.

Tulips, Florida real estate, houses, when will they ever learn?