A Thaw in the Credit Markets

Somewhere out there a small bud is trying to break through the permafrost and seek out the warming rays of the sun, all in hope that spring will come. That, my friends, is a picture of the capital markets at this time. Tiny things are beginning to happen. Nothing you can point your finger at and say it is the beginning of a movement, a change, but there are these just starting, peaking over the horizon, rays of hope.

In order for the markets to return, we have to get over the blame game. We seem to want to blame the banks, the bankers, the market makers and everyone we can think of that may or may not be on Wall Street. Many banks needed bailing out and many banks didn’t need bailing out—but we gave them all bail out money and then started pointing fingers and saying the entire industry, all of the capital markets, all you folks are at fault. So, the real estate people who sold this stuff, they weren’t at fault, the mortgage brokers who underwrote this stuff, they weren’t at fault, the people who bought and were over-stretched, they weren’t at fault and the Senators and Congressional leaders who pushed through massive affordable housing legislation with Fannie and Freddie, well, they weren’t at fault either. Nope, just the folks in the capital markets.

That isn’t a rant, it is a perspective of what happened and a bit of insight as to why the markets are so contracted at the moment. The markets performed just like they were supposed to and money was made everywhere – by them, by real estate agents, by builders and contractors, housing material suppliers, carpenters, plumbers, electricians – everybody was making money – and many of those in that long line, were jacking up the margins and making lots and lots of profit. It is how the system, the capital system, works.

When you disproportionably, blame one sector, that sector’s response is to retract, contract, and run for cover. So, they have run for cover and they will stay under cover under the blaming stops. They will also stay under cover until they figure out how they are going to be regulated, taxed, etc. It is very hard for them to go forward when they don’t know what they can or cannot make in profits and pay in compensation. Please understand, this isn’t to give them a free pass, there were massive screw ups within the capital market system – and I, for one, am among the clan that says let them fail if they make really stupid decisions—nobody out there was setting up TARP funds for the rest of us. There are a lot of very smart people who disagree with that position and hence you have the bail out. But, if you are looking for money to come back to us in the buy here-pay here world, for capital to be available at the old rates, it isn’t going to happen soon.

Some will have great relationships with their local banks and will get pretty good deals, and those deals will stay in place until either the dealer wears out his welcome, the deal gets too big for the bank to handle, or, the federal regulators change the rules of the game and the bank can’t make that loan anymore. For everyone else, money is going to be more scarce than it was before, more expensive than it was before and more regulated than it was before. By regulated, I am defining that to mean there will be more performance covenants, i.e., equity ratios, profitability margins, than were normally in place prior to this present pickle of a situation.

However, it is not as depressing as it sounds, it ain’t glamorous, but it also isn’t all bad. Everyone in the business is going to have a deeper potential customer base than ever before and it is an environment where you can do well. But, it means, and we have been preaching this over and over and over again, you have to understand that you are in the finance business, you just happen to sell cars. So, you must watch overhead like a hawk, manage and guard your profit margins, know where every dollar comes from, where every dollar goes and you can recite those numbers in your sleep. Why? Because the money that becomes available will go to the people who know their business, know their numbers and look and act like they know their business.

The days of “I’m not sure, but I think my numbers are pretty good” are gone. Capital will find those people who are in the know. When the markets come back, and like this article stated in the beginning, hope is budding out, when those markets come back, they will be interested in working with people who know their business. They’ve seen what happens when all you know how to do is sell.