Friday, October 17, 2008
The greatest fear of the credit crisis, and the one that spurred the Treasury to act last month, is the fear that the unwillingness of banks to extend credit would lead to companies being driven out of business, impacting the real economy as a whole. The Treasury announced last week a plan to buy commercial paper debt in an effort to spur banks to lend again, but that announcement came too late for one retailer, Linens 'n Things. The company had been teetering on the edge of insolvency for some time, but the credit crisis has dried up the short-term money that insolvent companies nonetheless rely on to survive a restructuring under Chapter 11. Without that money, Linens 'n Things had no choice but liquidate its assets and shut its doors for good. With the continued reluctance of banks to loan to companies whose future is uncertain, it's only a matter of time before we see more businesses meet the fate of Linens 'n Things.