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Bracing For A Long Winter

Publication Date: 
October 15, 2008
Source: 
Forbes.com
Author: 
Elizabeth Corcoran

Professor Jospeh A. Grundfest is quoted in Forbes.com in an article about the coming recession:

Underlying many of the economy's problems is a lack of "transparency." More bluntly: No one actually knows how to value some of the assets claimed by the biggest banks. Joseph Grundfest, a professor at Stanford Law School and former commissioner on the Securities and Exchange Commission, contended that accounting rule FAS 157 has been so open to interpretation that banks could value the same debt-based assets very differently.

"I think we'll have a recession and that it will be longer and deeper than any one of us want to think about," Grundfest said.

What to watch for? In an interview with Forbes.com, Grundfest ticked off a list: plunging real estate values, problems erupting in the debt markets, increasing credit card delinquency, rising foreclosure rates and "plague, pestilence and locusts," Grundfest said. "Make sure you put in those last three."

Green or clean technology investments are likely to come under significant pressure, Grundfest noted. Bringing a novel energy product to market--such as a new biofuel--demands hefty investments, on the order of hundreds of millions of dollars. For investors to make money on such deals, however, those companies must eventually have gigantic liquidity events--historically, initial public offerings that pin a billion-dollar, or more, valuation on the companies.

The prospect of those deals seems pretty dim these days. The IPO market is moribund, Grundfest notes. (Only six venture-backed companies went public in the U.S. in the first three quarters of 2008, according to the National Venture Capital Association.)

...

"We know enough about the 1930s to prevent the mistakes that caused that terrible macroeconomic crisis," Grundfest says. "But that doesn't mean we can't make new mistakes."