Wally Weitz: Market Commentary—Credit Problems Continue to Dominate Financial News

In the late 1990’s we experienced a technology stock “bubble.” Agood idea—“the Internet will change the way we all communicate and do business”—was carried too far. Investors paid ridiculously high prices for “dot.com” companies with little substance and the episode ended badly as the Nasdaq Composite dropped roughly 70% and the rest of the market followed.

Over the past few years, a surplus of capital has been generated by corporations, individuals, and repatriated trade deficit dollars (spent on foreign oil and manufactured goods). This excess capital created an enormous demand for income-producing assets—loans, bonds, real estate, etc. Wall Street, always eager to accommodate, created new mortgage products for real estate buyers and helped facilitate a boom in leveraged buyouts. Again, generally good ideas were carried too far. Credit quality slipped as lenders found ways to sell the loans they created, thus divorcing themselves from the risk of loss if borrowers defaulted.