Tuesday, February 22, 2011

No End to Extend and Pretend

I ran into an old acquaintance of mine, a lawyer who has been Chapter 11 business bankruptcies since rocks were soft.  He's a deals kind of guy: quick in and out, look the facts in the eye, slam bam thank you ma'am, scrape a few pennies off the table and goodbye.  I asked how things were going   He shook his head.  "Extend and pretend," he said.  "Extend and pretend and--and no deal?"  I asked.  Yes, he said, that's about it.

We're talking commercial cases here--yawning  basketball-arena expanses of empty retail, warehouses populated only by the resident Doberman, stuff like that.  I asked him if he had any idea why lenders were so loath to cut their losses on these sour deals.  He said he didn't have any idea.

I have two, though only one makes sense.  One is that the lenders are thinking that someday the market will turn up and all these glum looking losers will turn into fairy princes.   Well, they maybe right and maybe pigs will fly and a horse will learn to talk.  But if not, what?  Here's my second guess:  bureaucracy.

Consider: "workouts" has always been a low-rent operation for the bank.  Not  a profit center, not something we like to think about, nothing we are going to use for a color picture in the annual report.   As you will surmise, I have a soft spot for these workout guys: it's nice to meet a banker without a blow-dry and they have a sense of realism that is refreshing, at least as long as it is not my money.

My guess is that a grunts in the workout infantry know perfectly well that a lot of these deals are going nowhere.  They also know there is absolutely no percentage in presenting this hard truth to the boss.   It may be your hard truth but it is my paycheck.

This insight (if true) is one more item in a growing inventory of insights about the market meltdown that can be filed in a single folder: management incompetence.  Failure has a thousand fathers but it's becoming increasingly clear that a prominent source of our late misery is the ignorance and arrogance of the people at the top--people who would rather blow up the company under their own feet than listen or try to understand.  No wonder that the same informational slippage might pursue us all the way down the line. 

1 comment:

Ken Houghton said...

Take a bankruptcy onto your own books, and you are admitting (1) that a valuation doesn't make sense, (2) by how much the valuation didn't make sense, and (3) most importantly, that any comps based on that valuation also don't make sense.

The reason I'm bitter and nasty about excess reserves (and the only-an-economist-could-be-stupid-enough-to-believe-it's-a-good-idea paying above-market interest on same) isn't that banks aren't lending so much as it is that banks aren't lending because those "reserves" aren't excess—they're writedowns that should have happened and been done with.

Instead, as much of the worst paper as they could get away with was stuffed into Fannie and Freddie (paper those orgs wouldn't have bought on origination), and there are piles of "assets" that are performing about as well as Sam Kinison these days.

Mark them to a realistic market value, and you'll be lucky to see any "excess" reserves.

Right now, you have banks that can't loan with customers who can't (for business reasons) borrow. It's only the chimera that those banks are "sitting on cash" that disguises the reality that everyone in finance already knows.

That it happens to be Crony Capitalism at its worst is lagniappe.