Anatomy of a Liquidity Panic – Clear Communications Is Vital

Now is the time for clear communications, as investors and traders stay on high alert for signs of weakness in the financial system.

Coventree Capital Group announced it was having trouble finding short-term funding for its asset-backed loans, causing an 80% drop in Coventree’s share price. The stock rebounded today to almost half of its earlier $12.98 price, on the announcement that it had found lenders willing to step in.

The Globe and Mail reports that the asset-backed commercial paper market is a $120 billion business that is suddenly struggling to find any lenders. This is in the wake of revelations that financial companies are facing heavy losses from subprime mortgages.

The rubber is hitting the road for North American companies that rely on commercial paper and commercial lending. The markets hammered Coventree for the bad news, but recovered some confidence once the immediate crisis passed.

Globe columnist Rob Carrick nails the more important issue: sudden concern about a financial instrument that until now has been considered relatively safe – money market mutual funds, some of which were investing in Coventree securities.

Says Carrick:

"The irony is that money market funds are coming under scrutiny at a time when they’d ordinarily be looked (at) as an obvious place for investors to take cover from market volatility."

Signs of weakness in any company, any business plan, any third-party, could be the rationale for investors to run away.

The temptation to hide, or downplay a problem is extreme in this kind of environment. But if you think the markets were tough on Coventree’s open disclosure of its problems, imagine the retribution that would have resulted if they’d been caught trying to hide their credit problem.

iStockphoto by Mikhail Tolstoy.

Tags: business, lending, finances, banks, mutual funds, investing, communication, public relations, credit, money markets, disclosure, stock markets