Monday, October 22, 2007

It's the reserves

Gretchen Morgenson, in yesterday's New York Times, points out an aspect to the subprime meltdown that I haven't seen touched up on very much: where are the reserves?

Traditionally banks keep very little cash on hand. This doesn't just apply to the money they keep at the bank. As banks eat losses from lending, they in turn have to take that money out of reserves, and there's only one way to replenish those reserves, which is out of income.

Ms. Morgenson expects profits to take a big hit at the major banks for some time to come, and her analysis seems compelling to me.

What does this mean for entrepreneurs? Keep your assets handy, and if you have equity in a property, and can get it now, you may want to investigate the pros and cons of getting at that equity. It won't do you any good sitting there, but it also won't do any good to pay more for your property than you can afford. Take a look at the numbers and get a broker to run your scenario past a variety of lenders.

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