There’s no arguing the fact that these are tumultuous, and downright scary, economic times for Wall Street. The outright downfall or restructuring of venerable banking giants Lehman Brothers, Merrill Lynch, A.I.G. (soon perhaps to be followed by Washington Mutual and Morgan Stanley) has been such a shock that it’s easy to overlook one important detail: with chaos and transition comes opportunity.
What was true for Lone Star Funds back in July is just as true today. As the titans of Wall Street begin to panic, they begin selling off their distressed assets at fire-sale prices. To be sure, a portion of these assets will never regain their worth, but at bargain prices of around 22 cents or less on the dollar, the complete package will likely end up netting a considerable profit for those investors wealthy and patient enough to hold onto them until the financial crisis (most notably in the housing market) passes. In short, distressed asset investment is a long-term game, not a churn and burn, get rich quick process.
Currently, the U.S. Government is planning to invest over two trillion dollars(!) in distressed mortgage assets from some of the nation’s largest investment banks. True, the purpose of this act is to avoid what many fear could become the next great depression. What this situation indicates however is the desperation to sell, or to seek assistance, on the part of many Wall Street institutions that heretofore would have been loathe to do so.
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