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It may be a distant memory now, but only a few years ago the financial world was awash with debt financing. Then along came a little thing called the ‘credit crunch’. Unsurprisingly, many organizations couldn’t meet their creditors and the rest is, well, history – just like several of the companies involved. Now they can take their place in the pantheon of great business bankruptcies, alongside those other infamous failures…
PG&E is an old, distinguished firm that supplied gas, hydroelectric and steam power to the nation. Following the deregulation of the electricity market somebody decided it would be a good idea to sell off their gas power plants, retaining only their hydroelectric resources. Big mistake. Over the next few years the company was forced to purchase gas from its competitors, buying at fluctuating market price and selling at a fixed rate to clients. Unsurprisingly, this just wasn’t sustainable and led to massive losses and, ultimately, bankruptcy in 2001. Unusually for this list though, PG&E has since emerged from the depths and established itself has a leading light again, being named one of the most profitable companies for 2005 on the Fortune 500 list.
In August 2007 Thornburg were riding the mortgage-backed security wave, with a high rating from most investment banks. Then, amid fears of increased margin calls, a trader at Deutsche Bank downgraded Thornburg to ‘sell’. There followed a dramatic decline in the value of these securities and, despite attempts to raise equity through shared offerings, the company found itself on the slippery slope down into the abyss of bankruptcy. Filing in early 2009, Thornburg had become a textbook victim of mid-2000s, asset-backed security delusion. And they paid for it.
Increased demand for smaller, more fuel-efficient vehicles had Chrysler – one of America’s motor powerhouses – on the back foot for much of the previous decade. The credit crunch ultimately finished the company off when, resisting pleas from President Obama himself, several creditors refused to forgive Chrysler’s debts. On April 30, 2009, Obama forced Chrysler into federal bankruptcy protection and the company announced a plan for a partnership with Italian automaker Fiat. After an asset sale and the formation of a new company, Chrysler Group LLC, Fiat will now hold a 20% stake in Chrysler, with an option to increase this to 35%, and eventually to 51% if it meets its goals in the future.
Originally known as Security Life of Indiana, Conseco is a financial services organization based in Carmel, Indiana, providing life insurance, annuity and supplemental health insurance products to more than 4 million people in the US. Following a spate of ill-thought out acquisitions in the 1990s, Conseco collapsed in 2002 under a huge debt load that included the $6 billion purchase of Green Tree, the nation’s largest mobile-home lender. Under the terms of a tentative bankruptcy agreement, Conseco Finance Corp. was sold to CFN Holdings, whilst Conseco Finance became insolvent after it failed to make a $4.7 million payment.
In 2001 Enron became a byword for corporate failure and scandal when it collapsed following an elaborate cover-up of its failures. In just 15 years, Enron grew from nowhere to be America’s 7th largest company, employing 21,000 staff in more than 40 countries. But the firm’s success turned out to have involved an elaborate scam. Through the use of accounting loopholes, special purpose entities and poor financial reporting, senior executives were able to hide billions in debt from failed deals and projects. Among the firm’s crimes were: manipulating the Texas power market, bribing foreign governments to win contracts abroad and manipulating the California energy market. Enron filed in 2001 for a whopping $65.5b.
CIT is a leading participant in vendor financing, factoring, equipment and transportation financing, Small Business Administration loans, and asset-based lending. Like many others, CIT spent years on a debt-fuelled growth spree, but when Lehman Brothers’ failure drained the Wall Street liquidity pool, CIT was left exposed. Despite TARP funds, CIT’s plea for a second federal bailout was refused, and it was forced to take a $3 billion loan, later expanded to $4.5 billion, from bondholders. All this was to no avail, however, and in November 2009 it filed for Chapter 11 bankruptcy, and had all its prior stock written off – now a long, uncertain recovery faces CIT.
General Motors was for years the biggest company in the automotive industry, a sector that was regarded for much of the twentieth-century as the most important market in the world. At its peak in 1962, one out of every two vehicles sold in the US was a General Motors vehicle. GM narrowly avoided bankruptcy in 1991, as falling sales hit profits, but it managed to recover through a process of cost-cutting and management changes. But second time around – the automotive industry crisis of 2008/9 – GM was unable to stay afloat. Years of losses were pushed over the balance and GM declared to the world it would run out of cash in mid-2009, and following a controversial and drawn-out saga, President Obama refused to rescue the once mighty firm. GM entered administration on June 8th, 2009 – analysts subsequently blamed the collapse on General Motors’ strategy of cutting prices in order to improve sales, instead of cutting its product line, manufacturing capacity and dealer network.
WorldCom CEO, Bernard Ebbers, became astronomically wealthy from the rising price of his holdings in the WorldCom’s stock. Yet when the telecommunications industry entered a downturn in 2000, WorldCom’s aggressive growth strategy suffered a serious setback when it was forced to abandon a proposed merger with Sprint by the US Justice Department. To cover up the mess, senior executives began used fraudulent accounting methods to mask WorldCom’s declining earnings by painting a false picture of financial growth, and therefore keeping the price of its stock artificially high. After a secret investigation by a team of internal auditors in 2002, WorldCom was found to have added $1b on to its balance sheet fraudulently and was forced to file for bankruptcy – becoming the largest such filing in US history at the time.
Washington Mutual, or WaMu as it was called by many of its clients, is a lesson in what not to do for lenders in today’s market. The Seattle based bank grew at a a frightening pace, pumping out loans at a furious pace to virtually anyone who asked – a textbook case of the lax lending practices that so contributed to the global recession. By 2007 WaMu had accumulated bad loans valuing $11.5b, and it didn’t stop there. The company’s top executives were rewarded for swift expansion and often disregarded borrower’s income and assets in order to approve loans. Unsurprisingly this debt-ridden company imploded when the credit crunch hit, filing on September 26, 2008 for Chapter 11 bankruptcy. Subsequently, all WaMu’s assets and most of its liabilities (including deposits, covered bonds, and other secured debt) were assumed by JPMorgan Chase.
The behemoth, the monster… Lehman. Recent books dealing with the collapse of Lehman have borne titles such as ‘Inside the Doomsday Machine’, ‘Colossal Failure of Common Sense’ and ‘Devil’s Casino’. Says it all really. You know the story by now and are probably very sick of it – anyway, here goes one more time.
A loosening of underwriting standards, coupled with a greedy search for yield by financial organizations, meant that an increasing proportion of the US mortgage market was subprime – in other words, could never hope to repay. Several banks, notably Lehman, built up huge exposure to these mortgage-backed securities, and to make matters worse complicated everything by slicing up these bad debts and selling them on to each other. One thing led to another, the crap hit the fan and boom. Lehman was left high and dry – no thanks to the US government and other banks, who declined to save them. When it filed on September 15th, 2008, it had an asset holding of $691b, the largest bankruptcy in history.
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