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April 16, 2001

Banks Feeling the Pinch of Bad Investments

The economic downturn that started in earnest last fall is slamming the bottom line of some of the largest banks in the U.S. These banks, such as Citigroup, Bank of America, and First Union, extended huge loans to risky businesses in the heyday of the bull market. Today, many of those companies teeter on the brink of bankruptcy. They're too busy trying to keep themselves afloat to pay back those hefty bank loans.

Our research has identified 652 companies on a collision course with bankruptcy. Several of these companies, including Pacific Gas & Electric, have bank loans that might not be repaid. Many observers thought that PG&E; would never file for bankruptcy. In fact, even at the height of the power fiasco this winter, investors still bought PG&E; bonds. They'll be lucky to see any return on that investment.

Other large companies, like Xerox, Lucent, and Nextel also are operating at sky-high debt levels and are burning through cash. Xerox has $17.1 billion in debt with just $5.6 billion in cash and fixed assets to secure it. Lucent has $9.8 billion in debt coming due within a year and less than $0.3 billion in cash to cover it. Nextel, which is drowning under $14.7 billion of debt, has only $4.7 billion in cash on hand. Sounds like a lot of cash, right? Wrong! Nextel burned up $2.1 billion in cash last year alone.

And those are just a few of the American corporations that are up to their eyeballs in debt with little or no practical hope of repaying it. It's no wonder their banks are facing earnings woes - these banks are lucky it's just their stock that is getting hammered, and that they are not headed toward bankruptcy as well.

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