By Stevan Buxbaum, Executive V.P.

Back in the first quarter of 2008, we predicted a challenging year for retailers, wholesalers and secured lenders alike. The 2007 holiday season had been lackluster, and pressures like skyrocketing energy costs and the housing crash were forcing shoppers to retreat.

Who could have predicted these challenges would come to include an utter meltdown of the financial system, or the legitimate threat of a protracted global recession? As surprised as the next guy by the colossal scope and scale of the crisis, billionaire Warren Buffet dubbed the meltdown Wall Street’s Pearl Harbor. The famously prescient Oracle of Omaha could hardly have come up with a better analogy—just as Pearl Harbor turned geopolitics upside-down, shockwaves from the financial crisis continue to reverberate across the global economy.

Let’s start with U.S. consumers. Responsible for some 70% of Gross Domestic Product, they have been spending way beyond their means for well over a decade. But the formerly free-flowing spigot of easy credit seems like a distant memory. And make no mistake about it, desperate government efforts to unfreeze the credit markets by recapitalizing banks and snapping up toxic securities will, at best, stop the bleeding. Curing the patient will involve nothing less than a radical reordering of the global financial system itself, including the reality-based re-pricing of trillions of dollars worth of assets. Think of it—according to the International Swaps and Derivatives Association, credit default swaps in the United States alone are valued at about $62 trillion!

Among financial institutions of every stripe, the massive de-leveraging now underway clearly will continue well into the future. For credit card companies, this has translated into tighter terms for cardholders, and fears that the credit card bubble will be the next to burst are palpable. Unable to use their homes like ATM machines or to ramp up spending limits on a fistful of credit cards, once-carefree U.S. shoppers have no choice but to borrow and spend less.

The implications of these macroeconomic shifts are clear enough for retailers and wholesalers. When consumers anywhere in the world stop spending, that spells trouble for the wholesalers who depend on robust trade with China and other export-dependent economies. When it comes to retailers, meanwhile, the industry is clearly experiencing one of the worst holiday seasons on record.

The Wall Street meltdown also has shaken the world of asset-based lending. As consumer demand slumps, so does the value of retailer inventories. Declining asset values in turn translate into reduced incentive for retailers and asset-based lenders to do deals. Throw in financial institutions’ reluctance to lend to one another and you have a recipe for a freeze.

Just as certain investment banks pushed the envelope of risk during the go-go years of the housing bubble, the asset-based lending community had its own breed of freewheeling newcomers. Consolidation during this time reduced the number of secured lenders even as the demand for loans and the supply of capital skyrocketed. Suddenly, there was an explosion of new finance companies emerging from hedge funds. Many took serious gambles. Where loans once were peppered with covenants placing restrictions on borrowers, these lenders issued riskier loans that could be described as “covenant lite.” Buxbaum Group stuck to its principles during this era and even warned against this trend in industry journals. Because these loans contain fewer triggers allowing lenders to take action against recalcitrant borrowers, their issuers will have to wait far longer to try to recoup their investments. Many will be able to step in only after their retail borrowers are in outright default. Much like Lehman Brothers or Bear Stearns before them, they will pay a steep price for having flown so high.

Timing Proves Fortuitous continued

Buxbaum Group sold the Gamer’s Paradise inventory at the chain’s stores at Water Tower Place in Chicago, Woodfield Mall in Schaumburg, and Yorktown Center in Lombard. It included board games like Risk and Monopoly; role-playing adventures like Dungeons & Dragons; collectibles like Webkinz; and hand-carved chess sets. The sale at Guyer’s 100,000-sq.-ft. warehouse included stainless-steel hoods and ranges, state-of-the-art microwave and convection ovens and better cabinetry.

Fortunately, both sales happened prior to the Wall Street meltdown, which put shoppers in an even more cautious and pessimistic mood. Indeed, bargain-hunters felt confident enough to flock to both sales, which ultimately offered 50% to 75% off original retail. At the eight-week Gamer’s Paradise sale, for example, “inventory sold down to nothing,” relates Buxbaum project manager Martin Coburn. “Basically, all we had left were some ceramic fish with lips.”