This was one of the worst weeks for banks and the market that I've ever seen. First-quarter earnings were terrible, and few people are optimistic about next quarter. It looks as though the credit crisis still has a long way to go. Oil is more than $140 a barrel, and parts of the market are reaching new lows. Either this is the low point, or we should prepare to endure a crisis of greater magnitude than we expected. Here's what's going on.
It's getting harder to find takers
Investors are getting a little finicky about throwing additional billions at subprime-infested banks. While capital-raising efforts appear to be continuing, big banks are facing increasing difficulty finding willing investors, who are losing money on past offerings and are far less eager to continue throwing good money after bad. To give banks more access to more capital, the Federal Reserve is thinking about easing restrictions on private-equity firms in regard to their investments in banks. Large investments in banks from private-equity firms typically result in accompanying regulatory scrutiny, which private-equity firms hate. So the Fed has hinted that it's willing to find ways around some of the restrictions.
Why should big banks have all the fun?
Small banks are facing a growing problem. A common lending practice allows real estate developers to delay paying interest on construction loans, and there's a fear that the practice could be masking huge problems as the construction industry hits the skids, not to mention huge losses for small banks that could blow up down the road. Analysts have warned that as many as 150 small banks could fail in the next few years.
Subprime pink slips
Lawyers to the rescue
Next week begins the second-quarter earnings season. The earnings will give us insight into the extent of the current crisis and an idea of the market's likely direction. It should be an enlightening time.