Page 2 of
5 Mortgage
crisis to corporate debt
crisis By Doug
Noland
Investment grade issuance included
GE Capital $8.5bn, UPS $4.0bn, Goldman Sachs
3.0bn, Berkshire Hathaway $2.0bn, Duke Energy $900
million, Kroger $750 million, Alabama Power $500
million, Florida Power & Light $400 million,
Emerson Electric $600 million, Commonwealth Edison
$450 million, Cintas $300 million, Buckeye
Partners $300 million, South Carolina E&G $250
million, and Questar Pipeline $200 million.
Junk issuance included Block Financial
$600 million,
Southwestern Energy $600
million and Jabil Circuit $250 million.
Foreign dollar debt issuance included KFW
$5.0bn, European Investment Bank $4.0bn, Colombia
$3.5bn, Indonesia $2.0bn, Petrobras $1.75bn,
Mexico $1.5bn, Canadian Natural Resources $1.2bn,
and Korea Development Bank $1.0bn.
German
10-year bund yields fell 4.5bps this week to
4.085%, while the DAX equities index fell 1.2%
(down 4.3% y-t-d). Japanese "JGB" yields dropped
4.5 bps to 1.42%. The Nikkei 225 sank 4.0% (down
7.8% y-t-d). Emerging equities were mixed to
higher, while debt markets generally added to
recent gains. Brazil’s benchmark dollar bond
yields declined 3 bps to 5.61%. Brazil’s Bovespa
equities index gained 1.5% (down 3.0% y-t-d). The
Mexican Bolsa rose 1.4% (down 2.8% y-t-d).
Mexico’s 10-year $ yields fell 7 bps to 5.21%.
Russia’s equities markets gained 1.0% (1-yr gain
28.5%). India’s Sensex equities index added 0.7%
(1-yr gain 53%). China’s Shanghai Exchange gained
2.3%, increasing y-o-y gains to 98%.
Freddie Mac posted 30-year fixed mortgage
rates sank a notable 20 bps this week to 5.87%
(down 34bps y-o-y). Fifteen-year fixed rates
dropped 25 bps to 5.43% (down 53bps y-o-y).
One-year adjustable rates fell 10 bps to 5.37%
(down 7bps y-o-y).
Bank Credit expanded
$23.3bn during the most recent data week (1/2) to
a record $9.280 TN (3-wk gain of $115bn). Bank
Credit posted a 24-week surge of $636bn (15.9%
annualized) and a 52-week rise of $987bn, or
11.9%. For the week, Securities Credit surged
$48.1bn. Loans & Leases dropped $24.7bn to
$6.806 TN (24-wk gain of $481bn). C&I loans
added $3.6bn, with one-year growth of 21.6%. Real
Estate loans increased $0.5bn (up 7.9% y-o-y).
Consumer loans fell $5.0bn. Securities loans
declined $9.3bn, and Other loans dropped $14.4bn.
On the liability side, (previous M3) Large Time
Deposits rose $12.6bn.
M2 (narrow) "money"
supply increased $4.3bn to a record $7.472 TN
(week of 12/31). Narrow "money" expanded $411bn
during 2007, or 5.8%. For the week, Currency added
$0.8bn, and Demand & Checkable Deposits
increased $8.2bn. Savings Deposits fell $13.1bn,
and Small Denominated Deposits dipped $0.3bn.
Retail Money Fund assets rose $8.7bn.
Total Money Market Fund assets (from
Invest. Co Inst) surged $52bn last week to a
record $3.165 TN. Money Fund assets have posted a
24-week rise of $582bn (49% annualized) and a
one-year increase of $775bn (32.4%).
Total
Commercial Paper rose $14.4bn to $1.813 TN. CP has
declined $411bn over the past 22 weeks.
Asset-backed CP added $4.8bn (22-wk drop of
$417bn) last week to $779bn. Over the past year,
total CP has contracted $177bn, or 8.9%, with ABCP
down $290bn (27%).
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 1/7)
declined $3.6bn to a record $2.057 TN. "Custody
holdings" were up $287bn year-over-year (16.2%).
Federal Reserve Credit dropped $22.5bn last week
to $869bn. Fed Credit expanded $24.7bn y-o-y
(2.9%).
International reserve assets
(excluding gold) - as accumulated by Bloomberg’s
Kristy Scheuble – were up $1.363 TN y-o-y, or 28%,
to a record $6.221 TN.
Global Credit
Market Dislocation Watch January 11 – Dow
Jones (Steven D. Jones): "The burning question in
the markets earlier this week was whether home
lender Countrywide Financial would file for
bankruptcy. Friday’s news that the California
company was being sold for $4 billion, or about 30
cents on the dollar, points to the likely answer.
Now that Bank of America has spread a safety net
beneath Countrywide, the new question is by how
much will Bank of America have to write down
Countrywide’s $209 billion balance sheet to merge
into its own?"
January 11 – Bloomberg
(Shannon D. Harrington and Hamish Risk): "The risk
of Bank of America Corp. defaulting rose to the
highest since at least November 2001 after the
biggest U.S. bank by market value said it will
rescue Countrywide Financial Corp. Credit-default
swaps tied to the bonds…Bank of America increased
12 bps to 92…"
January 9 – Bloomberg
(Hamish Risk and Shannon D. Harrington): "The risk
of companies defaulting on their debt soared to a
record after Goldman Sachs Group Inc. said the
U.S. economy is probably slipping into recession
and bond insurer MBIA Inc. said it will cut its
dividend to preserve its top credit rating.
Credit-default swaps tied to…MBIA and …Countrywide
Financial Corp. rose to all-time highs, while the
Markit CDX North America Investment Grade Index
and Markit iTraxx Hi Vol index both jumped to the
widest since they were created in 2004."
January 11 – Bloomberg (Christine Richard
and Pierre Paulden): "MBIA Inc., the largest bond
insurer, paid a yield of 14% on the sale of $1
billion of AA rated notes, a rate usually charged
to the lowest-ranked borrowers."
January 9
– Financial Times (Stacy-Marie Ishmael): "The
extent of damage in credit markets from recent
turmoil was starkly underlined yesterday when the
credit rating of one of the largest independent
structured investment vehicles was slashed by 13
notches.The downgrade of the $6bn Victoria SIV by
Standard & Poor’s takes its rating deep into
‘junk’ territory, to B minus. Just three months
ago it was rated AAA. Analysts yesterday warned
that Victoria’s fate was being echoed across the
SIV sector as this corner of finance suffers a
barrage of downgrades. SIVs issue cheap,
short-term debt to fund investments in longer-term
and higher-yielding securities. The wave of
downgrades is now threatening to create painful
shocks for investors, not least because many of
the supposedly ultra-safe securities were sold to
risk-averse institutions such as pension funds."
January 10 – Financial Times (Sam Jones
and Stacy-Marie Ishmael): "Investors in
collateralised debt obligations face further
downgrades and the possibility that the value of
their investments will plummet or be wiped out.
About $58bn worth of CDOs, which repackage slices
of other structured deals such as mortgage-backed
bonds, are understood to have hit ‘events of
default’. A growing number of those are being
pushed towards liquidation, which means a fire
sale of some assets and the unwinding of the large
derivatives contracts that make up much of the
structure of these CDOs."
January 10 –
Bloomberg (Rhonda Schaffler and Christine
Richard): "MBIA Inc., the largest bond insurer,
may need to raise $10 billion in capital to keep
its AAA credit rating, said William Ackman,
president of Pershing Square Capital Management."
January 11 – Financial Times (David
Wighton): "Merrill Lynch and Citigroup are in
talks to raise new capital from sovereign wealth
funds ahead of earnings announcements next week
that are expected to include further losses on
mortgage-related investments.Bankers say the
groups, which together raised $14bn at the end of
last year, are looking for more capital to repair
the damage caused by mounting mortgage losses."
January 7 – Bloomberg (Jody Shenn): "A
third of planned U.S. home sales were canceled or
delayed in September, October and November as
consumers had fewer borrowing options, according
to a survey of 2,416 real-estate agents. Thirteen
percent of transactions failed because of loan
problems… In California…more than half of planned
deals were postponed or scuttled, the survey
found."
January 9 – Bloomberg (Neil
Unmack): "Structured investment vehicles have $70
billion of medium-term debt maturing this year,
according to Merrill Lynch…analysts. Dresdner Bank
AG’s K2 Corp., Bank of Montreal’s Link Finance
Corp. and nine other SIVs have to repay $21
billion of medium-term notes before April…
SIVs…have been unable to borrow since August… U.S.
Treasury Secretary Henry Paulson initiated talks
to set up a fund to avert a firesale of SIV assets
further roiling credit markets. Banks abandoned
the initiative after cutting SIV assets to about
$282 billion from a peak of $400 billion last
year…"
January 8 – Bloomberg (Edward
Evans): "Citigroup Inc. may post a larger loss
than previously estimated because the biggest U.S.
bank may have to take a $16 billion writedown in
the fourth quarter, Merrill Lynch & Co.
analyst Guy Moszkowski said."
January 9 –
Financial Times (Jennifer Hughes): "Companies
could be forced to develop a ‘parallel’ balance
sheet to better explain their off-balance sheet
vehicles if preliminary ideas being discussed by
international accounting standard- setters are
developed further.The International Accounting
Standards Board is discussing the issue and is due
to publish a consultation paper - the first public
step in its standard-setting process - later this
year. Off-balance sheet accounting practices have
been criticised for their role in the credit
crunch, where they are blamed for potentially
obscuring the true risks banks face."
January 8 – Bloomberg (Erik Holm): "Marty
Whitman and Al Zucaro… may be dripping in sweat
after they snapped up U.S. mortgage insurers that
shed more than 40% of their value in the past
three months… Whitman bought into the slump to
become the largest stakeholder in…Radian. Zucaro
became the No. 1 investor in PMI…and the
second-biggest for…MGIC."
January 10 –
Bloomberg (Todd White): "Spanish bankers may call
on the government to bail out any big real estate
company that falls behind on its debt payments,
hoping to help protect their own industry from
losses, El Confidencial reported. Banks are
considering requesting that the Instituto de
Credito Oficial, a
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