Why Businesses go Bankrupt: Nortel

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Telecommunications equipment maker Nortel’s market capitalization reached a peak of $250 billion in 2000, giving it the financial wherewithal to lay out $15 billion for the acquisition of switch makers Bay Networks and Alteon WebSystems.   But the company failed to leverage its acquisitions, and did not keep up with changing technology in its core markets.  An accounting fraud which came to light in 2005 didn’t help matters.  Nortel filed for bankruptcy in January of this year and is being auctioned off in pieces, with bidding interest from Avaya, Cisco and Siemens.

Lesson Learned: Have a solid plan in place to fully integrate acquisitions, and execute it well!

Congressmen Beat the Market, Leveraging their Insider Information

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American Public Media’s Marketplace reported that Congressmen have on average fared 1 percent better than the overall stock market on their personal investments, according to Georgia State University business professor Alan Ziobrowski.  Said Ziobrowski, “We have every reason to believe they are trading on information that the rest of us don’t have.”   Acording to the Marketplace report, Minority Leader John Boehner sold $40,000 in mutual funds the day after attending a small briefing with Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke in September ’08 after the duo had dashed to Capitol Hill to tell a small group of legislators that the country was teetering on the edge of financial catastrophe.

Cabinet Secretaries Exceed $100 Million Savings Target – Barely

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Challenged by President Obama three months ago to deliver $100 million in savings for the current fiscal year, his Cabinet secretaries collectively responded by identifying $102 million of savings opportunities, the “Wall Street Journal” reported.  Regrettably, most of these “savings” opportunities were actions that should have been done as a matter of course, without White House pressure:

  • Department of Justice: adopting two-sided copying,  for the first time ($430,000 fiscal 2010 savings)
  • Department of Justice:  discontinue use of travel agents, book travel on-line ($4 million)
  • Forest Service: will no longer paint newly purchased vehicles green ($1.8 million)
  • Office of Thrift Supervision: phase out unused phone lines ($320,000)
  • U.S. Navy: delete unused internet accounts ($5 million)
  • Air Force: switching from specially prepared fuel, to standard jet fuel, plus some additives ($52 million)
  • Dept. of HUD: turning off the lights in non-working hours, and centralizing PC power supply ($525,000)

The article is a reminder that there are sometimes ample savings available to any [government or business] organization which do not require any cuts in programs or services whatsoever.  Of course, finding such savings usually requires someone to be motivated to look for them in the first place.

What Caused the Current Financial Crisis?

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The current U.S. (and world) financial crisis started only two years ago, but there is also an emerging consensus of what caused it, thanks to the work of Paul Krugman, Robert Shiller, Jeremy Siegel and even graphic artist Jonathan Jarvis:

1. The Federal Reserve Bank lowered interest rates to 1% in the beginning of the decade to stave off a recession, after the dot.com bust and 9/11.

2. Greedy mortgage lenders lowered lending standards, stimulating the housing market to gallop ahead of real income growth. The Federal Reserve bank did nothing about the resulting real estate “bubble.”

3. Wall Street institutions created new financial products that allowed mortgages to be securitized and then resold from the institutions who knew the lenders to those who did not, making it an even more attractive source of profit for original lenders.

4. Wall Street firms such as Bear Stearns and Lehman Brothers took on unimaginable amounts of leverage, edging themselves even closer to the precipice, sometimes with little or no direction from their boards.

5. Abandonment of the Glass-Steagall Act of 1933 meant that troubled financial behemoths such as Citigroup were ill-equipped to lend to consumers and small businesses once the financial crisis hit.

To start learning about the causes of the financial crisis at an easier pace try visiting Financial Crisis for Beginners.

Also, David Rudofsky conducted a free webinar on 7/14/09, titled: “Financial Crisis: How Did We Get Here?” which is archived at the Webex site.

Karen Gordon Mills is new SBA Administrator

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Karen Gordon Mills, confirmed earlier this month as the new SBA Administrator, has a unique set of qualifications for the position: Baker Scholar at Harvard Business School, General Foods product manager, McKinsey consultant, Chair of the Council on Competitiveness and the Economy for the state of Maine, and co-author of a Brookings Institute paper on the importance of industrial clusters in bolstering U.S. competitiveness. According to the Institute for Strategy and Competitiveness, “clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region. Clusters arise because they increase the productivity with which companies can compete.”