Handicapping the Current Credit Crunch

The current tightening of credit has drawn comparisons to past financial crises, ranging
from the collapse of Long-Term Capital Management, the Russian default in 1998, the U.S. savings and loans crisis in the 1980s and even the Great Depression.

The following is a partial handicapping of past crises, on a scale of "1" (minor) to "10" (terrible), according to an Aug. 6 Lehman Brothers report.

1973-75: 10, almost off the scale to an 11.

Middle East War, Arab oil embargo, quadrupling of oil prices, Watergate, worst global economic slump since the great depression. The Baa/BBB corporate bond market was effectively
shut for an extended stretch. AAA spreads widen 199 percent but later tighten by 72 percent.

1981-82: Another 10.

Worst global/U.S. recession since the Great Depression: U.S unemployment hit 10 percent, the highest since the 1930s. Spreads soar 108 percent, then rally by 68 percent.

1998: A 10.Triple-punch body blow.

Russian devaluation/default, LTCM, and revelations that led to an impeachment vote on U.S. President Clinton. Credit spreads widen 111 percent, then rally 30 percent.

2001: A 10 for 9/11.

Onset of global recession, Enron. High-grade spreads widen by 26 percent, followed by a 17
percent rally.

2002: An 8 for WorldCom, continuation of malaise.

High-grade spreads widen by 43 percent, followed by a 61
percent rally as the world economy recovers.

1979: An 8. Iranian revolution, another leap in oil prices
and U.S. rust belt restructuring.

AAA spreads pop 361 percent, than contract 91 percent. Rating agencies begin to sharply
reduce ratings on electric utilities. (Three Mile Island nuclear accident in March did not help.)

2007: A 7 so far, with a higher final grade possible.

First "neo-modern credit market correction," magnified by subprime
flu. High-grade spreads widen by 48 percent. World economic and
corporate fundamentals far superior to past credit crises, but
this could change.

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