Page 2 of
4 CREDIT BUBBLE
BULLETIN The
worst-case scenario -
live Commentary and weekly watch by Doug
Noland
has posted a 33-week surge of
$770bn (14% annualized) and a 52-week rise of
$977bn, or 11.6%. For the week, Securities Credit
rose $23.4bn. Loans & Leases jumped $21.8bn to
a record $6.916 TN (33-wk gain of $591bn). C&I
loans increased $6.7bn, with one-year growth of
21.1%. Real Estate loans dipped $1.6bn (up 7.7%
y-o-y). Consumer loans were unchanged, while
Securities loans rose $13.2bn. Other loans gained
$3.5bn. Examining the liability side, Deposits
increased $22.3bn and Borrowings From Others
jumped $32bn.
M2 (narrow) "money" supply
rose $14.4bn to a record $7.645 TN (week of 3/3).
Narrow "money" expanded $182bn over the past nine
weeks, or 14.1% annualized, with a y-o-y rise of
$512bn, or
7.2%. For the week, Currency
added $0.9bn, while Demand & Checkable
Deposits jumped $23.1bn. Savings Deposits fell
$12.7bn, and Small Denominated Deposits declined
$3.4bn. Retail Money Fund assets increased $6.5bn.
Total Money Market Fund assets (from
Invest Co Inst) gained $3.5bn last week (10-wk
gain $341bn) to a record $3.454 TN. Money Fund
assets have posted a 33-week rise of $870bn (53%
annualized) and a one-year increase of $1.046 TN
(43.5%).
Asset-Backed Securities (ABS)
issuance slowed to about $3bn. Year-to-date total
US ABS issuance of $40bn (tallied by JPMorgan's
Christopher Flanagan) is running only a quarter of
the level from comparable 2007. Home Equity ABS
issuance of $197 million is a fraction of
comparable 2007's $84bn. Year-to-date CDO issuance
of $4bn compares to the year ago $95bn.
Total Commercial Paper dropped $15.1bn to
$1.845 TN. CP has declined $379bn over the past 31
weeks. Asset-backed CP declined $5.7bn (31-wk drop
of $411bn) to $785bn. Over the past year, total CP
has contracted $150bn, or 7.5%, with ABCP down
$272bn, or 26%.
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 3/12)
increased $1.2bn to a record $2.151 TN. "Custody
holdings" were up $94.5bn y-t-d, or 21.8%
annualized, and $291bn year-over-year (15.7%).
Federal Reserve Credit fell $4.1bn to $869bn. Fed
Credit has declined $4.4bn y-t-d, while having
expanded $17.6bn y-o-y (2.1%).
International reserve assets (excluding
gold) - as accumulated by Bloomberg’s Alex Tanzi –
were up $1.384 TN y-o-y, or 27.4%, to a record
$6.432 TN.
Global Credit Market
Dislocation Watch March 11 – Bloomberg
(Thomas R. Keene and Alex Lange): "Henry Kaufman,
president of his own consulting firm and former
chief economist at Salomon Brothers, comments… On
the crunch: ‘This credit crisis is deeper and
wider and has been exceedingly opaque in contrast
to earlier credit crises in the post-World War II
period.’"
March 14 – Dow Jones (Jed
Horowitz): "Bear Stearns Cos.' troubles graduated
from problematic to crisis size in the past week
as fellow banks and customers changed their
concerns from worries about profit declines
stemming from its large mortgage exposure to sheer
ability to fund its businesses. With Bear Stearns
now making history as the first investment bank to
require a Federal Reserve bailout, indirectly
through J.P. Morgan … its problems are far from
over. ‘Once this happens, no one will deal with
them,’ said Joseph Rizzi, a veteran banker who
focuses on risk-management. He equated the crisis
of confidence to the one that caused Barings Bank
to collapse after its massive trading scandal.
‘The remaining franchise value, customers and
employees, will evaporate,’ he said."
March 14 – Financial Times (Michael
Mackenzie, Aline van Duyn, and Peter Thal Larsen):
"Bear Stearns is hardly Wall Street’s biggest
investment bank but its travails have far-reaching
consequences for the global financial system
because of its crucial behind-the-scenes role in
some of the world’s most troubled markets. Bear is
a significant underwriter of mortgage securities,
an active trader of derivatives and leading
financier of hedge funds. Analysts said it was
almost impossible to know what impact Bear’s
problems would have on its clients, its
counterparties and on other investors holding
securities or derivatives that Bear is trying to
liquidate. ‘The ripples could be widely felt
because Bear Stearns has so many points of contact
with everyone else in the financial industry,’
said Matt D’Amico, partner in the banking business
at law firm Bryan Cave. Evidence of bubbling
contagion in the financial markets can be seen in
the dramatic surge in the cost of credit insurance
for global banks. Many banks have double-A credit
ratings, but the price charged to insure their
debt is more typical of lower-rated companies."
March 14 – Bloomberg (Shannon D.
Harrington and Caroline Salas): "The cost to
protect the largest financial institutions from
default soared after Bear Stearns Cos.’ emergency
bailout stoked concerns that other companies may
also be on the brink of failure… ‘This is the
worst case scenario that's playing out right now,’
Tom Houghton, who manages $2 billion of corporate
bonds at Advantus Capital Management… ‘It just
raises all the fears now about counterparty risk,
and it’s just a snowball effect.’"
March
10 – Bloomberg (Tom Cahill and Katherine Burton):
"The hedge-fund industry is reeling from its worst
crisis in a decade as banks are now demanding more
money pledged to support outstanding loans even
when the investment is backed by the full faith
and credit of the United States. Since Feb. 15, at
least six hedge funds, totaling more than $5.4
billion, have been forced to liquidate or sell
holdings because their lenders -- staggered by
almost $190 billion of asset writedowns and credit
losses caused by the collapse of the
subprime-mortgage market -- raised borrowing rates
by as much as 10-fold with new claims for extra
collateral."
March 12 – Financial Times
(James Mackintosh): "Another three big hedge funds
have been forced to close down or to suspend
investor withdrawals as the credit squeeze
persists. Drake Management, a $12bn New York
manager, wrote to investors in its three hedge
funds on Wednesday offering them the choice of
winding up the funds after about half asked for
their money back. Global Opportunities Capital,
$870m Amsterdam hedge fund, said it would block
withdrawals until the end of the year to prevent
firesales of shares… It also emerged that Blue
River Asset Management, a Colorado-based hedge
fund manager specialising in municipal bonds, was
to shut its main fund after nearly 80% losses,
even after raising $110m for a fresh fund. ‘These
are very tough times,’ said Angelos Metaxa, a
director of CM Advisors, a Geneva-based fund of
hedge funds. ‘Anyone with significant amounts of
leverage is going to be in trouble.’"
March 13 – Bloomberg (Edward Evans):
"Carlyle Group said creditors plan to seize the
assets of its mortgage-bond fund after it failed
to meet more than $400 million of margin calls on
mortgage- backed collateral that plunged in value.
Carlyle Capital Corp….said in a statement it
defaulted on about $16.6 billion of debt as of
yesterday."
March 13 – Bloomberg (Jason
Kelly): "Carlyle Group, the world’s second-
largest private-equity firm, was caught off guard
by the failure of negotiations to save its
publicly traded mortgage fund, co- founder David
Rubenstein said. ‘We were surprised,’ Rubenstein
said… ‘The banks have a lot of their own credit
problems. They didn’t have any flexibility.’"
March 14 – Financial Times: "Last summer,
Wall Street seemed to try quite hard to avoid
seizing collateral from a Bear Stearns mortgage
hedge fund, hammered by margin calls. The fear
then was that a forced liquidation of all those
complex securities might spark a panic. The banks
are more battle-hardened now. As the
highly-leveraged Carlyle Capital fund, with about
$21bn in assets, started to default on its debt,
the banks moved in quickly. This is, after all,
repo land: a financing market where there is no
wriggle room. If the value of the collateral
falls, the banks have to protect themselves with
extra cash. Repo desks are not paid to take on
masses of market risk. What is shocking is that
Carlyle Capital has been done in by wobbles in
agency triple-A mortgage-backed securities, the
only assets in its portfolio… These securities
carry the implicit guarantee of the US government.
But even these have not been immune from the
stress in the credit markets."
March 14 –
Financial Times (Joanna Chung and Peter Garnham):
"The collapse of the dollar, which suffered
another sharp fall on Thursday, is causing growing
difficulties for economies whose currencies are
tied to the greenback. A sliding dollar, whose
decline has been accelerated by a series of
interest rate cuts in the US, is feeding growing
inflationary pressures in countries as varied as
China, Saudi Arabia and Russia. These pressures,
which could lead to significant economic and
social problems, may get worse if, as expected,
the US Federal Reserve slashes its main interest
rate by 75 basis points…next week. Indeed, some
analysts believe that the Fed’s aggressive
policy-easing to stabilise the US economy may end
up destabilising those emerging-market economies
with fixed or quasi-fixed dollar pegs…"
March 14 – Bloomberg (Jeremy R. Cooke):
"Billionaires Bill Gross and Wilbur Ross and the
U.S. Securities and Exchange Commission failed to
restore confidence in the $330 billion
auction-rate bond market, as borrowing costs for
states and municipalities rose… More than 67% of
auctions failed this week…"
March 14 – Dow
Jones: "Only 24 of a total of 129 public auction
rate securities up for resale succeeded Friday,
according to a document provided by a person
familiar with the situation. By way of comparison,
75% of the auctions up for resale failed, although
there were more auction sales. Out of 190
securities on offer Thursday, 142 failed while 48
succeeded."
March 11 – Bloomberg (Tom
Cahill): "Citigroup…will provide $1 billion to six
of its leveraged municipal bond funds, the second
time in a month it has bailed out funds hurt by
tightened lending. The funds…have $15 billion in
assets and about $2 billion in capital."
March 11 – Bloomberg (Abigail Moses): "The
risk of losses on U.S. Treasury notes exceeded
German bunds for the first time ever amid investor
concern the subprime mortgage crisis is sapping
government reserves, credit-default swaps prices
show. Contracts on 10-year Treasuries traded at a
record 16 basis points earlier today, compared
with 15 basis points on German government notes…
In July, U.S. credit-default swaps were at 1.6
basis points, compared with 2.5 basis points on
bunds."
March 11 – The Wall Street Journal
(Peter Grant): "Even optimistic
commercial-property developers are stacking
sandbags to hold back a financial deluge in the
market for office towers, hotels, shopping malls
and other commercial real estate… In recent weeks,
sales of commercial property have nearly hit a
standstill. And the market value of such
properties -- and the mortgages on them -- have
declined as the spreading fallout from the crisis
in risky, or subprime, mortgages has made credit
practically evaporate."
March 11 –
Bloomberg (Jody Shenn): "Rising downgrades on
Alt-A mortgage securities may boost by $42 billion
the amount of collateralized debt obligations
causing writedowns and higher capital needs at
banks and bond insurers, according to Barclays Plc
analysts… Downgrades on Alt-A securities may
affect ‘high grade’ CDOs, which repackage highly
rated asset-backed securities into new debt, by
creating so-called events of default, according
to… Barclays analysts."
March 12 – The
Wall Street Journal (Robin Sidel): "Here comes
another headache for banks suffering from the
mortgage downturn: Losses on home-equity loans are
soaring, even at some lenders that avoided big
blunders on subprime loans. When times were good,
banks raked in billions of dollars in profit from
home-equity loans, which allow borrowers to tap
the accumulated value in their property with
either a loan for a specific amount or a line of
credit. As long as home prices were rising,
lenders had little to worry about. But falling
home values are leaving banks with little or
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