By Vahan Janjigian - The financial crisis was brought upon us largely by big institutions that used too much debt. In particular, they used leverage to buy lots of mortgage-backed securities. Of course, thanks to exotic mortgages, some of which required no down payments, those mortgages themselves were already leveraged much more so than they had been historically.
Ironically, the crisis appears to be helping large institutions at the expense of small ones throughout all sectors of the economy. The credit crisis caused havoc for all companies and made it impossible for them to borrow. However, credit spreads have come down and large, investment grade corporations are having no trouble borrowing money at reasonable rates. Although the banks are still reluctant to lend, large corporations can go to the capital markets and issue debt.
Small businesses, however, don't have this option. They rely heavily on the banks for financing. But they can't get financing from the banks on reasonable terms. The inevitable result is that the big are getting bigger and the small are being driven out of business.
This should be extremely troublesome to politicians who are concerned about the rising rate of unemployment. According to the Census Bureau, there were just over 6 million firms in 2006 that employed people. Small companies (i.e., those with less than 500 employees) provided jobs for just over half the nation's workforce that year. More importantly, according to the Department of Labor and summarized by the Small Business Administration, small businesses account for most of the job growth. They were responsible for 64 percent of the 22.5 million net new jobs created from 1993 through the third quarter of 2008.
You don't find many small businesses that are publicly traded. Furthermore, most stock market indexes are market-capitalization weighted. As a result, the stock market provides a reasonable picture of how large businesses are doing, but it does not tell us much about small businesses. The strong rally from the March lows could be an indication that large businesses are successfully managing the economic crisis. The unemployment rate, however, is not likely to go down until small businesses get healthy again. That is not going to happen until the feds make sure that small businesses can also access capital at reasonable rates.
