When Credit Crunches

In the blink of an eye, over one thousand people are about to lose their jobs because Capital One has made a sound business decision. The company best known for its credit card business wandered into the home mortgage game recently, but the mortgage business has turned sour of late and Capital One did not wish to go down in flames. Close up all the branch offices, no more mortgages, and how will the former employees pay their monthly bills?

The credit crunch has crushed another firm, but one that is not well known to the average investor. Sentinel Management Group took money from futures brokers and hedge funds, with an eye to managing the cash. The clients of Sentinel were expecting their money to grow, and Sentinel promised to invest in safe havens such as government securities. On Friday last, Sentinel declared bankruptcy and the Securities Exchange Commission is all over the bones of Sentinel's carcass.

In a bit of a Ponzi scheme, client money was used to dress up the corporate bottom line, all in an effort to borrow money for investing. One can picture Sentinel's head trader, watching his investments lose money day after day, and cooking up a little scheme to save his arse. It might have worked, given enough time and a better credit picture, and it had worked before in 2004. This time around, the house of financial cards tumbled down as the subprime mortgage market collapsed and brought easy credit with it. Sentinel used its clients' money in ways that are illegal, in an effort to create a facade of financial liquidity so that banks would loan the firm money. Like a gambler on a losing streak, the firm figured that the next deal would be a winner and all the debts could be repaid and the SEC would never know and the losses made good and the clients none the wiser. The scheme failed when easy credit expired dramatically and world markets tanked.

Over at Capital One, employees will lose their jobs and have to scramble to find other employment. High powered futures brokers will be forced to shut their own businesses if they can't access the funds they invested with Sentinel and a few more people will be added to the unemployment line.

And what of all the workers whose livelihood would not seem to be dependent on the credit markets? Those who toil for the Tribune Company will be left to ponder their fate, wondering if the lack of easy money will prevent Sam Zell from buying up the Tribune and injecting it with new life. The nervous employees of Harcourt are thinking along the same lines, not knowing if the credit crunch will keep them from joining forces with HM Riverdeep or find them working (or getting laid off) by some other faceless corporate entity.