August 9, 2007 was a tough day on Wall Street, with stocks falling 400 points on increased credit concerns over the struggling mortgage lending market. On the same day insurance giant AIG released a report showing that borrowers in the category just above sub-prime were showing increased residential mortgage delinquencies.
AIG is a good position to know. The company is the world's largest insurance company and would have its hands full if lenders can't collect from borrowers. It's also one of the largest mortgage lenders in the world. The company says that more than 10% of its sub-prime mortgages were 60 days overdue, while 4.6% in the category just above sub-prime were late during the second quarter.
In addition, total delinquencies in AIG’s $25.9 billion mortgage insurance portfolio clocked in at 2.5%.
Given that bit of disturbing news, can the credit crunch spill over into the technology industry? As I pointed out yeserday, sure . . . but maybe not as badly as the national media would have you think.
With the money supply tightened, some companies, especially younger, less cash-rich technology companies, will find it more difficult to raise the capital they need to work on new products, develop new markets, and keep hiring good, smart people. But most companies know enough to hunker down at times likes this and ride out the credit slide.
Also, if stocks continue to slide shareholders in technology firms may decide to cut their losses and sell their stocks, opting instead to place their money into more cautious portfolios like cash or bonds. That will cut into the operating capital and the revenues of publicly traded IT companies, who, in turn, may have to decrease investments in research spending, hiring, and other key operational areas.
Then there are the venture capitalists. With credit tight, and the rekindled memories of the go-go 1990’s, which got up and went after billions in venture funding into internet companies came up snake eyes, venture capitalists are reluctant to fund new companies is such a bearish financial climate.
Again, the markets are taking their lead from the housing market, which is traditionally a good benchmark for the economy in total. Economist Robert Samuelson, writing in the August 9, 2007 edition of Investor’s Business Daily, says that the real estate market had added, on average, 30,000 new jobs per month in the past few years. But with the housing market in sick bay, those numbers have just about flipped, with housing industry companies letting go an average of 15,000 employees per month in 2007.
Back in the late 90’s, venture capitalists were waving checkbooks at any new firm with a passable idea. Over $100 billion was sunk into such companies from 1998 to 2000. Samuelson says that number is down significantly 10 years later, with 2007 and 2008 shaping an even thinner period for venture investment.
Again, this too shall pass. As I pointed out yesterday, financial markets are self-correcting, and that's the situation now.
So it's not a great time for technology companies to be looking for free money, but the whole concept of free money, as exemplified by the low-interest rate lending spree of 2005-2006, was a mirage, anyway.
Technology companies that practice good, sound fiscal management have little to worry about. They know that next year will be better. Those that rely on mirages?
Well . . . not so much.