Page 3 of
5 CREDIT BUBBLE
BULLETIN Road
to ruin By
Doug Noland
that works
right,' he chuckles grimly. 'It is like the Dark
Ages.' …Never mind the fact that the risky
tranches of subprime-linked debt (the so-called
BBB ABX series) have fallen 80 per cent since the
start of the year; in a sense, such declines are
only natural for risky assets in a credit storm.
Instead, what is really alarming is that the
assets which were supposed to be ultra-safe -
namely AAA and AA rated tranches of debt - have
collapsed in value by 20% and 50% odd
respectively. This is dangerous, given that
financial institutions of all
stripes have been merrily leveraging up AAA and AA
paper in recent years, precisely because it was
supposed to be ultra-safe and thus, er, never lose
value."
October 30 – Dow Jones (Anusha
Shrivastava): "The higher-rated tranches of the
subprime mortgage-based ABX index were being
clobbered Monday after Fitch Ratings said the
credit ratings of $23.9 billion of the
highest-rated collateralized debt obligations
could be downgraded. The AAA-rated slice of the
index based on home loans from the second half of
2006 was quoted at 80.5 cents, according to one
primary dealer. It had closed at 83.39 cents
Friday, according to index administrator Markit.
Its AA-rated slice hit 47.5 cents, down from a
close of 52.04 cents Friday."
November 1 –
Bloomberg (Deborah Finestone): "The Federal
Reserve added $41 billion in temporary reserves to
the banking system, the largest one-day cash
infusion since the terrorist attacks of September
2001. The amount reflects the central bank's
effort to push the effective rate lower after
policy makers reduced their target yesterday by a
quarter-percentage point to 4.50 percent."
November 1 – New York Times (Eric Dash):
"Nearly three weeks after the country's biggest
banks announced a $75 billion fund to help
stabilize the credit markets, the reality is
sinking in that the plan will provide hospice care
to troubled investment funds, not resuscitate
them. The reason, market participants say, is that
the structured investment vehicles, or SIVs, that
helped fuel the Wall Street loan-packaging boom
hinged on confidence in the quality of the $400
billion in securities they bought and on easy
credit from investors. Now, that trust has been
shattered and most of the investors have fled.
Many say that the business model is dead, or soon
will be."
October 30 – Bloomberg (Neil
Unmack): "Sachsen Funding 1 Ltd., a $2.2 billion
debt fund set up by Landesbank Sachsen
Girozentrale said the value of its assets fell,
preventing it from being able to borrow in the
commercial paper markets. The company, a so-called
SIV-lite, is now in 'restricted issuance' after a
'recent reduction' in the market value of its
assets… In the 'restricted issuance' state, the
company is not allowed to sell further debt, or
invest in assets other than deposits or short-term
investments…"
October 30 – Bloomberg
(Sebastian Boyd): "Axon Financial Funding, a $9.5
billion structured investment vehicle or SIV, had
its debt ratings cut by Standard & Poor's
after it sold assets at a loss. S&P cut its
rating on the company's debt by eight steps to
BBB, two steps above high-risk, high-yield, from
the top AAA investment-grade ranking."
October 30 – Bloomberg (Jacob Greber):
"UBS AG, Europe's largest bank by assets, reported
its first quarterly loss in almost five years
after declines in the U.S. subprime mortgage
market led to $4.4 billion in losses and
writedowns on fixed-income securities."
November 2 – Bloomberg (Allen Wan):
"Merrill Lynch & Co., the world's biggest
brokerage, may need to write off another $10
billion of losses in collateralized debt
obligations, Deutsche Bank Securities said in
downgrading the stock today. 'New CDO writedowns
could approach $10 billion given a worse CDO
market,' Deutsche Bank analysts wrote…"
October 30 – Bloomberg (Sebastian Boyd):
"At Merrill Lynch & Co., a lot more was lost
than the $2.24 billion, or $2.82 a share, Chief
Executive Officer Stan O'Neal said would be
subtracted from the third quarter. The real damage
to shareholders came with Merrill's $8.4 billion
writedown. It is the biggest in the history of
Wall Street and wiped out four quarters of growth
in shareholders' equity, according to Merrill's
published figures. The charge, mostly for
collateralized debt obligations and subprime
mortgages, left the New York-based company with
$38.8 billion of assets minus liabilities. Losing
'20 percent of shareholders' equity in one fell
swoop is a serious blow,' said Robert Willens, the
accounting analyst at Lehman Brothers…"
November 2 – The Wall Street Journal
(Susan Pulliam): "Merrill Lynch & Co., in a
bid to slash its exposure to risky mortgage-backed
securities, has engaged in deals with hedge funds
that may have been designed to delay the day of
reckoning on losses, people close to the situation
said. The transactions are among the issues likely
to be examined by the Securities and Exchange
Commission. The SEC is looking into how the Wall
Street firm has been valuing, or "marking," its
mortgage securities and how it has disclosed its
positions to investors, a person familiar with the
probe said. Regulators are scrutinizing whether
Merrill knew its mortgage-related problem was
bigger than what it indicated to investors
throughout the summer… In one deal, a hedge fund
bought $1 billion in commercial paper issued by a
Merrill-related entity containing mortgages, a
person close to the situation said. In exchange,
the hedge fund had the right to sell back the
commercial paper to Merrill itself after one year
for a guaranteed minimum return, this person
said."
October 30 – Financial Times (Haig
Simonian): "UBS committed itself on Tuesday to
improving radically its risk assessment and
control procedures as a bank once renowned for its
risk awareness admitted it had slipped up
grievously in the US credit turmoil… UBS will
"de-emphasise" proprietary trading, and introduce
measures to reprice capital put at traders'
disposal. Staff in its investment bank will also
receive a higher proportion of compensation in UBS
shares in a further effort to underline the
potential consequences of their decisions."
October 30 – Bloomberg (Gavin Finch): "The
cost of borrowing euros for two months rose the
most in eight years as banks sought loans that
will cover their commitments through to the start
of next year. The London interbank offered rate
that banks charge each other for the loans climbed
28 bps to 4.59% today… It was the biggest one-day
increase since Oct. 28, 1999, when it soared 54
basis points in the run-up to the new millennium
on concern computer systems would crash at the
turn of the year."
October 31 – Bloomberg
(Caroline Salas): "Residential Capital LLC, the
biggest privately held mortgage lender, is the
worst performer of the 50 biggest issuers in the
high-yield, high-risk bond market this month,
according to index data compiled by Merrill Lynch
& Co. ResCap's bonds lost 9.45% in October…"
Currency Watch November 1 –
Bloomberg (Liz Capo McCormick): "Currency traders
are betting in the forward exchange rate market
that the Hong Kong Monetary Authority will abandon
its currency's 24-year peg to the U.S. dollar as
overseas investment floods into the city. In the
forward currency market, an investor can buy Hong
Kong dollars now for delivery in 12 months at
HK$7.7096 per U.S. dollar, above the HK$7.75 top
of the Hong Kong Monetary Authority's permitted
trading range. The authority sold HK$7.828 billion
($1 billion) to defend the currency yesterday,
twice as much as two previous interventions since
Oct. 23."
November 1 – Bloomberg (Patricia
Kuo and Aaron Pan): "The Hong Kong Monetary
Authority denied market speculation that its
officials have asked China to allow the city to
revise its fixed exchange rate. Medley Global
Advisors, founded in 1997 by Richard Medley,
former chief political strategist at Soros Fund
Management, said Hong Kong suggested widening the
band…"
October 30 – Financial Times (Peter
Garnham): "Is the dollar set to join the yen and
the Swiss franc as a carry trade funding currency?
Both the yen and Swiss franc have been pushed to
multi-year lows this year as carry trade investors
have sold the low-yielding currencies to fund the
purchase of riskier, higher-yielding assets
elsewhere. However, the dollar has come under
similar pressure in recent weeks, hitting a series
of multi-year troughs."
October 30 –
Bloomberg (Abdulla Fardan): "The six-nation Gulf
Cooperation Council will decide at a summit in
December whether to abide by the proposed start
date of 2010 for a single currency in the region,
Al-Ayam newspaper said, citing a Bahraini
official."
The dollar index declined 0.9%
to 76.34. For the week on the upside, the Canadian
dollar increased 2.2% (to an all-time record), the
British pound 1.3%, the Swiss franc 1.0%, the
Danish krone 0.6%, and the Euro 0.6%. On the
downside, the Norwegian krone declined 0.9%, the
New Zealand dollar 0.3%, and the Japanese yen
0.2%.
Commodities Watch October
31 – Financial Times (Javier Blas and Chris
Flood): "For a moment this week, it looked as if a
sliding dollar and surging oil prices would drive
gold through $800 dollars an ounce for the first
time since 1980. Precious metals traders say that
a move above this psychologically important level
and towards the nominal record high of $850 an
ounce reached in January 1980 is likely if an
expected cut in interest rates today by the US
Federal Reserve leads to further dollar weakness."
October 31 – Financial Times (Ed Crooks):
"Shortages of skilled labour and capital
investment mean oil supplies might fail to meet
the expected growth in demand over the coming
years, the head of the rich countries' energy
watchdog has warned. Nobuo Tanaka, executive
director of the International Energy Agency, told
the Oil and Money conference in London: 'Despite
five years of high oil prices, market tightness
will actually increase from 2009. New capacity
additions will not keep up with declines at
current fields and the projected increase in
demand.' He said that the IEA had revised up
sharply to $5,000bn its estimate of the investment
that the world's energy industries would need by
2030 to meet rising demand."
October 30 –
Bloomberg (Gemma Daley and Jae Hur): "Australia
cut its wheat harvest forecast for the third time
as the nation's worst drought damaged crops,
adding pressure to shrinking world supplies that
drove up prices to a record last month. Output may
be 12.1 million metric tons in the current
harvest… That is 22% less than the 15.5 million
tons estimate from Sept. 18. Last year's
9.8-million-ton crop was the country's lowest in
12 years. 'This is close to the worst case and
will lend support to the market,' Kenji Kobayashi,
an analyst at Kanetsu Asset Management Co., said…
Still, 'this is not a big surprise as some had
expected wheat harvest estimates to fall close to
10 million tons.'"
November 2 – Bloomberg
(Jeff Wilson): "Soybeans rose, capping the 10th
weekly gain in 11 weeks, on speculation that
rising crude oil prices will boost demand for
alternative fuels made from oilseeds including
soybeans. Crude oil rose 2.6% to a record close on
speculation that fuel consumption will increase
after a government report showed
higher-than-forecast U.S. employment growth last
month. Soybeans have had a correlation of 0.7
against the price of oil in the past two months. A
figure of 1 would indicate the two commodities
move in lockstep. 'Crude oil is driving
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
