How the Real Business Credit Crunch Is Unfolding

Today, I’m going to try to make you smarter than 98% of the population by giving you a real example insight of the business credit crunch. And without giving you a headache or making you sleepy:

Let’s say you’ve got a house full of antiques and know they’re worth around $100,000.

Now, you got to an antique auction in town and nobody is bidding on anything. I mean, you can hear crickets in the place – there’s just nobody bidding and the prices are averaging 60% of their actual valuations.

At home, you can tell all your friends your antiques are worth $100,000, but that’s just talk. For someone that relies on your financial statement, the true value right now is $60,000 because that’s what the last market value was out in the word! In the same way, you can’t count next months’ paycheques on your bank balance today.

It’s a law called Mark to Market and started because of Enron Energy frauds more than a decade ago where they counted billions of dollars of next years’ maybe profits as today’s income. The financial statement now has to show the actual true market value each day!

The logic of this regulation is solid but in our example it’s also totally stupid, right? Well, there’s also a law of unintended consequences and that regulation is responsible for a huge part of the credit crunch for businesses.

Here’s a “today” example of it: Drug giant Pfizer is buying another drug giant Wyeth. One lender was approached to do a $10 billion finance package as part of the sale. Maybe the rate was good, the deal was solid – I don’t know. But today, lenders have to value commercial loans at about 70 cents on the dollar. So the day the loan gets made, if it does, it isn’t a value of $10 billion – it has to be shown as $7 billion. So on paper, this lender has lost $3 billion the day the cheque is written! THAT is a problem and that’s part of the reason business lending has slowed down so much.

One other thing:

I have a great idea but I don’t want to do it alone:

The Washington Post recently featured a story about Katie Wheelock and her family who went two weeks without spending a dime. The original family went a month but how about you join me for seven days of No Spending Week.

Fill the fridge, gas up the car and keep paying your normal payments like utilities, the rent or mortgage payments and car payments. But nothing comes out of your pocket, off your debit or credit card. No Tim Horton, no lunch out, make the tank of gas last or take the bus, no restaurant meals or take out. Yes, on day five or six you’ll need to reach a little deeper into the fridge or further down into the freezer and get a little more creative. But you can do it, I guarantee it.

Now, I don’t want to be a lawyer here but you know exactly what I mean. Try it for a week and you’d be amazed at the lessons you’ll learn and the insights you’ll get about yourself, your habits and the money that just mysteriously leaks out of your pocket. As Canadians, our so called burn rate of a $100 is 3 ½ days! And that doesn’t count what we put on credit cards.

I hope you’ll join me because there’s definitely strength in numbers. We’ll start next Wednesday night to let you go shopping and to the gas station and go until Wednesday March 4th.

In the worlds of President Obama: Yes we can!

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