Two separate, but somehow linked recent events reminded me of how our current, improving financial times are merely part of a never ending cycle. The mortgage crisis led to tight or non-existent bank credit to atone for our too free, lending years. Now the stock market, and even housing, seem to signal a return to a better economy just ahead. Which brings me to:

“Debt Makes Comeback in Buyouts” Wall St. Journal 6/13/13

You may have not noticed or paid much attention to this one. A software developer, no one ever heard of,  is being taken private by Bain Capital and another firm. The purchase price is almost $7 billion consisting of $1.25 billion of cash and the remainder in debt. This is less than 20% cash and far less than the 40% cash that lenders required only a year ago. In fact, to find this low level of cash in a deal like this, you would have to go back to 2007-8 before the financial crisis. Now Bain Capital and other large private equity funds often get treated much better than the average corporation or individual, but this is still a major swing in lending standards in a short time. I hope that deal works better than my sister Sally’s favorite example of H-P buying the UK software firm, Autonomy, for some $15 billion and then writing off most of their purchase price as a loss!

“Regulators Review Lending Standards” Wall St. Journal 6/13/13

This separate article stated that Banks have finally loosened their lending standards, as the economy is slowly improving. More than half the banks surveyed said they have eased the loan covenants or loan tests that borrowers must comply with, such as the ratio of interest costs to earnings. Again, in a recovering economy, you expect this to occur. But besides easier loan tests, banks have increased the terms of loan agreements while lending to many companies at all-time-low rates. The combination of these factors, if there is another economic slowdown, not even a recession, could be very problematic. And you thought we solved all the banks’ problems the last time?

I mentioned a cycle at the beginning. An old boss of mine, Tony, used to say that cycles swing back and forth like a pendulum. Bank lending goes in a cycle just like the economy and just like everything else. And even though only large private equity firms or large corporations are currently benefitting from this easier credit trend, you can bet it will soon be credit card issuers and even mortgage lenders before too long. And then somewhere down the road, there will be another financial crisis and everyone will demand that our government solve their problem. Again. Good luck with that!