Something Ventured: Economy Is Less Than Prime
“Gotta keep moving,
Never gonna slow down. See you 'round.
But I got to ramble (ramblin'
man) It’s been a good ride. After four years of growth and jobs and profits and increased house prices, it looks as though we might finally have a real crisis on our hands. At least from the point of view of our biggest trading partner’s economy, which seems to be lurching towards recession. Like the proverbial butterfly flapping its wings in HG Wells’ novel, the impact of the actions of just a few unscrupulous mortgage lenders has rippled its way across the entire North American economy. You’ve read about it already. You hear the talking heads pointing fingers and analyzing the tea leaves. I thought of a simpler metaphor for the sub-prime debacle in the form of a short story… I hope it fits: What this whole mess is about is how one feels about risk.
Six
months ago, four folks walked into a casino, feeling
good about life. Interest rates were
low, which means they all feel good about spending some
cash. The first guy is Pinstripe
Pete, the banker. He is the eldest
and most conservative of the four.
He toddles off to play the nickel slots, which don’t
have great odds, but what the heck, it’s peanuts to him.
The second guy is Ernie Equity.
He has been investing in big companies and doing
buyouts. Life has been good because Pete has been
lending him money to leverage up his deals.
He hits the craps table which has the best odds
in the house, but he still sits at the $5 minimum table.
The third guy is not a guy, its Corporate Carol and
she’s dressed to kill. She has been
floating higher interest rate corporate debt, dabbled in
“jumbo loans” and generally played fast and loose for a
few years, which has been great because the rates are
not really that high, historically speaking.
Carol goes straight to the blackjack table, $25
minimum bets and lets everyone know she’s there to win.
The last guy is Slick Dick.
Dick gave up his used car business in 2003 to start a
mortgage brokerage outfit that offers people that should
not qualify for a mortgage low up front rates and 100%
mortgages. Dick heads to the
penthouse “high roller” poker room, where no-limit
They
sit at their respective locations playing their games
for a few months. Then something
happens. The real estate bubble
starts to burst as supply gets ahead of demand.
Dick’s cell phone rings. Right in the middle of a $150,000 pot. Dick answers and turns pale. The FBI wants to talk to him. All those mortgages he passed on are defaulting and people are pissed. Dick’s appetite for risk disappears as quickly as his last martini. He leaves the table and runs from the casino calling his lawyer as he goes. As Dick runs out, he passes Carol. The “jumbo loan” business is tanking as the lenders higher up the food chain are not into the riskier debt all of a sudden. Her corporate clients are not finding any buyers for their paper either. Her Blackberry starts buzzing like crazy and suddenly she feels like going back to her condo and hiding in a dark room. Her swagger is gone. Her job prospects dimming… She leaves in a hurry passing Ernie at the craps table. Ernie sees Dick and Carol leave the party. He feels OK. No need to panic. After all, this is all about debt and he is an equity guy. The companies are still doing well. He leaves the tables and strolls the casino. The higher risk tables are all eerily empty. His confidence ebbs. His Apple iPhone rings (“Killing Them Softly” ring tone, naturally). It seems that deal flow is slowing… not much too look at without that 5 debt dollar to 1 equity dollar leverage all gone. Yikes! Does this mean that they have to invest all equity like venture capitalists? Whoa! Deals just got a lot smaller. Ernie spins and heads out. Time for a vacation in Cabo. Now Pete has been watching all this nervously. He still sits at the slot machine, but he hasn’t put a single nickel in the machine in weeks. He has been observing. His compatriots in big banking have stopped lending to Ernie or taking paper from Carol and Dick. They have decided that the world has gotten far too risky. They just let the casino owner know that they are shutting the whole thing down. They are scared to death of bad loans and want nothing to do with this. Pete sighs, lifts himself off the stool and shuffles out the door.
Over
in the corner,
As a
technology company in
Again, in
What
to do? Follow What Do You Think? Talk Back To Brent Holliday
Something Ventured is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks). Something Ventured Archive Printable edition |
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