Economic Update – Economists Call for Downsizing Financial Companies

If some esteemed economists testifying before the Joint Economic Committee of  Congress Tuesday had their way, “too big to fail” would be a phrase of historical interest only–applying especially to that period of history just before 2008. “We have little to lose, and much to gain, by breaking up these behemoths, which are not just too big to fail, but also too big to save and too big to manage,” said one of them, Columbia University professor Joseph Stiglitz, who is a well-known critic of the current bailout of the financial sector, and who also happens to be a Nobel Prize recipient (economics, 2001). The president of the Federal Reserve Bank of Kansas City, Thomas Hoenig, also testified before the committee, arguing that really large banks should be allowed to fail like smaller ones are. Enough with the zombie banks, he said. His actual words were: “Nonviable institutions must be allowed to fail and could be put into a negotiated conservatorship.” Once upon a time, collaterized debt obligations (CDOs) were up-and-coming financial instruments in the commercial real estate world, but no more. Fitch Ratings, which rates 35 U.S. commercial real estate loan CDOs encompassing about 1,100 loans and 370 rated securities or assets with a total balance of $23.8 billion, says that CDO delinquencies were 6.5 percent in March, compared with 5.4 percent in February. And the Fitch CDO Default Index isn’t going to go down again any time soon. “Under the current credit market conditions, Fitch anticipates increased defaults on land loans as debt service reserves burn off and business plans fail to actualize,” said Fitch senior director Karen Trebach. In other words, if operating capital is oxygen, a good number of debtors are gasping for breath about now. Restaurant expansion has been muted in recent months, but a deal inked by P.F. Chang’s China Bistro Inc. on Tuesday shows that growth in the industry is still possible, if you think long term and far away, since the world is still a very large place. The Scottsdale, Ariz.-based restaurateur and Kuwait-based M.H. Alshaya, a Middle Eastern retail specialist, will develop 34 restaurants in that part of the world over the next 10 years. The first location is scheduled to open in Kuwait City by the end of this year, and another will open in Dubai during early 2010, according to P.F. Change. Future locations are also planned for Saudi Arabia, the United Arab Emirates, Bahrain, Qatar, Lebanon, Jordan and Oman. The chain’s opening of restaurants in the United States has slowed down recently. During the last quarter of 2008, the company opened seven Bistro restaurants and four Pei Wei locations, but during all of 2009 it expects to open no more than that 4Q08 total, and possibly fewer. Wall Street was back in positive territory on Tuesday, gaining back much of the previous day’s losses. The Dow Jones Industrial Average was up 127.83 points, or 1.63 percent, while the S&P 500 and Nasdaq gained 2.13 percent and 2.22 percent, respectively.