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.”

<snip>

“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/

Can anyone spell lawsuit? Part II

And now, it is revealed that Moody’s allowed investment banks to cherrypick which analysts determined their ratings. Seems to me it is basic common sense that this would be a no-no, no?

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.

 

“Gov’t spending burns the toast”

From the “Mogambo Guru”:

“This same bankrupt America is getting ready to send out $160 billion in ‘economic stimulus’ checks, where the government is literally giving people free money even though the government is borrowing like crazy just to keep afloat, which means that we that are truly, truly toast.

Citigroup: It’s now too dangerous to invest in U.S. economy

Citi says the “great unwind” has begun: We are now confronted by a broad bloodbath in the credit markets,” Citigroup said. ” The most leveraged paper is falling in value because it is leveraged, and now the least leveraged paper is also falling in value because it is owned by leveraged investors.”   Investors should also avoid hedge funds themselves, along with private equity, Citi added. Both types of investment rely at least partly on borrowed money to generate returns. <snip> Leveraged economies, like the U.S., should also be avoided, in favor of emerging market countries, which have reduced borrowing, the bank advised. “With less capital sloshing around the world, and the dollar falling, the U.S. may have to compete more to finance its deficits. http://www.marketwatch.com/news/story/great-unwind-has-started-avoid/story.aspx?guid=%7B1DC25DFD%2D3543%2D4CF4%2DBE26%2D74EA4B9C9330%7D&dist=hplatest

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)

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.

How to fix the bond insurer/monoline mess

We all know the monolines (bond insurers) are a huge mess.  Although they insure massive amounts of debt, they themselves appear to lack the assets to honor those obligations. How best to fix this mess? 

Bill Ackman’s recent presentation is highly recommended reading.  It has an A to Z analysis of how the bond insurers do business, financial condition, and — go to page 134 of his analysis — a very cogent outline of how the scenario will play out.  Spoiler:  he says downgrades, bankruptcy, receivership.

Here it is:  howtosavethebondinsurers.pdf

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?

Newest and gloomier IMF report: worsening global financial markets

Today IMF released its latest report on global financial markets (well worth a read – see link).  Financial markets have worsened as evidenced by pressure on bank balance sheets, and problems will broaden as credit deterioration widens.  IMF recommends transnational stabilization efforts.  Direct link to report:

    imf01292008.pdf