The Credit Crisis in Action
Over the past couple of months I’ve been reading with great interest all the postings on how the current economic crisis can/can’t, will/won’t effect the start up world. Having lived through the 2001 – 2003 nuclear winter, I feel strongly that no one will be spared, irrespective of how big your company is.
This reality scored a direct hit last week when we got a call from the CEO of our contract manufacturer (domestic, not overseas). Their credit lines were pulled by their bank (one of the big ones) because they had violated some terms of their loan agreement. While in the past, this type of thing was met with a “let’s work it out” type of attitude from the bank, instead given the credit crisis, that attitude disappeared. Consequently, they closed the facility where our product was being built.
As a result, we needed to immediately pull all our inventory, test fixtures, and packaging out of their facilities. To say the timing was terrible is a grave understatement. Our products were literally on their assembly lines, on schedule for our early October shipping deadlines.
It’s hard to describe the feelings this sudden crisis created. First there was the enormous frustration of having to cope with another manufacturing delay. Closely coupled was the harsh realization we now risked losing the confidence of our loyal customers that we’d ever get these units out the door. To that end, let me describe what we’ve done and are doing to make sure this setback has minimal impact.
Our product team, having gone through the process of spinning up a new contract manufacturer (CM) not too long ago, is well prepared to make this next move happen quickly and smoothly. We have already identified, contracted and engaged a new CM who has committed to hitting the ground running. This CM is a family run business, a bit smaller than the one we’d been using, is debt-free with strong financials. While of course there are no guarantees, I feel strongly that they are the right fit for the job we need to get done right away. They know the stress we’re under and have signed up to the task of helping us move rapidly.
This switch will create a four week delay in our shipping schedule. Not good news, but hopefully not terminally bad either. Many of you who are reading this have been waiting for a long time for your BUGs and I can only say everyone here at Bug Labs is working like mad to get them to you. We all deeply appreciate your patience. We will get through this setback.
I will continue to blog about our progress to make sure you stay informed. If you have any questions, concerns, frustrations or suggestions I would love to hear from you. You can email me at peter (a) buglabs dot net.
Tags: credit crunch, economy, manufacturing
October 13th, 2008 at 8:15 pm
i guess this endemic to manufacturing overseas, i’d pay extra (10-20%) for bug modules that were made in canada or the usa, any possibility of this?
October 14th, 2008 at 9:07 am
Roland,
Actually both CMs were in the USA and I believe the third is as well, but the credit crisis is going into ” real” business more than the media thinks.
October 14th, 2008 at 9:38 am
I’m a BUG fan till I die and can wait a bit longer. Hang in there and do what you gotta do. Credit to you for being open about what’s going on.
October 14th, 2008 at 11:18 am
thanks Kevin! for some strange reason I thought the CMs were in China! My Bad!
October 14th, 2008 at 3:10 pm
Sigh. I’m starting to wonder, frankly. It’s been one delay after another here, and I’m really hoping this is the last. At this rate, the device may not be relevant for me anymore by the time I actually get my hands on it…
October 16th, 2008 at 12:21 pm
No shipping to Canada, no product to ship, and a track record of manufacturing problems and other delays. Ill check back in a few years if you are still around.
October 17th, 2008 at 12:41 am
Hi,
Having worked in Financial Risk Management for the last 4 years at a large bank, I was in a unique position to analyse the technical causes behind the current so-called “credit crisis”.
Financial Risk Management involves the use of ‘pricing models’ to estimate potential future values of financial instruments. These models calculate the risk of an instrument based on the number of variables, and with interest based products, the most important variable used is the ‘mean time to default’.
The “mean time to default” is basically the credit rating. So as long as these CDOs had a credit rating of ‘AAA’, the model would assume that the mean time to default of about 8 years, whereas a subprime mortgage debtor has a mean time to default that is closer to 3/4 years, which would be a credit rating of B or CCC.
(I’m simplifying, more information here http://www.blaha.net/Finance%20Corporate%20Debt%20Ratings.php)
Now not all of the mortgages in the CDO were subprime, as these types of instruments are generally made up of tranches of different mortgages on the bank’s mortgage book. So the risk on the whole of the CDO was definitely not B, but it certainly wasn’t AAA either.
The real crunch here though is that the credit rating determines the coupon (interest) rate. AAA assets have a very low yield, because their risk is virtually non existent. B assets have a high risk, and so investors expect a much higher yield to cover the risk (this is known as the risk premium).
So the banks were selling BBB instruments (CDOs) at AAA risk premiums, and making the spread between them. Given that there is often a large (up to 100 basis points) spread between those two I can see why the banks were keen on this practice. Lend at 600 and borrow at 500? Where can I get me some of THAT action !! ??
Given the massive profitability of this fraud for banks, one has to question the role of Moody’s/S&P in all of this in their rating the CDO paper as ‘AAA’. No doubt they will claim they were duped by financial whiz kid quants at the banks, but I think only the American taxpayer would be silly enough to believe that story.
On that final note, the Rest Of The World ™ would like to extend a big ‘Thank You’ to the American taxpayer for volunteering to pay for our investment mistakes in your financial system. We could have done our due diligence on your mortgage backed derivatives ourselves and found them overpriced for the risk, but instead we decided to buy them anyway, and now you have agreed to pay the risk premium through your taxes.
THANK YOU, and remember not to vote!
October 27th, 2008 at 10:03 pm
How long before Buglabs run out of cash itself?