Borrower run

  We’re all familiar with the scene in It’s a Wonderful Life where the good people of Bedford Falls go running down to the bank in order to demand their money.  That’s the vision of a bank run most of us have in our heads.

Strangely enough, similar runs have occurred in both the U.S. and the U.K. over the past year.

More importantly, however, have been the 21st-century style runs on institutions that don’t call themselves “banks” but are in fact banks, inasmuch as they borrow short and lend long.  When those non-bank-banks suddenly find themselves unable to roll over their short-term debts, it is the functional equivalent of a bank run, even if the visuals are less dramatic. 

But according to some very smart people here at HBS, this financial crisis has seen something that I’d never heard of before:  the borrower run.

Victoria Ivashina and David Scharfstein dug deep into Reuters’ DealScan database of large bank loans.  They found what I mentioned in my previous post:  total bank loans for commercial and industrial use appear to be up.  But then they nailed what had only been a hypothesis:  commercial and industrial loans are up only because companies are drawing down their pre-authorized credit lines.  In other words, if a bank will allow a company to borrow from it and hoard the resulting cash, then right now companies prefer to borrow all they can and hoard the resulting cash.

In fact, new loans that aren’t part of revolving credit lines have, in an expression that’s rapidly becoming one of my favorites, gone cliff-diving.  Mira: 

 * 2008 is an annualized figure based on the first three quarters of data.  The actual number will likely be lower.

Meanwhile, the use of revolving corporate credit skyrocketed, as borrowers drew down their credit lines.  In other words, borrowers ran down to their banks and demanding that they be lent the cash right now that the banks promised to lend them.   

But how do we know that these drawdowns in fact represent a borrower run?  Simple.   Ivashina and Scharfstein went out and took a look at the borrowers’ SEC filings.  Which contained gems like: 

Delta Air Lines:  “Simply put, we have taken this action to increase our cash balance.”

Fairpoint Communications:  “These actions were necessary to preserve [our] availability to capital due to Lehman Brothers’ level of participation in the company’s debt facilities.”

Michaels Stores:  “The company took this proactive step to ensure that it had adequate liquidity to meet its cash needs while there are disruptions in the debt markets.”

General Motors:  “[We] are drawing down the credit in order to maintain a high level of financial flexibility in the face of uncertain credit markets.”

Southwest Airlines:  “Although our liquidity is healthy, we have made the prudent decision in today’s unstable financial markets to access $400m in additional cash.” 

And so on.  Said companies grabbed the cash promised them, and are parking that cash as, well, “cash” on their balance sheets.  (Actually, they are probably depositing the money back into insured banks.  Those banks, however, are parking the cash in their vaults.  See previous post.)  They’ll take the interest hit just to have assured access to the money.

It isn’t as dramatic as Jimmy Stewart or those angry Californians, and it is sort of ass-backwards in a strange sort of way, but it still looks like a big bank run.

I am getting more nervous every day.  How about you all?

Comments

[Noel Maurer]

Nobody is nervous? Nobody?? Caray.