Like most of the country, and increasingly many parts of the world, NPN Magazine is intently watching the current economic situation. Just in the past few weeks unprecedented moves have been made, including the contentious $700 billion rescue plan approved by Congress.
The plan, formerly known as the Wall Street bailout, gives the U.S. Treasury the ability to decide what and how to buy, which is designed to help clean up the so-called toxic debt primarily caused by subprime mortgage lending. Other features of the measure are to raise the insurance on bank deposits to $250,000 and to allow the government to buy stock in firms.
The Fed has taken a central role in trying to calm the market. It joined the Treasury to save mortgage giants Fannie Mae and Freddie Mac by giving over $200 million. The Fed also saved insurer AIG from going under by loaning it $85 billion, but that number recently increased by $37.8 billion.
Investment banks have been having trouble getting quick loans. In order to help these institutions to keep operations going, the Fed loosened bank lending rules, allowing banks to borrow from savings branches inside their own firms.
Another move by the Fed was to lower the federal funds target rate. This joined actions taken by other central banks across the globe to lower interest rates. The Fed also began to circulate $600 billion to assist these other countries’ central banks and stimulate the global economy.
Businesses trying to borrow large sums of money from banks have been having a difficult time. Usually, a company can get a loan for millions of dollars by selling what is known as commercial paper. However, banks wary of lending have made these types of loans hard and expensive to get, causing a credit crunch. The Fed said it would begin to offer short-term loans for stable companies; a move seen as an attempt to restore confidence and encourage more lending in the commercial paper market.
The outlook for businesses is gloomy, but there has been some indication that the petroleum retail industry could fare a little better than the rest of the economy. In the 1990s marketers and c-store operators experienced their own speculative bubble when lenders started to throw large amounts of money at them. These loans were then rolled-up into bonds that were marketed to institutional investors, much like the way mortgage backed securities, until recently, had been sold. New money started coming in from brokers, but when this market turned a few years later, over-leveraged businesses couldn’t get out of debt and went under. The parallels to the current financial crisis are staggering.
On another positive note, the marketers and retailers typically have long-standing relationships with local banks for their financing. Although the local bank are feeling a trickle down impact from the credit crunch they should, for the most part, be financially sound in their own community investment practices. And, similarly, because of industry consolidation most marketers have solid equity in their commercial real estate made of valuable retail corners.
This is not to say that the coming few years will be challenging for the industry. Petroleum retailers are facing some big changes, most notably the Payment Card Industry Data Security Standard, which will require notable capital investment. Unfortunately, marketers may have to find the funds regardless of market conditions.