Page 3 of
5 CREDIT BUBBLE
BULLETIN The
meaning of stage II Commentary
and weekly watch by Doug Noland
England expects
to swap 50bn pounds ($100bn) of assets in the
first couple of months. This figure could rise
sharply as commercial banks rush to offload loans
on to the central bank for a period of at least
one year, renewable for a further two years. It is
a radical action… US Federal Reserve officials
will consider a similar long-term liquidity scheme
if it eases UK financial strains. The European
Central Bank had no comment."
April 21 -
Bloomberg (Jennifer Ryan and Brian Swint): "The
Bank of England offered to swap government bonds
for mortgage securities to kick-start bank
lending, with Governor Mervyn King pledging to
meet demand even if it exceeds an estimate of 50
billion pounds ($100
billion.) 'There is no arbitrary limit on this so
it could well go higher,' King told reporters… He
said the plan aims to restore confidence to the
banking system and the most important aspect of
the scheme is that 'everyone needs to know this is
there for them to access as needed… The measures,
backed by Prime Minister Gordon Brown's
government, mimic a similar swap of $200 billion
of securities by the US Federal Reserve last
month… 'We will make sure there is enough
liquidity in the economy to make sure people can
buy their own houses,' Brown said… 'We can get
markets working again in a way that we can ensure
that jobs.'"
April 23 - Financial Times
(Ben White and Francesco Guerrera): "Big US
financial groups have raised more than $28bn in
the capital markets in recent days, suggesting
that many investors believe the sector is poised
for a strong comeback. Merrill Lynch raised $7bn
in its first senior unsecured debt sale in six
months yesterday and Goldman Sachs sold $1.5bn in
10-year notes. CIT, the commercial finance group,
sold $1.5bn in common and convertible preferred
stock yesterday, 50% more than it had planned.
These sales followed a preferred share offering
from Citigroup on Monday that raised $6bn and a
preferred sale by JPMorgan Chase last week that
raised about $6bn. Merrill raised $2.5bn in a
preferred share sale on Monday. Lehman Brothers
also raised $4bn this month in a preferred share
offering… 'We are witnessing a tsunami of fund
raisings,' one senior fund manager said…"
April 25 - Financial Times (David Oakley):
"Bond issuance has jumped sharply this month amid
improved investor sentiment stemming from central
bank interventions and hopes that banks have
revealed most of their writedowns and credit
losses. Issuance this month has hit $300bn
globally in the four main currencies - dollar,
euro, yen and sterling - a 25 percent increase
compared with March, according to Thomson
Financial. In the whole of April last year,
issuance was $440bn."
April 23 - Financial
Times (Gillian Tett and Michael Mackenzie): "As
the Bank of England announced the details of its
new swap facility yesterday, global policymakers
were handed some good news: the three-month
sterling Libor, or London Interbank Offered Rate,
fell back slightly… However, any sense of euphoria
was tempered… behind the scenes, a much bigger
worry is haunting Libor: that, at the same time as
institutions such as the Bank of England are
trying to pull this rate lower, the credibility of
Libor as a measure is declining. This is
threatening to inject a new element of volatility
and investor distrust into the financial arena of
the type that banks, policymakers and investors
can ill-afford to see. Indeed, traders say this
crisis of confidence has left some investors
doubly wary of taking on large positions in
derivatives markets and made banks more reluctant
to lend money to each other. 'Since Libor is such
a critical rate and now filled with uncertainty as
to where it should be, it's only logical that all
sorts of positions have been exited until the fair
level is determined,' says David Ader, strategist
at RBS Greenwich Capital…"
April 23 -
Bloomberg (Christine Richard): "Ambac Financial
Group Inc., the world's second-largest bond
insurer, posted a wider loss than analysts
estimated after being crippled by writedowns for
guarantees on subprime-mortgage securities. The
first-quarter net loss was $1.66 billion… Ambac,
which was stripped of one of its three AAA ratings
this year, was 'severely impacted' by the plunging
value of mortgage- related guarantees, interim
Chief Executive Officer Michael Callen said…
Ambac's new business slumped 87%..."
April
24 - Bloomberg (Shannon D. Harrington): "The cost
to protect against the risk that Ambac Financial
Group Inc. and MBIA Inc. won't make good on their
guarantees and debt payments rose to a record on
concern the companies may not be able to raise
enough capital to keep their AAA ratings.
Credit-default swap sellers today are demanding
$1.25 million upfront and $500,000 a year to
protect $10 million of debt guaranteed by Ambac's
insurance unit for five years, according to CMA
Datavision."
April 24 - Bloomberg (Neil
Unmack): "BlackRock Inc., the biggest publicly
traded asset manager in the US, Invesco Ltd. and
Bear Stearns Cos. have pushed the amount of
defaulted collateralized debt obligations to $180
billion, Wachovia Corp. analysts said. Downgrades
to mortgage bonds and other assets triggered
events of default on 165 CDOs, an increase from 99
of the deals worth $116 billion in February... An
event of default forces a CDO manager to either
liquidate or divert money to repay senior
creditors at the expense of other investors."
April 23 - Bloomberg (Caroline Salas):
"The looming wave of bankruptcies is unlikely to
be kind to bondholders. And they have only
themselves to blame. Rather than receiving the
historical average recovery of 42 cents on the
dollar in a default, owners of a third of high-
yield, high-risk bonds rated B+ or lower may get
no more than 10 cents, according to…Fitch… About
22% are likely to get 11 cents to 30 cents. Bond
investors… may pay the price for allowing
themselves to be Subordinated by junk-rated
companies that borrowed a record $2.2 trillion of
bank loans in the past three years."
April
22 - Financial Times (Paul J Davies): "The banks
involved in the $20bn financing for the buy-out of
Chrysler, the US carmaker, at the height of the
private equity boom are renewing a push to offload
the debt by slashing prices. Goldman Sachs and
Citigroup have already sold chunks of the roughly
$12bn in secured loans granted to the
Cerberus-backed private equity buy-out, which
acquired Chrysler from its fromer parent Daimler -
among the biggest of the jumbo deals struck in the
run-up to the credit crunch. Goldman broke ranks
first to sell $500m worth of the loans at 63 cents
in the dollar and Citigroup swiftly followed with
a chunk of Chrysler debt set to be included in a
$12bn portfolio of risky, leveraged loans being
sold… Citi was offered prices of 63-65 cents for
the Chrysler debt, according to people involved."
April 25 - Bloomberg (Michael B. Marois
and Jeremy R. Cooke): "More than $9 billion of
auction- rate bonds sold by student-loan agencies
in states from Pennsylvania to Utah have trapped
investors in debt that's not paying interest."
April 25 - Bloomberg (Laura Cochrane):
"Australia's non-bank mortgage lenders, which rely
on the nation's now dormant securitization markets
for funding, won't be able to sell mortgage-backed
bonds for at least two years, according to
FirstMac Ltd."
Currency
Watch April 25 - Bloomberg (Emma O'Brien):
"Russia's central bank bought about $20 billion in
April as it sought to curb the appreciation of the
ruble, deputy Chairman Alexei Ulyukayev said… Bank
Rossii's actions were aimed at 'holding back' the
ruble…"
The dollar index rallied 1.1%,
ending the week at 72.79. For the week on the
upside, the South African rand increased 2.2%, the
Mexican peso 0.7%, and the British pound 0.3%. On
the downside, the Swiss franc declined 2.5%, the
Norwegian krone 2.4%, the Danish krone 1.8%, the
Euro 1.8%, the Swedish krona 1.5%, the New Zealand
dollar 1.5%, and the Japanese yen 1.1%.
Commodities Watch April 24 -
Bloomberg (Jae Hur): "Rice prices in Chicago
advanced above $25 per 100 pounds for the first
time on speculation more countries may introduce
export curbs, reducing supplies needed to combat
shortages and cool inflation. Brazil may restrict
exports of rice to build domestic inventories amid
tightening international supplies."
April
23 - Financial Times (Carola Hoyos, Ed Crooks and
Javier Blas): "Expectations rose yesterday that
soaring food prices will provoke a rethink of
support for biofuels in Europe and the US, as the
price of oil hit a new high of almost $120 a
barrel. Biofuels produced from crops such as corn
and soya provide a small but fast-growing share of
road-fuel supplies, and had been expected to make
an important contribution to meeting growing
demand. But yesterday Gordon Brown, the UK prime
minister, said the country could push for a change
in a European Union target to increase the
proportion of biofuel to 10% of road fuels by
2020."
April 21 - Financial Times (Carola
Hoyos): "Saudi Arabia, the world's biggest oil
producer, has put on hold any plans to further
increase long-term production capacity from its
vast oil fields, its most powerful policymakers
have said. In a series of statements, including
one by the king himself, the kingdom has warned
consumers it does not believe there is a need for
further expansion, an assumption disputed by the
world's biggest developed countries."
April 21 - Financial Times (Javier Blas
and Joanna Chung): "Speculators such as hedge
funds or pension funds are not responsible for
pushing agricultural commodities' prices,
including wheat and rice… The US Commodity Futures
Trading Commission is meeting farmers and traders
tomorrow to discuss the jump in agriculture
commodities' prices amid criticism from US
politicians and farming associations that
speculators are behind the increase. It will say
prices have been driven by robust demand,
weather-related supply disruptions, the lowest
inventories in 30 years, government trade
restrictions and the impact of the weakening US
dollar, officials said."
Gold dropped 3.4%
to $886 and Silver 5.5% to $16.96. May Copper
added 0.5%. May Crude rose $2.68 to a record
$118.84. May Gasoline gained 2.0% to a record (up
23% y-t-d), and May Natural Gas rose 4.2% (up 47%
y-t-d). July Wheat sank 8.0%. The CRB index dipped
0.4% (up 16.5% y-t-d). The Goldman Sachs
Commodities Index (GSCI) rose 0.9% (up 22.1% y-t-d
and 55.9% y-o-y).
China
Watch April 21 - Bloomberg (Mark Shenk):
"Traffic jams in Beijing and humming air
conditioners in Dubai are replacing US highways
and
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