Not Your Father's Bankruptcy

What's So Bad About Bad Credit??

For many consumers, preserving one's credit rating is one of those sacrosanct, preserve-at-all-costs values.

But what if you don't plan to buy anything? Or are afraid to? Or simply can't afford to?

Then, a trashed credit rating really may not matter so much. Especially if it means ditching a whopper monthly mortgage payment on a house that has plunged in value.

In the new economic landscape that many Americans already inhabit, maintaining a high credit score is a luxury they literally can't afford. In fact, torpedoing one's credit by defaulting on a "legacy" mortgage may be quite rational, for five reasons:

One. Credit scores don't matter if there's no credit to be had.

When credit is flowing, good credit scores can open the vault doors. Now, however, those vault doors are slammed shut even for many good credit risks -- and there's nothing behind, them anyways. (At least not until Uncle Sam replenishes the banks' coffers.)

The "Pay-As-You-Go Economy"

At some point, even the profligate U.S. government is likely to find its own access to unlimited credit curtailed.

In his current letter to Berkshire Hathaway shareholders, Warren Buffett pronounces U.S. government debt the next big bubble, following in the wake of the Internet and housing bubbles.

Once that bubble pops, the government will discover what many consumers already know first-hand: it's increasingly a "pay-as-you-go" world.

Two. No one's buying anything. At least not big ticket items, anyways. And if you're not buying a big-ticket item . . . you don't need credit to finance it.

In many U.S. housing markets now, prospective Buyers have a adopted a "show me" attitude, triggering a vicious cycle: wary of being stung by falling values, Buyers are waiting for the market to clearly bottom, but while Buyers stay on the sidelines, housing prices inevitably fall more.

In the mean time, with more people renting instead of owning, fewer consumers need a good credit score to qualify for a mortgage.

Three. In the land of the bankrupt, the marginally solvent are . . . welcome.

Look around -- it's a recession. People's balance sheets have been hollowed out by falling home and stock prices, and now are being kneecapped by rising unemployment. Exactly who has pristine credit these days?

Beggars can't be choosers, and that's exactly what many retail companies catering to consumers are right now. If it's a choice between selling to marginal customers or not selling at all, many companies will choose the latter.

Four. Perversely, defaulting can increase borrowers' leverage.

Lenders receiving federal bailouts are under increasing pressure to "modify" (read, relax) mortgage terms for distressed borrowers.

How does a borrower signal financial distress? By not making their mortgage payments. Ironically, someone who's current on their mortgage is unlikely to get their lender's attention.

Five. Bad credit can be rehabilitated.

Credit scores aren't static, like college transcripts, but dynamic, like one's health. As consumers handle more credit more responsibly, their credit scores increase; if they miss payments or have multiple delinquencies, they decline.

Over time, most people's credit scores recover from a major default -- just like they recover from a major illness.

Given the epidemic number of foreclosures today, the federal government might logically take steps to shorten that recovery period.

Realogy Bankruptcy Filing Imminent?

Who's Searching for Realogy Info -- and Why?

Judging by all the hits on this blog for anything Realogy-related the last few days, you'd guess that something is up.

For those who don't know, Realogy is the heavily-leveraged parent company of several national real estate companies, including Coldwell Banker Burnet.

In August, I posted an article titled "Coldwell Banker Burnet Troubles." That's the post that has proved especially popular this week (thanks to blog tracking software, it's possible to see where traffic is coming from, and where it's going within the blog).

The $64,000 question is, "who's looking for information about Realogy -- and why?" Unfortunately (fortunately?), that's not something that tracking software can answer (at least not yet).

P.S.: If you didn't know, you should: Google, Double-Click, and countless other companies now have the ability to track Web traffic, mouseclick by mouseclick. That's what drives advertising revenues.

Star Trib Bankruptcy

Lost Ads -- Including Real Estate --
Hasten Local Paper's Demise

The Star Tribune is not the first major city newspaper to file for bankruptcy (last Thursday, 11 p.m.), and it certainly won't be the last. Like the Tribune Company before it, its demise was hastened by, roughly in order of significance: 1) way too much debt, piled on by the most recent buyer; 2) the continuing advertising shift to the Internet; and 3) the recession's effect on advertising generally.

In what rates as a small footnote, the paper's demise was foreshadowed by Edina Realty's decision two years ago to slash its print advertising budget, and instead focus its resources on http://www.edinarealty.com/

At the time, the move was criticized by some as unwise penny-pinching, and as weakening the company's market presence. However, virtually every Twin Cities broker quickly did the same.

Multiply those actions one hundred-fold (or one-thousand), and it's not surprising to see the company -- and the newspaper business generally -- in deep, deep trouble . . .

P.S.: the obvious parallel to the "horseless carriage" is the "newspaper-less," but for some reason the latter term never caught on.

Coldwell Banker Burnet Troubles

Tale of Two Parent Companies

[Note: see, "Realogy Bankruptcy Filing Imminent?" (2/12/09) for an update to this post]

One of the most popular quotes making the rounds these days is Warren Buffett's observation about risk: "You don't know who's swimming naked until the tide goes out."

Latest addition to the list of naked swmmers? Realogy, Coldwell Banker Burnet's parent company (and Edina Realty's biggest rival in the Twin Cities market; Buffett is chairman and CEO of Berkshire Hathaway, Edina Realty's corporate parent).

According to the new Barron's (Sept. 1, 2008), one of the most troubled private equity deals in the last few years is Apollo's late 2006 purchase of Realogy for $7 billion ("Look out Below! More disasters could hit debt-laden companies owned by private equity shops Apollo, Blackstone, & KKR").

The Barron's article notes that Realogy's bonds are trading for 50 cents on the dollar. For those who don't know finance, that qualifies as somewhere between intensive care and life support.

By contrast, Berkshire Hathaway, Edina Realty's parent company (via MidAmerican Energy), is flush with cash and in acquisition mode. In just the last six months, Berkshire financed Mars' acquisition of Wrigley, launched a new municipal bond insurance company, and expanded its transportation sector investments. Oh, yes, and it's stock price is holding up well at $117,000 a share.

So how will the prospect of Realogy going bankrupt affect Coldwell Banker Burnet? To tweak that old line about chicken soup,"can't help, might hurt."