The credit market is suffering from, amongst other things, a lack of liquidity due to an increase in uncertainty. However the crisis in the global market provides an opportunity for investors/lenders with cash, to purchase assets cheaply and hopefully reap rewards from a resumption or increase levels in business activity. Persons with the ability to scrutinize good investment ideas and provide funding are now able to select from numerous investment opportunities at much more attractive prices, providing they are able to analyze the investment sufficiently to compensate for inherent risks.The uncertainty in the global financial markets began with mortgage bankers/brokers over lending to inappropriate borrowers, primarily in the USA housing market, at sub-prime rates, answering a call by political leaders to put as many people as possible into their own house, creating a housing demand while boosting the construction sector. Then investment bankers packaged these sub-prime mortgages with other good investment instruments to get international rating agencies to give this compilation of investment instruments its highest rating and sold these complex portfolios containing these risky loans worldwide to unsuspecting banks/investors, who depended the rating but did not fully understand the risks involved.
As the borrowers reneged on their obligations and foreclosures occurred, asset values fell causing a glut on the housing market and drying up liquidity in banking sector. This then lead to widespread and massive losses on loan and investment portfolios. As the losses spread, many were uncertain on how to value their complex investments and some were too afraid to consider the necessary write-downs in values in order to fairly value or offload them. As some banks suffered runs on deposits and pleaded for government support other banks tried to cleanse themselves of any toxic assets and even stopped lending to each other as they were unsure of the counterparty risk.
The rippling effect lead to a situation where business is finding it difficult to access even short term funding for working capital requirements, even to pay existing salaries. Hence people have been laid off facing growing personal debt, maxed out on their credit cards, unable to service car loans and even good mortgages are turning bad. Retailers particularly, are worried about their local economic climate as consumers’ confidence declines and customers are much more reluctant to spend even if they are able to.
All this is contributing to investor appetite for risk being reduced. A look at the TED spread or any global stock market indexes shows us this. Nonetheless, governments and central backs both are trying to improve the markets with the tools available to them. Governments are trying to bolster the market by buying assets deem to be socially important and central banks are reducing interest rates in hopes of improving liquidity and encouraging commercial banks to resume lending. Without debt funding the leveraged buyers have no ability to drive the markets that depend on them such as the auto industry, the housing market and general M&A activity.
Once again, this is an opportune time for investors/lenders to capitalize on the ongoing situation by making smart decisions based on maximizing business efficiency and finding the bargains out there.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
