Wednesday, October 10, 2007

Is the Credit Crunch Over?

From the WSJ:

Against the gloom that descended on credit markets, banks have pulled off a surprising feat: selling $30 billion of loans for leveraged buyouts by offering some unusual bargains. They also accepted losses on the sales.

Now comes the hard part: what to do about the other 90% of the LBO loans in the pipeline.


Gone, too, even more suddenly, was investor demand for the loans -- and the price for them fell in step. That left Wall Street banks such as Citigroup Inc., Credit Suisse Group and J.P. Morgan Chase & Co. holding some $400 billion in debt they had promised as financing for purchases private-equity firms had in the works globally.

Unless the pace of sales quickens in the coming weeks, banks could be stuck holding these hundreds of billions of dollars of loans for months to come -- a big risk if the economy slows and corporate profits weaken. That could reignite tensions with the private-equity firms they have agreed to finance the deals for and increase the possibility of a fire sale to unload the debt.

So far, financial companies have reported over $20 billion in losses related to the credit crunch from the summer. The question to ask now is this: "Is this a one time event, or will be keep seeing these types of write-downs for the foreseeable future?" While we don't have an answer for that yet, the amount of loans that still has to be sold (over $300 billion) indicates we're not anywhere near the end of the problems associated with the credit crunch.