Mid-American Energy just announced that they will acquire Constellation Energy for $26.50/share. Constellation, which had traded at almost $108/share in January of this year, had been seeking a life-line for several days as its credit was being downgraded. This is a company that had revenues of around $8 billion in wholesale power trading in just the first half of this year, yet because of the banking crisis, was perceived by the market to be at risk because they were so large and appeared to be dependent on multiple lines of credit from various banks that are either wobbly or are going under.

Again, keep in mind that Constellation was a strong company. Its trading business was fundamentally solid and they were making money. Yet, because they were so large and relied on various lines of credit to support their operations, just like most every large business in this country, the perception developed that they were at risk. And, when it comes to credit exposure in this market of hypersensitive nerves and sweaty palms, perception is everything. If your counter parties think you’re at risk (even if you’re not), you’re going to have a hard time maintaining your business. These trading partners will pull back and want to limit their exposure to you. You become a trading leper and you can’t stay in business. Perception of risk will always create risk - it is truely a self-fulfilling prophecy.