Who would have imagined that the lust, excesses, and good intended intentions that are the hallmarks of Wall Street would have led to a complete demise of trust on the very foundations on which our global connectivity is built?
The street-side worker is terrified. He's scared that the job that he had left Friday afternoon won't be available the next morning. He is worried that the increasing costs of fuel, food, and housing will continue to take away the credit card bills in one drop.
The boardroom lady is also shaking at the idea of her financial security being interrupted. Where can she find the cash flow needed to pay for next week's pay? How can she pay for the cost of the raw material purchase she made with the supplier she has in China? What is the capital equity in her machinery and plant that was so common only a year ago and is she able to run this business using the tiniest savings she kept in the last five years?
Everywhere you go, the connection between the banking world is becoming apparent. The current financial crisis that is being debated at the moment on Capitol Hill and Wall Street is becoming real to Main Streets across this and numerous countries around the world. A global economy of debt is only as effective as the rules that regulate it. As we're experiencing the rules that governed our system were sloppy. They were loose due to a variety of different reasons. However, the primary issue is definitely greed. The system that rewards you with spoils that are beyond gluttonous imagination is only able to last so long before it consumes itself.
This is the place which we're currently at. The system of purchasing, selling, and ensuring instruments for debt became extremely complicated when institutions began separating the instruments into smaller pieces and combining them in other pieces of debt with similar features (tranches). To make things more complex it was the case that the seller would cover the tranche (to safeguard the remaining balance in the loan instrument that he had to hold) and the buyer would protect the tranche against losses that could be incurred in the future. Because the tranche was "insurance" involved in the buying and selling, several parties could hold the same instrument in their books to be used as an asset. If the debt instrument failed due to a default by the lender or an act by markets (in regards to credit default spreads as well as credit swaps) insurance companies could not cover the loss. The inability of insurance companies to pay for the huge losses caused by a slumping market for real estate has caused an unintended consequence that now is threatening the security of the markets for financial instruments.
Instead of relying upon insurance to compensate for losses, banks have to depend on capital reserves. When their capital reserve requirements rise in response to an increase in default rates for the funds they've loaned to the owner of a business or the homeowner, car buyer, or the cardholder as well as the consumer of credit cards, the money that can be used to fund new loans is stretched. The banks, therefore, have to tighten their lending policies in order to safeguard the institution from the possibility of failure. You'll probably see from the news that certain have had more success in this regard than others recently.
Despite having long-standing banking relationships with their valued clients, banks across all over the world are becoming more cautious in the way they part of their cash reserves. The regulations for banking that still remain in force and are being enforced are requiring banks to keep some amount of cash or equivalent in the bank as a reserve to cover losses. As a result, the new loans can only be issued when the old ones are paid off.
When you finally locate an institution willing to lend you money but you must be prepared to pay more for interest. The loan terms also begin to get more restrictive. For the majority of commercial Loan, it's three to five years, as opposed to the 10 - to 15-year loans that were standard this year. Don't think about borrowing at competitive rates for development projects that are speculative in the present, since only those projects that are near stabilized with only the highest quality credit tenants are even taken into consideration by the majority of traditional lenders.
There are always lenders willing to loan you money during difficult economic times. Most, however, will charge you astronomically high interest rates , with many points, and offer loan-to-values of fifty% to less than that, or include certain loan covenants that are extremely restrictive included in the contract. These are loans made for needy borrowers and must be thoroughly scrutinized prior to being thought of by anyone.
