Tuesday, September 30, 2008

The crucial factor of our economic crisis

The crisis come and there is no one clear what happened actually.
 
People can only see the result to the reason.
 
No one dare to challenge the fundamentals  of the financial markets.
 
The history of stock market make us forget the foundation of it. And this is why everybody fell into the trap.
 
The existence of stock, at the beginning, is for funding from public and keep liquidity.
 
After years and decade, the stock values become an accountable assets in our financial statement.
 
And accountants count assets with shares that float its price everyday.
 
The problems is bank use the same formula to calculate risk.
 
In checking liquidity of a company, we usually use acid test , or quick ratios which include investment in stock markets as an asset.
 
We don't anticipate a fast drop in the value of those stock investment. As current assets, in the financial ratios, banks will lend his money to a company whose quick ratios or acid test ratios good. It can be good while the stock price in high position. However, when stock price is going down, bankers may regret as the current asset shrinks! and the quick ratios turn bad. Bankers cannot withdraw their money!
 
Banker's money are trapped in listed company! The listed company borrowed more than they are qualified. They take advantageous of being listed and get a higher leverage in their business.
 
When stock market plunged, current assets of those listed company dropped seriously, and directly lower the financial strength of the company. Bankers then start worrying their loans may turn bad,
 
As matter of facts, it is a wrong approach that makes this mistakes . I think no bankers should lend their money base on the financial ratios currently used. 
 
They should exclude securities that is traded in the market.
 
And always security are traded over value in most days with too many funds supporting it.
 
The financial strength of a list company can be enlarged with the share prices traded in the market.
 
When we all forgot this basics, the day is come when the stock market's function is abused.
.
 
 
cwwinson
 
 

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