Tuesday, October 6, 2009

Effect of the 2008 crisis on Norm

Norm Brodsky writes about how the crisis affected his company:

In the fall of 2008, Allied Capital [an investor in his company] began closing offices and laying off staff, including the two guys who had been working with us and who served on our board. During this same period, the media were filled with stories about how mark-to-market accounting rules -- which required periodic adjustments of the value of assets -- were aggravating the problems of financial-services businesses. It dawned on us that our majority partner was probably Exhibit A. Although it had steered clear of the subprime mortgage market, it couldn't escape the general drop in asset values. With each passing day, its investments in companies were declining in value, as would-be acquirers reduced the multiples of EBITDA they were willing to pay. At the time of the sale, for example, businesses like ours were going for nine to 10 times EBITDA. A year later, the same businesses were being sold for six or seven times EBITDA. Thus, even if a company's EBITDA had increased in the interim, its valuation had declined. As long as the business remained fundamentally sound, its equity would recover sooner or later, but the mark-to-market rules required Allied Capital to reflect the decline in its quarterly financial statements. As a result, Allied was in increasing danger of being found in violation of its bank loan covenants, which stipulated that it must always have twice as much in assets as it does in debt.

Question: Was the impact of margin calls as severe during the dot com bust or the previous crises?

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