Nouriel Roubini: We’re in the eye of the storm

“The complacency that took hold of financial markets (equity and partly credit) – after the bailout of the Bear Stearns’ creditor and the extension of the lender of last resort support of the Fed to systemically important broker dealers (those that are primary dealers) – is rapidly fading away as financial markets and financial institutions are again under severe stress. Let us detail how.”

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“A contracting economy, falling employment for months now, the worst US housing recession since the Great Depression, collapsing home values, millions of households underwater with an incentive to walk away, a shopped out and saving-less and debt burdened US consumer buffeted by falling home prices, falling HEW, falling stock prices, rising debt servicing ratios, oil at $130 a barrel and gasoline at $4 a gallon, collapsing consumer confidence and falling employment are taking the toll on the economy, on financial markets, on banks, on the shadow financial system and on money markets and credit markets. We were in the eye of the storm rather than past the storm; and the recent events and developments suggest that the worst is ahead of us, for the economy, for equity markets, for credit markets and for money markets.”   http://www.rgemonitor.com/blog/roubini/252731/

Shrinking credit market in Eurozone

euroarealendingsurvey0408  ←link to full report

The Euro Area lending survey for April 2008 is out, and shows considerable tightening in both lending standards and in loan demand across consumer, enterprise and mortgage credits. 

 

 

The results of the April 2008 bank lending survey indicate a further increase in the net tightening of credit standards for loans to enterprises (up from 41% in the fourth quarter of 2007 to 49% in the first quarter of 2008), with net tightening increasing more for large than for small and medium-sized enterprises. Banks’ risk perception regarding general economic activity, the industry or firm-specific outlook, and the cost of banks’ funds and balance sheet constraints contributed to the further increase observed in banks’ net tightening of credit standards. Banks also reported a further increase in the net tightening of credit standards for loans to households for house purchase (up from 21% in the fourth quarter of 2007 to 33% in the first quarter of 2008). In addition, the net tightening of credit standards for consumer credit and other lending to households rose (up from 10% in the fourth quarter of 2007 to 19% in the first quarter of 2008). With regard to demand for loans, banks reported that net demand for loans to enterprises was negative in the first quarter of 2008, a decline by comparison with the slightly positive net demand observed in the previous quarter.

 

Latest from Satyajit Das: inflation may be the better solution?

The other alternative perhaps being a 1929 style crash. 

A DERIVATIVES expert who two years ago warned of a potential meltdown in global credit markets has cautioned that the crisis is far from over, and has endorsed recent calls to relax controls on inflation and allow higher prices to help markets trade their way out of their problems.  Longtime critic of derivatives markets, Satyajit Das, says those who believe the US sub-prime loans crisis, and the drought in credit markets it triggered, are nearly over are wrong.

Full article:  das0508

 

A European view: “The Madness of Ben Bernanke”

 Read the article (click) The Madness of Ben Bernanke  The G7 Meeting

The dollar is in a tailspin, the trade deficit is growing and a recession is on the horizon. The American way of life is in serious danger. But the head of the Federal Reserve keeps on pumping easy credit into the system — a crazy policy that will worsen the crisis.   So begins today’s article in Der Spiegel. 

 

 

 

 

Real life result of credit crunch: no more student loans

If you thought the credit crunch was a financial phenomenon confined mainly to Wall Street, think again.  Among its real life effects is that college students are no longer able to get student loans.  Example, Pennsylvania’s Higher Education Assistance Agency has stopped giving student loans as a result of the frozen credit markets.  Normally, it would sell bonds to investors to finance the loans it gives to students for college.  Now the PHEAA has been unable to sell its bonds and has had to stop giving student loans.  Instead, it’s referring families to various private banks which may or may not lend the money.  This is a rolling problem cropping up in the states – not just Pennsylvania.  (E.g.: Michigan http://media.www.michigandaily.com/media/storage/paper851/news/2008/02/14/Government/Student.Lending.Woes.Worry.u.Officials-3210042.shtml)

Between a debt rock and a monetary hard place

Henry C. K. Liu in the Asia Times explains the inflation/deflation issue in the best summary I’ve seen lately.  The bottom line:  Using monetary policy (“printing money”) to keep up the current debt bubble will not work, and will cause hyperinflation.  The alternative is to allow the credit bubble to burst, an unavoidable reality in the long term anyway.  Liu’s article gives an accurate, highly readable and concise summary of the inflation/deflation debate as it has unfolded until now.  

Credit crunch hits small businesses where it hurts; had depended on HELOCs for funding

CHICAGO (Reuters) – The credit crunch driven by the U.S. housing crisis appears to have hit another engine of the American economy — small businesses. After years of fast and loose lending, major banks have begun tightening standards for loans to small businesses — often described as the backbone of the jobs market.

It’s painfully obvious

Ours is a consumer driven economy.  Household spending accounts for about 70% of our GDP.  Graph:

Since 1999, American households have been spending more money than they have.  We are running our own deficit spending programs.  Isn’t it beyond obvious that when the credit runs dry, GDP will collapse? See charts and analysis of household deficit spending:householddeficit.pdf

Fear of Buyout Debt – Asset firesales to come?

Homeowners aren’t alone in experiencing buyers’ remorse in today’s troubled marketplace. Private-equity firms, too, are finding out their recent investments might not be worth what they paid for them.  Gone are the days when buyout shops could purchase a company, pile on debt for an initial fat payout for themselves and then quickly flip it for a big profit. The credit crisis has put a freeze on debt-laden dealmaking and is causing bond investors to shun the risky debt used to finance the takeovers.
That could jeopardize the returns seen on some deals — which isn’t just the buyout firms’ problem. Investors from pension funds to endowments to financial institutions have plunged big money into private-equity funds.  It’s also a problem for the banks that are stuck with billions of dollars in loans clogging their books that they’ve been unable to sell.

How ironic – Moody’s issues a caution to oil producing nations: we might downgrade your credit rating

Moody’s, whilst maintaining its high ratings of the monolines, issued a stern sounding almost Puritanical caution to the nations of the Arabian Gulf (Kuwait, Qatar,  Saudi Arabia, Bahrain, Oman, and UAE ). 

Moody’s is worried that these nations are making and spending so much money (driving inflation).  Moody’s issued Speccial Announcements on the Governments of the Arabian oil producing countries — implying that if they keep on their path of making and spending lots of money, their national credit rating will be scrutinized and may be downgraded.  And this is at the very same time that the U.S. is deep into deficit spending.  Hmmm.

Excerpt: ”Gulf States’ Spending Hikes Could Have Future Ratings Impact”

 ”Moody’s acknowledges that, over the short to medium-term, the robust creditworthiness of GCC governments is unlikely to be undermined by strong spending growth. This is because oil prices remain at historically high levels, generally wide fiscal surpluses are being maintained despite spending increases, and GCC governments have accumulated large cushions of net assets with which to meet potential future liabilities.”

“However, there could be longer-term adverse implications: the danger is that governments will find themselves dependent on ever higher oil prices to balance their budgets, making it more difficult for them to adjust in the event of a downturn in revenues. Large increases in current expenditure are of particular concern as they are more difficult to reverse than hikes in capital spending in the event of a potential downturn in revenues.” 

Does anyone else think this is a funny way for Moody’s to be spending its time nowadays?

Massive foreclosures in Massachusetts; up a stunning 600% over 2005

We’ve heard a lot about the Southwest, California and Florida lately.  But the collapse of credit, wealth and homeownership is no doubt occurring throughout the United States.  Case in point:  Massachusetts.  There, the number of foreclosures in 2007 was 600% higher than in 2005.  And 150% more than 2006. 

BOSTON–(BUSINESS WIRE)–Foreclosure deeds in Massachusetts more than doubled in 2007 when compared to 2006, and were up seven times the number of foreclosures in 2005, according to The Warren Group, publisher of Banker & Tradesman.

China hit by subprime credit crisis

* Chinese bank earnings will suffer because of subprime crisis and tighter monetary policy and macro-economic controls

* Chinese regulators and banks are studying the credit crisis

* Beijing expects bad loans may rebound this year (Adds comments from China’s banking regulator)

By George Chen

SHANGHAI, Jan 21 (Reuters) – Earnings at Chinese banks will probably be hit this year by the snowballing U.S. subprime mortgage crisis and Beijing’s moves to cool the economy, the president of the country’s sixth-biggest bank said on Monday.

“We have to be very realistic: we are facing many challenges this year which are not only from home but also abroad,” China Merchants Bank Co  President Ma Weihua told Reuters in an interview.

The bank, China’s biggest non-state lender, made some U.S. subprime-related investments in 2004 and sold them two years later for 13.4 percent returns.

But the country’s bigger, state-owned banks could suffer.

Real economy effect of crisis: State retirement and health care funds in peril?

Update:  What About the Munis?  → good article:   http://wallstreetexaminer.com/blogs/winter/?p=1348

Is the current credit crisis and resulting loss of asset valuation having an impact on pensions and healthcare benefits?

Yes – see two preliminary reports below.

pew.pdf     ← The Pew Center on the States released a report in December 2007 highlighting the perilous footing of  the states’ funding of their long-term retiree benefits (both pension and nonpension).  Click through to full report.  

What will be real-life effects of monoline downgrades?

Monolines are in deep trouble.  That’s not news -  well-covered by FT Alphaville, Calculated Risk, Reggie Middleton, and Mish’s. 

 FT Alphaville notes today:

In a credit note sent out to clients on Friday, RBS started to outline what it thought was on the horizon for the monolines:

Bernanke’s message to Americans: Run! Run for your lives!

http://www.huffingtonpost.com/linda-keenan/bernankes-message-to-ame_b_82160.html

Panic selling closes UK fund

   Panic selling shuts £2bn fund

· Scottish Equitable acts after slump
· Fears that other funds are at risk

Friday January 18 2008   

The fund, invested in London office blocks and shopping centres across Britain, apparently no longer has sufficient cash reserves to meet demands from investors. Photograph: Martin Argles

One of Britain’s biggest property funds was forced to shut its doors to withdrawals yesterday after the slump in commercial prices triggered panic selling by small investors.

The move prompted fears of a Northern Rock-style run on billions of pounds invested in once high-flying funds which many savers have seen as a safe haven for their pensions.

Scottish Equitable said yesterday that 129,000 small investors in its £2bn property fund will not be able to access their money for up to a year, although payments relating to regular income already being paid, retirements and death claims will not be affected.

It said the fund, invested in London office blocks and shopping centres across Britain, no longer had sufficient cash reserves to meet demands from investors wanting to withdraw their money. Its “buffer fund” was down to 1% of its total assets, instead of the usual 10-15%.

Commercial property values, especially in the City of London office market, have dived amid fears of a recession brought on by the global credit crunch.

In late December another insurer, Friends Provident, halted access to its £1.2bn property fund and last night speculation was growing that Scottish Widows may be on the verge of restricting customer withdrawals on some of its funds. The insurer said last night: “We are looking at all the options, but no decisions have been taken.”

Scottish Equitable’s parent group, Aegon UK, is due to announce the closure of its fund today. It said last night: “Aegon UK has decided to take this step to protect investors following a significant level of customer withdrawals from the UK property fund market.” It blamed “worldwide phenomena relating to concerns over the US sub-prime mortgage market fallout, rising interest rates and talk of recession”.

The Financial Services Authority said it was closely monitoring the situation and had been informed by Aegon of the decision to halt withdrawals.

The crisis in Britain’s commercial property market is now worse than at any time since the early 1990s, when Olympia & York, the company that began the Canary Wharf office development in London, went into administration.

The credit crunch has raised borrowing costs, making many property deals no longer attractive. Financial institutions hit by the fallout are already beginning to cut staff, reducing demand in the City office market in which most of the UK’s property funds are invested. A downturn in consumer spending growth is also making retail shopping developments less attractive to investors.

Small investors have put about £15bn into property unit trusts – £5bn pouring in during 2006 and early 2007 alone. Billions more are invested through pension funds held by millions of company employees. Investors bought into promises of rich returns after a decade in which returns far outstripped gains on shares or bonds.

But the downturn in values since the middle of 2007 has been savage. Shares in British Land, the UK’s leading property company, have fallen by nearly half, and most funds are showing falls of between 20% and 40%. But investors stampeding for the exit are now finding that they cannot access their cash.

The crux of the problem is that the funds are invested in buildings which can take months to sell, and therefore cannot produce the cash to pay out money to small investors if they all want it back at the same time.

Usually the funds hold a cash “buffer” of 10-15% of total assets to meet withdrawals. But Scottish Equitable said yesterday that the cash buffer in the £2bn fund had fallen to just £80m following a wave of redemptions, giving it little choice but to suspend the fund. The only alternative was a “fire sale” of its holdings which could leave investors even worse off.

It emerged yesterday that staff at some of the property managers have been informing key clients in advance that a fund is heading for suspension. The FSA said that such trading may fall foul of its rules regarding treating customers fairly.

Financial advisers continue to recommend that investors take their cash out of the funds that remain open. Jason Hemmings of Albannach Financial Management in Edinburgh said: “There are lots of rumours going about that other providers may be considering following Friends Provident and Aegon.”

The Aegon/Scottish Equitable property funds are managed by Morley Fund Management, which also runs the £4bn Norwich Union Property unit trust, the UK’s biggest property fund. This week Norwich Union said the fund had fallen in value by a fifth over the year, but its cash buffer was at 6.4% after selling office blocks in London and Manchester worth £165m.

Aegon UK added that it believes the “underlying fundamentals of the asset class remain healthy”.

The Last Laugh: Investment Bankers

A bit of comic relief during a rather nasty day of economic news