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| COURSE CONNECTOR |
| ARTICLE SUMMARIES AND QUESTIONS |
"The Economy in Crisis: GE Under Siege," pp. 84-94: The latest word on the Street is that General Electric, the stately 130-year-old giant of corporate America, admired far and wide for its exceptional management, is tanking right along with the economy. Say it ain't so! Oh, but it is. GE's stock now trades for less than half its price 12 months ago, and in its most recent earnings announcement, the company reported that profits fell 22% in the third quarter, driven down by a 38% drop in earnings from its financial services division — an industry the average citizen probably doesn't even know is part of GE's business. But it is, in fact, a big part. For years, almost half of GE's prodigious profits have come from General Electric Capital, which has ventured into practically every kind of financial service, including making car loans, investing in real estate, issuing credit cards, leasing commercial airplanes, and, yes, dabbling in subprime mortgages. GE Capital also has performed the critical function of helping its parent company manage earnings — that is, until the credit crisis hit. Now all of GE is flailing, and it took an emergency infusion of cash last month to keep the company afloat. GE is stable for now, but clearly this will be the challenge that makes or breaks CEO Jeffrey Immelt's legacy.
In this article, students read about the crisis at General Electric Capital that has put the future of the entire company at risk.
Discussion Questions:- What events transpired to put General Electric in such a tenuous position? How did Warren Buffett aid the company? What areas of GE remain strong? What potential threats linger?
- Explain the symbiotic relationship between GE and General Electric Capital. What missteps taken by GE Capital over the past few years have had the most detrimental effects on the parent company? Why?
- In what ways is GE like a microcosm of the U.S. economy? Why is its survival integral to the economy as a whole? How would you advise CEO Jeffrey Immelt to lead the company through the difficult economic times ahead?
"The Economy in Crisis: Birmingham on the Brink (of Bankruptcy)," pp. 114-123: Everyone knows that individuals can seek bankruptcy protection, and companies declare bankruptcy all the time. But municipalities going bankrupt? It seems absurd. Unfortunately for the citizens of Jefferson County, Alabama — home to the state's largest city, Birmingham — it's a real possibility. The county has fallen hopelessly behind on payments to service the $3.2 billion it borrowed over the past decade to build a new sewer system. If the Jefferson County Commission decides to file for Chapter 9 protection, it would be the largest municipal bankruptcy in our nation's history. This isn't the first time a local government has been on the brink, but unlike previous municipal meltdowns, Jefferson County's financial woes are to a large degree the fault of Wall Street. Some of the biggest names in banking encouraged the county to avoid paying off high-fixed-rate loans in favor of lowering its payment with auction-rate and variable-rate securities and hedge its bets with swaps. At the time, it sounded good to officials, who were at best foolishly optimistic about the growth of the county population — and the state of the national economy. Now, with state and county officials squabbling over how to clean up the mess, the disaster bears an eerie resemblance to the wider credit crisis that has enveloped the whole financial world.
Students examine the financial disaster in Jefferson County, Alabama, and the solutions being proposed to resolve it.
Discussion Questions:
- Compare and contrast traditional municipal financing options with more recent Wall Street-created tools. Why were the riskier options appealing to Jefferson County officials? Why did they fail?
- What miscalculations did Jefferson County officials make with regard
to the county's ability to repay its debt? Do you think any criminal
activity was involved? Explain.
- What are the advantages and disadvantages to the county's filing for Chapter 9 bankruptcy protection? If you were a member of the Jefferson County Commission, how would you vote? Why?
"The Unsinkable Mellody Hobson," pp. 148-157: Just call her a ray of sunshine in a dark and stormy financial environment. Mellody Hobson, the president of the Chicago-based Ariel Investments, has become something of a financial Dr. Phil these days, offering calming advice to folks up and down the income scale — from a single mom trying to get ahead to the big-money investors in Ariel's funds. With her appearances on Good Morning America and her work at the Ariel Community Academy, a public financial-education school on the South Side of Chicago that she established in 1996 with Ariel founder, John Rogers Jr., Hobson's goal is to improve financial literacy for everyone, particularly minorities, who are generally underinvested in the stock market. Hobson's and Ariel's conservative approach, known as value investing, focuses on achieving solid, long-term results. In recent years, value investing has taken a beating, leading Ariel to lose more than a third of its assets in 2008 as investors, frustrated by the decision to stay out of a booming commodities sector and to hold on to plain-vanilla names like Smuckers and Clorox, pulled their money out. But Hobson's slow and steady approach works — the Ariel fund has returned 11% annually since 1986, more than a percentage point better than the S&P 500. Perhaps that's why when Hobson talks, people listen.
This article profiles Mellody Hobson, president of Ariel Investments, a $7-billion-in-assets mutual fund company.
Discussion Questions:
- What are Mellody Hobson's chief assets as a fund executive? How has
she been driven by her own experiences? In what ways has her ability
to connect with people helped fuel her success?
- How did Hobson work her way up to president of Ariel Investments?
How has her public visibility helped strengthen Ariel's brand?
- What is Hobson's advice to investors in weathering the current economic storm? What strategy has she used to retain clients shaken by market turbulence?
"MasterCard’s Keys to Survival," pp. 159-164: When there's a national credit crisis and possibly a recession going on, it seems only natural that a credit card company would suffer most. After all, such a company's well-being is closely tied to both consumer spending and to the fate of its thousands of business partners: the banks. So why is Robert Selander, the CEO of MasterCard, so upbeat? Because it's a great, big planet, and there are still plenty of people left to "plasticize." A huge untapped sea of transactions takes place in the nonelectronic, paper-money world. If MasterCard can grab a hold of even a chunk of that market, its prospects are lucrative. While the average American carries eight credit cards, Britons carry only five, and Germans and Japanese just two. In India and China, credit card penetration is practically zero. Though MasterCard isn't as large as the industry leader, Visa, that fact matters less in developing countries, where much of the population doesn't use banks, the institutions with whom credit card companies typically deal. In those markets, the winner will be the company with the best technology, an area where MasterCard, with its contactless payment devices, ranging from cards to key fobs to mobile phones, has taken a clear lead over its bigger rival.
Students take a closer look at MasterCard and the strategies the company is employing to grow during troubled economic times.
Discussion Questions:
- How does MasterCard's business work? How does the company make money?
Why did MasterCard go public in 2006? What are the biggest challenges
it faces now?
- Why does MasterCard prefer affluent cardholders? In what ways does
the company try to attract them? How has the company's "priceless"
marketing campaign been helpful to that end?
- How has MasterCard used technology to increase its market share? Why do contactless devices still make up just a sliver of the electronic market? With what "potentially giant revolution in payment" is MasterCard experimenting? Do you think it will be successful? Why or why not?
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