Losses to hedge funds, largely, though, no? I realize it is affecting corporate borrowing ability and even higher quality mortgage pools at the moment, but my guess is that this will be relatively short-lived.
To the extent that fundamentally good companies are still earning profits and making good products, this contagion represents an opportunity for long term investors. These companies will again have access to capital debt markets when investors realize the baby is now out with the bathwater. But, it may get uglier, first who knows...
Having been around for the 87 crash, the late 90s Asian contagion, the 2000 Nasdaq absurb bubble, the corporate malfeasance adventures of 2002, etc., I believe the market pendulum swings too far upward, then downward.
Maybe this time is different, but I’m guessing not. These CDO meltdowns and liquidity problems are an issue, but I don’t see it as a worldwide economic disaster like proclaimed on the front pages of some papers, and by traders and hedge fund managers who are now getting burned after convincing themselves that there truly is no longer any credit risk in the markets. That the markets have grown too sophisticated.
It reminds me exactly of the “new economy” and “New metrics” BS that was being spewed before the Nasdaq tanked.
I am not suggesting that its the end of the world, nor would I. It is a contraction, but its going to be a very very big one. Companies will make money sure, but the capital constriction is going to be bigger than I think most expect.
Less and more expensive capital hits all markets... and its difficult to predict when it becomes widespread exactly who will get burned.
Imagine if you will, FORD or GM for example finds themselves in a need for huge cash influx to just stay afloat as they did just not that long ago? Fortunately for them that need happened at a time when rates were low and capital was readily available.... that’s not going to be the case in 6-12 months.... Would they be able to survive in their loan rates were to jump just a few points?
Now I don’t expect this to happen to these companies, but it is going to happen to others. Capital contraction, in an age where most companies are over leveraged to begin with is NOT a good thing. IN the broader sense it is, as it will hopefully end the insanely short term practice of leveraging yourself to meet a short term street estimate and actually build your company slowly and steadily... however the fallout to flush out those who have made the mistakes will be massive and ugly.
Like I said, I think the $200 BILLION is grossly underestimated... I expect loses to be much much more than this.
Is it the end of the world? Nope.. but any company that is looking at short term floating notes as part of its obligations or severely leveraged for whatever reason, may look profitable now, but likely won’t be for long.