As the stock markets struggle—so far without much success—to recover from an astoundingly quick rout that has lopped off nearly 30% from the Dow Jones Industrial Average in a month’s time (you may recall that the all-time high on the Dow, 29,551, was February 12), the action on Wall Street is moving quickly to the credit markets, and that’s when things can begin to get really scary.

The vicissitudes of the stock market get all the attention of course: the ticker at the bottom of the CNBC screen, the chyrons announcing the latest bombshell moves up or down, the headlines on the Wall Street Journal, the inane presidential tweets. But the credit markets are where the rubber meets the road for capitalism. If businesses can’t get access to the capital they need to finance payroll, to pay their bills, to make expenditures on new projects, or to simply run things on a daily basis, then the economic consequences get dire. If companies with debt coming due can’t refinance that debt with banks or public investors, then the economic consequences become dire. If companies can’t issue new debt at acceptable rates of interest, or at any rate of interest, then the economic consequences become dire. If the credit markets freeze up, as they did in the fall of 2008, as they did for the about three years after Citibank in 1989 failed to syndicate the loan that was to be used to finance the management buyout of United Airlines, then the economic consequences become dire.

We’re not there yet. But we are, sadly, heading in that direction, and quickly. According to my Wall Street sources, companies of all stripes are drawing down the lines of credit that they have from their banks. This is, of course, a “better safe than sorry” course of action—take the money down whether you need it or not because otherwise when you really need it you might not be able to get it. But it’s also a leading indicator of extreme financial and economic nervousness. Before it collapsed 12 years ago, Bear Stearns drew down the full amount of its credit facilities too. Companies such as Boeing, Hilton, and Wynn Resorts will draw down their credit lines, according to reports earlier this week. Bloomberg reported that big private-equity firms such as the Blackstone Group and the Carlyle Group were encouraging some of their portfolio companies to draw down their credit lines too. (“There is no firm-wide directive to our portfolio companies to draw upon credit lines,” a Blackstone representative said in a statement. “We are evaluating the financing needs of a small number of companies directly impacted by COVID-19.”)

While this will put more risk assets on the balance sheets of the big Wall Street banks that made these lines of credit available in the first place, it is important to note that this financial crisis is very different than the one that occurred 12 years ago. That one was caused by a systemic breakdown inside the Wall Street banks at the heart of the capitalist system. They had made the classic banking mistake of borrowing for short periods of time and lending for long periods of time. They did that—and continue to do that—because short-term financing is generally (but not always) much cheaper than long-term financing. So by borrowing short-term and lending long-term the difference between what they pay for the raw material—money—and what they receive by lending it out is their profit, or much of their profit. (Fees are an important source of profits too.) That works just fine, until it doesn’t. What happened 12 years ago to Bear Stearns—almost to the day—was that it could no longer finance itself in the short-term markets, even on a secured basis. It could no longer pay its bills as they became due. It was bankrupt. The same thing, more or less, happened to both Merrill Lynch and to Lehman Brothers, and was about to happen to Morgan Stanley (and many think to Goldman Sachs too).



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