Is the current mortgage crisis the beginning of the end for the U.S. economy?
Do you mean, is the sky finally falling? We wouldn’t blame you for putting your question that way, given the market’s volatility over the past few weeks and the spate of highly public bankruptcies, such as those at New Century and American Home Mortgage, and the recent closure of the respected hedge fund Sowood Capital Management. And that’s not to mention the big private equity deals that are hanging precariously or, like last week’s sale of Home Depot’s wholesale supply unit, being sharply renegotiated in the 11th hour.
No, we’d only blame you if your question meant you were thinking of running for cover right now, or worse, hunkering down. Because for many individuals and companies, right now happens to be the perfect time to venture out—in fact, to get aggressive. Forget Chicken Little. Think “Holy Cow!” That’s what you’ll be saying when you see the once-in-a-lifetime deals that are suddenly popping up all over the place. The strategic acquisitions that never seemed possible before. The warehouses of assets selling at massive discounts. Every economic, industry, or business crisis inevitably spawns such extraordinary opportunities. You just have to have the foresight to be looking for them and the guts to grab them.
Look, we’re not saying you shouldn’t worry about the current unsettled environment. Two months ago in this column, we noted that the era of low-cost money was swiftly coming to a close, and there would certainly be painful consequences for many banks, private equity firms, and individual investors. But in our view, this credit crisis is just a financial-sector crunch, not an economic Armageddon. Like all cycles, this one will play itself out in several months or a year—two years at the most. Think of the savings and loan industry debacle in the 1990s, the Mexican peso devaluation in ’95, the Asian financial crisis in ’97, and the tech bubble burst in 2000. All of those dislocations came, wrecked havoc, and eventually got cleaned up by market forces with some form of government intervention. Without question, that will happen this time around too, and the reason for this certainty is that the underlying global economy is so fundamentally strong. Yes, it may be entering a period of slower growth but thanks to record levels of economic interdependence and activity, it is more resilient than ever.
Which is why now is the perfect time to take the big swings. The rewards can be huge, even disruptive—in the best sense of the term. Case in point is Bank of America’s recent $2 billion investment in Countrywide Financial, a leading mortgage banker that was facing a liquidity and credibility crisis. The deal not only delivered short-term paper profits to Bank of America, it allowed it to leapfrog its way into the mortgage business and opened the gateway to a flood of new deposits. In one fell swoop, Bank of America expanded its market share and enhanced its industry profile, basically changing its competitive position.
Bank of America, of course, is not a solitary example. The Japanese banking woes of the early ’90s gave numerous companies, including aig, Ripplewood Holdings, and Citigroup, a chance to pick up assets at attractive prices and enter a market that had long been closed to them. Those bets—made in a real doomsday-like environment—turned out to be big winners as Japan recovered. Similarly, after the Enron blowup, Warren Buffet was able to take a position in its pipeline business at a deeply discounted price, a deal with a surefire payoff. ge was also able to get a good price on Enron’s wind power assets, allowing it to jump-start its alternative energy business. Indeed, business history is filled with stories of seemingly perilous risks that turned out to be prescient moves. The point is, anyone can invest in a trend, just as hordes invested in the subprime housing market over the past few years. Such bandwagon investing is easy. What’s so much harder, but so much more rewarding, is investing in the wreckage of a trend that’s been brought to a halt by its own excesses. Talk about a gold mine.
Now, obviously, no one in business savors a downturn. The personal cost is always too high; people can lose their jobs and their homes. Sometimes they have to move or start again, or both. But the incontrovertible fact of capitalism is, markets ebb and flow. Industries contract and collapse, bankruptcies occur. Cycles happen. Most companies take advantage of the obvious opportunities. That’s well and good. But the winners of tomorrow are often those who take advantage of every opportunity, including those that arise when—or because—the sky is falling.
This question and answer originally appeared in Business Week magazine on September 17, 2007.
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