Tuesday, August 14, 2007

Global Credit Squeeze: There is no Free Lunch

The current news about what is being called the "global credit squeeze" has got me thinking.

Like every other man and his dog I have a few things to say about the subject. The implications for share markets, lending between banks and institutions involved directly with dodgy loans and those invested in companies holding those loans have been crystal clear over the last two weeks.

Market participants have reacted in a highly negative way which has spread fear and some loathing amongst the investing community. As I commented a few days ago, I and nobody else is entirely sure about how bad the squeeze is, but we will find out soon enough. What is clear though is that we are talking multi billions of dollars of losses.

Banks and other lenders have been lending money to people who cant afford it and surprise surprise they cant pay it back.

In New Zealand we have already had a local taste already of what is currently happening globally, with several finance companies exposed to risky loans going belly up and investors in those finance companies being out of pocket.

Globally though, with the exception of countries like New Zealand and Australia, State financed backing has been pumped into the banking sector to "increase liquidity" and stem the flow of losses on financial markets.

Now I do understand how this happened but what I cant begin to fathom are the details and what this means in detail: how these taxpayer funded "loans" get paid back, how much if any interest is charged and what happens if the banks and institutions getting these state funds cant pay the loans back because the losses they are exposed to are greater than they have let on?

So many questions I have huh?

I feel uneasy about the billions being "lent" to institutions in the first place to prop up their liquidity problems. Surely they should just take the hit for writing bad loans to begin with and then either fold or move on the wiser and not expose themselves again. After all the guy living next door to you ain't going to bail you out if you cant meet the mortgage payment.

In my humble opinion ,I think the interventions by the likes of the US, European and Asian States have merely postponed the inevitable and the interventions overwhelm the problem it was originally trying to ameliorate. These over extended banks with cash flow problems will take big hits anyway and interventions by governments meddling in money markets are just going to end the way most government intervention does.


One thing is very clear though. Regardless of whether banks pay back taxpayer money or not. Giving away your equity like this does have a material effect somewhere. There is always a downside when money is "lent" without it being worked for.

We are talking large sums here and we probably haven't seen the end it it.

Hang on.

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c Share Investor 2007


  1. I think that the Central Banks are not aiming to really bail anyone out and they should not even think of it anyway. I think they are just supporting the larger market and showing a vote of confidence that they are willing to act and that they are not going to step in and do something drastic in a panic, like cut rates sharply.

    I 100 percent agree with you that if money was managed poorly, the lenders should take a hit. After all, if I open a business and it fails, the govt is not going to send me a check and say "gee we're sorry about that, here you go, you can try again" The carefree attitude of investing without doing homework is over, it is once again going to become about doing your research and reviewing your risk plan. Good post.

  2. Hi John,

    Im not so sure that we have seen the worst of this. Does anyone?

    When markets do dip again in the coming weeks, I think you will see the Fed doing exactly what you say they wont. That is, decrease the US interest rates. They have already cut intra-bank loans so I expect them to do anything they can to stem a possible cash run should things be worse than everyone thinks.

    If things are VERY serious though in my opinion central banks are just delaying an inevitable crash.




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