Who Might Profit From the Subprime Lending Mess

Whenever there is carnage, there are vultures. Nothing rings more true in the world of high finance. Not many of us can ignore the great meltdown in the credit market south of the border, which could put about 1.7 million American homeowners out on the street.

Moreover, holding on by the skin of their teeth, hedge funds and troubled institutional traders went ballistic on the stock markets, which appear to be unable to stop spiraling down. And all of this despite the central banks pumping liquidity into financial systems and promising to decrease interest rates!

Now, who in the world could come looking for dinner at a time like this? What particular kind of vulture(s) would be able to profit from this misery? As it turned out, those would be the by now rather lean investment companies specializing in underperforming corporate loans.

Namely, such companies focus on other companies struggling with loads of debt. It matters little whether the target company is a manufacturer or a financial institution. Debt is debt. These “vultures” (not really, debt buyers are a normal and necessary consequence of any food chain, including the corporate one) try to turn around target companies and sell them at a profit.

Of course, specialty investment firms are not the only ones lining up to survey the wreckage. There are also liquidators, insolvency lawyers and accountants, appraisers, auctioneers, and many others, looking to squeeze some profits from a failure.

Up to only a few short weeks ago, the attractive interest rates and easy money have delayed the catastrophe in the subprime lending market. But with the safety net being quietly away, the bottom- feeders seem ready to pounce.

Still, whether we like the image of vultures waiting for a sick animal to die or not, both in nature and in the economy, this is all part of a very natural process. In fact, the “vulture sector” plays a crucial role in the economy when times are tough, leading to the much needed cleansing and recovery stages in a business cycle. Strangely, people always seem to forget that failure is a natural event, just like success.

But why am I talking about the economic ecosystem? Partly, I think I’m done explaining why and how things in the credit market went down so fast so soon, and partly because I see something else potentially on the horizon (excluding the vultures, of course).

With the supply of easy money slowly but surely drying up, large- caps may no longer be able to grow through mega-takeovers. We have already heard about a few huge deals having difficulty finding investors, while new ones are not even trying.

This potentially opens the door to small- and mid-size companies finally having more access to banks’ lending portfolios. Although it might be more difficult for homeowners to get mortgages, it does not necessarily mean that all money taps have been shut down. Banks need to make money, too, and, I’m afraid, bank charges on individual accounts, regardless of how shameless and egregious they might be, are hardly enough. With smaller companies, takeovers and acquisitions do not have to cost an arm and a leg, which, with some extremities perhaps permanently gone from the capital markets, right about now sounds pretty good.