Tag Archives: credit crunch

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!

Credit Crunch? What Credit Crunch? Where?

Whether it’s in the U.S. or here in Canada, I keep hearing about that “credit crunch.”

I understand it, but I can’t personally find it, and you won’t, either. Not as an individual who has decent credit, with a credit score above 700 and the income to justify making the payment.

In fact, all the talk in the U.S. recently was that the lowering of interest rates to near zero was fueling a huge boom in re-mortgaging. Well, those two stories of a credit crunch and all that refinancing don’t jive. And if I had the resources, I’d gladly put up a reward for anyone who can document being turned down because of a credit crunch. It won’t happen.
Find me a lender who’s got the sign out: Not lending today.

I tried to find it myself. I applied for three car loans and three lines of credit. No, I wasn’t getting them – neither you, nor me need more debt. But I was approved every single time! I’m pretty typical middle class and have a credit score over 720. All the approvals were a no-brainer and took less than five minutes each time.

Challenges for business credit issues are different and do exist. But you and I don’t borrow 50 million or a half a billion dollars. It’s why the government is getting the Export Development, Farm Credit and Business Development corporations involved, and helping them.

Lots of debt also gets sold as asset backed securities. That’s the balloon that blew up in the US housing market. It’s about a $50 billion market in Canada and that’s definitely slowed down. No investors really want to own pieces of these securities right now.

As a result, lenders have to keep their loans or credit card balances on their own books, instead of re-selling them. That is the reason rates haven’t moved down much for fixed mortgages and why credit cards are actually going up. It’s an issue of supply and demand.

If we call it business credit crunch, I’m OK with that. But for you and me – for us individuals, there’s isn’t a crunch, shortfall or lack of money. There’s just a new reality that we need good credit and the money to pay the payment. If lending based on good credit and income hadn’t been temporarily abandoned for a few years we wouldn’t have 90% of the mess we do now!

Credit Crunch, Mortgage Crisis – Everything’s a Crisis

Last week you gave me the heads up on a newly release International Monetary Fund report. This IMF report claims that the “global credit crunch will cause losses of nearly $1 trillion worldwide.”

But I’ve got a question: How can a credit “crunch” cost $1 trillion? That was the headline in the USA Today report but think about it. A credit crunch is NOT lending. And NOT lending can’t create a loss; it saves lenders from potential losses.

With these types of headlines, there’s often the choice to be dramatic instead of informative, I’m afraid. What they meant to highlight is that the mortgage problems, mostly subprime, that is poor credit mortgages, will create huge financial losses. Now the IMF is a pretty political body and they’re often late to the party, because I would suggest it’s going to be well beyond $1 trillion when the dust settles. Try $1.5 or $2 trillion, but that remains to be seen and it’s only my opinion.

But there’s some good news, because not every lender was caught up in the subprime fever where financial institutions from Germany and Denmark to Asia and North America were somehow caught by surprise that the loans to bad credit customers could possibly go sour.

And both these good news stories are from right here in Canada. One is ING Direct and here’s the difference: They keep all their mortgage loans on their books. So they’re really really invested in making sure they’re good quality. They weren’t taking whatever they could get their hands on and re-selling it before it started to smell.

The other one is Canadian Western Bank. There is a great quote from CEO Larry Pollock: “We’re not smart enough to understand that stuff,” which he gave as a reason for not investing in these off-balance sheet SIVs. Oh, they’re plenty smart and it’s the reason it’s the best performing bank stock in North America!