Historical Perspectives (from the Orange County Business Journal)

HECTOR CUELLAR
PRESIDENT, MCGLADREY CAPITAL MARKETS

CHARLENE DAVIDSON
SENIOR MANAGING DIRECTOR, MCGLADREY CAPITAL MARKETS

This crisis is unmatched and while its visible implications are often compared to that of the Great Depression, this touches far more aspects of the economy and with deeper global implications at stake. It’s so complex that the consumer, commercial, corporate and global markets are all simultaneously affected. The interconnectivity of these capital markets is negatively affecting personal stock accounts, corporate balance sheets and the real estate we live on, work in and drive by. In other words, this touches everybody.

One move by the government won’t fix it. The root of the problem began with loss of control and oversight, eventually spreading to potentially intentional fraudulent practices. And despite the evidence of a fractured system years ago, the immediate opportunities outweighed the complexities of meaningful discovery and conscientious objection to the enormous wealth being created.

We’re nervous, yet prepared to weather the storm. We think it could be another six to nine months for the undercurrents to stabilize and expect upward trends 12 to 18 months out. Credit markets have shut down for many types of deals. In the investment banking world there’s considerable market confusion and a realignment of investor strategies. Fundamentally speaking, a lack of financing makes deals harder to close. And with less cash flow from companies, deals become less attractive and even less likely to be financeable.

Larger deals are generally hit the worst. There were signs of their distress in 2007 and by the beginning of 2008, things got progressively worse and have since been trickling into the middle-market deal flow. The larger appetites for risk and the sheer magnitude of their exposures have sidelined many of the major Wall Street firms. The next tier of investment banks doesn’t carry the same risk but do remain subjected to significant downsizing. And while we are all vulnerable to a shrinking economy with less access to credit, we believe that boutique firms actually have the greatest opportunity ahead.