More Risk, Less Investment

     Now that the major investment banks of the United States are essentially a curious part of our history, the availability of capital, especially for risky projects is going to be hard to find for an extended period. 

     These big investment banks which are now sequentially failing used to earn their keep by advising your investments.  Somewhere in the not too distant past that changed and they began to attract large volumes of capital and put it at risk in very highly leveraged investments.  The commercial banking function began to merge with the investment banking function when the law separating them was repealed in 1999. 

     They offset the risk of their ever more highly leveraged investments with a string of very sophisticated financial instruments and hedges which we are seeing unravel now that the underlying investments performing this function are failing.  The big problem continues to be that many of these financial instruments cannot be traded since they cannot be priced.  They can't be priced because there is an unknown amount of future default in them.  When that happens a kind of seizing up takes place which only adds to the run on these investments with people trying to recover whatever they can before the whole thing collapses.  When the financial instruments cannot be sold to raise cash to pay the panicky demands of investors the recourse is borrowing from the FED temporarily (if the FED believes the problem is temporary), finding a cash rich company or country that can solve your short-term cash demand and buy you out for some fraction of your expected future value or go belly up.

     The long and short of all of this is that interest rates may be low but capital, especially for risky investments is essentially non-existent.  The oil rich but food poor nations and some other international banks have lots of capital available so you see some of them standing at the fringes and buying up some of the attractive assets and pieces that fall out of the crashing banks.

     Banks that didn't take advantage of the extreme leverage and risky investment opportunities of the last five or so years and traditional sources of credit like Farm Credit Services are only marginally affected by this at the present time.  However, the move to put "money in the mattress" as fear reaches a fever pitch may eventually limit their ability to raise capital through the sale of traditionally very safe, low risk bonds etc.

     Fasten your seatbelt and forget about any wild ideas that require risk capital.