The federal government's surprise decision to broaden the scope of its $700-billion bailout to include "non-bank financial institutions" (rather than buy troubled mortgage assets) and to ask Congress for another facility to buttress the $1 trillion asset-backed consumer lending market, opens the door to needy companies. If you are critical to consumer well-being and the flow of credit, you may qualify.
Or alter your business model to become a "bank," like American Express and GE Capital did this week, receiving regulatory clearance to qualify for tarp fund infusion. Who else qualifies as "too big to fail"? Treasury Secretary Henry Paulson raised more questions than he answered Wednesday about the changed tarp rules, amid signs that everyone everywhere is in trouble through 2010.
Best Buy CEO Brad Anderson said he expects comparable-store sales to decline 5% to 15% in the four months remaining in its fiscal year. "Since September, rapid seismic changes in consumer behavior have created the most difficult climate we've ever seen," Anderson said.
It was an unnerving reminder of why its biggest rival, Circuit City, filed for bankruptcy earlier this week--claiming $3.4 billion in assets against $2.32 billion in liabilities, with the difference well below what it collectively owes its vendors. With retailers bracing for the same, other Chapter 11 filings are expected during the depressed holiday season--expected to be the weakest since the early 1990s. Consumer debt is at 100% of negative GDP. Some 60 economists surveyed by Bloomberg News said this is worst financial crisis in seven decades.
Gawker's Nick Denton is forecasting that stressed companies will cut back as much as 40% on their traditional and online advertising next year, even as Wall Street continues its almost-daily modest reductions in earnings and revenue estimates for advertising and media, entertainment and tech.
The crushed newspaper business--the worst of all sectors with more than a 16% decline in revenues this year and at least another 13% decline in 2009--would be a candidate for "tarping." Or how about the United Bank of Broadcasters, whose analog signals get yanked in three months? Most of the hardware gadgets that brought consumers to the broadband party are hurting, too.
The Consumer Electronics Association this week predicted that holiday sales will fall sharply, struggling to top last year's 12% gain over 2006 with a marginal 3% growth if the economy does not tank any further. Automobile video systems, navigation and games are the only sure growth sectors. Little wonder, then, why Apple recently curbed its fourth-quarter iPhone production to fix its iPhone and iPod screens on new video-game software instead.
What that means is that the digital revolution will continue to roar ahead though this economic downturn, courtesy of interactive mobile devices, televisions, computers and smart phones that consumers already own. That is the single most-obscured incentive for companies to continue to innovate and develop a new silver lining for revenues. After all, the depth of corporate debt and potentially destructive looming loan commitments has barely come to light.
Pali Capital analyst Richard Greenfield Wednesday reported that Sumner Redstone's private holdings company National Amusements is preparing to sell its movie theater assets to meet a $1.6 billion loan obligation triggered by the plummeting price of collateralized Viacom and CBS stock that it controls. Because NAI still would have its own debt to service, Greenfield says the best strategy would be for Redstone to sacrifice his "most saleable asset"--Viacom--valued at $12 billion. Redstone says he refuses to sell either CBS or Viacom; Greenfield says he may "no longer have a choice."
The savvy octogenarian, known for getting himself out of tight spots, simply has to make the case that entertainment is integral to the stability of the nation's financial system and the flow of funds. The equity promised to Viacom and CBS shareholders when the companies split is a long way from being delivered, even for majority owner Redstone. So maybe he's not a candidate for declaring himself a bank.
However, the most brilliant minds in media and tech need only consider moral hazard. The economic concept now includes bailing out badly managed firms that were burnt by their own risk-taking when the bottom fell out of a high-flying, easy-money market left to its own devices.
The question is where the government, persuaded by strategic business thinkers and lobbyists, will draw the line. Which companies will be lucky enough to get under the tarp? And will any provide the ultimate relief needed to restore consumer and advertiser spending?