Not David Letterman’s Top Ten by any means but a top ten that needs to be looked at. Today another company was added to the top ten bankruptcy list.
Company, Bankruptcy Date, Assets
Lehman Brothers Holdings Inc., Sept. 15, 2008, $691.06 billion
Washington Mutual Inc., Sept. 26, 2008, $327.91 billion
WorldCom Inc., July 21, 2002, $103.91 billion
General Motors Corp., June 1, 2009, $91.05 billion-x
CIT Group Inc., Nov. 1, 2009, $71 billion
Enron Corp., Dec. 2, 2001, $65.50 billion
Conseco Inc., Dec. 17, 2002, $61.39 billion
Chrysler LLC, April 30, 2009, $39.30 billion
Thornburg Mortgage Inc., May 1, 2009, $36.52 billion
Pacific Gas and Electric Co., April 6, 2001, $36.15 billion
x-GM listed $91.05 billion in assets in its annual report as of Dec. 31, 2008, but listed $82.29 billion in assets as of March 31, 2009, in its bankruptcy petition.
(Source: Businessweek)
Notice that they came is spurts. Six of them in the last 13 months. The other four came in a 21 month span. Obviously the economic picture is pretty important for why they went bankrupt though each of them have some unique issues. The most recent ones all involved a breakdown in the credit bubble we have created in our country. Two banks, two auto manufacturers, a real estate investment company and an investment bank. Financing drove the automotive market, the real estate market and the investment bank. Once the bubble burst they came crashing down. Are we done with bankruptcies of this size? I don’t know but I wouldn’t count out at least one more being added to this list before our current economic slow down is completed.
So what can we learn from these two very distinct set of time periods? April 2001 to Dec 2002 had 4 of the largest bankruptcies. Then it was a telecom, a insurance company wanting to be in real estate, and two energy companies. A very different list than what we have today. Worldcom was focused on growing through acquisitions in a very competitive industry. Enron basically lied about their finances for many years before things simply imploded on them. They used their higher stock prices to grow dramatically. Pacific Gas was caught in an energy crunch and limited by their inability to rise prices in California. Conseco started in insurance and got into trouble with mortgaging mobile homes. To be honest I am not sure there is a true link between them other than they happened at the same time.
Today’s set of bankruptcies are much more closely tied together. They are based on a faltering economy and a change in mindset with consumers. Most of them got into trouble by thinking that the past was predictive of the future. They took risks in leverage based on how things have been in the past. If they continued into the future, they would have been ok. But unfortunately for them, life happens and things change. When the economy slipped, they weren’t able to adjust because they had leveraged themselves to the point of needed that growth to stay alive.
This is the double edged sword of leverage in investments. When things go well, you report incredible success. If you can leverage 50 to 1, you only need a 1% gain in the foundation to report a 50% gain overall. The problem is, this works the other way too. If your investment drops 1% you lose 50% of your money.
People who deal in the forex markets, the futures markets, stock options and real estate are very familiar with these types of results. When things go your way you can make a lot of money fast. When things go against you, it drops just as quickly. This is one of the reasons you should always be diversified in your investments.
Leverage is an incredibly powerful tool. But like any tool, the risk associated with it must be understood. Leverage is also the single most important thing to understand when it comes to growing your wealth dramatically.
PS If you own your own business or are thinking about it, you really need to check out The Worst Case Scenario for Small Business. For the cost of a book, you can get access to nearly $1,500 in video and audio training. I have been through the training and it is pretty awesome. I am waiting on the book to be delivered from Amazon and will give an update on it as soon as I get it read.
PSS Seriously – you didn’t click the link above? Just click here so you don’t have to move your mouse at all
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