Thursday, November 8, 2007

How Many Shoes Can We Handle?

Everyone is waiting for the next "shoe to drop" in the financial markets. No one knows when or what it will be but the market spends an inordinate amount of time thinking and speculating about it. Here is another scenario:

Citigroup, Inc., under pressure from the financial markets and shareholders decides to reduce its balance sheet risk, just in case. A memo goes out from the office of the new CEO. Long time commercial bankers call their customers. The conversation goes something like this:

Banker: Hey John. How are things going?

Customer: Oh good. How's the bank?

Banker: Pretty good. The reason I am calling is that the loan that is due next month. We're not going to be able to roll it over this time.

Customer: What?

Banker: Yeah, I'm sorry but I wanted to give you some notice so you can make other arrangements.

Customer: But we have always paid on time. I've had that loan with you for years. That bank was called First National City Bank when I first took it out. You can't do that.

Banker: Well I've got to go. I have some other customers to call. Bye John.

John decides then not to open that new store, or build that building, or expand into that new line of business.

The credit crunch spreads to Main Street.

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