Did you ever notice that stock always shoots up right after a firm announces layoffs or downsizing? According to an AP report by noted journalist Greg Bluestein,
Shares of the giant ISP EarthLink moved upwards over six percentage points today after the
they stated that they would be trimming about nine hundred or so positions (which is around fifty percent of their total work force), plus close down 4 offices in a major campaign to lower existing expenses.
In addition to these rather draconian measures, the firm stated that it will also repurchase some two hundred million dollars worth of their own stock as part of this restructering plan. Furthermore,
the Georgia-based firm declared that additional cuts may be announced as early as prior the year’s end.
All in all, the firm will close it’s offices in Orlando, Florida., Knoxville, Tennessee., Harrisburg, Pennsylvania. and San Francisco, California.
They will also reduce their profile in a couple of other locales around the country.
The firm claims it may save between twenty-five million to thirty-five million through the remainder of the year due to these actions. The firm now employs nearly two thousand individuals,
and they have been one of the leading ISP’s in the nation for some time.
The firm is struggling to bring dial-up customers into the fold who were turning to high-speed internet alternatives and had declared that it was looking at its municipal wireless Internet networks in 4 metropolitan areas prior
to deciding how to move forward with similar networks at other locations around the nation.
Last month, the firm prudently lowered their 2007 revenue estimate after reporting large losses pertaining to the Helio project.
These struggles certainly reflected in the firm’s overall earnings. They posted a $16.3 million loss last quarter which may have prompted the current downsizing efforts.
I would not be at all surprised if they eventually outsourced some of their other positions overseas, if they have not already done so.
According to an August article in the Reuters online News network, the worsening United States housing market has caused an major surge in job losses at the country’s financial services firms,
and the end is nowhere to be seen, unfortunately.
Of 2007’s cuts, a whopping 41% were connected to housing market woes, particularly the risky (and now extinct) subprime mortgage market. Employment cuts by real estate and construction firms were in excess of twenty thousand.
This figure is more than double that for the entire previous year.
Just in the past week alone, for instance, investment bank Bear Stearns Co’s, credit card issuer Capital One Financial Corporation
as well as mortgage lenders Countrywide Financial Corporation and First Magnus Financial Corporation have announced well over eight thousand mortgage-related employment cuts.
There seems to be a certain pattern in effect here: employment cuts are increasing as credit losses deepen.
Just recently for instance, the government’s Office of Thrift Supervision stated that troubled assets, or loans at least ninety days delinquent, rose at savings & loans it regulates to $14.2 billion in the 2nd quarter from $9.5 billion the year before.
In the meantime, home foreclosure filings surged ahead over ninety percent last month from a year earlier and rose nine percent from June, to 179,599, according to the Reuters news network and their sources.
It should be noted that it is only natural for mortgage workers to feel whipsawed. Nationwide, for instance, cut some five hundred positions just last week after having added nearly seven thousand positions from January to July, with increases in every single month.
Let’s hope we finally get some good news after all of these sad statistics.
Many analysts are wondering if the housing downturn can get worse than it already is.
Channel 4 News has reported that Mortgate repayments are rising and repossessions
are at an all-time high - while still increasing - and new figures released today
showed that the number of new homes being constructed in the United States has decreased
to its lowest level in some ten years.
Just yesterday Yesterday, one of the countries largest mortgage firm, Countrywide Financial,
stated that it had been made to borrow nearly $6bn from a consortium of forty banks to stay alive.
This has caused it’s shares to fall severely - with repercussions for the stock market.
In addition to this, homeowners have seen their home values drop and defaulters have seen their homes taken over
by the banks. Your out on the streets mama. I don;t care if you have 3 young children.
We just gotta have the profit.
BusinessWeek is not optimistic on a quick recovery either.
They reported on their website that financial markets were already in some turmoil today when
the Commerce Department stated the bad news that housing starts fell some 6.1% in July to a seasonally adjusted pace of 1.381 million.
That is the lowest level in an entire decade. it was really ytthe sheer size of the drop that was such a shock, however, as they had beeb bracing for some kind of tumble.
Meanwhile Single-family building permits, down about 1.6% last month, were not much better than the housing-starts numbers. Since they are less affected by the weather,
they are a less volatile measure of the state of the market and are a crucial marker for future construction. Last month’s steep slide in permits marked the nineteenth reduction in the twenty-two months
that housing has been in recession. Sounds like we are out of the frying pan and into the fire.
“As bad as July’s numbers were, they are going to get worse in the next 1 to 3 months because of the turmoil in financial markets today,” stated Patrick Newport, an economist at Waltham (Massachusetts.)-based Global Insight.
Part of the reason is that fewer individuals will be qualifying for mortgages.
As reported recently in ‘The Economic Times’, the subprime loan problem that has been hammering the American
economy of late has also sent ripples worldwide, with a mild correction occuring to global equity markets
in recent weeks. Even countries such as India are feeling the heat and are affected, unfortunately.
But what exactly is this thing all about?
Well in a nutshell, the home loans offered by banks and various real estate finance firms are subject to capital standards that are prescribed by regulators. This essentially requires them to back
the risk in lending with an adequate level of owned capital. The growth in the mortgage business of a firm is therefore limited by the amount of capital available. and this includes undistributed profits as well.
Pursuing a more aggressive growth rate would require new capital to be raised from time to time, and this has a tendency to limit the attractiveness of the firm in the equity market.
As the Economic Times reported, to overcome this particular problem the firms in question began to sell the loans which they originated through a process sometimes known as securitisation. This big word just means the carving out of
pools of home loans with varied risk & return characteristics and selling down the same through certain structures to new investors in basically the same way that a bond is traded in the debt market.
Now the mortgage firms by becoming originators of mortgage loans who sell down the assets at a profit to other investors — often mutual funds, insurance firms, hedge funds and so on therefore improve their return on equity without having to continually raise new capital.
Wow, talk about playing games with money!
The CDOs are usually sold at a yield lesser than the contracted yield with the individual home mortgages therefore deriving a profit equivalent to the difference between the net present values of the cash flows at the 2 yields.
The subprime fiasco in America a therefore a result of the excesses built into the system originally created by pushing the balance between risk and return beyond reasonably levels. Aggressive American banks were offering well priced home loans to subprime borrowers while hoping that the boom in the real estate market
would continue and the security cover will be more than enouph when repossession & ultimate sale becomes necessary on loan default caused either by too much unemployment or increasing interest rates. So far, it hasn’t been.
