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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 npr.org

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 npr.org.

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 marketwatch.com

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.

Content sources – marketwatch.com and npr.org