Printer Friendly

eMail Article

February 15, 2008

Businesses Advised To Walk Away
by Mike Shedlock

Before exploring legal advice being given to banks about walking away, let's review one more time the Moral Obligations Of Walking Away.

In a nutshell I made a case that "business is business" and yes, I encourage people to walk away now if they are going to be forced to do it later anyway. I also encourage people to walk away if they are hugely underwater on their homes.

Banks knowingly and willingly gave homeowners a free PUT option when they financed homes at zero percent down. It's just a business decision. Businesses break contracts all the time.

In the "moral Obligations" post I also claimed there would be a national referendum on walking away. A few days later an ABC Poll showed that US citizens decided that walking away from Iraq was the single most important thing we could do economically for the country.

The masses have finally caught on and that is one reason why I declared Obama: The Next President Of The United States.

Walking Away Retail Style

In Does The Shopping Center Economic Model Work? we took a look at trends in retail. Consider what Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research said two days ago:

"Some companies are closing stores to increase profitability, some are doing it just to stay alive. A lot of retailers already had their plans for 2008 laid out, had already invested in signed leases, ground-breakings, pre-opening, etc, so they couldn't just stop those new stores on a dime. Looking back on that, they're going to wish they had just walked away and paid whatever it would have cost them to stop the process. ..... For the next decade, retailers are not going to have to open a brand new store because there's going to be so many empty ones that need to be filled."

The interesting thing from the morality standpoint is that some stores are walking away, not to stay in business but to increase profitability. Others wished they walked away right during construction to say costs. Are such decisions morality issues or business decisions?

Wilson's Leather Walks Away From 160 Stores

"Sandi", one of my readers, sent me a note this morning that Wilsons Leather will close up to 160 mall locations.

Wilsons The Leather Experts Inc. will close the majority of its 260 mall locations and cut more than 1,000 jobs, the clothing retailer said Friday.

Wilsons will keep 100 stores open, revamping them under a "Studio" concept focused on fashion accessories for women. All stores should be remodeled by August.

About 938 store-related jobs and 64 positions at the company's corporate headquarters, overseas offices and distribution center in Brooklyn Park, Minn., will be cut.

Clearly Wilson's Leather had contractual agreements on all those leases. Is there a morality issue here when they just walk away like that?

Banks advised to walk away from big deals

Today, the Financial Times is reporting Banks advised to walk away from big deals.

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

"It is the tipping point argument," said a senior partner at one of the biggest private equity firms, who asked not to be named. "The banks have so many issues with their balance sheets that they are considering a new policy."

Oh! The Morality!

Note the irony. Numerous programs are being put into place in an attempt by banks and mortgage holders to encourage home owners to stay debt slaves forever, while lawyers are advising banks to walk away from contracts and pay the penalty of loss of reputation.

Exactly how does this differ from homeowners choosing to walk away from their obligations with a price of "loss in reputation" otherwise known as a black mark on their credit score?

Here's the answer: There is no difference, and that is precisely why all these programs to keep homeowners in their homes when it is a bad economic decision for them to stay, will fail.

"It is the tipping point argument," said a senior partner at one of the biggest private equity firms, who asked not to be named said Mish, who was willing to be named. "The banks Consumers have so many issues with their balance sheets that they are considering a new policy."

If it's in your best interest to walk, and you are willing to pay the penalty price, then walk.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

Copyright © 2005-2008 Mike Shedlock

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »