October 26, 2020

Hungary Credit Rating Downgraded by S&P to Junk

Opinion »

The Stone: Occupy Language

A movement challenges the structure of language in an effort to foster equality.

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Business Briefing | Company News: S.&P. Moves Ford a Step From Investment Grade

The Ford Motor Company is within one notch of an investment grade credit rating at two of the three major ratings agencies after Standard Poor’s Ratings Service on Friday moved the automaker two notches up on its ratings ladder. Standard Poor’s said the outlook for Ford was “stable.” This follows an upgrade of one notch by Fitch Ratings on Thursday. Fitch also rates Ford at BB+, the highest level of speculative or junk status, one notch below the lowest investment grade rating. Moody’s Investors Service has Ford rated two notches below its lowest level of investment grade. Moody’s rates Ford at Ba2 on its credit risk ladder. Ford was last at investment grade in 2005, the year before it borrowed heavily to finance its restructuring. Lewis Booth, Ford’s chief financial officer, said on Thursday that the company might reinstate a dividend before the ratings agencies certify it as investment grade.

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Investor Fear Over Morgan Stanley Sharpens

As confidence in the soundness of some of the world’s biggest banks has fallen in recent weeks, investors have been selling off their shares of one financial institution after another.  

Now, the fears about Morgan Stanley are becoming especially acute. Investors are worried about the bank’s exposure to the European debt crisis, its ability to weather a turbulent trading environment and its reliance on short-term borrowing to finance its operations.

The bank and some analysts say the fears are unfounded. But the market drove Morgan Stanley shares down 10.5 percent on Friday to $13.51, and the stock has lost 41 percent in the last three months. That performance was par for the course in what was a bruising third quarter for the entire financial industry. Bank of America shares fell more than 44 percent. Citigroup shares dropped more than 38 percent, while even Goldman Sachs, considered the mightiest of the Wall Street giants, tumbled more than 28 percent.

It was also a brutal quarter for the broader stock market. The Standard Poor’s 500-stock index fell 14 percent from July to September, its worst performance since the fourth quarter of 2008 at the height of the financial crisis.

Almost everywhere they looked, investors saw trouble. In the United States, the Congressional deadlock over debt and the downgrade of the nation’s once-sterling credit rating rocked the confidence of consumers and businesses. In Europe, rising concerns about a potential Greek default and the inability of other governments to agree on a financial rescue plan surged through the markets. Grim data also pointed to a sharp slowdown in economic growth around the globe.

Now Morgan Stanley, which never regained the prestige and power it had in the years before the 2008 crisis, is quickly becoming a focal point for investors who fear that it may not be able to weather another financial storm

In another closely watched indicator of investor sentiment, the cost of buying protection against a default of Morgan Stanley bonds has soared. It now eclipses the cost of similar insurance on major French banks. Only a few weeks ago, the French banks came under heavy fire amid concerns that they were struggling to finance their operations.

Investors are now paying $449,000 a year to insure $10 million of Morgan Stanley bonds against a possible default in a sparsely traded market in what are called credit-default swaps. That is almost three times the cost in early June, but it is still well below the roughly $1.3 million a year it cost to insure Morgan Stanley bonds a few weeks after the collapse of Lehman Brothers, according to pricing from Markit.

Among investors, the concerns are many. Some worry that the test could come from the company’s exposure to French banks. Others fear a liquidity crisis similar to what occurred in 2008 when banks like Morgan Stanley struggled to borrow the short-term debt that keeps them afloat. Still other investors expect the turbulent markets to take their toll on trading and investment banking results, which are the lifeblood of Wall Street.  

“It strikes me that everything seems to be O.K. with these guys,” said Brad Hintz, an analyst at Sanford C. Bernstein Company, who is a former treasurer at Morgan Stanley. “I’m not arguing that we’re not seeing stuff in the credit-default swaps market that is pretty scary-looking. But they just don’t seem to be having any problems funding themselves.”

Some investors worry that Morgan Stanley may be too reliant on short-term borrowing or that it lacks a significant deposit base like those of the large commercial banks JPMorgan Chase or Bank of America. Others, however, note that Morgan Stanley has shifted much of its borrowing into longer-dated paper since 2006 and that its deposits have risen to $66 billion, from $28 billion.

Citing the quiet period before Morgan Stanley reports third-quarter earnings, a spokeswoman for the company declined to comment.

In recent weeks, analysts and investors have scoured obscure regulatory filings and reports, trying to determine what potential exposure Wall Street banks could have to troubled regions and institutions in Europe.

One filing that quickly gained attention in the market revealed that Morgan Stanley had one of the biggest exposures among Wall Street companies to the ailing French banks — about $39 billion at the end of last year, before factoring in offsetting hedges and collateral. Morgan Stanley has not provided investors with more up-to-date information.

But in a research note, Mr. Hintz said that Morgan Stanley had substantially reduced its exposure to French banks and estimated that it was now likely to be less than $2 billion, after factoring in collateral and hedges.

Investors also expect Morgan Stanley to report lackluster trading results, in line with many of its peers who have seen a slowdown in activity as clients have moved into cash.

After several periods of lackluster results, Morgan Stanley’s trading desks had a standout performance in the second quarter — besting even Goldman in challenging markets. Morgan Stanley’s financial statements showed that it was increasing its appetite for risk.

Now, some investors worry that Morgan Stanley may have turned too aggressive at just the wrong time. They are now girding for another round of dismal results — especially after JPMorgan warned in mid-September that its trading revenue could fall almost 10 percent from a year ago and now that Wall Street analysts expect Goldman to report a loss in the quarter.  

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Bucks: Wednesday Reading: Postal Service Considers Branch Closings

July 27

Wednesday Reading: Postal Service Considers Branch Closings

How consumers should react to a possible downgrade of the nation’s credit rating, a study finds that one-third of workers have access to health care for a gay partner, McDonald’s trims the number of calories in a Happy Meal, and other consumer-focused news from The New York Times.

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Geithner Confident on Debt Limit

In a pair of appearances on Sunday talk shows, Mr. Geithner said the Republican leaders made it clear to President Obama in a White House meeting last Wednesday that they would go along with the administration’s efforts to raise the debt ceiling to avoid a financial crisis.

“Congress is going to have to raise the debt limit,” Mr. Geithner said on the NBC program “Meet the Press.” “They understand that. That’s absolutely essential to preserve the creditworthiness of the United States of America.”

He went on: “You know, we’re a country that meets its obligations, and we have to meet our obligations, and they recognize that. In fact, I heard the leadership tell the president that again on Wednesday.”

Republican leaders responded rather indirectly to Mr. Geithner later on Sunday, focusing on their demands for greater spending cuts in next year’s budget in exchange for a vote to raise the debt ceiling, rather than on whether they actually planned to vote for the increase.

In a statement, Michael Steel, a spokesman for Speaker John A. Boehner of Ohio, said Mr. Boehner had made it plain to the president at the White House meeting that more spending cuts would be the price for a debt ceiling deal.

“Boehner has been very clear: the American people demand that any increase in the debt ceiling be accompanied by spending cuts, and real reforms so we can keep cutting,” Mr. Steel said.

Representative Paul D. Ryan of Wisconsin, chairman of the House Budget Committee, gave a similar response to Mr. Geithner’s assertions on the CBS program “Face the Nation.”

“We want cuts in spending accompanying a raising of the debt ceiling, and that is what I believe they told the president,” Mr. Ryan said, referring to Republican leaders. He added that “nobody wants to play around with the country’s credit rating.”

“Nobody wants to see defaults happening,” he said, “but we also think it’s important to get a handle on future borrowing as we deal with raising the debt limit.”

The administration says the legal debt limit, now just over $14 trillion, will be reached next month. Many economists have warned that if the ceiling is not raised, the United States will soon begin to default on its debt, and that could set off an international financial crisis.

The vote over raising the debt ceiling is the second major showdown over budgetary and financial matters between the White House and the Republican-controlled House in recent weeks. A government shutdown was narrowly averted when negotiators worked out a deal that included billions of dollars in spending cuts for the remainder of the 2011 fiscal year. Mr. Obama signed that legislation on Friday, just in time for the next battle.

Republicans, prompted by Tea Party supporters who helped fuel their electoral victory in the 2010 midterm elections, have been pushing for greater leverage to cut spending further, and the debt ceiling vote has been looming for months as one of their most potent weapons.

Yet it is not clear how much of an appetite there is among Republicans for a showdown on the debt ceiling. Senator Rand Paul, a Kentucky Republican elected last year as a Tea Party favorite, said Sunday that he was not necessarily opposed to raising the debt ceiling. When asked on the CNN program “State of the Union” whether he would vote on a bill to raise the limit, even without other provisions attached to the legislation, Mr. Paul answered indirectly.

“I don’t think it should be an either-or situation, you know,” he said. “There is another alternative, and that is that we send the message to the president through legislation that says: ‘You know what, Mr. President? Don’t default, but pay the interest out of the revenue.’ ”

Mr. Obama acknowledged Friday in an interview with The Associated Press that he would have to agree to Republican demands for more spending cuts to win their backing for a higher debt limit.

On Sunday, Mr. Geithner gave a slightly more detailed answer, saying it would be difficult to try to push both the spending cuts and the debt ceiling through Congress simultaneously.

“I think you can do these things in parallel,” he said on “Meet the Press.” “But if by the time we need to raise the debt limit, we haven’t worked all that out, Congress still has to raise the debt limit. And again, leadership realized that.”

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You’re the Boss: Soldier of Fortune: Collecting Receivables

Thinking Entrepreneur

There are many bumps in the road on the way to building a successful business. Many of the challenges are right in front of you — like finding business, delivering the product or service on time, hiring the right people, and financing the whole to-do. One of the most surprising, upsetting, and dangerous challenges is trying to collect money owed (as we discuss in a small-business guide published today). If you own a cash business, this should not be a problem. If you are in a business that has to extend credit, it is a problem that can have disastrous consequences.

I started extending credit many years ago as my company grew and I started doing business with companies that expected, or demanded, credit terms. I complied because I was so happy to have the business. And in most cases I got paid. But I learned early on that just because you have payment terms of 30 days does not mean people will pay you in 30 days. You have to call them, you frequently have to send them a new invoice, and you frequently have to call them again. It is difficult being a nice guy salesperson one day and a tough-talking credit collector two months later. Here are some things I’ve learned through the years.

1. Stop giving credit to anyone who asks. Most companies do have credit cards. If you are selling something that is being resold, or providing a regular service, you probably need to extend credit to be competitive. Make your clients fill out a credit application and provide references. If you are doing this a lot, consider joining one of the credit-rating services (can anyone recommend one?). For a small company with a limited staff, this will add one more burden that is easy to neglect, especially when you are hungry for sales. The only thing worse is spending a lot of time trying to collect money, the crucial word being trying. An experienced business owner knows that the job is not done when the product is shipped or the service delivered, it’s when you get paid.

2. Credit collection is not pretty, fun, or for wimps. There are people who are short of money, people who just don’t like to pay, and people who are going broke. It is not always easy to tell which is which. There are people who will not pay unless you keep calling them. They most likely have a long list of creditors beyond you that they are not paying. The creditor who bothers them the most will probably be the one that gets paid. In this case, patience is not a virtue, it is a liability. In some cases, it is not worth doing business with them. In other cases, it is. Perhaps you should charge them more.

3. When it really gets bad — 60 days, 90 days, the customer is not returning calls, not following through on promises and things are looking bleak — you might call your lawyer. This is when you learn that business, like life, is not always fair. A threatening letter from your lawyer will not make them quake in their boots, and suing or sending it to collection costs a lot of money. But being an obnoxious, crazy animal can work. Sometimes.

For example: a new restaurant owed me money for some art. In hindsight, I should have insisted on payment upon delivery. After it continued to give me the run around, I went to the restaurant on a Friday night — it was busy! — and told its people that I wouldn’t be leaving until I got paid. Or, I could take the art down from the wall. Yes, they probably could have threatened to call the police. But here’s what I was thinking: Go ahead and arrest me! I am already unemployable! I am an entrepreneur. They paid me. And they went broke a couple of years later.

Another time I was lied to repeatedly by an art consultant who had taken some art from me on consignment. She gave me a check as a deposit and then stopped the check. I heard from someone in her hometown that she had stuck vendors all over the Midwest. I got her husband on the phone and screamed at him. I used bad words. I didn’t threaten him, but I made it clear that cheating me wasn’t a good idea. The art was back the next day. I know, a little uncivilized. I’m O.K. with that. I was just trying to support one of the 10 commandments — thou shall not steal.

4. If you give credit, you will eventually get stuck with some bad receivables — even if you are careful. Good companies go bad, and bad companies figure out how to play the system. It is called the cost of doing business, and you should factor this into your plans. There is probably some percentage of bad receivables that is normal for your industry. It would be good to know what it is. Be careful out there.

Jay Goltz owns five small businesses in Chicago.

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