RSSCredit Crunch Resolution Continues
Trust is gradually being restored among the major world financial institutions and enough liquidity has been provided by central banks to cover most of the capital destroyed in the subprime mortgage mess. The situation is not yet back to normal. There are still some investors though to have questionable assets - maybe or maybe not enough to cover their obligations. The balance sheet clean up and the restoration of trust will continue well into the year and will act as a restraint on construction. Reed Construction Data believes that the availability and cost of credit is no longer the major constraint on nonresidential construction starts. That role is now held by doubts about the amount of space needed in a slipping economy.
In its boldest action yet, the FRB sold off Bear Stearns for a penny on the dollar to JP Morgan and effectively took $30 billion in assets of dubious value onto its own books when Morgan refused to take them. Bear Stearns got appointed “fall guy” for investment banking because they played a major role in originating the subprime market and held so much bad paper that they would have been liquidated by their creditors, possibly within days. The FRB avoided the agony- and panic – of dealing with Bear Stearns’ customers and suppliers one by one as the investment bank failed to meet loan commitments to customers and repayment demands from credit suppliers.
Several hedge funds recently collapsed, finding themselves holding too large a share of bad assets to write then down to current market value and survive. More hedge funds can be expected to take big write-offs soon. Some will survive and some will be rolled into other funds. The demise of a hedge fund destroys the capital of its investors. We will probably hear about several private investors and some institutions that have to take outsized capital losses and can no longer do what they used to do.
Billionaires may have to cut back on personal expenses. But they will also have fewer funds for venture capital. Institutions may have to cancel facility projects or raise their tax rates and service fees.
