Jan 16 2009
Business Defaults Fuel Next Financial Crisis
Although lately the nation’s attention has been on the stimulus package being discussed in Congress and on Barack Obama’s upcoming Inauguration, for about three months now major retail and manufacturing companies and corporations have been quietly not paying their bills. That single fact threatens to kick off the next financial crisis in the United States (as if we need another one), and has the potential to sink so many small banks and local credit unions that we could easily end up with just three retail banking institutions–Bank of America, MBNA, and Citi.
And Citi is not looking so good either.
Here is what is happening:
Most large businesses float short term loans in order to stay operational when cash flow is weak. They do this on a regular basis. It’s part of normal daily functioning. When these businesses can’t get the short-term loans (which is what the credit crunch is all about–businesses not being able to get these short term loans) then they can’t make payroll, can’t pay normal monthly expenses and so forth.
In addition to all that, many businesses are badly over-leveraged. ‘Over-leveraged’ is just another word for having too much debt. When you buy on credit because you assume that down the road your investments will pay off big when your investment appreciates in value, you are over-leveraged. During the boom times lots of businesses borrowed beyond their capacity to repay and banks let them do it, because everyone thought economic expansion would continue and in the end everyone would make money.
So for months now, these loans (which are often for business expansion in commercial property and/or equipment) have been in default for many businesses. They just can’t make the payments, and what’s worse, the property/equipement they bought with money they didn’t have is now depreciating in value–so many of the loans are already “upsidedown,” made for more than the property is now worth.
What this means is that we are about to see a huge wave of commercial property foreclosures and equipment repossessions, followed by another wave of corporate bankruptcies. Some analysts believe we will start to see these foreclosures and bankruptcies as early as mid-February.
Not to throw cold water on your Inaugural party plans.
By all means, celebrate. But make sure you’ve stocked up on rice, beans, and noodles for the rest of 2009.
