Opening Bell: Clearly a Mess

Collapsing deals; the Fed in perspective; Floridians' recession strategies, etc.

The Wall Street Journal reports on A1 that the $19 billion private-equity deal reached 16 months ago for Clear Channel has all but fallen apart, apparently because the banks who agreed to finance it have now decided that’s not such a good idea. Thomas H. Lee Partners and Bain Capital Partners, the two buyout firms who agreed to buy the radio-station behemoth, are on the hook or a $600 million breakup fee, which the WSJ says they’ll try to hang on their bankers (who include troubled ones like Citigroup, Wachovia, and Credit Suisse) if they can’t get financing.

The market for debt has collapsed since November 2006 when the deal was reached. That means the banks will immediately lose money if they make the loans or they would have to hold the loans on their balance sheets and have less money to lend for other purposes.

The New York Times on C1 says the banks wanted THL and Bain to put up more equity and agree to stricter terms, but the two refused.

Clear Channel’s problems are the most recent instance of a private equity deal tumbling into court, as the squeeze in the credit markets has disrupted the buyout world. The cheap debt that powered the recent two-year buyout boom has disappeared, forcing the banks to sell those loans and bonds at steep discounts. At the same time, the acquisition business has cooled with private equity firms largely sidelined because they are unable to get financing from the banks.


Always low prices, on debt

The Journal says the banks would lose billions instantly if they finance the deal:

The continuing crisis in the market for leveraged debt means they would have to mark down the value of their Clear Channel loans as soon as the deal closes and book the losses.


Such debt has typically been marked down 15%, meaning the banks could lose $2.7 billion the moment they close the deal. Still, the commitment letters the banks signed when the deal was cut in May make it almost impossible for them to back out of their commitments.

The NYT says Clear Channel and its suitors may sue the banks for failing to live up to their commitments.

Bloomberg puts it nicely:

”Given the latest actions of some of these banks, reputational risk has apparently dropped down on the list of business considerations,” said Roy Behren, a portfolio manager with Westchester Capital Management in Valhalla, New York.


Busted deals from around the globe

In other big deal busts, Brazilian mining company Vale dropped its quest to buy rival Xstrata for about $90 billion, the Financial Times says on the front of its Companies & Markets section. Unlike the Clear Channel buyout, the banks were committed to finance this one, the Journal says on A3, but the deal fell though after commodities stocks, which had been booming for months, fell sharply in the last couple of weeks.

The collapsing consumer

Consumer confidence collapsed last month, reaching a 35-year low. The NYT buries the news on C5 and pooh-poohs its significance:

Fears often prove overblown, of course, and this particular survey, which was released on Tuesday by the Conference Board, has a spotty track record as an indicator. But expectations can often be self-fulfilling: worried consumers are less likely to make the big purchases that help keep the economy humming.

The WSJ puts it on A2, notes that the Consumer Board survey predicts inflation of 6.1 percent in 2009, and says:

The combination of negative factors weighing on the economy “increases the probability that we’re looking at something more sustained and somewhat deeper…as people react to their fears and batten down the hatches,” said Bank of America economist Peter Kretzmer.


A big step down


The Journal combines that story with, what else, bad news on housing. A housing index of 20 big cities found that house prices nationwide fell 10.7 percent last month from a year ago, its thirteenth-consecutive drop. Las Vegas and Miami home prices are both down more than 19 percent year over year, while Phoenix is down more than 18 percent.

he continued declines in housing prices are part of a troubling picture for an economy battered by surging fuel prices, stock-market volatility and a downturn in hiring. There are few signs that home prices are bottoming. “The house-price story is going to get worse for consumers. The labor market is going to get worse. You could see gasoline prices rise further coming into the start of the summer driving season,” said economist Paul Ashworth of Capital Economics.

The nationwide pace of the collapse is increasing: In the last three months have fallen at an annualized rate of 20 percent.

Bloomberg flat-out says in its third paragraph that “price declines will continue as foreclosures add to a glut of unsold properties, and stricter lending rules make it harder to get financing,” noting that $460 billion of adjustable-rate mortgage are due to reset this year and that Lehman Brothers predicts another 10 percent fall in prices before we see 2009.

The patient is not responding

The FT goes big on page one with a poorly cobbled-together report that despite central banks’ opening of cash gushers in the U.S. and Europe, banks still aren’t wanting to lend to each other. Libor, the rate at which they lend overnight to each other, is at its highest level this year and near rates that caused the Fed and others to dump cash into the markets last summer.

Won’t hurt (him) a bit


Robert J. Samuelson chimes in with a column in The Washington Post that tries to make the case that this slowdown is just business-cycle-as-usual.

There’s a disconnect between what people see around them and what they’re told is happening. The first is upsetting (rising gas prices, falling home prices, fewer jobs) but reflects the normal reverses of a $14 trillion economy. The second (“panic,” “financial meltdown”) suggests the onset of something catastrophic and totally outside the experience of ordinary people. The economy, the New York Times said last week, may be on “the brink of the worst recession in a generation” — an ominous warning.

Perhaps, but so far the concrete evidence is scant. A recession is a noticeable period of declining output. Since World War II, there have been 10. On average, they’ve lasted 10 months, involved a peak monthly unemployment rate of 7.6 percent and resulted in a decline in economic output (gross domestic product) of 1.8 percent, reports Mark Zandi of Moody’s Economy.com. If the two worst recessions (those of 1981-82 and 1973-75, with peak unemployment of 10.8 percent and 9 percent) are excluded, the average peak jobless rate is about 7 percent.

Well, la-di-dah. No biggie, folks, so pipe down. Let’s just exclude a recession or two, and, you know, it’s not so bad, especially for me, the economist. Anyway, read it for yourself, but there’s a strain of easy-for-them-sayism that passes for perspective among economics writers that we find annoying. And since when are falling home prices part of the “normal reverses” of a $14 trillion (and falling) economy? Isn’t that how we got into this mess, because people thought home prices never went down?


On dropping sick policyholders

The Los Angeles Times continues its strong beat coverage of the insurance industry in general and health insurance in particular with a story on a meeting scheduled for today between California regulators and insurers over allegations that insurers improperly cancel policies after patients pile up medical bills.

The Department of Managed Health Care has been investigating the cancellation, or rescission, policies of three California insurers for about a year.

The paper says consumer advocates are afraid today’s closed meeting will result in insurers’ proposals getting a leg up. Included among them are the requirement that patients head to arbitration before court and the elimination of punitive damages. The paper notes:

In the first reported verdict in a rescission lawsuit in California, a judge awarded more than $9 million last month to Patsy Bates, a Gardena hair salon owner dropped by Health Net while undergoing chemotherapy for breast cancer.

The largest portion of Bates’ award was punitive damages. Evidence showed that the company paid bonuses to an employee based in part on the number and value of rescissions she carried out.

The OB loves good beat coverage.


How unusual is it?


Bloomberg this morning offers good perspective on just how unusual is Ben Bernanke’s Fed-led bailout of Bear Stearns. The story quotes Tom Schlesinger, executive director of the Financial Markets Center in Howardsville, Virginia:

“I can think of nothing in recent or distant memory that remotely resembles what the Fed is doing here, certainly within the context of the central bank’s operations.”

And Joe Mason, associate professor of finance at Drexel University:

“The Fed is so far outside the traditional bounds,” said Mason, a former economist at the Office of the Comptroller of the Currency, one of five federal bank regulators. “It isn’t innovative, it is taking a step back in time to a system of direct credit” where the government decides “who gets funding and who doesn’t,” he said.

Well, all right, then.


Bad hair year


Floridians are foregoing beer, taking $200 vacations and cutting their hair shorter because of falling house prices and economic fears, according to this story from the ‘Berg.

The hair thing caught our eye, too. But here’s the deal:

To save more than $1,600 a year, Roland said she cut her 14-inch-long hair to three inches so she wouldn’t have to pay for Japanese-style thermal straightening.

Got it. Roland is Rita Roland, a single mom, who moved from Los Angeles to Melrose Cove, Fla., for a slower pace and lower cost of living. Still, she paid $350,000 for a single-family house, her first. Think about that price for a second. That’s not outlandishly high, relatively speaking, but how many people can really carry that?

Big Bucks. Not

The WSJ on A1 points out that while the stock market’s ups and downs may fool us, it’s gone exactly nowhere in the last nine years.

The paper says the S&P 500 has fallen an average 0.37 percent a year since 1999 and that “some economists and market analysts worry that the era of disappointing returns may not be over.” Since the Dow Jones Industrial Average has less technology companies in its index, it has risen about 1 percent a year.

Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn’t held up for stocks bought in the late 1990s or 2000.

Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks. Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.

All listen to wise man Robert Shiller of Yale who has correctly predicted—well in advance—the dot.com and housing bubbles. He says stocks are still overvalued, trading at 20 times annual earnings, compared to their long-term average of 16 times. And profits are not on the upswing, meaning if prices stay the same those multiples will increase, making stocks inherently more expensive.

Here’s our backhanded compliment Quote of the Day:

“I think the global economy will stay, on balance, not so bad,” (money manager Jeremy Grantham) says. “There is no reason for people to become as pessimistic as they did even in Japan, and certainly not as pessimistic as in the Depression.”

Soft hard-good orders

In economic news, durable-goods orders dropped last month by 1.7 percent after falling 4.7 percent in January. A 13 percent fall in machinery orders was the biggest since records began in 1992.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.