|Liquidity Is The First Casualty In A Financial Crisis
Many of the credit-lines that existed prior to 2008 have gone the way of the dinosaurs with banks claiming new government regulations are to blame for the way they do business today, this is especially clear in the commercial real estate market. CEO Chris Maher of New Jersey’s Ocean First Bank has already pulled back on refinancing transactions that let customers cash out on their debt, and has started reducing exposure to industrial loans, told Reuters.
“In a downturn, industrial property is extremely illiquid,” he said. “If you don’t want it and it’s not needed it could be almost valueless.”This is why even if we do not know what the future will bring in a financial crisis when liquidity drys up cash rapidly becomes king. To anyone doing a great deal of negotiating the one-word people wanting to reach an agreement don't want to hear is "IF"! This is why I will never call the holder of cash stupid unless it is during a long period of massive inflation. With this in mind, how well banks fare if assets retrench will depend a great deal on the collateral they have glommed onto. Falling oil prices are already putting pressure on a slew of oil patch loans and bonds and it is also important to remember historically banks have been poor managers of any tangible assets that require day to day care.
For years investors have been rather complacent to the risk they faced and because of this, leverage has slowly built up within the system. It is only in the last week that we have seen panic start to set in as traders began to realize the long-awaited Santa Claus rally was not going to occur and indeed the Fed and the plunge protection team were not going to or unable to stem the tide of selling in many markets. This, of course, does not mean a vicious rally is off the table in the near future but when and how high it will go has yet to be determined and if it does occur many traders will see it as an opportunity to sell. For those many bulls crushed this week in the rush to the exits, it is too late, which brings up the question of how long the current downtrend will last.