Some loud, scary noises have been coming from the stock market recently – driven by fears about a credit crunch, liquidity, and subprime mortgages. I don't normally write about Wall Street or economic issues, but this week I have to. What's happening isn't just background noise, but something so huge that IT professionals must understand it. This could have major implications for our jobs.
In a nutshell, the worldwide cheap-money credit spigot has been turned off abruptly. For several years, low-interest loans have been widely available to almost anyone, from condo buyers with bad credit (so-called subprime) to private equity firms doing billion-dollar leveraged buyouts of huge corporations.
Most of these loans came from lenders in Europe and Asia, or from U.S. hedge funds and brokerage banks that saw a chance to make a quick buck and pass the risk on to someone else (also known as the greater fool theory). Now some of these greater fools are realizing they've been stiffed – to the tune of billions – as default rates on these loans (chiefly, mortgages) shoot way up.
In several recent cases, loan funds supposedly worth billions have told their investors that they're actually worth zero. And some governments (such as Germany) are even stepping in to bail out the funds to avoid a total loss of confidence and meltdown in the banking system.
The result is a panic of unknown duration in which lenders are sitting on their cash, not wanting to loan anything to anybody until things settle down. So interest rates are heading up, stocks are panicky, and everybody's focused on how many more "blowups" will come to light in the next few months.
As IT professionals, we'll be the last ones to know where the bad loans are buried (you might try asking your CFO – not!). But we can at least be prepared for the likely fallout. If you work in one of the following situations, I'd advise you to hunker down and get ready for a rough ride:
1) If your company has a lot of debt on its books, budgets will likely get squeezed under pressure from lenders to repay debt faster, plus higher interest rates.
2) If you work in real estate or related industries such as home building, the market had already cooled, but with the dramatic mortgage pullback, the slowdown should accelerate. Ask yourself if you think your company will survive and in what form.
3) If you work in financial services, large, diversified banks will probably be OK. But if you're at a brokerage or an investment bank that's taken on lots of mortgage-related risk, or a firm that's been dependent on cheap loans to do M&A deals (or on the Japanese "carry trade"), it could be a rough ride.
4) If you work at a company heavily dependent on the U.S. consumer, it's hard to imagine a U.S. credit pullback (mortgages, credit cards, home equity loans) not cutting into consumer spending, especially combined with high gas and food prices. If your company sells globally, great – the global economy is still booming. But if you just sell luxury items to middle-class American teenagers, you might want to freshen up that resume.
I don't want to be Dr. Doom, but it's best to peek under the rug and be proactive. If you've been in IT for more than a couple of years, you've been through some ups and downs already, and it never hurts to have a polished resume in the cache. People have been speculating for years that this cheap-credit-driven boom would end, but it finally seems to be happening. And IT will not be immune.
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