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The Biz Roundup January 19

And now, the home builders eat the foreclosure ashes . . .

The convergence of these problems is bringing many small and medium-size builders — who account for about 70 percent of new-home construction in the United States — to their knees. . . .

With the industry still owing hundreds of billions of dollars in loans made at the market peak, many more face insolvency in the coming months and years. “Probably north of 50 percent will fail . . .”

Many loans in the building industry are of short duration, coming up for renewal at least once a year. This allows banks to take a fresh look at the financial health of a borrower, as well as the assets securing their debt. A steep fall in cash flow or a decline in the value of the collateral — usually building lots or half-built houses — can mean an automatic default, whether a borrower has missed payments or not.

(“Banks Foreclose on Builders With Perfect Records,” New York Times, January 19) And that, my friends, is how recessions work. Does it make sense for banks — going into the severest year in our recession — to continue floating loans to companies that are currently struggling with interest payments? No. Does it make sense for banks to foreclose on housing developments that are near completion, meaning that no buyers will probably ever be found? No. Welcome to the world of recessions where the best choice is always a bad choice.

Where Britain goes, we’re not far behind . . .

As Gordon Brown set out plans to increase public ownership to 70 per cent of what was once one of the world’s biggest financial conglomerates, City investors dumped the shares in a selling frenzy.

RBS, worth £75 billion only two years ago, is now valued at £4.5 billion, even though it received £32 billion from taxpayers and shareholders less than three months ago.

The bank’s plight prompted calls for the outright nationalisation of RBS, with some MPs urging the Treasury to take over its day-to-day running. . . .

The turmoil suggested that the Government’s second massive rescue package had failed to restore confidence to the financial sector. It was a graphic illustration of continued banking uncertainty that prompted calls on the Government from Labour MPs to nationalise the whole system, an idea resisted firmly by Alistair Darling, the Chancellor, last night.

(“Royal Bank of Scotland: the bank that sank,” The London Times, January 20) Before you read this news item, read Floyd Norris’s blog today, “Should We Force Banks to Lend?” Money quote: “But any successful government bailout must lead eventually to the banks becoming attractive to private capital. The belief that banks are on the road to confiscation by the government will assure that no such capital will be forthcoming anytime soon, and it can create a vicious circle, in which that fear causes investors to dump bank shares, and thus makes them seem even more shaky and unworthy of investment.” Attractive as it seems, burning the asses off the shareholders isn’t the solution to banks’ capitalization problems.

Did you know that Fiat means “let it be done”? And Chrysler means “weaver of veils”? Well, enough secrecy, get it done, already.

Under terms of the deal, Fiat is likely to take a 35% stake by midyear and have the option of taking as much as 55% of the company over time, these people said. Cerberus Capital Management LP, Chrysler’s owner, is looking to retain an interest in the U.S. car maker, these people said, adding that it is unclear whether Daimler AG will want to keep its entire 19.9% stake. . . .

Chrysler and Fiat are similar and, in some ways, complementary companies. Chrysler operates almost exclusively in North America and gets about three-quarters of its sales from trucks, sport-utility vehicles and minivans. Fiat specializes in small and midsize cars. Both companies could benefit from having a larger global volume of sales over which to spread development costs.

(“Fiat Considers Stake in Chrysler ,” Wall Street Journal, January 19) Back in early December, Sergio Marchionne, the CEO of Fiat, gave a must-read interview to Automotive News Europe, where he said that only six companies with sales volumes of 5.5 million cars per year would survive this recession. At the time, only five companies met the sales volume he set; with the acquisition of Chrysler (1.5 million cars in 2008), Fiat (1.7 million cars made) inches closer to Marchionne’s 5.5 million car mark. Will it hit that sixth slot Marchionne left open in December?

Take note filmmakers, the economics of independent film are changing overnight.

Jonathan Sehring, IFC’s president, and his crew were already here last Thursday to begin stocking up on pictures for their In Theaters and Festival Direct services, which send first-run movies to more than 50 million viewers in all, through their video-on-demand services.

(“At Sundance, IFC Prepares to Go on a Shopping Spree,” New York Times, January 19) I’ve been playing the independent film game for a while (way on the margins, though), and the festivals are all about getting theatre distribution. On Demand, both cable and Internet, is the new game and most independents aren’t playing to that economy.

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