'Construction' Archive
January is named after Janus, the Roman god of doorways and gateways, looking forward and backward at the same time. Since this is a time of reflection on the past and predictions for the future, let’s crank up the Wayback Machine (or at least a few previous blog entries) and take a look at what the past year has wrought.
January: Last year at this time, the world and I were agog over Robert Nardelli’s payout from Home Depot for a lackluster year. The answer to the question, “what is bad-to-mediocre leadership worth?” was, “about $210 million — and the CEO-ship of Chrysler.” Pretty nice work if you can get it.
February: Hah! This is where I blithely predicted that the subprime mortgage crisis will go away by itself, and we would all learn a lesson by the closing credits. That’s why I get paid the big bucks for my trenchant business analysis. My neighbor did sell her house, though.
The spring and summer saw the growing effect of the subprime mortgage meltdown. By the fall, deals were collapsing left and right. Additionally, Barclays surrendered its bid for ABN AMRO, and I, well, declared my love for Tata.
Even more tellingly, in May, Bear Stearns-funded Everquest Financial announced its IPO, in June it withdrew it, and by August Bear Stearns co-president Warren Specter was fired.
So how about some predictions? Well, let’s see. We won’t see any more high-profile resignations, as all the lambs have been sacrificed, but I for one will be very interested in Ralph Cioffi’s career over the next year. Virgin Money will buy Northern Rock. Residential housing will recover in fits and starts, with some markets recovering sooner than others. And (really going out on a limb here) Tata will buy Jaguar and Land Rover.
In the latest news from the homebuilding front, Beazer Homes, one of the largest residential businesses in the country, said that it broke the law when it helped some buyers qualify for mortgages. It’s also restating earnings back to 1999.
The company didn’t specify how exactly it broke the law, but there’s no doubt that in the go-go runup to the subprime mortgage debacle, a lot of people got a lot of questionable loans from mortgage makers. (By the way, Terry Gross’s Fresh Air interview with Pulitzer Prize-winning business journalist Gretchen Morgenson was an excellent recap of the subprime mortgage bust and its ramifications.)
The fact that Beazer fessed up is not surprising — better to take your lumps now than have to undergo an investigation and possibly stiffer fines. What would be surprising is if Beazer were the only company that has to admit to illegal business practices.
Even without that kind of revelation, the residential construction industry is already facing a tough year or years ahead. Companies overbuilt, buyers were overleveraged and, in many cases, were speculators hoping to buy-and-flip.
The market is not sanguine about the recovery, cutting ratings on debt for top builders.
As quarterly earning reports start coming out we’re going to see more of this kind of story. Basically, it can be summed up with, “things are bad and we don’t know when they are going to get better.”
For many builders, they are probably hoping that’s the only kind of bad news they will have to reveal.
I have a nametag on my desk that is from the Ferengi School of Business. Tag line: “First Rule of Acquisition: Once you have their money, you never give it back.”
(Star Trek aliens have always been a reflection of society’s current preoccupations: The 1960s Klingons, for example, were vaguely Asian, one might say representing America’s, ah, uneasiness over the Vietnam War; the 1980s Ferengi were a way to sort out our feelings about Gordon Gekko.)
So was it the Ferengi who were responsible for the subprime mortgage mess, the collapse of the residential construction market, and the subsequent fallout that has been rippling across the globe?
Dear reader, let’s take a look at the evidence.
Hedge funds Wharton Asset Management and the aptly named Pirate Capital are both telling investors they can’t withdraw from certain funds. This is bound to annoy investors, but whether they have recourse is another matter. That invokes rule number 1, as we saw above.
Rule 45. “Expand or die.” Sounds like the credo of residential construction companies. Maybe this explains why residential builders overbuilt, even though they knew they were contributing to a bubble.
Rule 111: “Treat people in debt like family. Exploit them.” There was plenty of that during the subprime bubble, as we saw lots of unethical behavior by brokers selling loans to customers who could not handle the debt they were taking on or who didn’t even understand the kind of loan they had.
Rule 189. “Let others keep their reputations. You keep their money.” We saw how well that one worked for Bear Stearns.
Rule 202. “The justification for profit is profit.” Ditto New Century Financial and many, many of its cohorts.
The clincher:
Rule 284. “Deep down, everyone’s a Ferengi.”
After numerous trials and tribulations, Swiss industrial giant ABB Ltd is taking the final step in its restructuring plan by shedding its last downstream oil and gas assets. In a deal worth nearly $1 billion, energy engineering and construction firm Lummus Global will go to Chicago Bridge & Iron (CB&I), leaving ABB to live its dream as an automation and power systems guru.
The Swiss firm, which has a long and colorful history, is going back to its late-1800s roots as an electrical equipment manufacturer for utilities and other industrial companies. After over-diversification in the 1990s led to financial strife in the next decade, the company began shedding assets, including its upstream oil and gas business (Vetco Gray), financial and insurance firms, and transportation assets.
Lummus has been a pain point for ABB in recent years due to its involvement in sticky asbestos litigation in the US. The engineering firm entered and exited Chapter 11 bankruptcy protection during 2006 to settle liabilities, paving the way for ABB’s planned divestiture. Asbestos woes from Lummus and other operations have cost ABB billions, but the company’s swift restructuring moves have kept the tide from pulling it under.
In fact, ABB has ultimately reversed its fortunes and intends to use its newfound cash surplus (estimated to be around $3 billion) to fund acquisitions aimed at bolstering its streamlined industrial technologies empire. The company has said that it will target acquisitions of all sizes in the US and emerging markets. A thorn in its side remains, however, as ABB has admitted that suspected bribery payments are under investigation.
The company plans to host a strategy session on September 5th in which those curious about ABB’s future may receive some juicy tidbits. My thoughts are that the firm has a deal waiting behind the curtains to woo shareholders and spend that dough!
Like some kind of Lovecraftian demon god, the tentacles of the subprime mortgage bust have twined into some farflung places, spelling doom for unlikely victims.
Okay, seriously, when it looks like Bear Stearns is in trouble because of the mortgage debacle, you know things are bad — maybe not Cthulhu bad, but bad nonetheless. Bear Stearns co-president Warren J. Spector (and check this out — separated at birth?) resigned from the venerable investment firm because of the firm’s bad bets on subprime mortgages. Bear Stearns cancelled the proposed IPO of Everquest Financial, which was to invest in collateralized debt obligations, or CDOs, or basically, high-risk subprime loans.
What had originally seemed to be a more or less localized situation, with the obvious victims and villains (often the same companies, as witness the demise of New Century Financial and American Home Mortgage Investment, to name two), is now seen to have growing ramifications. When D.R. Horton CEO Donald Tomnitz said that “2007 is going to suck, all 12 months of the calendar year,” little did he know that he was talking for everyone in the construction, real estate, and financial services sectors, not just his company. The fallout from the bust has spread all around the world, reminding all of us just how connected the financial markets really are.
But back to Bear Stearns — are they in trouble? Does Spector’s resignation foreshadow more ominous events to come? It’s hard to believe that one of the oldest names on Wall Street could find itself in a perilous state entirely due to the shortsightedness of some very smart people. Hindsight is 20/20 and all that, sure, but seriously, the housing bubble was fueled by very low interest rates that started rising again in 2006. That was a year ago. So what was Bear Stearns thinking when it created Everquest Financial?
Then again, human nature being what it is, I can see how smart people wouldn’t want to look dumb and instead try to brazen things out. John Maynard Keynes wrote: “The market can stay irrational longer than you can stay solvent.”
To which Bear Stearns’ Spector must so painfully reply, “The market can also become rational just when you least expect it.”