Monthly Review: July Wrap Up

Monthly Review: July Wrap Up
July was a relatively busy month with several major events hitting the newswire, like the new GM reorganization, company quarterly earning reports, Goldman Sachs record earnings and bonuses, and California IOUs. Let's review some of the events for this frantic month.

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LEAR files for Chapter 11
Due to sagging demand for automobiles, automotive parts supplier Lear Corp (OTC:LEARQ) was forced to file Chapter 11 on July 2, 2009. Lear, based out of Southfield, Mich., listed assets of $1.27 billion and $4.54 billion in liabilities at the time of filing.

Lear's filing was one of the first big automotive suppliers to file for bankruptcy, possibly the beginning of a wave of bankruptcies still to come if demand for automobiles remains extremely weak. Look for the effects of the new cash for clunkers incentive to lift sales at major automakers in the next quarter. The last major auto parts supplier to go bankrupt was Visteon Corp (OTC:VSTN) in May - a major parts supplier to Ford Motor Co (NYSE:F).

California Starts Printing IOUs
California's budget crisis reached critical levels in July, as the state was forced to begin printing IOUs to pay local governments, vendors and taxpayers. The IOUs, called warrants, were issued with an interest rate of 3.75% payable in October and initially accepted at a group of banks including Wells Fargo (NYSE:WFC), J.P Morgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C). Some of these banks imposed cut off deadlines, at which point they would no longer accept the IOUs.

It was only the second time in California history that the state was forced to print IOUs, the other time was during The Great Depression. Because of the budget crisis, Fitch Ratings also downgraded California bonds to BBB, one notch above junk status, on July 6. (Learn more about The Great Depression in our article, What Caused The Great Depression?)

Goldman Sachs Swimming in Money
Goldman Sachs (NYSE:GS) was involved in more headlines than usual in July. The month saw Goldman Sachs pay $1.1 billion to redeem TARP warrants from the U.S. government, which was in addition to $318 million in preferred dividends. Several weeks before this deal, Goldman had initially tried to buy back the warrants for $650 million, then increasing the offer to $900 million before finally agreeing to pay $1.1 billion. Goldman was one of several banks buying back warrants; others included State Street Corp (NYSE:STT), U.S. Bancorp (NYSE: USB) and BB&T Corp (NYSE:BBT).

One of the reasons for the rush to repurchase the warrants may have come from the desire to pay out record bonuses to their bankers after reporting record earnings in the second quarter. Goldman reported net income of $3.44 billion, or $4.93 per share, exceeding Wall Street estimates of $3.44 per share. From these earnings, bonuses Goldman plans to pay employees also reached a record high, estimated to average $700,000 per employee for 2009.

That's not all for Goldman. In July, a former Goldman employee, Sergey Aleynikov, was arrested and charged with stealing proprietary trading code from Goldman Sachs. Interestingly, U.S Attorney Joseph Facciponti told the court that "someone who knew how to use the program could use it to manipulate markets in unfair ways."

CIT Bank on Brink of Bankruptcy
After failing to secure a government bailout, CIT Group (NYSE:CIT) was scrambling in July to secure financing from different sources. CIT is the 26^th largest bank in the U.S., with total assets of about $75.7 billion. The bank had already received $2.3 billion from TARP last year, but it looks like its portfolio has deteriorated even further in 2009.

CIT Group's situation could become somewhat of a guinea pig for the U.S. government to see if the market can digest a failure of this magnitude. It doesn't look like CIT Group will file for bankruptcy in July though, as it has confirmed a rescue deal with bondholders that would restructure its liabilities.

GM Emerges From Bankruptcy
Following on the heels of Chrysler's quick rinse bankruptcy, General Motors Corp also completed its own quick prepackaged bankruptcy in July - selling virtually all of its assets from the Motors Liquidation Company (OTC:MTLQQ.PK) to the new GM. It only took 40 days under bankruptcy protection for GM to reorganize, likely the fastest bankruptcy reorganization in history for a company of this size.

The new GM will only produce four brands of cars: GMC, Buick, Cadillac, and Chevrolet. Other brands will be sold off or discontinued. This was one of the key changes designed to make GM into a leaner and more efficient automaker. One component of the new GM to keep an eye on is the U.S. governments 61% stake in the company and how it will affect its operations going forward. Regardless of what the government says now, GM is still a taxpayer-owned company, and with that will come public pressure and criticism.

Microsoft Posts First Sales Drop in its History
Due to weak PC sales, Microsoft (NYSE:MSFT) recorded its first ever year over year decline in revenue in its history. Microsoft reported revenue of $58.44 billion, which was down 3% from the same period last year. Net income was down 18% to $14.57 billion. Microsoft is hoping the release of the new Windows 7, which has been getting positive reviews, will reignite slumping sales.

Despite Microsoft's poor performance, the tech sector did get a boost in July from Intel's (Nasdaq:INTC) second quarter results. Intel reported revenue of $8.0 billion, up 12%, and net income of $1.0 billion (excluding the European Commission fine).

July Review
July was definitely a busy month for companies reporting earnings, but it also was a month of major market events. There was a lot of unprecedented events for just one month such as the first sales drop for Microsoft, the fastest bankruptcy reorg for a company with GM's size, record earnings and bonuses for Goldman Sachs in the midst of a recession, and California being forced to print IOUs. Look to August for a bit of a cooldown.

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