After the credit party
Linda says:
I believe we are now seeing “the morning after” of what has been not just risky lending for housing, but a generalized global credit party. Most of the headlines have concerned foreclosure on unfortunate homeowners, falling property prices in parts of America, risky lenders closing their doors and (in the UK) an old fashioned run on a bank.
Certain financial institutions have an obvious bad hangover, from slick operators on Wall Street to central bankers suddenly watchful for bad lending practices. But aggressive lending and lax credit standards have not been confined to the mortgage markets. As well as money being lent on inadequate income to householders, there has been a proliferation of other types of imprudent lending. The world has been awash in money looking for a home and a good return.
The hedge funds, no matter what their strategy has been are usually highly leveraged. Some of these have already closed to redemptions and others are yet to reveal their losses. Many pension funds have dabbled in “alternative” investments such as hedge funds so the losses will not be confined to the wealthy.
One of the reasons that all sorts of assets fell in value when the subprime crisis first hit, was that entities who owned the dodgy mortgages were trying to raise some cash. Since no one was prepared to buy the mortgages, at a reasonable valuation, stocks, commodities and anything else that could be easily sold was sold to improve liquidity.
Private equity groups have also been busy financing all manner of merger and acquisition deals. There was such pressure to participate in such activity that many banks dropped their usual conditions, just to do the deal. There was a high appetite for risk and some deals appeared to pay huge bonuses to the participants with doubtful long term returns to shareholders.
With a change in the availability of money at cheap rates, the party seems, at least temporarily to be over. A desire for gain has been replaced by fear of loss. The media is full of institutions, politicians and central bankers trying to calm a skeptical public that the situation is under control. Or find some convenient scapegoat for revealed problems.
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