Page 3 of
5 CREDIT-BUBBLE
BULLETIN What
is left that is
sellable? Commentary and weekly
watch by Doug Noland
longer than the 1998
crisis. ‘LTCM was such a transitory event compared
with today,’ Mr O’Donnell said. ‘This is not just
about the collapse of one entity, this is about
millions of homeowners who are underwater.’"
March 7 – Bloomberg (Shannon D.
Harrington): "The cost to protect corporate bonds
from default reached a record for a fourth day
this week as more evidence the U.S. is in a
recession compounded a credit-market squeeze that
has diminished companies' ability to borrow… ‘It’s
just ugly,’ said Scott MacDonald, the head of
research at Aladdin Capital Management…which
manages $20 billion in assets."
March 6 –
BusinessWeek (Matthew Goldstein): "There’s a chill
spreading across the hedge fund industry. With
more portfolios
falling victim to the credit
crunch, managers by the dozen are freezing
investor redemptions, preventing a mad rush to the
exits that would force funds to sell beaten-down
assets to raise cash. But is this unprecedented
move just postponing the day of reckoning for
funds and the market? Since November at least 24
hedge funds have barred or limited investors from
taking their money out, tying up tens of billions
of dollars for an indefinite period. Among them:
GPS Partrillioners, a $1 billion fund that bets
mainly on natural gas pipelines; Pursuit Capital
Partrillioners, a $650 million portfolio with
troubled debt; and Alcentra European Credit, a
$500 million fund that owns slumping loans used to
finance private equity buyouts. The new rules
affect not only the pension funds, endowments, and
well-to-do families that buy the funds directly
but also smaller individual investors exposed
through diversified portfolios of hedge funds,
known as funds of funds. Some hedge funds have
broad powers under their contracts with investors
to make such changes at their discretion. ‘It’s
the largest period of redemption suspensions in
the industry’s history,’ says Jonathan Kanterman,
a managing director with Stillwater Capital
Partrillioners…"
March 7 – Bloomberg
(David Mildenberg): "Thornburg Mortgage Inc., the
home lender that’s lost 95% of its market value in
the past year, may go out of business because the
provider of ‘jumbo’ loans can’t meet $610 million
of margin calls. Bankers have agreed to freeze
their demands for payment while Thornburg tries to
raise enough cash before a deadline of midnight
tonight… Falling prices for mortgage assets and
the company’s shrinking liquidity ‘have raised
substantial doubt'' about Thornburg’s ability to
keep operating, the statement said."
March
6 – Bloomberg (Shannon D. Harrington): "The cost
to protect corporate bonds from default soared to
a record as hedge fund failures and rising bank
funding costs stoked concern that a financial
institution may collapse. Credit-default swaps
tied to Citigroup Inc., Bank of America Corp.,
JPMorgan Chase & Co. and Wachovia Corp., the
nation's four biggest banks, climbed to the
highest on record. A benchmark gauge of credit
risk in the U.S. and Canada reached the highest
since it started trading in October 2003. ‘There’s
so much concern about a market failure,’ said
Gregory Peters, head of credit strategy at Morgan
Stanley… ‘It’s a situation where there’s just a
general lack of trust and there’s a heightened
fear of the unknown.’"
March 6 – Dow Jones
(Deborah Lynn Blumberg): "In yet another sign of
just how jittery financial markets have become
again, U.S. Treasurys are just about the only
security accepted in the securities repurchase
market Thursday. Super-safe Treasurys are being
scooped up like hotcakes and mostly on an
overnight basis in the repo market, where dealers
go to finance their positions by lending and
borrowing securities from each other on a
short-term basis. The 10-year note is the most
popular thus far, with most other Treasury issues
in demand as well. Other securities - such as
agency debt issued by the
Congressionally-chartered housing finance
companies Fannie Mae and Freddie Mac - and deals
to loan out any types of securities for longer
than overnight were struggling. The focus on
overnight loans backed by Treasurys… comes
Thursday as some mortgage bond funds failed to
meet margin calls, leading them to sell high
quality, liquid assets to make up for the loss.
That drove market participants to gravitate once
again to only the safest possible securities as
trust dwindled… ‘Dealers are tightening up lending
standards for non-Treasury securities in the repo
market,’ said Carl Lantz, fixed income strategist
at Credit Suisse… noting that the financing of
mortgage securities in general is becoming more
difficult. Agency mortgages ‘are typically
something you think of as stable,’ Lantz added,
but are now becoming especially volatile."
March 7 – The Wall Street Journal (Carrick
Mollenkamp and Serena Ng): "The financial turmoil
is taking on a new dimension: Banks that lent
money to hedge funds and other big risk-takers are
asking for some of it back. Loans from banks and
brokerages had allowed hedge funds, which manage
some $1.9 trillion in clients' money, to amass
many times that amount in investments. But as the
value of mortgage-backed bonds and other
investments has dropped in recent weeks, the
lenders are demanding that borrowers put up more
cash or assets. This is producing a negative cycle
that has policy makers deeply worried. When
investors rush to dump assets, prices fall and
lenders feel compelled to make further demands, or
‘margin calls,’ which cause even more selling."
…’The appetite for risk is dropping sharply,’ said
Steven Abrahams, chief interest-rate strategist at
Bear Stearns… In the early stages of the financial
turmoil, the riskiest securities… were hit by
selling. Now, as margin calls intensify, hedge
funds and others find they must unload even assets
perceived as high-quality, such as bonds backed by
the government-sponsored mortgage giants Fannie
Mae and Freddie Mac."
March 6 – Bloomberg
(Abigail Moses, Hamish Risk and Neil Unmack):
"Credit trading models used by Wall Street have
gone haywire, raising company borrowing costs even
as Federal Reserve Chairman Ben S. Bernanke cuts
interest rates. General Electric Co. is one of
five U.S. companies rated AAA… making its ability
to repay debt unquestioned. Yet when the… sold
2.25 billion euros of five-year bonds last week,
its annual interest payment was $17 million higher
than on a sale nine months ago… Yields on $5.12
trillion of corporate bonds tracked by Merrill
Lynch & Co. average 2.05 percentage points
more than U.S. Treasuries, the most since at least
1997. The higher costs are an unintended
consequence of securities that allow investors to
speculate on corporate creditworthiness. So-called
correlation models used to value them have become
unreliable in the fallout from the U.S. subprime
mortgage crisis."
March 7 – Bloomberg
(Edward Evans and Cathy Chan): "Carlyle Group’s
mortgage-bond fund was suspended in Amsterdam
trading after creditors forced the sale of some
holdings, jeopardizing shareholders' capital.
Lenders who issued default notices have liquidated
some residential mortgage-backed securities held
by the fund and may sell more as talks continue,
Carlyle Capital Corp. said… The fund had
‘substantial’ margin calls and additional default
notices from lenders yesterday… Carlyle Capital
said yesterday it had failed to meet margin calls,
prompting creditors to seek immediate repayment…
Carlyle increased its mortgage holdings last year,
selling $300 million of shares in Carlyle Capital.
The fund used leverage to buy about $22 billion of
AAA rated mortgage debt issued by Fannie Mae and
Freddie Mac. ‘This marks a further savage step in
the ongoing credit implosion of recent months,
Keith Baird, an analyst at Bear Stears…wrote… ‘The
liquidation of the fund cannot be excluded nor the
potential loss of capital, rendering the shares
worthless.’"
March 7 – Bloomberg (Edward
Evans): "The collapse of the subprime- mortgage
market has engulfed Carlyle Group, the world's
second- biggest leveraged-buyout firm by assets.
Carlyle Capital Corp., the firm's mortgage-bond
fund, was suspended from Amsterdam trading today
after it failed to repay lenders, who in turn sold
assets held as collateral. The fund expects more
margin calls, which may deplete capital. The pool
may be liquidated and the stock left worthless,
Bear Stearns Cos. analyst Keith Baird said… ‘This
marks a further savage step in the ongoing credit
implosion of recent months,'' Baird wrote…"
March 7 – Reuters (Laurence Fletcher):
"Hedge funds under pressure from a combination of
tightening credit lines, illiquid investments and
investor redemptions are increasingly moving to
stem investor outflows, industry experts told
Reuters… An increasing number of funds are using
gates -- which can typically limit investor exits
to between 10 and 25% of assets per quarter.
Alternatively they are suspending investor
redemptions entirely so the managers don’t have to
undertake a fire sale of assets in difficult
markets to pay exiting investors. ‘We see a lot of
situations that aren’t total write-offs but where
it’s more a question of suspending dealing or a
gate,’ said one fund of hedge funds manager…
‘These situations are increasing.’ Prime brokers
-- who provide services such as financing for
trading and settlement of trades -- have become
increasingly concerned in recent months about
funds, particularly in the credit area, who may be
leveraged, have suffered large losses or are
holding illiquid investments."
March 6 –
The Wall Street Journal (Liz Rappaport, Joellen
Perry and Deborah Lynn Blumberg): "Despite
repeated doses of medicine from central banks,
short-term lending markets around the world are
struggling again. In both Europe and the U.S., the
rates that banks charge each other for short-term
loans remain elevated, a sign of how cautious
banks still are about using their capital. In
other markets, investors are signaling distress at
banks. For example, the cost to buy insurance
against a bank debt default is soaring, in some
cases to more than 20 times the cost last summer."
March 6 – Bloomberg (Joseph Galante and
Edward Evans): "Carlyle Group’s publicly traded
mortgage bond fund failed to meet margin calls and
said it received a notice of default as banks call
in loans against even the highest-rated bonds… The
Carlyle fund raised $300 million in July and used
loans to buy about $22 billion of AAA rated agency
mortgage securities issued by Fannie Mae and
Freddie Mac, securities that have the ‘implied
guarantee’ of the U.S. government, according to
Carlyle. ‘The credit crisis is spilling over to
the next asset class, agency bonds,’ said Philip
Gisdakis, senior credit strategist at UniCredit
SpA in Munich. ‘There’s never just one cockroach.
If you see one highly leveraged hedge fund going
bust, then there’s another on the way.’"
March 5 – Bloomberg (Jody Shenn): "The
extra yield that investors demand to own agency
mortgage-backed securities over 10-year U.S.
Treasuries reached the highest since 1986… The
difference in yields on the Bloomberg index for
Fannie Mae's current-coupon, 30-year fixed-rate
mortgage bonds and 10- year government notes
widened about 12 basis points, to 215 basis
points, or 79 basis points higher than Jan. 15…
Some owners have been selling the debt ‘to make
room for the cheaper alternatives or to lighten up
because they anticipated further
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