Your knowledge of the current state of lending seems to differ from that of the New York Times. In an article posted yesterday, “Cost of Borrowing Zooms Up for Corporations”, the authors of the article state:

“Companies with poor credit ratings are virtually locked out of credit markets or face the prospect of paying 20 percent interest. Many of them are slashing costs, canceling projects or putting assets up for sale to avoid defaulting on their debts.”

This is the URL: http://www.nytimes.com/2009/01/19/business/economy/19debt.html?adxnnl=1&ref=business&adxnnlx=1232398820-OoSEcRm5FUE+bVclkuS3yA

It would seem that many businesses, particularly small businesses, cannot find credit that is not attached to exhorbitantly high interest rates. Such high interest rates undercut the bottom line and threaten to throw many of these firms into bankruptcy if they choose to accept them.

You state, “Credit standards are returning to normal. Long overdue.” I would agree. But I don’t think we are there yet.

Dear Mr. norstadt,

Are you familiar with the term HYPERBOLE? Please look it up.

You are exaggerating, Tom K. The economy hasn’t ground to a halt. There’s still almost as much activity this year as last year.

Basic fairness says that those responsible for financial losses should bear them. Without fairness we don’t have a society worth defending, which is a lot more important than having extra “oil to lubricate the system”.

I know of no one who cannot obtain financing using traditional underwriting criteria.

Credit standards are returning to normal. Long overdue.

A related issue does perplex me. Banks’ loan to deposit ratios are near 100%. At one time, 85% was considered high.

This is not the case in Europe. The biggest downside risk to the global economy is not in the form of the US banking system blowing up, but those in of some European countries. Pause for a moment to consider the list below of countries and the liabilities of their banking systems as % of GDP:

1. Small countries, large banking system, own currency:
Sweden 900%+
Switzerland 900%+
Denmark 300%+

2. Small country large banking system, Euro:
Luxemburg 3400%
Ireland 950%
Malta 760%
Cyprus 620%

Ooops! If push comes to shove how are the tax payers of those countries going to bail out their banking systems? They can not print dollars or Euros. The German tax payer isn’t going to rescue Irish banks — well, he might have to but there is no mechanism for that. If you thought Lehman was a mess you might have to think twice….

Aggregator issues: A critical element remains pricing of troubled assets into whatever vehicle is to own them. I have been in hedge funds where “side pockets” are employed to wall off the assets deemed not marketable…investors that have effectively contributed those assets receive their pro-rata share if, as and when some value is realized. I would suggest that the banks get nothing in direct immediate return for taking troubled assets off their books. They would receive credits toward whatever value eventuates and enough capital to meet reserve requirements based on their remaining assets. I suspect that this is alot of money. That capital would be repaid from eventual proceeds of however the bad assets realize when disposed. I suspect that the taxpayers will foot a large bill, but the interim reduction of uncertainty may be worth the price relative to the never-ending sinkhole that the current incrementalist strategy represents.

Finally….we will need one really good accounting system to track all the side-pockets….a very difficult, but not impossible, task.

It appears that it would be helpful if the IMF had ready access to much larger funds sources. They need the ability to tap lines of credit from large, wealthy countries when the need arises. These lines of credit could be arranged with the central banks of China, US, Japan, Europe, etc.

The lines of credit should be drawn upon only in the most extreme circumstances.

If we are going to have an extremely integrated global economy (and we are definitely headed there, if not there already), then there needs to be a global institution with the ability to put out brush fires.

There is a tremendous amount of money on the sidelines right now, not invested in anything that pays a reasonable return. This is true of the stock market. It is true of the bond market.

This is one reason why Treasuries have risen so high and pay such a lousy return (in some cases negative interest). People don’t want to invest in anything that is not 100% safe. They want a safe place to park their money, regardless of any yield.

The creditors and bond holders are ordinary people like you and me with 401 Ks. They are wealthy individuals like Kerkorian or Buffet. They are financial institutions like banks and also other corporations and businesses.

All these people and entities are licking their wounds now and waiting for the right moment to invest in stocks and bonds. They don’t want to do it until they know that things have returned to normal and they are not going to get burned like the creditors of Lehman.

You assume that current creditors are future creditors. In this, you are mistaken.

Most current “creditors” need to de-lever. Their ability to offer new credit is zero as long as they cannot de-lever by accessing more capital. Since equity issuance is near-impossible, the only solution is to reduce debt. By definition, you cannot reduce and increase debt at the same time. This is simply indisputable.

So who are these “investors” that need to buy corporate bonds again? I would argue they are unlevered, and if they are unlevered, then they are not the creditors harmed by the Lehman bankruptcy.

The best way to help unlevered investors is to provide them with rich returns. Remember, un-levered returns must be much greater in order to provide the same post-interest return as levered returns.

The only way to create rich unlevered returns is to mark down assets as much as possible. Only then will new lending begin. The only way to mark down assets as much as possible is to HARM current creditors.

Seems to me the people determining the value should be very conservative. That way the tax payer is likely to lose less (or even profit).

The losses the banks take on the sale of the assets can be made up with capital injections in exchange for equity shares.

The whole problem here is that creditors are not willing to lend anymore. The economy has ground to a halt because the oil that lubricates the system, credit, is non-existent.

If you punish bond holders, in other words creditors, by making them take a haircut, you exacerbate the problem. You would make it less likely, rather than more likely, that creditors would be willing to resume lending.

The authors of this website, along with many other experts, maintain that the credit crisis started when Lehman was allowed to go bankrupt. The bankruptcy of Lehman demonstrated that we were in a situation where creditors could expect to lose everything. Nobody knew what kind of financial health a potential counterparty was in. Under these circumstances, everybody stopped lending.

One of the primary goals is to get creditors to start lending and to get investors to start buying corporate bonds again.