Tightening The Noose

It’s apparent since the last posting on this blog on 6 February 2008, that financial institutions are in credit-retraction mode across the board – and nowhere more so than in the US. Capital liquidity ratios are being watched – apparently diligently.

What a concept!! For the past 6 years in the US, assumed cash flow from dodgy based credit was considered “prudent” business. It didn’t occur to these stellar bankers that when cash flow stops, capital base erodes, and business confidence with it.

The following quote sums it up. It’s taken from an article by Doug Noland entitled “At The Heart Of Disorder”, Credit Bubble Bulletin, published in Asia Times Online on 12 February 2008:

“[A] survey of senior bank-loan officers provided confirmation both that bankers have become much more cautious in lending and that borrowers have lost enthusiasm for taking on more debt. Moreover, any indication of general tightening of bank credit takes on major significance today due to the seizing up and breakdown of Wall Street finance. Inarguably, what erupted last year in subprime has now evolved into a broad-based and severe credit tightening. Notably, 80% of banks tightened credit for commercial real estate lending and better than a third tightened commercial and industrial (C&I) credit.”

For SMEs the news is ominous. It suggests that credit tightening is so broadly based as to have become indiscriminate. In other words, the company’s track record and creditworthiness are now irrelevant. Financially responsible SMEs may be denied access to funds from banks on account of the inflated and reckless stupidity of Wall Street and their cohorts. These large “sophisticated investors” were leveraged over, above and beyond their equity base in so-called Asset Backed Securities, Mortgage Backed Securities (many of which were sub-prime) and the associated derivatives such as CDOs and SIVs.

All of these products are now the subject of rapidly depreciating asset values, forced sales and margin calls. As mentioned in earlier posts, the issues are one of liquidity and solvency in an inter-connected credit web, where the risks taken were both direct and indirect.

Yeah, interest rates may continue to fall, but what difference does that make if SME’s can’t get the funds at any price?

It’s been one year since this whole sub-prime fiasco broke. For an informative look at how this whole thing unfolded, have a look at the article by Julian Delasantellis entitled, “Subprime Crisis A Year Later – And The Band Played On”, Asia Times Online, 6 March 2008.

© 2008 Sanjeev Aaron Williams All Rights Reserved