In '29, General Electric was a very healthy company,
almost debt free. "At its peak," writes Jim Grant, "it
covered fixed charges out of cash flow (that's EBIT, not
EBITDA, an invention of the 1980s) 109.6 times over. In
1932, at the bottom, it covered by 11.5 times. In 1929,
GE generated a return on equity of 18.8%. In 2001, a
thoroughly up-to-date GE produced an ROE of 26.3% while
employing vastly more debt (it had, of course, long
before entered the financial services line)."
How much debt? While the company had debt of only one
half of one percent in '29... by 2001 GE's debt reached
60% of its capitalization.
The biggest increase in debt has occurred in the recent
past. "To get a broad idea of the ravage imparted to
corporate balance sheets during these years," writes Dr.
Kurt Richebacher, "just compare the two following
figures covering 1995-2000: U.S. business net fixed
capital investment edged up $321 billion; indebtedness
ballooned by $2,472 billion. For each dollar added to
net new fixed investment, there were 7.7 dollars added
to indebtedness."
The stunning difference between the two figures
essentially reflects the fact that the debt orgy went
overwhelmingly into unproductive use, mainly stock
buybacks, mergers and acquisitions. Counterpart to the
soaring gap between debt growth and net investment
growth were bits of paper bearing the pretentious title
of 'goodwill.'
...
"At the 1929 top," Grant continues, "the capitalization
of the U.S. equity markets amounted to just 81.4% of
U.S. GDP. By the March 2000 peak, the reading was 183%
of GDP."-- The Next Enron? 03/05/2002
[
www.dailyreckoning.com]
***
03/05/02
THE NEXT ENRON?by Bill Bonner
Source"Give him enough credit and even a dumbbell will find a
way to blow himself up."--Bill Bonner
The newspapers and TV stations are turning the Enron
story into a the sort of tale they can handle.
"Witnesses clash" heralds the NY TIMES account of Enron
officials' testimony before the Senate Commerce
Committee.
"I never duped Ken Lay," Jeffrey Skilling told the pols.
Soon, they will be looking for a 'deep throat' or a
stained blue dress.
Here at the Daily Reckoning we will try a different
approach. We take it for granted that even a
Presbyterian or moron will find a way to lie, cheat and
steal - if it pays well enough. And any fool will allow
himself to be duped or hypnotized... if not for money,
for love or glory.
While the rest of the press and the politicians look for
a tragic character flaw or lamentable regulatory gap,
here at the Daily Reckoning we continue to search for
the comic absurdity. Not that it provides any better
explanation or any more entertaining reflections... but
we hope it helps us anticipate other Enron-like farces.
What's more, it allows us to come to the end of our
story without having to sort out who told what to whom
when. For it was not a shortage of character strength
that gave rise to the Enron debacle, we reckon, but a
surplus of easy credit. Too much credit leads to
financial chicanery as surely as a fat wallet left on a
car seat in a bad neighborhood leads to a smashed
window.
In that light, we can anticipate a lot more glass on the
nation's streets. Because the amount of financial
leverage in America has gone up - since '29...since the
bull market began in '82... since the collapse of Long-
Term Capital Management in 1998... and even throughout
the recent recession that never happened.
In September 1998, the Fed panicked when LTCM faced
extinction. The 'systemic risk' was so great, feared the
central bankers, that they had to do something. They
brought the bankers together to bail out Long-Term, and
not coincidentally, loosened credit worldwide.
But LTCM was peanuts compared to what lay ahead. The
hedge fund raised only about $2.5 billion - still, the
most successful launch ever. By 1998 the fund was out of
business... but John Meriwether and the other partners
were back in the game in a matter of months. And, thanks
to the easy credit, the number of new hedge funds
ballooned. By 2001, the amount of money in the funds had
grown to $500 billion... with $86 billion of new cash
raised in 2001 alone.
In September 2001, the Fed again feared 'systemic risk'
- after the WTC towers were destroyed by terrorists.
Again, they loosened credit worldwide.
In fact, throughout the entire post-WWII period, central
bankers have maintained a bias towards looser credit...
putting so many extra dollars in circulation that the
purchasing power of the greenback is down at least 75%.
A glimpse at a single company shows how the culture of
credit has expanded since the Great Depression.
In '29, General Electric was a very healthy company,
almost debt free. "At its peak," writes Jim Grant, "it
covered fixed charges out of cash flow (that's EBIT, not
EBITDA, an invention of the 1980s) 109.6 times over. In
1932, at the bottom, it covered by 11.5 times. In 1929,
GE generated a return on equity of 18.8%. In 2001, a
thoroughly up-to-date GE produced an ROE of 26.3% while
employing vastly more debt (it had, of course, long
before entered the financial services line)."
How much debt? While the company had debt of only one
half of one percent in '29... by 2001 GE's debt reached
60% of its capitalization.
The biggest increase in debt has occurred in the recent
past. "To get a broad idea of the ravage imparted to
corporate balance sheets during these years," writes Dr.
Kurt Richebacher, "just compare the two following
figures covering 1995-2000: U.S. business net fixed
capital investment edged up $321 billion; indebtedness
ballooned by $2,472 billion. For each dollar added to
net new fixed investment, there were 7.7 dollars added
to indebtedness."
The stunning difference between the two figures
essentially reflects the fact that the debt orgy went
overwhelmingly into unproductive use, mainly stock
buybacks, mergers and acquisitions. Counterpart to the
soaring gap between debt growth and net investment
growth were bits of paper bearing the pretentious title
of 'goodwill.'
But the more debt U.S. corporations took on, the better
investors seem to like them.
"It is said that millions of investors are angry and
disillusioned about the financial community that has so
grossly defrauded them," adds Dr. Richebacher. "Looking
at sky-high P/E ratios, we have the impression that
complacency and hope still grossly outweighs worry."
"At the 1929 top," Grant continues, "the capitalization
of the U.S. equity markets amounted to just 81.4% of
U.S. GDP. By the March 2000 peak, the reading was 183%
of GDP."
While debt grew faster than an escapee from a fat
farm... profits and earnings slimmed down.
But that part of this story... and the exciting climax -
in which we reveal the biggest 'next Enron' of all -
will have to wait until Thursday.
Until then, adios...
Bill Bonner