The Subprime Storm

Lately I can't seem to keep the Bob Dylan song "Idiot Wind" out of my head. It's because the subprime mortgage debacle reminds me of how stupid brilliant people can be. The country's MBA wizards seized upon the low-interest, rising-home-value climate of recent years to come up with this great scheme to convince borrowers they could use a home mortgage as a giant piggy bank.

Who could have foreseen that interest rates might go up or that home values might go down? Well, anyone with half a brain, which apparently excludes executives at the bulk of the nation's lending institutions.

CRAIG ZARLEY Can be reached via e-mail at czarley@cmp.com.

This mess has spread beyond mortgages and threatens to infect all credit markets. Solution providers active in mergers and acquisitions report that deals they have in the works may fall through because some lending institutions have put a lock on loans until the dust clears. And for those thinking about or in the process of selling their businesses, some specialists estimate the value of your company just took as much as a 20 percent hit. That's because with the availability of money scarce and the cost of it going up, the payback time for buyers to recoup their investments has grown significantly.

And who knows where it will end? One solution provider said the credit crunch might be a ripple now but he senses a tsunami just over the horizon. Joe Mertens, executive vice president of Sirius Computer Solutions, one of IBM's largest business partners and an active player in acquisitions, predicts it will take six months for the situation to calm down.

My prediction is that the channel will be forced to deal with mutations of this subprime virus in the coming months. Solution providers, who possess more common sense than the people who finance their businesses, will weather the storm—which will be much less severe than the dot-com bust.

But a few years down the road, the cycle will repeat itself. A new crop of intellectually superior MBAs will populate financial institutions, bringing with them another surefire lending scheme. The only way to break this cycle would be for prestigious business schools to require students to answer this question before they are awarded their MBAs: Can you tie your own shoes? Half would fail.

How has the subprime mess affected you?
E-mail craig zarley at czarley@cmp.com.

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