Survival of The Fittest

Life is unfair... Even the “best” disappear when they fail to adapt to changes in their environment. The rise of the cost of money (see Federal Funds Effective Rate below), over the last twelve months, has put medium-sized banks in a perilous situation. “Only when the tide goes out do you learn who has been swimming naked” (Warren Buffett). The burden of debt has rarely been as heavy as today. And, what is true for banks is probably true for most businesses with significant leverage (debt to equity ratio). European firms, particularly, should be carefully monitored. Financing being mostly marketing, financial reporting is more an art than a science. We all learn to: “ Believe nothing you hear, and only one half that you see” (Edgar Allan Poe). Today’s collapse of First Republic Bank provides an excellent example of the distance separating the rosy picture of financial statements from the harsh reality (liquidity and solvability) that a company may face. Reader beware!