Skip to main content

Can't get a loan? You're not alone

Can't get a loan? Don't worry, you're in good company. Neither can anyone else, and that's including some top-shelf investment funds and financial institutions. Today we'll continue to examine why this is so.

Recap

In our last post, "Money is cheap and unavailable", we highlighted comments from investor Wilbur Ross on the current availability of money and credit. In a recent interview with the Wall Street Journal, Ross noted the following:

"Usually when money is cheap, it's also very plentiful...now, it's cheap, except you can't get it".

It's an odd situation, and it led me to wonder how such a disparity came about. Was money being priced too cheaply as a result of artificial forces? If there is demand for money and credit, yet little availabilty, wouldn't that suggest high prices for access to credit?

Higher Rates, Nervous Lenders

Well, it turns out that banks are now charging higher rates to individuals seeking loans for new homes or for refinancing their mortgages, in spite of the latest Fed rate cuts.

Meanwhile, the recent credit crunch has also proved disastrous for mortgage lenders, hedge funds, and private equity firms, all of whom depend on short-term loans to drive their business models.

Washington Post columnist, Steven Pearlstein explains:

"The underlying problem is that, over the past 20 years, we've allowed the process of credit creation to be shifted from banks, which are regulated and required to keep a minimum capital cushion, to largely unregulated securities markets with no limits on the amount of leverage they take on.

Like banks, these markets borrow short and lend long, which creates profit margins but makes them vulnerable to an old-fashioned bank run if that short-term capital suddenly dries up. The first victims in such a scenario run the gamut from mortgage lenders like New Century and Countrywide, hedge funds such as Peloton Partners and Carlyle Capital and even venerable investment banks like Bear Stearns."

Following the rapid decline of blue-chip investment firms like Carlyle Capital and Bear Stearns, banks are now especially wary of any exposure they might to highly leveraged firms holding large amounts of illiquid and opaquely priced assets. Carlyle Capital was forced into insolvency after the value of their securities were called into question, and the firm was hit by a round of margin calls from nervous lenders.

A Lender's Strike

Dow Theory Letters editor, Richard Russell recently labeled the situation a, "lender's strike". While the Fed is trying to create a renewed environment of easy money and low interest rates, banks and the private sector, fearing for their very survival, refuse to make new loans.

At least that's the message I seem to be getting from some of the more seasoned observers, like investor Marc Faber, who recently offered a similar view in an interview with CNBC. Here's how Faber explained the recent money conditions:

"The Fed is pumping money into the system, and other central banks will do the same. But the private sector is tightening credit conditions, and as a result of that we have a relative illiquidity in the world that, in my opinion, will affect all asset markets..."

So in Faber's view, the Federal Reserve is trying to bring about continued liquidity and easy money conditions in an effort to keep things going, while the private sector is resisting these attempts. Clearly, the priority for private firms is a focus on survival and retrenchment, rather than expanding their business at this time.

What Started This Mess?

You might also be interested to hear Marc's views on the origins of this current financial crisis.

In short, Faber feels that the Fed's pursuit of easy monetary policies in the past fostered the growth of a gigantic credit bubble, and brought about the increased leverage in the financial system which led to many of the recent problems.

He also notes that the current financial crisis is "yesterday's story", and that we are now in a painful process of deleveraging, during which investors should focus on "other potential areas of danger" that could hit asset prices.

So, having covered all of that, we'll end here for now.

Join us tomorrow when we serve up a little break from the markets, and remember to stop in on Friday for our latest, "Features of the week". We hope to see you then.

Popular posts from this blog

Market Wizard, Steve Clark on Trading: Grow Your Equity Curve

Trading wisdom recap: Steve Clark , founder of Omni Partners, was featured in Jack Schwager's 2012 book, Hedge Fund Market Wizards .  Clark's interview with Schwager provided us with some valuable trading insights; "Lessons from Hedge Fund Market Wizards: Steve Clark" was one of our most popular posts ever. If I had to pick my favorite sections from Clark's chapter, it would be boiled down to these two concepts: "Do more of what works (and less of what doesn't work)" and "Manage your equity curve". Here's his full quote on the supreme importance of growing your equity curve :  "Your job as a trader is to make the line of your equity curve go from bottom left to top right. That's it. Don't get hung up on other supposed "mandates". Protect your capital and the direction of that equity line. "   I will leave you with one last series of quotes from Steve Clark's interview with Jack Schwager. ...

How to "Pull the Trigger" on Your Trading Ideas

In our last post, I quoted hedge fund manager, Jim Leitner on the importance of following up on your investment ideas.  Today I'd like to follow up and share some thoughts on how you can learn to consistently "pull the trigger" on your best trading setups and investing ideas. In order to help you do that, we'll take from the best and offer up key insights from interviews with top traders and trading psychologists like Alan Farley, Brett Steenbarger, and Doug Hirschhorn .  Now before we get to their key insights on overcoming trading anxiety and pulling the trigger on your trading ideas, let's remember what Jim Leitner said in his interview: "Learn to love to listen to people and when you hear something interesting, follow up on it. Don't just think, "Well that's an interesting idea" only to find out a year later that the company you could've bought shares in is now up 500-fold. You never want to say woulda, coulda, shoulda...

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4. ...