Credit Proves Tough Even for Good Borrowers

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Renee Montagne gets a firsthand account of the paralysis in the credit markets with Hugh Johnson, chief investment strategist at Johnson Illington Advisors. Johnson says borrowers are reluctant to make loans these days even to people with good credit.


And for a look inside the paralysis of the credit markets we just heard David speak about, we called Hugh Johnson. He's chief investment strategist at Johnson Illington Advisors. That's a money management firm in Albany, New York.

Good morning.

Mr. HUGH JOHNSON (Chief investment strategist, Johnson Illington Advisors): Good morning.

MONTAGNE: When David Wessel just now said that when good credit can't borrow, that's the definition of a credit crisis, is - was that something that you recognized?

Mr. JOHNSON: I certainly do. It's no longer just a marginal borrower or somebody that's trying to borrow money that really doesn't have the kind of financial resources that they need to borrow money. It's now that those that even have good resources are having difficulty borrowing money.

And that's obviously because the lenders, they're much, much more reluctant to make loans, not only to marginal borrowers - those that have very, very little good credit - but also even the better borrowers - those that have substantial resources and shouldn't be blocked out of the markets.

MONTAGNE: How do the securities that you've been working with fit into this larger picture, and how much of those mortgage-backed securities have you been dealing with?

Mr. JOHNSON: Well, we were fortunate that we didn't really do a lot of mortgage-backed securities, certainly not the ones that ran into trouble. We have some clients that we advised that did plenty of them. They've run into substantial problems.

And the problem, of course, is those securities, which were really just bundles of mortgagee that were made by banks, those securities, there are real questions about them right now because they're backed by mortgages and there've been defaults on many of those mortgages, which really makes the security less valuable or very suspect.

MONTAGNE: Now why didn't you buy those securities? Did you have an instinct or any knowledge that there was something wrong with them?

Mr. JOHNSON: No. I wish I could say it was good judgment, but it wasn't really good judgment. We avoided it for a lot of reasons, is that we didn't like the fact that there was a big housing bubble, which we thought would be followed by a period of, lack of a better word is revulsion or financial distress, and there might be problems.

MONTAGNE: Give us a maybe an example here. Who would you normally be selling your investments to, and why aren't they buying now?

Mr. JOHNSON: What we ordinarily do is we sell through a broker or a dealer. They either buy them themselves, or else another financial institution buys the securities that we sell. Now, they're very reluctant to step in and buy securities, whether it's a broker dealer, because they have that same question: Am I going to be paid the interest on the security that I buy? Am I going to be paid my principal at the time this thing matures?

With so many of the mortgages that support that security defaulting, they have real questions about whether they are going to be paid their interest and their principal. And as a result, they're backing away or they're not buying those securities. And, of course, I can't sell them if there's nobody going to buy them.

MONTAGNE: Does that mean effectively you're frozen?

Mr. JOHNSON: That's exactly what it means. And when there's nobody willing to buy, there's no price, the question is what is the security that I own what's it worth. And if there're not buyers and you can't sell it, it's probably worth nothing.

That doesn't mean it's going to be worth nothing forever. Hopefully, some confidence returns to the market in some juncture. You do get a lot of financial institutions that are willing buyers, at which time, of course, then we'll have some value to that security. But when you can't sell a security, it's really worthless.

MONTAGNE: Well, this is - clearly for you - being in this business, quite an immediate concern. How long do you think you might be stuck with these securities?

Mr. JOHNSON: Well, you know, that gets to the question of when will the tide turn? It's a function of seeing some stability in housing. It's a function of some time. And it's a function of having some confidence return to the markets. The prices get to a level that looks very, very attractive. And we've got to sort of reach that magical moment. We haven't reached it yet, but when we reach that magical moment, things will turn and go in the other direction.

MONTAGNE: You know, I just have to ask, does that mean you're just, in a sense, sitting there?

Mr. JOHNSON: I have a lot of clients that we advise, and that's exactly what they're doing. They're sitting there. They're waiting. They own the securities, but they can't sell the securities. And they have no choice except to wait.

MONTAGNE: Hugh Johnson is chief investment strategist at Johnson Illington Advisors.

Thank you for joining us.

Mr. JOHNSON: You're certainly welcome.

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