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Land values soared. States splurged on new programs. Then it all went bust, bringing down banks and state governments with them. This wasn't America in 2011, it was America in 1841, when a now-forgotten depression pushed eight states and a desolate territory called Florida into the unthinkable: They defaulted on debts.This was an incredible step, even then. Fledgling U.S. states like Indiana and Illinois were still building credibility on global debt markets. They rightly feared "a prejudice so deep and wide" that they could never sell bonds in Europe again, said one banker.
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When the defaults began in January 1841, investors dumped state bonds, pushing yields above 12% in early 1841, and to nearly 30% by 1842. The consequences of those defaults would last for decades: Among historians, the rule of thumb is that U.S. states would pay interest rates one percentage point higher than Canadian issuers the rest of the 19th century. To this day, Mississippi hasn't paid back some of those bonds, even after a 100-year English bid to collect.
The defaults weren't crippling. U.S. states went back into the public markets in the railroad boom of the 1850s, most of them armed with stronger safeguards for creditors and new constitutions.
Borders Group (BGP), the 2nd largest physical bookstore in America, is on the verge of bankruptcy (here is a history of Borders for those interested in the industry). It's still a bit too early to put the nail into the coffin, but the odds are long that Borders can survive without concessions from bondholders or book suppliers. Borders has posted losses for 4 years straight and something like 14(?) of 16 quarters.
The question is whether it will liquidate (chapter 7 bankruptcy) or restructure and re-emerge (chatper 11 bankruptcy). The path chosen is important because it has big ramifications for competitors like Barnes & Noble.
I started looking at Barnes & Noble (BKS) after Geoff Gannon suggested but it looks like Geoff has sold out of his position for a negligible loss (apparently because he found better opportunities elsewhere). I, on the other hand, still find Barnes & Noble attractive. I am sticking with the notion that, suggested by Geoff a while ago, Barnes & Noble's low price-to-sales ratio gives it some downside cushion.
A Borders merger with Barnes & Noble, as suggested by William Ackman, a key shareholder of Borders, would be disastrous for Barnes & Noble. Borders offers nothing for Barnes & Noble. However, a liquidation of Borders will probably provide a big bonus to Barnes & Noble. I'm waiting to see how this whole thing turns out.
History books would record the year of two thousand and ten as...
Copyright 2012 Can Turtles Fly? All Rights Reserved. Sivaram Velauthapillai.
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