The Age of Anxiety

A period of abundant liquidity has turned into a time of fear and doubt.

“You roll back the stones, and you find slithering things,” 1950s Presidential candidate Adlai Stevenson once said.

That’s as apt a description as any of the transformation in the financial markets; a period of abundant liquidity and credit has turned into a time of fear and doubt. The markets, it seems, were operating with imprecise (or no) information about what lay underneath some complex credits. When the rocks were overturned, well, you know the rest.

The resulting turmoil, which we explore in this special section on banking and finance, will be neither as mysterious nor as hidden as the causes. It will be measurable in higher yields on debt, bigger write-downs, larger delinquency rates, and increased costs of capital. As we note in “Only the Strong Shall Thrive,” for example, highly leveraged companies may find themselves scrambling to renew credit lines and finance buybacks. Cash-rich ones may fare better.

Plainly, banks will think harder about credit risk and how to price it. Given that, the Basel II capital rules, which are designed to promote stability in banking systems worldwide, may be arriving right on time. But as “One Nation, Left Behind” finds, U.S. banks face a delay with Basel II that is causing them great unease.

What may help companies during this credit cycle is the interconnectedness of global financial services. That a subprime-mortgage-loan hiccup in California can cause the forced bailout of a state-owned bank in Germany is downright scary. But the greater participation of foreign institutions in U.S. banking and investment also means greater choice of providers, as we describe in “Land of Opportunity.

What could impede a return to calmer markets? The bankers interviewed in our gatefold, “Fear Factors,” provide plenty of answers. Some of the problems they articulate could further rattle the system; some may simply reflect occupational pessimism. Either way, it’s best to leave no stone unturned.

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