The just concluded week of April 11^th 2008 ended on a down note. The earnings announcement (and considerable disappointment therein) by General Electric caught many by surprise and resulted in the largest one day decline in the GE common share price since the 1987 market crash. Perhaps one of the most widely held common stocks, General Electric was thought to be relatively immune to the on-going credit crunch due to its strong balance sheet (and "true" AAA/Aaa ratings), its diversified portfolio of short and long-cycle businesses and its truly global market exposure where more than half of its earnings resulted from activities outside of the United States. Yet even GE disappointed. The chief culprit was attributed to the global credit crisis and weaker American economy. According to The Wall Street Journal, CEO Jeffrey Immelt said, "We assume the economy is going to be very tough and remain very tough." Accordingly, he lowered GE's earnings growth rate to at most 5% for the year. That was a far cry from his pronouncement on December 12^th 2007 that "10% earnings growth next year is 'in the bag'", which also partly explains the sharp share price sell off.

As readers of this Insights section many recall, Toomre Capital Markets LLC ("TCM") has been warning that this credit crunch triggered by the American subprime mortgage default crisis will take far longer to work out than many in this near-instantaneous world of communication might fully appreciate. Many in the financial markets are buffeted by the 24x7 news cycle and feel compelled to react to the latest change(s) in this or that stock, credit, commodity or foreign-exchange price. Is it any wonder then that volatility as a whole as sharply increased from early 2007 levels, many are now decrying "complexity" and most are extremely fatigued? This credit crunch will take yet further time to work out. The key question is, though, Are we at the beginning of the end or just at the end of the beginning of the credit crisis?

With the demise of Bear Stearns, Wall Street now has four large global and independent investment banks: Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. This past week two of those banks held their annual shareholder meetings. According to Bloomberg, at the Morgan Stanley meeting, Chairman and CEO John Mack said the credit crisis will last ''a couple of quarters'' longer as it spreads to commercial real estate, subprime mortgages in Europe and U.S. midsized banks. He continued, "''The collapse of the subprime market in the U.S. has reached its eighth inning or 'maybe top of the ninth''' Mack said before the company's annual meeting, referring to the final period of a baseball game. Europe is in the sixth inning and the market for securities backed by commercial mortgages is 'probably in the fifth.'"

Two days later, according to Reuters, Lloyd Blankfein, Goldman Sachs' chief executive, said we are probably in the late stages of the global credit crisis that began last summer, but he would not predict when it will end. "We're closer to the end than the beginning," Blankfein said at the bank's annual shareholder meeting. "I think we're getting to that point where people are seeing the light at the end of the tunnel." He estimated the markets are more than half way to recovery, but declined to forecast how long the crisis would persist. "Maybe we're at the end of the third quarter, beginning of the fourth quarter," he said, though he cautioned that a recovery may still take a long time.

In contrast, Lehman Brothers' Chief Financial Officer, Erin Callan, was interviewed on Bloomberg Television on Friday, April 11^th 2008. She indicated that the global credit market crisis worsened last month and recovery for the securities industry may take until next year. "March was a very, very tough month. I don't see what the real catalyst for change would be over the next several months. We've got to look out to 2009 for where we're going to [see] change.''

Who is right? Time will tell. TCM might suggest that those arguing that the credit crunch is in the latter portions of a sporting event are perhaps a bit biased by the organizations that they represent. Morgan Stanley and Goldman Sachs would like nothing more than for the credit markets to end their seizure and to return to the state of where were they were in 2003-2006. A return to heightened activity levels would allow the credit problems to more quickly work their way through the economic system and also would reduce the eventual heightened regulatory oversight burdens that are sure to be imposed on the investment banks in the near future.

As credit spreads remain at elevated levels above (and start to expand again above even their) January levels, and market participants are phenomenally fatigued, TCM would suggest that there is another down leg to the credit crunch coming. Hedge funds collectively represent a very important source of liquidity to Wall Street. With the onset of the credit crunch, many turned from fixed-income strategies to those focused on equities or commodities. However, with the recent withdrawal to the sidelines of individual investors and more traditional institutional investors in the equity markets, and the growing realization of just how much speculative money is concentrated in the commodity markets, many hedge funds are cutting back on leverage and starting to decrease their transaction volumes.

It is well-known that one of the key results of reduced market participation is how much easier it is for the remaining market participants to move market prices. Hence, if some piece of adverse news comes out, the negative price reaction is significant and swift. Similarly, a piece of positive news can sharply swing prices to the upside. However, until a trend is established, many market participants will remain on the sidelines fearing the uncertainty and the seeming randomness of whether one is right or wrong. After all, psychologically a person (and collectively an organization) can only take being chewed up for just so long.

Are the investment banks and markets in general prepared for the realization that we are just at the End of the Beginning of the credit crunch? Reader comments and thoughts are welcome.