Actually the relationship was the opposite: corporations borrowed huge
amounts of money to purchase their own stock! Thereby increasing the
price of its stock to the benefit of the top executives. In the late
1990s, something like half (!) of all the money borrowed by corporations
was used for this purpose. Now the bubble has burst, but the debt still
has to be serviced and repaid.
True, though not all of that debt is being serviced or will be repaid. Corporate debt defaults continue to rise and those defaults increase in size. By mid year 2002 - 21 of the 89 bond defaults were over $1bln, the total was $78 bln. Add in the $374 bln in bankruptcies since 2001. And add in all the loan restructuring going on now, where banks are swapping (exchanging) higher interest for lower interest corporate loans in the hopes of deterring further defaults - and you've got a massive and unstable debt overhang. Over $7trln of loan and bond debt was raised since 1996.
The stock vs. loan issue is a bit of a chicken and egg thing. Hard to say which precedes which since both are so linked. While, borrowed money was certainly going towards stock buybacks, inflated stock was also being used as currency to acquire corporations (hence, the massive merger increase in the late 90s), and all acquisition deals created more debt. In many cases, notably the largest ones, part of the 'deal' of buying new corporations with stock, coincided with banks providing corporations shiny new credit facilities (mostly in the form of 5-yr loans). For example, 2 year old Global Crossing bought 100 year old Frontier Communications in 9/99. Chase lead a $3bln credit facility in conjunction with that deal that opened 7/99. Though, Chase maintains that the credit facility was not offered in return for the merger deal, they also confirmed that their credit offer was 'contingent' on the Frontier deal closing. They also happened to be Global Crossing's investment bankers on the deal. Borrowing, stock inflation, merging and accounting manipulation are inextricably linked.
The main question I have about possible sources of greater stability in
global capitalism is the government bail-outs of banks, that has happened
all over the world in recent years. This is a way to transferring bad
loans from the banks to the government, so the banks' survival is not
threatened and hopefully they can start lending again. Of course, the
government loses a lot in the process and the taxpayers end up paying the
bill, but there is less of a negative effect on the private economy, at
least in the short-run.
Any thoughts about this important new type of government economic policy?
I'm not sure that the government bailing out banks is new - but, with respect to the current level of bank debt, it's an increasingly dangerous practice. During the second half of the 90s: the financial, telecom, energy, manufacturing and health care sectors combined took on about $7trln of loans. $1.7trln in loans were issued to the financial sector itself, on the assumption that their other debtors would remain solvent. That loan volume was on average 6X what it had been during the first half of the 90s, 10X for the energy and telecom sectors. The financial institutions that issued the most loans and have the most exposure are Citigroup and JPMChase (JPMChase moreso). Both have had substantial reductions in their own share values due to loan writedowns (and lawsuits) which have negative effects on both the taxpayer and their shareholders (including employees.) Both rode the post Glass-Steagall repeal wave to gaining investment banking fees in return for offering corporate loans. Both count on the government to keep them afloat even as their debtors sink.
Yet, sadly various regulatory commissions in the government are still pushing for banks to lend more - to revive component of the economy. Yesterday, at a Senate Commerce Committee Telecom hearing, chairman of the FCC, Michael Powell (who, incidentally, put on quite a few pounds since last year), stated that the industry would not recover without investor participation - that means first - more bank loans, then - the hope of higher stock values, which he'll be happy to pump.
There's just no learning process going on up there and it's pretty scary.
Nomi
