Boeing Bankruptcy

The Banks… Boeing… and “Too Big to Jail”

Maybe Boeing isn’t “too big to jail” after all.

You might recall the term “too big to fail” came into use during the 2008 financial crisis. That is, the big banks were so huge and systemically important that the government insisted they had to get a taxpayer bailout lest society collapse into anarchy and martial law. (It wasn’t true, but for our purposes today, that’s neither here nor there…)

During a congressional hearing in 2013, Obama’s attorney general Eric Holder was asked why no criminal cases were brought against the banks for obvious fraud.

"I am concerned,” he replied, “that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy."

Thus, too big to jail.

“Too big to jail” came back into play in 2019 after two crashes of Boeing 737 Max jets killed 346 people.

Boeing is, after all, a linchpin of the military-industrial complex. Thus, as The Wall Street Journal reported, “a corporate indictment and potentially huge sanctions must be balanced against the economic and national-security risks of incapacitating the country’s second-biggest defense contractor behind Lockheed Martin Corp.”

In the end, the feds did with Boeing what they did with many of the banks — a sort of corporate probation called a “deferred prosecution agreement,” under which the company promises to keep its nose clean for a while, after which the feds would drop their case.

Then came the incident in January — in which a door blew out of an Alaska Airlines Boeing jet at 16,000 feet. Luckily, everyone survived; at 20,000 feet or higher that’s a good chance the plane would have crashed.

In May, the feds accused Boeing of violating its probation.

This morning, Boeing CEO Dave Calhoun is testifying before Congress. It’s one of those kabuki-theater events in which congresscritters grandstand but very little emerges in the way of newsworthy information.

Ahead of that hearing, today’s Wall Street Journal had a front-page story describing the hand-wringing inside the Justice Department over whether to prosecute. The deadline to decide is July 7 — less than three weeks from now.

Boeing Bankruptcy: Yes, It Can Happen

Under the circumstances Boeing faces now, “bankruptcy cannot be ruled out,” says Paradigm’s macro maven Jim Rickards — who cut his teeth as a lawyer for the big banks.

“Boeing faces criminal charges on three fronts: The original failures that gave rise to the agreement, the subsequent failures to live up to the agreement, and possible new criminal charges arising from the Alaska Airlines door blowout.

“These criminal liabilities mean more than just bad publicity and writing a big check. Criminal claims against a major corporation often result in bankruptcy, independent of economic fundamentals and other metrics that analysts observe.”

Examples abound from Jim’s days on Wall Street — long before the 2008 crisis, to be sure.

“The most famous example,” Jim says, “was the collapse of Wall Street giant Drexel Burnham in 1990, which at the time was facing a criminal investigation of junk bond fraud by Mike Milken. Wall Street didn’t wait for those charges to be filed. The rumors were enough to cause Wall Street counterparties to pull credit lines, close out open positions and push the company into bankruptcy in one day.

“A similar collapse started at another Wall Street giant, Salomon Brothers, the following year after an employee admitted to criminal violations in an attempted corner of the two-year Treasury note market. Salomon would have gone into bankruptcy but for a White Knight rescue by Warren Buffett orchestrated by the U.S. Treasury and N.Y. Federal Reserve. The government feared that two dealer collapses in two years would be too much for the market to handle.”

Fast-forward a decade and episodes of accounting fraud took down Enron in 2001 and WorldCom in 2002. (Enron was infamously hailed as “America’s most innovative company” by Fortune magazine five years in a row. Par for the course in corporate media.)

“None of these disasters was due to economic fundamentals,” Jim emphasizes. “All of them were the result of lost trust, accounting fraud, criminal investigations and other catalysts that had to do with the integrity of management and the absence of internal controls. That’s the situation Boeing finds itself in today.”

Jim’s conclusion: “No one should be surprised if the company quickly falls into bankruptcy as a result.”

[Editor’s note: Four times this year, readers of Jim’s Crisis Trader have been able to collect huge gains playing put options on Boeing — most recently yesterday, when they collected 62% after only 10 days.

While Crisis Trader is currently closed to new readers, The Situation Report with Jim Rickards is open — and we’re extending a special offer. Watch this short video from our customer-care director Dustin Weisbecker to see what’s in it for you.

Stomping on the Accelerator AND the Gas

If the U.S. economy were the driver of a car, it would have its feet on both the accelerator and the brake at the same time.

Or so one would believe from the day’s economic numbers.

Start with retail sales as calculated by the Census Bureau — which are a disappointment. They rose 0.1% in May — nowhere near the Wall Street consensus of 0.3%. And the number would be even worse were it not for the fact that car dealers had a good month.

If you factor out robust auto sales and falling gasoline prices… well, you get an identical disappointing reading of a 0.1% bump, compared with expectations for 0.3%.

But on the plus side of the ledger, industrial production as calculated by the Federal Reserve jumped 0.9% in May, compared with expectations for 0.3%. Manufacturing output rose 0.9%, mining/energy output grew 0.3% and utilities output jumped 1.6%.

All told, 78.7% of America’s industrial capacity was in use during May — the strongest reading so far this year, but still below the historical average of 79.6%.

Those falling gas prices might not last long: Crude is the big mover in the markets today.

At last check, a barrel of West Texas Intermediate has busted through the $81 level — the highest since the first of May. The rebound from beneath $73 on June 5 has been dramatic — 11% in less than two weeks.

The longer WTI can hold above $80, the more likely the rally will continue. The high so far this year is nearly $88 in mid-April.

The major stock indexes are little moved from yesterday’s closes. The S&P 500 is in record territory at 5,480.

Gold is up more than 10 bucks to $2,329. Silver has added a nickel to $29.47.

You Deserve a Break Today (From AI)

“McDonald’s has decided to stop testing the use of artificial intelligence to take drive-thru orders, at least for now,” says PC Magazine.

The experiment with an AI chatbot, a partnership with IBM, began in 2021 at the drive-thru. In time, it expanded to about 100 locations.

Apparently, customers had no better experience with the AI drive-thru than Joe Pesci had with regular drive-thrus in Lethal Weapon 2. (Don’t click if you don’t want to hear profanity.)

“They **** you at the drive-thru, OK? They **** you at the drive-thru!”

The chatbots will be gone by the end of July. Mickey D’s put the best spin possible on the situation, conceding in so many words that there are still a few bugs in the system.

“As we move forward, our work with IBM has given us the confidence that a voice-ordering solution for drive-thru will be part of our restaurants’ future,” says a company statement to the trade publication Restaurant Business. “We see tremendous opportunity in advancing our restaurant technology and will continue to evaluate long-term, scalable solutions that will help us make an informed decision on a future voice ordering solution by the end of the year.”

Meanwhile, other chains will carry on with their own AI ventures — including Wendy’s and Hardee’s.

Mailbag: The Draft, Russia, the Petrodollar

On the subject of a potential reinstatement of the draft, a reader writes…

“I can support the draft and participating in war with both the U.S. and Canada engaged against supposed enemies on one condition — that the idiots who do this are on the front lines with a rifle in their hands and not sitting in their respective capitals eating steak at the trough.

“Just think how quickly this would change their minds and get rid of some useless individuals whose only interest is themselves.”

Next, an inquiry about doctored economic numbers: “We show a healthy skepticism over the unemployment/employment numbers from the U.S. and assume that the Chinese economic numbers are more fudged than a triple-frosted devil’s food cake. But (perhaps I’ve missed it) where is the doubt concerning the economic numbers relating to Russia?

“If the evaluation is correct that the Russian economy is not adversely affected by sanctions, or is even improved by them, we would expect to see Russia, then China, then — oh, I don’t know — India, Canada, self-impose additional sanctions to make their economies even better. Maybe this is in fact happening.

“Now, I know that standard arguments for free trade versus autarky would recognize that there can be a boost for some sectors in the isolated country at the expense of its general prosperity, so the arguments against sanctions for a big country are that they are too slow, and that they encourage investments detrimental to the sanctioners. And I would not be surprised if that is the case for Russia, but how big is that effect?

“Can we really believe the numbers that we get? Please keep analyzing fearlessly, but please remind us from time to time why the conclusions are being drawn from truly credible, not merely plausible, evidence.”

Dave responds: A valid point. That said, perhaps you’d agree that the International Monetary Fund is — for our purposes here — an objective and impartial source?

In its latest World Economic Outlook, issued in mid-April, it reports U.S. GDP growth last year was 2.5%. The IMF projects 2.7% growth this year and 1.9% next.

Russian GDP growth rang in at 3.6% last year… and the IMF projects 3.2% this year, falling to 1.8% in 2025.

On the other hand, it’s true that wartime prosperity like Russia’s is often a false prosperity. That’s why it’s so irksome when people say World War II was great for the U.S. economy. In the statistics, yes. But in everyday folk’s standard of living? Hardly.

Our final inquiry comes on the heels of our lead topic yesterday — fake news and the eventual demise of the petrodollar.

“Great issue, as usual. I did, however, get a little lost with the coverage that Jim Rickards gave us several months back regarding a document that Biden signed that might in fact destroy the petrodollar with one swipe of a pen.

“I am just trying to connect the dots in what's left of my memory. Not sure if the history on what was written is still in the Paradigm library.”

Dave responds: Excellent question — and good recall.

Throughout much of 2023, Jim asserted that Washington’s sanctions on Russia — imposed two days after the invasion of Ukraine in February 2022 — alienated the Saudi royal family. Again, it’s a case of leaders in most non-Western countries wondering, If they do it to the Russkies, could they do it to us?

Indeed it was no coincidence that less than a month later, Saudi Arabia made it known that it would consider accepting yuan as payment for China’s oil purchases. Nor was it a coincidence that Saudi Arabia agreed last year to join the BRICS grouping of countries led by Russia and China, which is looking to build out non-dollar payment systems.

But in a puzzling development, the kingdom is dragging its feet on accepting formal BRICS membership.

That’s because as Jim understands it, a new modus vivendi is developing between Washington and Riyadh.

This “post-petrodollar” arrangement is fragile, to be sure. It hinges on several wild cards, including an end to Israel’s attacks on Gaza and ultimately on Donald Trump winning another term. Jim spells out the details in yesterday’s Daily Reckoning.

As I said yesterday, it’s a story with a long arc — we’ll continue to stay on top of it.

Best regards,

 

 

 

 

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets