Easy Money, Lifeblood Of Economy, Is Drying Up
Thursday, July 26, 2007
NEW YORK, July 25 -- In just a few days, shares of Internet travel company Expedia lost 12 percent of their value, one of the highest-flying executives on Wall Street watched his fortune shrink and the nation's largest mortgage lender said many Americans with good credit were in danger of losing their homes.
At the root of those seemingly unrelated events is a single new reality, one that could portend trouble for the broader U.S. economy: The era of cheap money appears to be ending.
Easy credit has been the economy's lifeblood in recent years. It gave people who previously couldn't afford homes a crack at the American dream. It fueled multibillion-dollar takeovers of some of corporate America's biggest names. It buoyed the stock market and propped up the prices of many other assets.
But now, the investors who a few months ago were willing to lend money to Wall Street at low interest rates, on loose terms, are balking as they worry about having to pay the price for lax lending standards.
The trouble started in one of the shakiest sectors of finance, home mortgages for people with bad credit, but it is spreading. As easy credit dries up, some huge corporate deals are being delayed and could unravel.
The question now is how far will the pain spread, and how many people will get hurt as it does.
"When people get scared, they tighten up all over," said A. Gary Shilling, president of the investment firm that bears his name. He said he expects housing prices to fall significantly further. "This kills consumer spending," he said of the credit crunch. "We think we'll be in a recession as a result by the end of the year. And that will spread globally because U.S. consumers still are the buyers of first and last resort for the excess goods and services produced around the world."
Yesterday, Chrysler postponed a $12 billion debt offering connected to its pending sale because of poor market conditions, according to people familiar with the matter. Separately, British health and beauty chain Alliance Boots, the target of what would be Europe's largest debt-financed buyout ever, postponed its debt sale.
It has been common for companies to borrow money to finance stock buybacks, but this week Expedia had trouble getting favorable loans to do that and had to sharply reduce a planned repurchase. The travel company's share price has fallen 12 percent since.
Those at the top of Wall Street's earnings pyramid are feeling the pinch. Stephen A. Schwarzman, co-founder of private-equity giant Blackstone Group, has seen the value of his multibillion-dollar stake in the company shrink since it went public last month. Yesterday, shares of Blackstone closed at $25.51, well below its initial offering price of $31.
Some market watchers say the credit market is simply in a midsummer pause, and investors will return to scoop up the billions of dollars in loans and bonds yet to be sold.
"What's really going to trigger the rally is when people start to refocus on the strong fundamentals in the underlying economy as well as the companies that issue the high-yield bonds," said J. Eric Misenheimer, a fund manager at J. & W. Seligman. "Default rates are still very low. Corporate earnings are robust and their balance sheets are some of the strongest they have seen since the mid-'90s."