CREDIT CRUNCH

What started as a subprime lending debacle, this Wall Street self-inflicted wound has now infected world credit markets. Despite liquidity infusions, a rate cut and comforting words from the Federal Reserve, the credit crunch is proving more difficult to corral than first anticipated.

For those who’ve had the pleasure of taking Luke Froeb’s micro-economics course, you are watching, in spades, the wrong incentives driving the wrong conduct. Mortgage brokers have been incentivized to sell sub-prime instruments without the accountability of their actions. Credit departments have difficulty saying “no”. Real estate speculators are driving up the price of properties in hot markets. There is too much liquidity chasing too few deals. All of these factors are combining to create the perfect storm. As these deals are syndicated and questionable mortgaged-backed securities sold, another portion of the play is unfolding in the M&A market. Balance sheets are being stacked to 6- to 9-times leverage to finance the latest acquisition. The stage is set for disaster. The slightest market hiccup or slowdown will trigger market reactions, such as the ones we have witnessed the last several weeks.

How might this affect the job market for Finance MBAs this hiring season? We’ve already seen the demise of several hedge funds, major cash infusions at others, and layoffs at sales and trading desks at a few major banks. More broadly, it has affected each and every person and institution investing in world security markets. Despite the fact that many companies are turning in excellent earnings, these events have already impacted and will continue to impact hiring this year – not uniformly for sure – making this year more difficult than last. My advice is to start early, be persistent, be geographically broad in your approach and don’t get discouraged. Your credentials and education position you well for the future. These events and cycles are common over time and do not mean you will have to forego that perfect job you want. You may have to look for it a little harder. While start-ups are finding funding sources more difficult to access, deals will get financed and transactions closed.

P.S. This hot-off-the-wire report indicates that the Fed sees the current crunch as having limited impact on the economy; this is not what I am hearing from my friends on Wall Street and I, like you, will stay tuned.

http://www.forbes.com/topstories/home/feeds/ap/2007/09/05/ap4084897.html