Listen Closely; You Can Hear the Credit Crunch

Like a wounded animal, the credit crisis of 2007 refuses to die, much to the consternation of market participants, who thought that — like the crises of 1987 and 1998 — this one would also be killed off with another shot of Fed liquidity.

A famously impatient lot, we Americans don't like problems; when they do occur, we like them solved quickly. We like our wars won easily, our taxes low and our benefits high, our airlines to be on time all the time, and the lines at Starbucks to move along quickly. We like everything to work, always. And we like the markets to go up, steeply and continuously.

A collective whine of exasperation and annoyance could be felt throughout the financial world when the market was forced to recognize that this credit crisis is not over yet, and that the intervention of central banks may not be the perfect silver bullet that can quickly and painlessly cure billions of dollars in bad mortgages, lax lending standards, low- risk premiums and foolish investments.

Let's review the last couple of months in these nutty financial markets. After seven relatively benign months of complacency and historically low-risk premiums, August saw the emergence of a credit crisis, ignited by subprime mortgages and fanned across the globe by a rash of scary acronyms like CDOs (Collateralized Debt Obligation) and SIVs (Structured Investment Vehicles), derivative-type products in which bankers carve up housing loans into tiny pieces and sell them around the world.

In this new world of financial engineering and risk-sharing, the failure of a bunch of middle-class homeowners in California to pay their mortgages affected the balance sheet of global banks in Scotland and elsewhere. Riding to the rescue, the Fed cut the discount rate, lowered the fed funds rate by 50 points and seemingly extinguished the fire.

Not so fast. Even if the total dollars of bad loans turns out to be a tiny fraction of a worldwide trillion-dollar market, $100 billion in bad loans has to hit someone's bottom line, as they surely did when they wiped out $7.9 billion in Merrill Lynch's market value, massacred hedge funds at Bear Stearns and Goldman Sachs, and cost 3,000 people at Bank of America their jobs.

It's kind of fitting that this repricing of risk has stretched out over and beyond Halloween. Remember the fear of ghosts you had as a kid? That fear cannot possibly compare to the terror a hedge-fund manager must now feel at the presence of CDOs and SIVs in his or her portfolio. Boo!

How bad is it? Some economists argue that the size of this crisis is a drop in the bucket of a $45 trillion worldwide economy, and that the real danger is that problems in the housing market are now going to mutate into a cause of wider economic problems.

In other words, whatever the cause of the credit crisis, the concern is that the problems in the subprime mortgage market will spill over into the real economy — a ripple that becomes a larger wave, a thread of a tapestry that, when pulled, brings down the entire portrait. Lending standards rise, housing construction slows, demand for building materials fall, UPS and FedEx notice a slowdown in their business, the consumer gets concerned and spends less, and the troubles in one area of the economy spread, virus-like, to another.

Here's the bottom line: The repricing of risk continues, and it is moving at a pace slower than we Americans would like. Too bad. The Fed has risen to the rescue again with another rate cut, but the consumer market may still suffer. However, at some point, this repricing should finish.

Until then, stick to your investment plan, don't time the market, lay off the mortgage and housing markets, take a deep breath and, well, just breathe.

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management. For information, go to:



Please enter your comment!
Please enter your name here