The world stopped Sept. 17, 2008, the day after Lehman Brothers filed for Chapter 11 bankruptcy: The net asset value of the money market fund that held Lehman Brothers securities went from 100 cents on the dollar three days earlier to zero, on news of the bankruptcy filing.
It was one of those seminal moments in the financial markets: The already reeling economy literally fell off a cliff that day, said Mitch Stapley, chief investment adviser for Fifth Third Asset Management.
Federal Reserve and Treasury rescue efforts totaled $3.48 trillion. The cost of the credit crisis marks the second largest outlay of all big budget events in U.S. history, with World War II weighing in at the inflation adjusted cost of $3.6 trillion. The good news, Stapley said, is that through the federal Troubled Asset Relief Program and government intervention globally, the country has raised some $930 billion to replace that capital.
Given the battered economy and continuing fallout from the financial crisis, what are the odds of companies securing credit to grow their businesses and of corporations securing credit to refinance their debt in the coming months? Not good, Stapley said Tuesday during a presentation at the University Center on Grand Valley State University’s Pew campus in downtown Grand Rapids.
The presentation was sponsored by the Small Business Technology & Development Center at GVSU.
“I would say if you are an absolutely pristine credit, a bank might talk to you,” Stapley said.
The nation has written off a trillion dollars in debt, so banks are still going through that process and rebuilding their balance sheets, he explained. An average high yield company — a below investment grade company — is going to have debt of about 20 percent, but there are not lot of companies today that have debt of 20 percent and have work, Stapley pointed out.
“There is $750 billion of maturing high-yield debt that’s coming due this year,” he said. “When I look at that $700 (billion) to $800 billion supply that’s got to come, I have to really worry about whether it can get placed so that companies don’t end up in default.”
Stapley said the nation will see some recovery but no positive growth until at least the third or fourth quarter of this year. The financial markets remain skeptical but are stabilizing, he noted.
The concern, he said, is that the financial crisis has metastasized and moved into the overall economy. A rebound for the auto industry and the Michigan economy is probably wishful thinking, he said, and it’s going to take the auto industry a long time to come back.
Stapley further predicts that:
- Regulation is going to come back in a big way.
- Leverage throughout the economy is going to go down and stay down.
- The saving rate will go up and stay up.
- The long-term growth rate for the U.S. economy will be lower than it has been over the past 30 years.
- Taxes will be going up.
- Income, particularly tax advantaged income, will become a more important component of personal portfolios.