In the past few days, low-rated corporate loans -- the kind that fueled the buyout boom of recent years -- have plummeted in value. As a result, banks are expected to try to unload some of those loans this week at fire-sale prices.
Nervous buyers also have retreated in recent days from the market for securities backed by student loans and municipal bonds, roiling some corners of the short-term money markets. Similarly, investors have recoiled from debt backed by commercial real estate, such as office buildings.
Over the weekend, the world's top banking authorities warned that the U.S.-led economic slowdown and continued uncertainty about securities could lead banks to further reduce their lending, and choke off economic activity. (Please see related article.)
One sign of investors' anxiety: Standard & Poor's said its index of the prices on high-risk corporate loans fell to a record low of 86.28 cents on the dollar at the end of last week.
Three weeks ago, I said this (and I'm sticking with my calls):
While I think we are in the 8th inning of the stock market drop, this does not hold true for credit markets. Though $100 billion has been written down off the balance sheets of banks, I think there is at least another $100 billion to go. The financial sector will continue to be a drag on the bigger equity indices.