Page 2 of 3 CREDIT BUBBLE BULLETIN Face to face with reality Commentary and weekly review by Doug Noland
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 12/12) increased
$3.6bn to a record $2.040 TN. "Custody holdings" were up $288bn y-t-d (17.1%
annualized). Federal Reserve Credit declined $3.2bn last week to $864bn. Fed
Credit has increased $11.6bn y-t-d (1.4%).
International reserve assets (excluding gold) - as accumulated by
Bloomberg’s Alex Tanzi – were up $1.281 TN y-t-d (27.7% annualized) to $6.092
TN.
Credit Market Dislocation Watch
December 10 – Bloomberg (Shannon D. Harrington): "Bank of America Corp…froze a
$12 billion enhanced cash fund after losses on holdings that included
short-term debt sold by structured investment vehicles. The Columbia Strategic
Cash Portfolio was closed last week and is being ‘wound down,’ Robert Stickler,
a [BAC] spokesman…said… The net asset value of the fund, which had $33 billion
two weeks ago, was 99.4 cents on the dollar as of today… Enhanced cash funds,
which hold about $850 billion in assets in the U.S., are sold to wealthy
individuals and institutions as an alternative to money-market funds… The
Columbia fund had been the biggest of its kind, according to Peter Crane,
founder of Crane Data LLC...publisher of the Money Fund Intelligence. ‘This
could be the death of enhanced cash funds,’ he said."
December 10 – Bloomberg (Elena Logutenkova): "UBS AG will write down U.S.
subprime mortgage investments by $10 billion, the biggest such loss by a
European bank, and replenish capital by selling stakes to investors in
Singapore and the Middle East. Europe’s largest bank by assets plans to raise
13 billion francs ($11.5 billion)…"
December 10 – Financial Times (Stacy-Marie Ishmael and Saskia Scholtes):
"Specialist bond insurance companies such as MBIA and Ambac face a moment of
reckoning in the coming weeks. Rating agencies Moody’s and Fitch will complete
their reviews of how such companies are rated, and might conclude that mortgage
losses have put the insurers' triple-A rating at risk. But the bond insurers’
quest for new capital to secure their triple-A status could face significant
challenges amid limited investor appetite for companies with exposure to
structured securities backed by mortgage debt… The fate of bond insurers has
emerged as a crucial concern in the credit crisis. These companies insure
thousands of billions of dollars of debt, including securities backed by
subprime mortgages, but hold relatively little capital to back these
guarantees."
December 13 – Financial Times (Stacy-Marie Ishmael): "Bond insurer Security
Capital Assurance risks losing its top-flight credit rating unless it raises at
least $2bn within the next six weeks, Fitch Ratings said… SCA has four to six
weeks to either obtain ‘firm capital commitments’ from a ‘reliable source’, or
reinsure its portfolio, Fitch said."
December 13 – Bloomberg (Christine Richard): "Ambac Financial Group Inc.,
struggling to avoid the crippling loss of its AAA credit rating, took out
insurance on $29 billion in securities it guarantees. The world’s
second-biggest bond insurer agreed to transfer the risk that the securities
will default to Assured Guaranty Ltd… Reinsuring the debt will free up capital
backing those bonds… Ambac guarantees $556 billion of securities and the loss
of its AAA rating jeopardizes the rankings on that debt…"
December 11 – Financial Times (Stacy-Marie Ishmael): "Ratings agency Standard
& Poor’s has downgraded the capital notes of all its rated structured
investment vehicles and said it does not expect the asset class to survive. It
also put 18 of these off-balance sheet vehicles on ‘ratings watch negative’,
meaning downgrades are likely in the near future. ‘The SIV as a type of vehicle
is unlikely to persist and thus we formally assigned negative outlooks due to
the issues in this sector,’ it said… S&P analysts expect continued erosion
in the net asset values of these vehicles, and do not expect investors to
return to the market in sufficient numbers to reverse the SIV funding problem."
December 14 – Bloomberg (Shannon D. Harrington and Elizabeth Hester):
"Citigroup Inc. will take over seven troubled investment funds and assume $58
billion of debt to avoid forced asset sales that would further erode confidence
in capital markets… Moody’s Investors Service lowered the bank’s credit
ratings. The biggest U.S. bank by assets will rescue the so-called structured
investment vehicles, or SIVs, taking responsibility for their $49 billion of
assets…"
December 11 – Financial Times (Paul J Davies): "The decision by Société
Générale to bail out its off-balance-sheet structured investment vehicle
(SIV)means that six out of the original 10 banks have all rescued their
sponsored vehicles as funding problems grip the sector. Of the four remaining
banks, Citigroup’s SIVs are still the largest, followed by Dresdner Bank and
Bank of Montreal, which have similar-sized vehicles, and Banque AIG with a much
smaller operation."
December 13 – Financial Times (Paul J Davies): "Downgrades and defaults of the
complex debt securities that pool together mortgage backed bonds and other
instruments have been breaking new records in recent weeks. According to
Moody’s…more than $45bn worth of collateralised debt obligations of asset
backed securities (CDOs of ABS)…have now gone into default… Meanwhile, the
number of CDOs that have suffered credit ratings downgrades was more than 2,000
in November alone, according to analysts at Morgan Stanley… ‘November was the
worst ever month for CDO downgrades since we have been tracking CDO rating
actions,’ analysts at Morgan Stanley said. ‘There were 2,072 rating actions
during the month, comprising 2,007 downgrades and only 65 upgrades.’ Structured
finance CDOs - also known as CDOs of ABS - were the worst affected segment of
the industry, with 1,900 of the downgrades from the three ratings agencies
being on these kinds of deals, the analysts said."
December 12 - Dow Jones (Aparajita Saha-Bubna): "Moody’s…said…that tranches of
collateralized debt obligations receiving default notices has jumped to $45
billion as of Dec. 11. This is nearly nine times higher than the $5.6 billion
of CDO pieces that Moody’s said were affected, as of the end of October, by
these default notices. The increase in volume will likely trigger fresh
concerns around forced liquidation of these complex securities by investors
heading for the exits."
December 11 - Bloomberg (Jody Shenn): "Downgrades on collateralized debt
obligations by Standard & Poor’s, Moody’s… and Fitch Ratings last month
totaled 2,007, a record, according to a Morgan Stanley report. The November
downgrades, mainly among CDOs affected by the surge in late payments on U.S.
subprime mortgages, represented 56% of the total for the first 11 months of
this year… November upgrades totaled 65, just 6% of the year-to-date total."
December 12 - Bloomberg (David Mildenberg and Hugh Son): "Bank of America
Corp., Wachovia Corp. and PNC Financial Services Group said losses tied to bad
debt will be worse than expected, providing fresh evidence that credit markets
aren't returning to normal…Bank of America Chief Executive Officer Kenneth
Lewis predicted disruptions will stretch into next year at his company…
Wachovia…said it may set aside twice as much for loan losses than planned in
this quarter and that writedowns already equal the third quarter's total. PNC,
ranked 11th, said quarterly profit will be less than analysts estimated.
Today’s announcements show bankers see no quick end to losses and writedowns…
Lewis said loan losses will increase in 2008 at Bank of America and Wachovia
Chief Executive Officer Kennedy Thompson said conditions are the ‘toughest’ in
his 32-year career."
December 13 – Financial Times (Norma Cohen): "The world’s largest banks have
around $212bn of assets at risk of default as a result of the severe
contraction in lending on commercial property and the expected fall in real
estate values, according to a new report from…Morgan Stanley. Sales of
commercial real estate have ground to a halt in recent months, as lending
markets have frozen and buyers disappeared. Property experts have said that the
sharp rise in real estate values in recent years has been fuelled largely by
access to cheap credit and its sudden withdrawal is expected to lead to
declining property prices. Because the banks made loans against the property, a
drop in values could leave them holding collateral worth less than borrowings.
The biggest buyers of commercial mortgage-backed securities have included the
specialised investment vehicles which are themselves facing a severe liquidity
shortage… Morgan Stanley is forecasting a 73% drop in the issuance of new CMBS,
an activity which has made a significant contribution to profits at some
banks."
December 11 – Financial Times (Norma Cohen): "Bonds backed by commercial real
estate have suffered their sharpest fall in value in recent months with new
issuance down sharply and turnover among older issues crawling to a near halt.
Mike Kirby, head of research at Green Street Securities…says: ‘The CMBS
[commercial mortgage-backed securities] market for the most part is shut down
and dysfunctional right now. Banks still have an enormous amount of paper on
their books from six months ago when lending standards were much looser.’"
December 14 – Bloomberg (Gavin Finch): "European money markets failed to
respond for a second day to the biggest effort by central banks to restore
confidence in the world financial system. The euro interbank offered rate banks
charge each other for three-month loans stayed near a seven-year high, falling
1 basis point to 4.94%... That’s 94 basis points more than the ECB’s benchmark
interest rate."
December 10 – Bloomberg (Gavin Finch and Agnes Lovasz): "Investors expect the
global credit squeeze to continue beyond the first quarter of 2008, according
to the Bank for International Settlements. Models using derivatives based on
money-market rates signal ‘expectations of a persistent lack of liquidity and
lasting concerns about counterparty risk,’ the BIS said… The three-month
Euribor rate…is at a seven-year high of 4.89%..."
Currency Watch
The dollar index jumped 1.5% to 77.44. For the week, the South African rand
declined 3.2%, the Australian dollar 2.7%, the Swiss franc 2.2%, the New
Zealand dollar 2.1%, the Brazilian real 2.0%, the Euro 1.9%, and the Danish
krone 1.9%.
Commodities Watch
December 14 – Bloomberg (Tony C. Dreibus): "Wheat rose to a record as a dry
spell threatened crops in Argentina and renewed concern that the world's
farmers may fail to deliver enough supply to meet rising demand for bread,
pastas and livestock feed… Wheat futures for March delivery rose… 2.7% to
$9.795 a bushel on the Chicago Board of Trade… The price has more than doubled
in the past year. Most-active futures jumped 6.3% this week and have reached
records 25 times since June 27…"
December 12 - Bloomberg (Eduard Gismatullin and Ayesha Daya): "Goldman Sachs
Group Inc…raised its forecast for crude oil prices next year 12% on concerns
that investment costs and weaker demand may prompt producers to limit supply.
Goldman increased its average 2008 forecast for West Texas Intermediate crude
oil to $95 a barrel from $85."
For the week, Gold was little changed at $794.65, while Silver fell 3.6% to
$13.98. March Copper sank 5.4%. January Crude gained $3.12 to $91.40. January
Gasoline rose 3.3%, while January Natural Gas declined 1.9%. December Wheat
jumped 3.9%. For the week, the CRB index rose 1.7% (up 13.5% y-t-d). The
Goldman Sachs Commodities Index (GSCI) jumped 2.8%, increasing 2007 gains of
37%.
China Watch
December 13 – Financial Times (Richard McGregor): "Beijing turned the tables on
Washington yesterday after years of US criticism over its handling of the
Chinese economy, warning of the serious global implications of the weak dollar,
recent US interest rate cuts and the subprime crisis. Beijing highlighted US
economic problems at the opening of a twice-yearly meeting between ministers
from both countries… Chen Deming, incoming commerce minister, said the falling
dollar had pushed up costs of imported resources and been a destabilising
factor. ‘What I’m worrying about is the weakening dollar and its potential
impact on global growth,’ he said… Zhou Xiaochuan, the governor of the People’s
Bank of China, was…was closely watching the impact of US interest rate cuts and
their impact on the world economy. ‘For China, what we worry about more is that
very accommodative US monetary policy could give rise to a new burst of excess
liquidity in global markets… In China, we have already had an excess liquidity
problem in the domestic market, which we know is somewhat connected to the
global markets.’"
December 12 - Bloomberg (Nipa Piboontanasawat): "China's retail sales increased
at the quickest pace in at least eight years on rising incomes… Sales climbed
18.8%...from a year earlier…"
December 10 – Bloomberg (Nipa Piboontanasawat): "China’s money-supply growth
exceeded the central bank’s annual target for a 10th straight month as a
ballooning trade surplus pumped cash into the world's fastest-growing major
economy. M2… rose 18.5% to 40 trillion yuan ($5.4 trillion) in November from a
year earlier…"
December 11 – Financial Times (Richard McGregor): "Chinese inflation reached a
new 11-year high in November of 6.9%, a figure which will harden Beijing’s
resolve to tighten monetary policy… Although inflation continues to be driven
primarily by food prices, because of a shortage of pigs and high global feed
prices, broader underlying inflation was also up, to 1.4%, because of higher
oil and coal prices. ‘The inflation issue has evolved into more of a
macroeconomic problem,’ said Yiping Huang of Citigroup…"
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