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The Impact of the Financial Crisis on Middle Market Acquisitions

By: George Spilka
Posted: November 14, 2008

The U.S. is in the midst of its greatest financial crisis since the Great Depression. Congress approved a $700 billion bailout package for the financial industry on October 3, 2008—an infusion of capital that is the most massive governmental intervention in the financial markets in U.S. history. After the initial rescue package was denied, the second version passed relatively quickly, as the consequences of not doing so were too dire. Had Congress not approved the package, there would have been a complete freezing of the credit markets.

Congress’s delay in passing a rescue package caused an intensification of the anxiety and fear gripping the financial markets. This significantly contributed to the overwhelming crisis of confidence that now impacts the U.S. financial markets and has spread to all global financial markets. Subsequent aggressive and prudent measures instituted by the Federal Reserve and U.S. Treasury (i.e.  the direct lending by the Federal Reserve to industrial companies) and the reduction of the Fed funds and discount rates, among other actions, did not immediately stem the panic devastating the markets. However, the former will eventually loosen up the commercial paper and general credit markets for numerous reasons, and the latter will have a positive impact on overall economic activity. And more actions are likely. The world's central banks and most national governments now seem to be making the right moves, while operating in a tremendously complex, unique and opaque environment. These moves will eventually bring stability to the world financial markets.

However, we are definitely not facing a financial Armageddon. The market should hit bottom in the very near-term, and, at that point, the return to normalcy will begin. And normalcy should arrive much before most people expect. Despite what you have witnessed, there is no reason to panic.

What brought the country to the brink?

Very simply, the reckless residential mortgage lending that began in 2004 combined with the use of modern technology to design exotic financial derivatives, which were little understood by many and had consequences that almost no one could forecast. The massive use and distribution of these derivative products was almost completely funded by debt.

What hasn’t happened in the financial crisis?

The impact has been limited to the financial industry, which has been devastated by the losses sustained in the residential mortgage lending market and the losses related to credit default swaps and other derivative products. The crisis reached one peak on September 17 when financial institutions became concerned about extending credit anywhere; thereby nearly causing a meltdown of the U.S. financial structure. The Federal Reserve and Treasury stepped-in and proposed the bailout package. This brought renewed life to the credit markets. However, while this scenario evolved, U.S. industrial companies (both manufacturers and distributors) had their strongest balance sheets since the 1970s. There has been no massive borrowing by America’s industrial companies during this period, nor has there been any meaningful disruption in the manufacturing and distribution segments of the U.S. economy. The immediate impact has been limited to the financial markets, and this is where the impact will be contained.