How Wall Street Can Hurt Silicon Valley

Monday’s 9.1 percent dive by the Nasdaq was so sharp — with big names like Amazon, Google, and Apple losing between 10 percent and 18 percent of their value — that some stocks are sure to bounce back. But in the meantime, something has changed: The belief that Silicon Valley is going to remain immune from the Wall Street fallout is gone.

Only two single-day drops in the Nasdaq have been steeper: one in October 1987 (the infamous Black Monday) and the other in April 2000 (the collapse of the dot-com bubble). As Eric Savitz at Barron’s notes, on Monday shares of Yahoo hit a five-year low, Dell a 10-year low and Sun a 13-year low.

Some of these companies had been saying they weren’t worried that the credit crunch would hurt them. I don’t blame them for saying that; it’s irresponsible for executives to speculate about nasty scenarios that could culminate in cutbacks and layoffs. It’s just that I don’t believe them.

Here’s a short list of things I’m guessing will soon start keeping technology executives awake at night, if they aren’t already. Some could be muted by quick action to restore liquidity and confidence in the markets, but all of them became at least a little more possible this week.

Fewer, costlier loans. No way around it, money is getting more expensive. As long as banks are licking their wounded balance sheets, they won’t make loans that carry even a whiff of risk. This could raise borrowing costs and complicate growth for capital-intensive sectors, like telecom.

A more immediate problems lurks in short-term lending such as commercial paper. Interest rates in that part of the market have recently risen from 2 percent to 4.5 percent for riskier companies, according to Businessweek.

No exits.Venture-backed startups need an exit strategy, but they will remain tough to find. There’s already a line of companies that would like to go public, but they’re in a market that won’t have an appetite for them for quite a while.

Then there’s M&A, but potential buyers will be shy about stock acquisitions if their stocks remain down, and they won’t make cash acquisitions if they think they might need that cash to finance daily operations.

Less respect abroad. Imagine you were considering a deal with another company, but that company was based in a country where the economy was about to melt down and the government couldn’t agree on how to stop it. Would you go ahead with the deal? That’s how U.S. companies, even in Silicon Valley, look abroad right now.

This also matters in a very real financial sense. If overseas investors pull money from U.S. equity investments, their value could decline. If they pull money from corporate or government bonds, interest rates could rise. One reason foreign money found a home here was that investors believed, rightly or wrongly, the U.S. was immune to nightmares like this.

Short selling. I’m with those who think bans on short selling are silly (why not also ban speculative buying while you’re at it?), but it’s starting to look like the SEC’s halting of short sales on 300 or so financial stocks has simply chased the selling into other sectors — such as tech. If the SEC extends the halts beyond this Thursday, they will only extend the pain in tech stocks.

Watching the tech sector’s delayed reaction to the financial turmoil is like watching Krakatoa erupt from an island miles away. At first you gape at the spectacular destruction over there, then slowly realize it’s also generated a tidal wave that’s coming you’re way. On Monday, reports of that tidal wave finally reached the West Coast.