Tuesday, July 17, 2007

The Death of Liquidity – Part I

Liquidity…it’s Wall Street’s excuse for everything. Why does the stock market keep going up? Liquidity. Why do real estate prices keep going up? Liquidity. Why haven’t we had a significant correction in months? Liquidity. Why do the skirts of CNBC anchorwomen keep getting shorter? Liquidity.

Recent articles in the financial press represent an obituary for this pesky little word that has come to mean so much to so many people.

The Wall Street Journal, reported today that Wall Street investment banks are having trouble placing debt to finance the latest round of private equity buyouts. They even had to extend bridge loans with their own capital since bond investors seem to have finally realized that covenant lite and toggle bonds are dirty words.

Will the end of liquidity knock out one of the legs that are propping up this market? Time will solve that mystery. Could it be that it is not really the death of liquidity, but just investors demanding a higher yield for the risk that they finally realized they are taking?

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