NOTHING IS TOO BIG TO FAIL – PART I

August 13th, 2009 Vijaianand No Comments »

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.

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 – marketwatch.com and npr.org

Cash for Clunkers Program – Is it really helping?

August 6th, 2009 Vijaianand No Comments »

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 http://www.cashforclunkersfacts.com/ 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 npr.org 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 npr.org 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.

Photo source: http://www.cristyli.com/

NEW CREDIT CARD HOLDERS PROTECTION BILL – Changes and Challenges

July 21st, 2009 Vijaianand No Comments »

President signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 into law on May 22, 2009. Amending the Truth in Lending Act, the Credit Card Act of 2009 requires certain measures to be implemented by the credit card companies in order to comply the new law and help consumers, taking efffect on July 2010. Let me share the changes and challenges of this new law from my research.

Changes
Some changes to look out from the credit card companies:


– Require CC companies and banks to give customers a reasonable time, such as 21 days, to pay the bill before it is considered late.

– Bans double-cycle billing, which eliminates the interest-free period for consumers who move from paying the full balance monthly to carrying a balance.


credit card bill– Prohibits retroactive rate increases unless the cardholder is at least 60 days behind in paying the bill. If a person does fall behind and the rate on past buys is increased, lenders must restore the lower rate after six months if the cardholder has paid monthly bills on time.


– Requires lenders to post their credit card agreements on the Internet.


– Requires that customers receive 45 days notice prior to any change in the annual percentage rate (APR).  The notification must also inform cardholders that they have the right to cancel the account before the effective date of the rate increase. If a cardholder cancels the account, the cancellation cannot be considered a default on the account, and cannot trigger an obligation to repay the account in full.

– Prohibited from increasing annual percentage rates (APRs) that apply to existing balances unless specific conditions apply. An APR may be increased only if
1) the index on which the rate is based changes,
2) it is a promotional rate that has expired,
3) a cardholder fails to comply with a hardship workout plan,
4) the account falls 60 days past due.

– Requires anyone under 21 to prove that they can repay the money before being given a card, or have a parent or guardian promise to pay off their debt if they default. (Big blow for college students)


– Prohibits over-the-limit fees unless a cardholder elects to be allowed to go over a limit.


– Requires lenders to say how much time it would take and how much money in interest would be paid if only the minimum monthly payments are made.


– Requires that gift cards remain valid for five years. Under the Senate’s rule, retailers and others that issue Visa, MasterCard, American Express or Discover gift cards or certificates will have to print explicit dormancy fee information on the card. Sellers of the cards will also have to inform the buyer of the fee.


– Bans “pay-to-pay” fees, which are charged when someone pays the bill by phone or on the Internet.


– CC companies need your permission before allowing you the “privilege” of spending more than your credit limit and paying a fat $39 fee for that privilege.

Other features of the Credit CARD Act of 2009 include:

If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to the portion of the balance with the highest APR.

If the payment due date is a date when a creditor does not receive or accept payments by mail (e.g., weekends and holidays), the creditor cannot treat a payment received on the next business date as a late payment.

Credit card companies are prohibited from charging a fee based on the manner in which a payment is made (e.g., on line, by telephone).

Some of these reforms are already on track to take effect in July 2010, under new rules by the Federal Reserve.

Challenges

The new law will be a savior for many credit card holders who are facing credit card debts with high fees  during this tough times. But for people who pay off their bills in full each month, and milk card rewards programs for everything they’re worth, there is some cause for concern. After Home affordability and stability plan, this new law is passed to help distressed credit card holders affects consumers who act and does thing right. They might be less in percentage compared to the other group but still a reasonable crowd not really happy about this change for certain reasons.

1. These restrictions will cost more expenses for the credit card companies. To compensate, there are chances of them assessing annnual fees and increase or add other fees.

2. Good credit customers are offered happy rate of 0% APR which already vanished the scene and will never been for a long time to come.

3. With added restrictions, it is going to be hard to get credit cards, which might  make more people strapped for money in this tough times.

4. Stripping reward programs – For months now, the card companies have been threatening to cut rewards programs sharply to make up for revenue lost because of the new restrictions. So will credit card companies kill reward programs or drastically scale most of them back? Of course not.


“If you strip away the reward component of a credit card, it’s essentially a commodity,” said Rick Ferguson, editorial director at the loyalty marketing company LoyaltyOne. “The reward is what gives it its personality. It works from a branding perspective as well as a mechanism to influence customer behavior and consolidate spending on a particular card.”

In all, I would say, this new credit card protection bill has lot of good measures packed to help all credit card holders whether they going thru tough times or not. It is very good step forward and should be welcomed but we will have to wait and see how it plays out in the field.

Image source: abcnews.com

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