"It's only when the tide goes out that you learn who's been swimming naked.” That insight from Warren Buffett is being proved true almost every day now. The demise of various hedge funds, the rescue package for IKB, a German bank, the decision of American Home Mortgage Investment to halt operations—all are results of the retreating liquidity tide.
What we are seeing is a clearing of the froth of the market. Some leveraged buy-outs may not go through; bad news for the profits of private-equity partners, but one suspects they will cope. Investors’ interest might switch from the mid-cap part of the market (where bids seemed most likely) to the large-caps; indeed, this may already be happening.