Page 2 of 4 CREDIT BUBBLE BULLETIN Riddle of the burst bubble
Commentary and market watch by Doug Noland
equities index 11.3% lower (down 24.8% y-t-d). India's Sensex equities index
gained 3.5%, reducing y-t-d losses to 25.2%. China's Shanghai Exchange index
sank 7.0%, boosting 2008 losses to 50.5%.
Freddie Mac 30-year fixed mortgage rates were unchanged at 6.52% (down 7bps
y-o-y). Fifteen-year fixed rates increased 3 bps to 6.10% (down 15bps y-o-y),
while one-year ARMs declined 5 bps to 5.22% (down 43bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 6 bps
this week to 7.50%.
Bank Credit increased $5.5bn to $9.405 TN (week of 7/30). Bank
Credit has expanded $192bn y-t-d, or only 3.5% annualized. Bank Credit posted a
52-week rise of $727bn, or 8.4%. For the week, Securities Credit increased
$16.5bn. Loans & Leases declined $11bn to $6.917 TN (52-wk gain of $557bn,
or 8.8%). C&I loans gained $5.7bn, with y-t-d growth of 8.5%. Real Estate
loans increased $2.9bn (up 1.7% y-t-d). Consumer loans rose $4.7bn, while
Securities loans dropped $16.5bn. Other loans declined $7.8bn.
M2 (narrow) "money" supply declined $14.2bn to $7.729 TN (week of 7/28). Narrow
"money" has expanded $266bn y-t-d, or 6.2% annualized, with a y-o-y rise of
$439bn, or 6.0%. For the week, Currency added $1.2bn, and Demand &
Checkable Deposits rose $9.7bn. Savings Deposits fell $35.8bn, while Small
Denominated Deposits increased $8.4bn. Retail Money Funds added $2.2bn.
Total Money Market Fund assets (from Invest Co Inst) jumped $58.5bn to $3.560
TN, with a y-t-d increase of $447bn, or 24.1% annualized. Money Fund assets
have posted a one-year increase of $903bn (34.0%).
Asset-Backed Securities (ABS) issuance slowed to less than $1.0bn. Year-to-date
total US ABS issuance of $118bn (tallied by JPMorgan's Christopher Flanagan) is
running at 26% of comparable 2007. Home Equity ABS issuance of $303 million
compares with 2007's $212bn. Year-to-date CDO issuance of $17bn compares to the
year ago $261bn.
Total Commercial Paper outstanding declined $2.8bn this week to $1.725 TN, with
a y-t-d decline of $60bn (5.5% annualized). Asset-backed CP fell $14.2bn last
week to $730bn, boosting 2008's decline to $43.1bn (9.1% annualized). Over the
past year, total CP has contracted $498bn, or 22.4%, with ABCP down $466bn, or
38.9%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 8/6) jumped
$28.0bn to a record $2.396 TN. "Custody holdings" were up $339bn y-t-d, or
26.8% annualized, and $389bn y-o-y (19.4%). Federal Reserve Credit declined
$3.6bn to $889bn. Fed Credit has expanded $15.6bn y-t-d (2.9% annualized) and
$38.6bn y-o-y (4.5%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.315 TN y-o-y, or 23%, to $6.992 TN.
Global Credit Market Dislocation Watch
August 8 - Dow Jones: "Fannie Mae swung to a second-quarter loss as the largest
buyer of home loans booked $5.35 billion in credit-costs from boosting loss
provisions and charge-offs ... The company ... also announced plans to cut
annual operating costs 10% by the end of 2009, increase its guaranty fees and
manage its balance sheet to conserve capital. Such balance-sheet moves include
eliminating higher-risk loans - namely newly originated Alt-A acquisitions - by
year-end, boosting efforts to revamp delinquent loans and opening offices in
Florida and California to more closely manage sales of foreclosed properties.
As of June 30, Alt-A mortgage loans represented 11% of Fannie's total mortgage
book of business ... The government-sponsored provider of funds for home
mortgages posted a net loss of $2.3 billion ... The credit-related expenses, up
more than tenfold from last year, include a $3.7 billion addition to its loss
reserves ... As of June 30, the serious delinquency rate ... was 1.36%, up from
0.98% as of Dec. 31, 2007 and 0.64% a year ago. Loan charge-offs, excluding
fair value losses, were $945 million in the second quarter, up 50% from the
first quarter ... "
August 6 - Bloomberg (Dawn Kopecki): "Freddie Mac ... slashed its dividend at
least 80% after posting a quarterly loss that was three times wider than
analysts' estimates ... The results, combined with (CEO) Syron's delay in
selling $5.5 billion in stock, increased speculation US Treasury Secretary
Henry Paulson will use his new power to pump money into Freddie. Syron said the
... company will wait to sell shares at 'a more propitious time.' Meantime the
company may slow purchases for its $792 billion portfolio of mortgages and
slice the dividend to avoid breaching regulatory capital requirements ... The
company has 22,000 properties in foreclosure, the most since it was created in
1970 during the Vietnam War and now anticipates losing 26% on each loan, up
from 22%. The fair value of its assets fell to a negative $5.6 billion ...
Almost one out of every 10 mortgages in the US was in trouble during the first
quarter, the highest in records dating to 1979, according to the Mortgage
Bankers Association ... Credit losses were 17.3 bps over the average total
mortgage portfolio, up from 11.6 bps in the first quarter. The company is no
longer forecasting losses because the decline has been too hard to predict ...
Freddie had projected credit losses of 12 bps or $2.2 billion for this year and
14 bps or $2.9 billion in 2009 ... Freddie is also searching for a new CEO, a
process that is 'taking longer than we'd hoped,' Syron said."
August 8 - New York Times (Mary Williams Walsh): "American International Group,
the big insurer, lost $5.3 billion in the second quarter as housing values slid
and disruptions continued in the credit markets. Securities analysts had been
expecting A.I.G. to post a small net gain. Still, its loss was less than the
$7.8 billion it lost in the first quarter of this year ... The continued red
ink underscored the way A.I.G. has been battered by the troubles that have been
spreading through the financial sector since late last summer. In the second
quarter of 2007, before the collapse of mortgage-backed securities began to
cause runs on hedge funds and huge losses at banks, A.I.G. earned $4.2
billion."
August 7 - Bloomberg (John Glover): "Defaults on bonds may rise to as much as
10% worldwide within a year as economic growth slows, according to Moody's ...
While defaults on high-yield, high-risk bonds are likely to reach 6.3% in 12
months, the rate may be higher should the housing slump lead to a 'protracted
US recession,' the ... company said ... 'The global default rate will climb
sharply over the next 12 months,' Kenneth Emery, director of default research,
said ... 'The pace of corporate defaults increased considerably in July as
economic conditions weakened and more companies experienced financial
distress.'"
August 8 - Bloomberg (Tom Cahill): "The $1.9 trillion hedge fund industry,
mired in its worst performance in two decades, faces 'much worse' conditions
than in 1998, when Long-Term Capital Management LP collapsed, a veteran of that
fund said. 'It's definitely a trickier environment,' said Hans Hufschmid, CEO
of GlobeOp Financial Services LP, and a former partner at LTCM ... 'The market
is much worse that it was in 1998. Then it was just LTCM, but this impacts
everybody.' Hedge funds are concerned for the first time about risks related to
prime brokers after Bear Stearns Cos.' forced merger with JPMorgan Chase &
Co., said Hufschmid ... whose ... company is administrator to funds managing
about $104 billion... 'Hedge funds live on credit and leverage and the ability
to finance esoteric positions for a long time,' said Hufschmid. 'To the extent
liquidity is drying up as it is now, that becomes more difficult.'"
August 6 - Bloomberg (Pierre Paulden): "Prices of high-risk, high-yield loans
fell in the week ended yesterday as shrinking sales hurt US automakers and the
number of companies filing for bankruptcy rose. The average actively traded
loan fell to 88.5 cents on the dollar, from 89.26 on July 29, according to
S&P's LCD. Loan prices have fallen 3.2 cents since the start of June to
near record-low levels ... 'Certain sectors, especially consumer-related and
homebuilding have been heavier hit than others,' said Chris Taggert, an analyst
at research firm CreditSights ... 'Fundamentals continue to weaken.'"
August 7 - Bloomberg (John Glover): "A year after losses on US subprime
mortgages caused a seizure in credit markets worldwide, European companies are
starting to default. As many as 6% to 7% of corporate borrowers may fail to pay
debts on time in the next year, a tenfold increase from June, according to
Dresdner Kleinwort ... That would be the highest since July 2003 ... 'Companies
that would have refinanced a year ago find now that they can't,' said Andy
Stoneman, managing partner at MCR Corporate Restructuring in London ... "
August 7 - Bloomberg (Lisa Brennan): "The Oakland, California, agency that runs
toll bridges across the San Francisco Bay is proving that the era of cheap
money for municipal borrowers is over. This week the Bay Area Toll Authority
sold more than $700 million of bonds at rates as high as 5.34% to refinance
debt that cost 4% last year ... 'The cost of money just went way up,' said
Brian Mayhew, the agency's chief financial officer. 'You may have projects on
the cusp that are going to be difficult to do.' Almost a year after the Federal
Reserve began to cut its target rate for overnight loans between banks to 2%...
borrowing costs for states, cities, hospitals and municipal authorities are
going in the opposite direction ... 'The world is falling apart' for borrowers,
said Robert Doty, the president of American Governmental Financial Services, an
advisory firm in Sacramento."
August 7 - Bloomberg (David Scheer and Karen Freifeld): "Citigroup Inc., the
largest US bank by assets, agreed to buy back or help clients unload as much as
$19.5 billion in auction-rate securities and pay a $100 million fine to settle
US regulatory claims it improperly saddled customers with untradeable bonds.
Citigroup will buy back about $7.5 billion in securities from individual
customers, charities and small businesses under a settlement with New York
State Attorney General Andrew Cuomo, the SEC and a group of states ... It must
also start 'restoring
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