Thursday, April 30, 2009
As I have repeatedly tried to point out, the problem is too much leverage, and what is needed to fix the economy is for the financial players to deleverage.
But instead of encouraging orderly deleveraging, the government has done everything it can to prop up and even increase leverage.
The Wall Street Journal has confirmed the problem in a new article:
Deleveraging? What deleveraging? Since the start of the credit crunch, corporate leverage has risen at a faster rate than it did at the peak of the boom, even as firms work hard to reduce borrowings. Companies that once embraced leverage in the name of shareholder value now find their debt piles balanced precariously on shrinking earnings. Absent a swift recovery, leverage is likely to rise even higher...
The picture is more worrying for companies where deleveraging should be the top priority: those bought by private-equity firms. For example, look at chip maker Freescale Semiconductor. When taken private in December 2006, it had leverage of just over 5 times, but relentless earnings pressure has pushed that figure ever higher. Analysts now forecast leverage will peak at more than 10 times earnings before interest, tax, depreciation and amortization, despite an exchange offer that cut debt by $1.9 billion.
Meanwhile, among the most aggressive European LBOs, leverage is standing still or rising, according to Fitch Ratings...
None of this bodes well for credit ratings. Even if total debt outstanding is stabilizing or falling in some cases, the ratings agencies focus on metrics such as asset-backing and interest cover. In the first quarter, Standard & Poor's downgraded 523 companies and upgraded just 38, giving a record downgrade ratio of 93%. That will make it harder for companies to refinance at attractive rates, leaving many running hard just to stand still.
Way to go Geithner, Bernanke and Summers. Instead of insisting that a couple of levels be taken off the top of the house of cards, you've encouraged the gamblers to add new, ever-flimsier layers.