From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

All of the world knows Deadly Strategy number 2 – the financial engineering known as the subprime mortgage bubble is the best example. Giving a mortgage out with no income, expecting property values to rise and securitizing those loans to the world on the basis if it is off my balance sheet who cares. The underlying premise was for years most people paid their mortgages, although that was because the previous system needed both income and a downpayment. The end result many billions were lost. Unfortunately, there are a great many other examples such as Green Tree Financial and Conseco. Green Tree gave mortgages out on mobile homes, which is an asset similar to a car and has a lifespan of 10 -15 years not the 30 years of a house and a house often times increases in value over time. .It was less expensive to declared bankruptcy than to pay the mortgage on a declining asset. Somehow Conseco missed this fact; it was lured in by the high returns Green Tree was reporting. The returns soured and Conseco ended up losing billions.

A variety of companies issue credit cards, some people do not pay them back and the company has to write it off. In 2000 VISA reported writeoffs of  6.7%, Target at 6.4%, Spiegel was 1.3%. By 2003 Spiegel was in bankruptcy as the numbers were lies

Heilig-Meyers spent 90 years being the small town furniture retailer, then they started going to the large urban areas with no competitive advantage. Credit terms became easier, fewer people paid and then the company tried to go upscale. Its customers did not like it and the chain was soon bankrupt .At the time 1 in 9 Americans who went bankrupt was holding a Heilig-Meyers credit card.

Tyco grew by acquisition and its stock price increased with each acquisition. The acquisition had to grow larger each time, the company was aggressive in accounting until it was no longer a secret and down it went.

Amerco, the holding company of U-Haul took on too much debt, on the advice of its auditors set up off-balance sheet SPE (Special Purpose Entities) to hold the debt. .After the Enron collapse, the SPEs had to come back to the balance sheet and the bankers were aghast, too much debt, means less credit from the bank.  The end of company happened fast.

There are always more questions than answers, till next time – to raising questions.