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WALL STREET WEST: Up-to-the-minute local reaction to the financial crisis

The Rocky

Published October 9, 2008 at 9:28 a.m.
Updated October 9, 2008 at 4:24 p.m.

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Up-to-the-minute short takes on the financial crisis, including a variety of opinions from local workers, executives, brokers and business leaders:

*Close but no cigar

If you’re wondering why economists didn’t warn us of this financial crisis, you haven’t heard the story of the three economists who went deer hunting.

The economists, to the amusement of everyone else, calculated the best place to shoot a deer.

On schedule, a 10-point buck stood in a clearing.

The first economist fired, and the shot went to the right. The buck didn’t flinch.

The second economist’s shot falls to the left, and the deer continued to graze.

The third economist fires and the bullet goes over the center of the deer’s head.

“Success!” the economists cheer, as they give each other high-fives.

John Rebchook

*Fine points of the Dow’s decline

Dow Jones, which obviously maintains the Dow Jones industrial average, sends out a list of “factoids” on interesting days. Well, Oct. 9, 2008, was an interesting day, so the factoids follow:

*Fell 678.91 points, or -7.33%, to close at 8,579.19.

*Closed below 9,000 for the first time since June 30, 2003.

*Worst bear market since the January 1973 to December 1974 bear market, when the Dow fell 45 percent from its peak to its trough.

*Down for the seventh consecutive trading day and eight of the past nine.

*Down 2,271.47 points, or 20.9%, over the past seven trading days.

*Largest seven-day point decline in its history.

*Largest seven-day percentage decline since Oct. 26, 1987.

*Longest losing streak since the seven-day decline that ended July 16, 2002.

*Lowest intra-day level since May 27, 2003. The last time the Dow had an intra-day level below 9,000 was on August 6, 2003.

*Lowest closing value since May 21, 2003.

*Largest one-day point decline since Sept. 29.

*Largest one-day percentage decline since Oct. 26, 1987.

*Has dropped 5,585.34 points, or -39.43 percent, from its record close of 14,164.53, on Oct. 9, 2007.

*Has dropped -34.30 percent from its 2008 close high of 13,058.20 on May 2.

*Year-to-date, the Dow is down -35.32 percent%.

*Off 38.8 percent from 52 weeks ago.

*Wells Fargo in line for $20 billion tax break*

Finance editor David Milstead says Wells Fargo wants to pay $15.1 billion for Wachovia, but it’s really getting paid $5 billion by the federal government to take the bank for free. Read all about it on his blog Material Disclosures: http://blogs.rockymountainnews.com/material_disclosures/archives/2008/10/wells_fargo.html

*Even the rich are cutting holiday budgets

More than one-third of U.S. consumers among all income levels plan to spend less this holiday season, according to a survey released today by The Nielsen Co. Only 6 percent plan to spend more, while 50 percent expect to spend as much as last year.

The economy has taken a toll even among high-income — defined as earning more than $100,000 — consumers, with nearly one-third planning to spend less.

“Clearly, consumers across all income levels have some trepidation about holiday spending,” said Todd Hale, senior vice president of consumer at shopping insights at Nielsen.

Consumers who reported that they expect to spend the same said they will focus their purchases on grocery stores, supercenters and mass merchandisers while pulling back at department and electronics stores.

Joyzelle Davis

*Health care squeeze hits Coloradans

A new study shows Colorado second only to South Carolina in declining employer-sponsored health insurance.

The report comes a week after the removal of a union-sponsored initiative on Colorado’s ballot that would have required employers to not only provide coverage but also pay the bulk of premiums for both employees and their families.

The share of Colorado workers whose employers provide health care coverage dropped 7.2 percentage points over the period ranging from 2001-2007, according to the Economic Policy Institute, a Washington-based thinktank. For an interactive nationwide map: http://www.epi.org/content.cfm/webfeatures_snapshots_20081009

The study also points to a shift from private to public coverage, especially among children. The full report: http://www.epi.org/briefingpapers/223/bp223.pdf

Joanne Kelley

*John Love, executive director of Capitol Hill Community Services, a nonprofit that operates four soup kitchens in the Denver area

“We’re seeing about 10 percent more people sign in for meals. Clearly, charitable giving is down. And not only that, food availability is down from our usual sources.”

Roger Fillion

*Todd Clough, executive director Denver Inner City Parish, a nonprofit that operates a food bank as well as other community services for low-income families:

“Our food bank has been very busy for quite some time. We tripled the size of the space and the amount of food we serve more than a year ago. At the end of the week, we run out of food. We go get some more. And then we run out again.

“It’s not like it just happened last week with the news of the bailout and Wall Street’s problems. Our food bank has been really, really busy for quite a while. For the last 1 1/2 years the economy has been really tough for the community we serve, including the working poor and the homeless.

“What I’m guessing is it’s going to be harder for us to raise money over the next couple of years. That’s what’s worrying me and other nonprofits. The need for our services getting greater and the ability to fundraise around this, I’m thinking, will be getting harder. People’s wallets are getting thinner.”

Roger Fillion

Barstool economics

Denver Realtor Steve Blank e-mailed us an amusing take on U.S. tax law, noting that it should be required reading for all politicians:

Suppose that every day, 10 men go out for beer and the bill for all 10 comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The 10th man (the richest) would pay $59.

So, that’s what they decided to do. The 10 men drank in the bar every day and seemed quite happy with the arrangement until one day, the owner threw them a curve. “Since you are all such good customers, he said, I’m going to reduce the cost of your daily beer by $20. Drinks for the 10 now cost just $80.”

The group still wanted to pay its bill the way we pay taxes, so the first four men were unaffected. They would still drink for free. But what about the other six, the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share?” They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount and proceeded to work out the amounts each should pay.

The fifth man, like the first four, now paid nothing (100 percent savings)

The sixth now paid $2 instead of $3 (33 percent savings).

The seventh now pay $5 instead of $7 (28 percent savings).

The eighth now paid $9 instead of $12 (25 percent savings).

The ninth now paid $14 instead of $18 (22 percent savings).

The 10th now paid $49 instead of $59 (16 percent savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the 10th man. “But he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got 10 times more than I!”

“That's true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute!” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor.”

The nine men surrounded the 10th and beat him up.

The next night, the 10th man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill.

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

Blank credits the scenario to David R. Kamerschen, who holds a doctorate in economics at the University of Georgia.

P.S.: For those who understand, no explanation is needed.

P.P.S.: For those who do not understand, no explanation is possible.

Rob Reuteman

*Diminished confidence is biggest threat

For those of us who don’t have the best handle on the credit markets, who don’t deal with them on a regular basis and who might not understand how they are having such a decisive effect on world markets these past few weeks, here is a (somewhat) simple explanation offered today by Jeff Thredgold, chief economist for VectraBanks:

We have two distinct financial markets in the world today. The equity, or stock market, is one where the typical U.S. or foreign consumer can look at the Dow average (the U.S.) or the Nikkei 225 index (Japan) or the Hang Seng index (Hong Kong) or the DAX index (Germany) or FTSE 100 (United Kingdom) and get a “feel” as to how stocks are performing.

Such a simple measure is not available in the credit markets. The typical consumer doesn’t really understand how commercial paper issuance provides the funding for thousands of global companies or how the issuance of BANs and RANs and TANs might be used by municipalities to temporarily fund their operations.

Consumers many times “see” problems in credit markets when they can’t get a mortgage or an auto loan or have a long-standing loan for their small business suddenly curtailed by their lender. They “see” problems when they can’t get funding to add to inventory for the holiday season. They “see” problems when the required down payment or documentation for a home loan is much more challenging than before.

Credit markets are all about confidence that if you lend or invest money with the investment bank across the street or across the pond you will get your money back, confidence that if you put money into a money market fund or other short-term investment that you will be able to get your money back, confidence that if you buy a bond issued by a major corporation or government entity that you will be able to sell that investment later in a viable and liquid marketplace.

It is that lack of confidence that is a grave and major threat to the global community today.

Rob Reuteman

*State’s tourism sector focuses on bargains in tough economy

The Colorado Tourism Office launched a new version of its Colorado.com trip-planning guide, adding a “vacation values” section to its home page that touts last-minute deals for budget-conscious travelers.

The site has an expanded list of offers, including a coupon good for discounts at Cherry Creek Shopping Center, reduced dining and lodging prices or room upgrades.

Colorado ski areas have been touting deals in the weeks heading into the season.

SolVista Basin near Granby announced a $149 package for two days of lessons, rentals and lift tickets. Those taking part will also get a season pass and a $20 voucher for the retail shop.

Joanne Kelley

*Woes of a telco

Even telcos with good balance sheets can’t catch a break these days.

Douglas County-based TW Telecom Inc. has enjoyed solid revenue growth, has $325 million in cash and a seemingly manageable amount of debt for its size — $1.4 billion — with no maturities until 2013.

Mark Peters, the company’s chief financial officer, said by e-mail that the company is being prudent with its spending but has the necessary cash to “expand and grow our business without being restrained by the seizing up of the debt markets. The current global financial situation has no near or medium impact to our balance sheet because we have no need to enter the credit markets to fund our growth.”

Donna Jaegers, a telecommunications analyst with D.A. Davidson & Co., concurs that TW Telecom is in better shape than Level 3 or Qwest Communications.

Still, the stock has been hammered just as much as Level 3 and Qwest. TW Telecom is down 62 percent, from $19.81 to $7.55, since the first of the year and has sunk nearly 50 percent since the Lehman Brothers collapse in mid-September.

As Jaegers said Wednesday: “In this market, there’s no place to hide.”

Jeff Smith

*Airline consultant predicts $3 billion in losses in 2009

Aviation experts say the nation’s economic problems could exacerbate the slowdown in demand for air travel as consumers reign in spending.

“If we talked in late August, I would’ve said the industry likely would have been marginally profitable in 2009 and that demand would decline a bit in the fourth quarter of this year but then stay constant,” said Stuart Klaskin, a Florida-based airline consultant. “But factoring in the negative pressure from the last 30 days, I think the industry could lose up to $3 billion next year and that demand will decline 3 percent to 5 percent.”

According to a poll recently conducted by Travelocity, 66 percent of respondents said the economy will factor into their decisions on whether to fly for the holidays. But that doesn’t mean airports will resemble ghost towns. About 78 percent of poll respondents said they will travel for one or more of the upcoming holidays. Travelocity released the results of the poll this week.

Chris Walsh

Kelso Kelly, president of AmFirst Bank in the Denver Tech Center on Sen. John McCain’s proposal to spend $300 billion to buy mortgages

Kelly thinks he has a simpler, better and more effective plan to help homeowners than McCain’s proposal to have the government spend $300 billion to buy mortgages that are under water.

Kelly’s idea is to stretch the amortization of the loans to 40 or even 50 years, which would lower monthly payments.

“And those loans (on average) turn over in seven to 10 years,” so it is not like they will actually be making payments for half a century, he said.

“We do not need to revalue the loans and the value of the loans. Lengthening the amortization, which is basically just the time frame of paying the loan back, will accomplish the same thing, and it will save us $300 billion. This will keep people in their homes. I’m tired of hearing of his plan over and over again. It’s not a good plan. We shouldn’t be taking the market risk out of the market.”

He also doesn’t like the plan that Congress approved and President Bush recently signed to provide $700 billion to buy toxic mortgage-backed assets from banks. “What troubles me about that is that owners of the mortgage-backed securities are the ones who are going to benefit because it will make them better,” he said.

John Rebchook

Comments

  • October 9, 2008

    12:44 p.m.

    Suggest removal

    HopiMedicineMan writes:

    The barstool thing has been around since the 1980s. Here's the question you should be asking, if the US government does not buy
    distressed mortgages, who will? I'll give you a hint, it's a foreign country that doesn't like us very much.

  • October 9, 2008

    12:45 p.m.

    Suggest removal

    Diff writes:

    Very interesting anecdote - the beer drinkers and paying taxes.
    Makes me think....
    BUT
    on all I think it is a bit too simplistic....
    Under our system of deductions - even if we all paid taxes at the same rate - the most wealthy would have more chances for write offs, deductions and loop holes.
    First
    Mandate a balanced US budget! Period.
    Actually I think a simple flat tax might be one answer.
    above a certain "poverty" level, below which you could pay no taxes but, only for 2 or 3 years.
    With the only allowable deduction being for # dependents, incrementally declining after some number - maybe 4 or 5 and maybe mortgage interest, but with a limit, somehow based on the value of an average home..
    Or even better perhaps a nation wide sales tax - and there by tax consumption and not earnings. . .
    or some simple combination of these
    Come up with a way to make it revenue neutral for the time being - plus a small amount over that to start paying down the national debt.

    -- but I am sure our congress could find ways to take something simple and straight forward and muck it up in only a session or two.

  • October 9, 2008

    12:58 p.m.

    Suggest removal

    BigSky182 writes:

    How about we stop paying Politicians at all. That way, the only ones who would take the job would be those that had a sincere interest in making things better for Americans... and they wouoldn't be so tempted to stay in their positions for decades at a time.

  • October 9, 2008

    4:19 p.m.

    Suggest removal

    seeingeyeseesall writes:

    "Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier."

    Good riddance to them.

    You omit the fact that nature abhors a vacuum and that if they leave, others will rise up - one of them, hopefully, might be ME.