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Old 09-26-2008, 05:06 PM   #41
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I suppose that's the disagreement at this point. How badly might the credit freeze impact corporate america and could it snowball.
Very badly. It's not just banks that are shutting down but the plain vanilla bond market is too. Even Coca-cola had a difficult time pricing a new bond deal yesterday. And the oil company Anadarko issued bonds at spreads typically reserved for junk credits. I don't think people fully appreciate what is happening in the world of credit . . . or how much the US economy relies on it . . . or how badly they will miss it when its gone.
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Old 09-26-2008, 05:12 PM   #42
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Where can I go to get info on that stuff? I'd be interested in seeing the terms of the two deals you mentioned.


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Very badly. It's not just banks that are shutting down but the plain vanilla bond market is too. Even Coca-cola had a difficult time pricing a new bond deal yesterday. And the oil company Anadarko issued bonds at spreads typically reserved for junk credits. I don't think people fully appreciate what is happening in the world of credit . . . or how much the US economy relies on it . . . or how badly they will miss it when its gone.
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Old 09-26-2008, 05:18 PM   #43
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Where can I go to get info on that stuff? I'd be interested in seeing the terms of the two deals you mentioned.
I'm guessing you don't have access to a Bloomberg terminal?

If the deal is SEC registered you'll eventually be able to find the prospectuses in an SEC filing at FreeEDGAR or some similar site.
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Old 09-26-2008, 06:27 PM   #44
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I have a hard time supporting anything called a "bail-out". I'm not sure that's an accurate term. Then again...

As for "rescuing" Main Street, I think a change of mindset is in order for both Main Street and Wall Street. We're getting a lesson in that now, but we have short memories.

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Old 09-26-2008, 06:50 PM   #45
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How about "shielding" Main Street from the aftermath of credit destruction?

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Old 09-26-2008, 06:59 PM   #46
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Where can I go to get info on that stuff? I'd be interested in seeing the terms of the two deals you mentioned.
i learned not to rely on news from the traditional sources like yahoo or marketwatch that simply rewrite AP and reuters.

CNBC has become an excellent source and they have videos of interviews for free on the website an hour after air time. unlike the past where it was buy buy buy, they have some excellent stuff now. especially from charlie gasparino and andrew ross sorkin.

and i found a bunch of blogs that link to stuff that the mainstream media picks up on later on when it becomes a big problem
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Old 09-26-2008, 07:10 PM   #47
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Brewer, so far most of this "purging" has had very little negative impact on Main Street. I'm not certain that letting things run their course will be disasterous.

People will still trust banks, since for the most part their failures are not going to affect depositors. WaMu's demise appears to have been seamless.

Credit has become harder to get, but that is probably a good thing long term. Credit can be a dangerous tool. Many people may be better off with it not being available.

Credit is still available to people who are solid risks. I'm pretty sure that I could walk into US Bank, or Wells Fargo and get all of the money that it would be prudent for them to lend to me.

I think that the people in banking see this as a much bigger problem than it is to the country as a whole.
Years ago I knew we were in a credit bubble. I didn't see the mortgage thing coming- just saw people spending more than they earn all around me- and knew that sooner or later it would come to a head.

I think Banks are greedy and find a way to make money, then they took on a little more risk (by extending more credit) to make a little more money. Then the banks decided to take on even more risk (by extending credit even more) to make incrementally more money.

You keep overextending yourself and you will forget where your foundation is. Banks should not be able to invest in "anything they want" or do "what they want" to make a little extra money.

If I as an investor want to make money, I know I can make ~3% investing in CDs. If I take on a little more risk, I can make ~5% investing in bonds. If I take on significantly more risk I can make 8-9% investing in equities. If I extend myself beyond that most of us here would call that speculation or gambling. Somehow our system allowed banks and lenders to extend themselves to try and make more money than they could reasonably earn and grow...

I know banks have a margin requirement, but the fact mortgages were issued when people could not repay them suggests too much risk was taken in the name of a higher profit margin. There needs to be better rules in place for the banks to operate within.

just wow on my part- we get to bail the banks out, yet when individuals do the same thing we just tell them to work longer and keep paying taxes.
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Old 09-26-2008, 08:28 PM   #48
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I suspect it's not being spelled out for Joe Blow.

If Joe's employer is a capital-intensive business that relies on borrowed money to flourish, turning off the spigot of credit puts Joe out of a job.

If Joe has a 401K or IRA, he can look forward to watching his retirement feel farther and farther away as it shrivels in value.

If Joe has a pension, he can watch as his pension fund crashes in value, threatening its solvency -- and perhaps that of his previous employer.

If Joe is retired and on Social Security, he can worry about how a collapsing economy and massive job losses will allow SS to continue taking in enough payroll taxes to pay benefits.
All those things could happen. The question is whether they will happen suddenly if we don't pass this particular bill this week (and that this bill will be all it takes to head them off.)

Take the first item. There's a wide range of borrowing strategies among US employers. Some don't borrow at all. Others are constantly in fear that their bank won't renew their loans.

It seems to me that a "credit crunch" should hit the heavy borrowers first. We should be hearing today about companies with fine sales and healthy profit histories who have to lay off workers simply because they can't get loans renewed. This should be happening months, even a year, before the "average" companies are impacted. When those stories add up, and someone with credibility can show that we've got a million unemployed (less than 1% of the labor force) just because their healthy employers can't get loans, then Joe Sixpack will conclude that his job is at risk due to credit problems.

Right now, it's difficult to convince skeptics like me that we (everyone except the financial companies) are about to walk off a cliff.
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Old 09-26-2008, 08:45 PM   #49
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Since the major risk right now is the seizing up of the credit markets with banks not willing to lend resulting in businesses not able to finance their operations.....

Why not have the Govt open a temporary line of short term credit to companies so they can continue to finance their operations. Just bypass the private financial system entirely while it self-destructs and/or is hoarding cash and unwilling to lend. It's probably easier to monitor the credit worthiness of business balance sheets than all the bizarre complex instruments used to package mortgage securities etc.
I see that this idea has taken some flak. I'd like to modify it a little, based on that input.

Suppose the banks that have been supplying mainstreet credit say "We've got good customers who have been getting loans from us in the past, who won't get loans this year because we simply don't have the lending room." If there are a significant number of them, the gov't offers to make the loans instead, with the bank acting as a servicing agent. The bank certifies that these borrowers have borrowed these amounts in the past, and the bank has no reason to believe the borrowers have suddenly become poor risks. With those assurances, the bank pays the money out, collects the interest/principal on the loans, adds up the ins and outs, and settles up with the gov't periodically. The gov't is on the hook for some of the banks poorer risks (the bank is probably keeping the best on its own books), but the gov't charges a "market" interest rate, and the bank doesn't charge for the processing.

The bank gets to keep the relationships with past, decent borrowers. When credit frees up, they take the loans back. The borrowers get the credit today, the banking system survives, the gov't isn't "bailing out the rich bankers".
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Old 09-26-2008, 08:53 PM   #50
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Yep - a very reasonable modification. I don't have a problem with the first line bank being a pass through for govt credit as long as they are compelled to lend. I don't like the banks standing in the way and being able to hoard cash to the detriment of main street businesses with good credit ratings.

Um - I'm sure the bank can't do anything for free - there has to be some fee.

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Old 09-26-2008, 09:01 PM   #51
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It seems to me that a "credit crunch" should hit the heavy borrowers first. We should be hearing today about companies with fine sales and healthy profit histories who have to lay off workers simply because they can't get loans renewed. This should be happening months, even a year, before the "average" companies are impacted. When those stories add up, and someone with credibility can show that we've got a million unemployed (less than 1% of the labor force) just because their healthy employers can't get loans, then Joe Sixpack will conclude that his job is at risk due to credit problems.
Actually, we are starting to hear those stories of businesses who will not get renewal on loans or are unable to execute on plans due to the credit crisis. I expect these stories to become more and more prevalent as the credit crisis extends. I'm concerned about the snowball effect and resulting panic that cause things to happen much more quickly than anyone expects or is prepared for.

I honestly can't say whether the government action at this point will avert this credit crisis or help improve the situation significantly. I'm stuck on the point of who is willing to lend and what is the most direct way to avert the credit crisis for main street. Seems like right now only the US government is willing to lend.

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Old 09-26-2008, 10:32 PM   #52
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It seems to me that a "credit crunch" should hit the heavy borrowers first.
Ironically this may not be exactly the way the story unfolds. Heavy borrowers (junk credits) tend to plan their liquidity needs very deliberately because access to capital is always uncertain for them. Strong companies, however, take their liquidity much more for granted because they "always" have access. In a systematic failure of the credit markets you could actually see large, financially strong companies hit first because they run their finances very lean (holding cash on the balance sheet is considered wasteful). It's possible you could see disruptions in just-in-time inventory deliveries that result in plant shut downs, defaults on short-term borrowings, missed payroll etc. for large name brand companies that are otherwise financially healthy. One might argue that a sudden elimination of credit would hit the most efficient companies first.
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Old 09-26-2008, 11:36 PM   #53
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...Yrs to Go - that is exactly one of my concerns. This recent hard credit freeze is a sudden business environment change for American business. A very well run company may suddenly be facing an abrupt withdrawal or shrinkage of a credit line. Up until now they have never had do deal with such a problem - or at least it hasn't been so drastic. It's so sudden that backup plans were not made. Now they are in crisis management mode themselves and have to take some drastic (non-optimal) actions.

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Old 09-27-2008, 11:20 AM   #54
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A very well run company may suddenly be facing an abrupt withdrawal or shrinkage of a credit line. Up until now they have never had do deal with such a problem - or at least it hasn't been so drastic.
This is clearly part of the fear. Simply put, we don't know how this will flow through the system. But here is one possible example . . .

Ordinarily a financially strong company has plenty of options if something bad happens . . . If they get forced out of the CP market they draw on their revolving credit facilities. If the R/C's are unavailable they can try to arrange secured bank financing. If the banks won't lend they can try to go to the private placement market where people like Buffett and KKR are usually more then willing to invest on a secured basis at usurious rates while taking some equity upside . . . but all of these sources of capital are getting tapped out.

So what does an otherwise strong firm do if none of those sources of funds are available? They start rationing their liquidity . . . they probably suspend the dividend, they might stop paying principal & interest on their bonds while asking lenders for "forebearance", they might shut down operations at some of their more marginal plants or operations to conserve cash, they might delay paying vendors or even employees, etc. etc.

So now vendors are getting squeezed, maybe employees too. Some business operations are shut down, which is going to hurt local economic demand for the other buisnesses in the region that are still running. Equity and fixed income investors run for the exits because they're not getting paid, which further constrains available liquidity.

All of this feeds on itself in a vicious cycle of tighter liquidity, reduced output and reduced demand.

Multiply this a thousand times accross the economy and you can begin to see why some people claimed this could result in a Great Depression II . . . and remember we started here talking only about financially strong companies.

That is why we need a lender of last resort (or in the case of the Paulson plan, a buyer of last resort). Unfortunately, only public money can fill that roll. I truly do think this is a case of pay now, or pay more, possibly much more, later.
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Old 09-27-2008, 02:04 PM   #55
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So what does an otherwise strong firm do if none of those sources of funds are available? They start rationing their liquidity . . . they probably suspend the dividend, they might stop paying principal & interest on their bonds while asking lenders for "forebearance", they might shut down operations at some of their more marginal plants or operations to conserve cash, they might delay paying vendors or even employees, etc. etc.

So now vendors are getting squeezed, maybe employees too. Some business operations are shut down, which is going to hurt local economic demand for the other buisnesses in the region that are still running. Equity and fixed income investors run for the exits because they're not getting paid, which further constrains available liquidity.

All of this feeds on itself in a vicious cycle of tighter liquidity, reduced output and reduced demand.

Multiply this a thousand times accross the economy and you can begin to see why some people claimed this could result in a Great Depression II . . . and remember we started here talking only about financially strong companies.

.
It seems to me that the first steps would be delaying payment to vendors (essentially getting a loan at the vendors' late pay rate) and laying off workers. I don't know about "asking for forbearance" on private loans. I always thought that that not paying on bonds is legally bankruptcy, so it would be the last thing on the list. Cutting dividends seems to be one of the later things.

Even if we believe that it's "strong companies" that will have the first problems, I can't believe that everyone is equally vulnerable. Someone has to go first. The visible action is laying off workers - and that seems to be one of the earlier actions. So I'm still saying that before we have a complete meltdown of the system, we should have some profitable companies cutting staff and blaming it on "can't get operating cash". I'm not seeing those stories in my newspaper. I'm not saying I'll never see them, just that it's easy to see why a lot of people are skeptical of sending $700 billion to "rich bankers" to deal with a crisis that hasn't hit their jobs yet.
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Old 09-27-2008, 03:54 PM   #56
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I hear you, Independent. The problem is if you wait to the point where otherwise healthy companies can't get financing, it's already too late. I think that is the definition of "melt down". Once the cascade starts, it might not be reversible.

----------------------

A technical point with respect to bondholders and "forbearance". Failure to pay principal or interest is a default under almost every bond indenture I've ever seen. The remedy available to lenders in the event of default is to accelerate the maturity date. This is typically a right, not an obligation. But the situation we're envisioning is one of a healthy company that is having a liquidity squeeze. Bondholders might be convinced to "forbear" on exercising their remedy (and avoid a bankruptcy filing) if they think that the company can at some point regain access to capital.

This exact situation happened with Southern California Edison during the California power crisis back in 2000 or 2001.

BTW, you're right that a company probably wouldn't chose to skip a coupon payment, but a $1B bond maturity might be a different story.
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Old 09-27-2008, 04:08 PM   #57
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Oh, and I forgot to add to my disaster scenario above . . . When company's file for Chapter 11 bankruptcy protection one of the first things they do is get "Debtor in Possession" financing. Essentially a super senior bank loan that allows them to keep operating their business while they try to reorganize their capital structure. With no DIP financing, there would be no Chapter 11 reorganization. Instead a lot more companies would go straight to a Chapter 7 liquidation. These companies would flood the market with assets where buyers would be few (a good reason existing bondholders might choose to forebear, btw). That flood of asset sales would push down valuations for companies with similar businesses and the vicious cycle would take another leg down.
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Old 09-27-2008, 05:05 PM   #58
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Hang on after we get the Bank Bailout done this weekend we can anticipate the "Bond Bailout" program to start wending its way through congress along with the 2d $25 Billion for the US Automakers (yes, they got the first $25B today in the Senate Bill passed and on the way to President Bush for signature (which BTW he will have to sign or the Government has no money next week (so it will be signed))) and the "Airline Bailout" program which is due to high oil prices. Even heard of some Grocery Store in Manhattan, NY, putting a surcharge on grocery bills due to high transportation costs - wonder how long that will take to get some traction.
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Old 10-08-2008, 02:59 PM   #59
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Finally - some credit relief directed to Main Street!

I want to say that after the move by the Fed yesterday to start providing some short term relief to companies by getting involved in the commercial paper market, and the globally coordinated interest rate cuts today, I feel that the Main Street issues are finally being addressed more directly, and I'm glad to see Europe finally step up to the plate and recognize their own messes and be willing to coordinate.

The Fed/Treasury now has a huge number of weapons in their arsenal, and now it's a matter of using the tools and working through a bunch of the mess. It's a matter of time now. The rest of the year may be really bloody markets wise, and main street companies will likely underperform for the quarter, but things could start to settle down and even start to improve next year. We're just going to have to be patient.

I'm starting to feel better about things. Yes, we'll get lots of bad numbers before seeing some good ones, particularly on the employment front, but I think it's now more of a matter of time than anything.

And people can only stay panicked so long! At some point "fear fatigue" comes into play. Credit analyst Tony Crescenzi says historically it usually takes about 60 days from the start of a major financial crisis for the initial panic/fear to settle down. That would mean late by Nov 2008.

Did anyone notice that August pending home sales showed a big jump last month? The foreclosures/low prices are finally starting to attract some buyers. Hopefully the subsequent credit squeeze hasn't completely scared them off again!

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Old 10-08-2008, 03:07 PM   #60
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I feel that the Main Street issues are finally being addressed more directly, and I'm glad to see Europe finally step up to the plate and recognize their own messes and be willing to coordinate.
Europe left its rates way too high for way too long. They faced many of the same systemic risks as the U.S. financials did -- and in some cases, worse -- and all they succeeded in doing is making the Euro too strong, tanking the dollar and more quickly sinking their economy.

Even in the face of an obvious global slowdown, Europe didn't move.
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