Archive for August, 2009


In my last week blog post, Nothing is too big to fail – Part 1, I shared information about Citibank and CIT, biggest commercial lender. How these big companies are struggling in this tough economy?  As I concluded, this week final part will have an another interesting story about Harvard facing hardship on its own. I did my conclusion with lesson learned from these stories. So Read on…

What’s up with Harvard?

It is not just financial companies which are failing in this recession. Harvard University is facing what some say is the worst financial crisis of its 373-year history. While many of the nation’s top universities are experiencing problems as a result of the financial meltdown — even Harvard University, which has the largest endowment of all universities by far. University’s $37 billion endowment a year ago has shrunk to an estimated $26 billion today.

What got Harvard into so much trouble?

Harvard did what many Americans did: It overspent. In this decade, it’s added 6.2 million square feet. That’s roughly equal to the space occupied by the Pentagon. These land acquisitions have cost Harvard more than $4 billion. It has had huge expenses built up while the number of students stayed constant. 

“It’s rather like someone who has taken on a mortgage, bought a house that far exceeds what it can afford, and they’re now facing really what is the worst, most dangerous financial crisis in their 373-year history,” according to  Nina Munk, contributing editor at Vanity Fair, told NPR’s Linda Wertheimer. To read the article, goto

Should big Companies allowed to fail?

Thats a very hard question even to Bernake. Being a big shark in a ocean is not an easy task. Playing a big role in the economy doesn’t protect against economy downfall.  I see it as a double edge sword. A company has to take chances and risk by investing their money in order to  make more money. If it avoids taking risk or chances, consumers won’t see new products and services at the same time company cannot grow and make money.

On other hand, if economy is falling because of companies fault and bad practicies, it does needs to be regulated and corrected. At the same time, If these companies are penalized by allowing to fail for taking risk to grow is not the right way. But I agree a company should act and forecast before stepping into risky modes of operation.

So if these companies are always left to fail, there is a bigger chance of snowball or avalanche effect which is actually averted by Fed last year.  Taking last years episode, if every big banks which faced problems are let to fail without bail out, just imagine the impact it would have created. It would have devastating effect twice worse than great depression. It is not prudent to always struggling company to fail. Everybody needs a lending hand sometimes and more so during bad times.

Obviously, it is really hard to say which companies should be allowed fail and not others. It all depends on the time and position. I hope that also answers the question, Why financial institution gets billions to when big GM and Chyrsler are allowed to fail. Check out these articles related to this story from SeekingAlpha and

Lesson Learned

I am fully convinced that no company is too big to fail and government won’t always come for help. So if you are investing in securities and bonds, please be cautions and invest in right company analysing their porfolio and performance. Don’t by stocks just because the company is too big and it will never will fail. As we all know now, NO COMPANY IS TOO BIG TO FAIL.


Last year, I posted a blog titled CITIBANK, TOO BIG TO FAIL  and it has been almost 9 months now. During this interim period, we have seen lot more companies face tough battles, some went under and some survived. Even Citibank came very close to be taken over by FDIC. With the help of US government and many other investors, it still stands as big financial company.

These past experiences changed a lot and made many analyst to rethink, “Is there anything TOO BIG TO FAIL?”. After seeing many big banks, financial institution, auto companies crumble like pack of cards, the statement doesn’t hold value anymore.

During a town hall meeting on Jul 27th, Fed chairman Bernake said, “The problem we have is that in a financial crisis if you let the big firms collapse in a disorderly way, they’ll bring down the whole system. When the elephant falls down, all the grass gets crushed as well,” Bernanke added. He said he had to “hold his nose” to rescue such institutions during this crisis. As a result, Bernanke said it was his “top priority” to fix the issue of too-big-to-fail. As per him, there is nothing like a company is too big to fail. It just needs to fail graciously without affecting others. To read the full article, go to

Citibank – Status quo?

Currently Citibank has it’s hands tied with U.S. government holding 40% stake(common stocks) after recieving giving  $45 billion in bailout money. Vikram Pandit, CEO who took over his job at tough times is still hanging in there when many big companies vanished from the scenes. He is surviving with big hope to bring the company to his pride. Meanwhile he is named as one of the worst CEO by analyst and government is closely watching  every one of his actions.

In an interview, Vikram pandit was chocked by questions which he struggled to answer. For a question,  When will this crisis be over? Do you see any signs, at this point, of a recovery?

VP: What you have to understand is that, this is a significant shock to the world economy. Just think about it, when you look at the last 5, 10 years there were two engines of growth. There was the U.S. consumer and credit creation. None of those are likely to be the engines of growth going forward. The world’s looking for a new business model. It’s about new engines of growth and it’s not only about creating stability and saying that we’re out of the crisis mode. But we all have work to do as we search for what the new business model is for the world. I am optimistic about the signs that we’re seeing, suggesting that stability is arriving. 

He seems to be optimistic, that is what he can do right! Click to check out the full interview.  It is hard to say, the worst is over for Citibank. Citibank is under close scrutinty and they cannot make any drastic moves without their Fed’s approval. Even today(Aug 8/13/2009), they need goverment approval to pay bonuses and rasies for their energy trader who clinched millions for the company. It is going to take lot of work and patience to get out of the mess. We have to wait and watch.

Big CIT Story

This summer another big financial failure caught everybody attention without much shocking. CIT, a commercial lending institution struggling to get out trouble even after getting $2B bail out money from the government. I am sure many never heard of this company. I only heard when it showed up in the news. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing, so other lenders taking up all the slack would pose a big financial strain.

CIT has been scrambling to raise $2 billion to $4 billion after the federal government refused to bail out the company. On Jul 19th, major bondholders to keep the company out of bankruptcy with a $3 billion rescue loan, the New York Times reported.  Under the deal, CIT’s main bondholders would give the company $3 billion at an initial rate of 10.5 percent, the Times reported.

A bankruptcy filing would have threatened funding for scores of small businesses across the country. It also would have wiped out $2.3 billion in federal bailout money injected into the company in December.

Right now, CIT seems to be working on many restructuring plans. The Federal Reserve put the company through its “stress test” last week and found it faced a $4 billion capital shortfall. It also suspended the dividends. Suspending the dividends on four series of preferred stock will improve liquidity and preserve capital during its restructuring, CIT said. The company also reaffirmed that it has received enough offers to complete a debt repurchase program.

There is more to come in the next week blog with final analysis and conclusion on a controversial question, “Should big companies be allowed to fail?” and Lesson learned from this crisis. Watch out…

Content sources – and

Cash for Clunkers Program – Is it really helping?

Recent days, I see one among three cars on the road are either new or almost new, waiting to get their new license plate. Thanks to the CARS program putting more fuel efficient cars on the road taking out gas guzzlers but no thanks. It seems to be the talk of all news channels and the most popular stimulus package of all in recent months. 

It has become so popular, it even ran out money so fast in couple of weeks of its announcement and waiting for approval to get more funds almost two billion to jump start again. While it is on hold in process to get more money, we take time to analyze,

Is the program really helps the consumer, economy and enviroment as it supposed to?

It  is a $64 question. I tried to do my investigation as usual from many information loaded internet websites.

Quick Overview of CARS program
Cash for Clunkers program also known as  The CAR Allowance Rebate System (CARS) is a $1 billion government program that helps consumers buy or lease a more environmentally-friendly vehicle from a participating dealer when they trade in a less fuel-efficient car or truck. The program is designed to energize the economy; boost auto sales and put safer, cleaner and more fuel-efficient vehicles on the nation’s roadways. 

Is it helping the consumer?

Answer to the question is, Yes and No. Consumers will be able to take advantage of this program and receive a $3,500 or $4,500 discount from the car dealer when they trade in their old vehicle and purchase or lease a new one. Consumers do not need to register anywhere or at anytime for this program. However, to find out eligibility requirements click here and also check another website for more info on this program.

By giving the cash credit to auto buyers while trading in their gas guzzlers, it is free money and helps the consumer. But it is again putting the consumer to debt and adding their debt load. Many consumers who can’t even afford to buy a new car at tough time. They just want to get the cash credit and blinding buying without realizing they need to pay back the rest of their auto loan which not even tax deductabile.  It was similar to the situation people bought big houses when they can’t afford mortgage payment. It not helping any middle class who are suffering from loss of jobs instead adding their burden by teasing them with free money.

So please don’t go rushing to get a new car if you can’t even afford to make car payments says Houston chronicle sharon buggs. She also says, if you can pay all cash for the vehicle after the cash credit and other incentives are applied, then you can afford to buy a new car. Also if your take-home pay can absorb a monthly car payment — and you are not in jeopardy for losing your income stream because of a layoff — then you can afford to finance the purchase of a new car. Check out some tips from her at Houston chronicle.

Is it atleast guzzling the economy?

Not really. It is only helping one industry which is Auto. It is also in a way boosting customer confidence with money flowing between consumer, banks and manufacturers. Thats a good thing. Banks and Auto dealers are writing off loans and loosening the credit crunch a bit.

It sure helping auto makers like Ford, Toyota who is selling more cars compared to last year. The program helped lift Ford Motor Co. to its first monthly sales increase in two years, the company’s top sales analyst said Sunday.  July sales results mark the first year-over-year gain for Ford since November 2007 and apparently the first uptick by any of the six biggest carmakers since last August, Ford sales analyst George Pipas said. Check for more info.

OK! What about reducing carbon residues?

Not exactly! I know it is meant to take out gas guzzlers out of the road help which eventually help reduce gas consumption but it doesn’t affect lot on reducing carbon residue. According to npr’s report, an analyst calculates that if you trade in an 18 mpg clunker for a 22 mpg new car (22 miles per gallon is the minimum mileage allowed for a new car under the program), it would take five and a half years of typical driving to offset the new car’s carbon footprint. With trucks, it might take eight or nine years.

Of course, the bigger the mileage improvement from your old car to the new one, the more gas you save and the faster you work off the new car’s carbon footprint. If you trade in a 20 mpg car for a Prius that gets about 48 mpg, it saves so much gas that you can offset the Prius’ footprint in about a year and a half. (But a 20 mpg car doesn’t qualify as a clunker, so there’s no government voucher). 

Analyst don’t see a direct or immediate impact on the reduction of carbon residues by this program but it does help in the long run.  It also takes whole lot of cars to be taken out of the road to really make a difference. Check out another report,  “Clunkers” program isn’t really green.

Bottom line, in all aspect, I don’t see a real value to this CARS program. Also is it worth saying the program is success just by merely from the billions running out? It neither nurtures the consumer personal finance status nor the environment. I only has shorter impact to the economy especially to auto industry. At this time of recession, when the unemployment rate is very high and people are struggling to feed their family, we need better program with greater impact. This program only helps smaller portion of people who either has good job or good bank account or credit to spend for their new car. 

Thats my take and I am sticking to it.

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