Page 2 of 4 CREDIT BUBBLE BULLETIN Misdirected credit runs unabated
Commentary and weekly watch by Doug Noland
The Nikkei 225 lost 1.5% (down 22.1% y-t-d). Emerging markets were under
heavy selling pressure before rallying with the world today. Brazil's benchmark
dollar bond yields jumped 23 bps to 6.22%. Brazil's Bovespa equities index
rallied 1.3% (down 17% y-t-d). The Mexican Bolsa added 0.6% (down 13% y-t-d).
Mexico's 10-year $ yields surged 34 bps to 5.97%. Russia's RTS equities index
recovered from a crash to end the week down only 3.4% (down 43.4% y-t-d).
India's Sensex equities index was little changed, with y-t-d losses of 30.8%.
Today's 10% rally took China's Shanghai Exchange back to little changed for the
week, with 2008 losses at 60.6%.
Freddie Mac 30-year fixed mortgage rates dropped 15 bps to 5.78% (down 56bps
y-o-y). Fifteen-year fixed rates sank 19 bps to
5.35% (down 76bps y-o-y), while one-year ARMs declined 18 bps to 5.03% (down
62bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr
fixed jumbo rates this week up 8 bps to 7.01% (down one bp y-o-y).
Bank Credit gained $13.4bn to $9.406TN (week of 9/10). Bank Credit has expanded
only $193bn y-t-d, or 2.9% annualized. Bank Credit posted a 52-week rise of
$476bn, or 5.3%. For the week, Securities Credit jumped $27.7bn. Loans &
Leases dropped $14.2bn to $6.913 TN (52-wk gain of $380bn, or 5.8%). C&I
loans fell $4.9bn, with y-t-d growth of 6.5%. Real Estate loans declined $8.4bn
(up 1.1% y-t-d). Consumer loans added $2.9bn, while Securities loans declined
$6.4bn. Other loans added $1.6bn.
M2 (narrow) "money" supply slipped $1.9bn to $7.714 TN (week of 9/8). Narrow
"money" has expanded $251bn y-t-d, or 4.9% annualized, with a y-o-y rise of
$357bn, or 4.8%. For the week, Currency was about unchanged, while Demand &
Checkable Deposits declined $5.2bn. Savings Deposits fell $4.5bn, while Small
Denominated Deposits increased $3.9bn. Retail Money Funds also rose $3.9bn.
Total Money Market Fund assets (from Invest Co Inst) sank an astonishing $169bn
to $3.413 TN, reducing the y-t-d expansion to $299bn, or 13.5% annualized.
Money Fund assets have posted a one-year increase of $587bn (20.8%).
Asset-Backed Securities (ABS) issuance has basically ground to a halt.
Year-to-date total US ABS issuance of $129bn (tallied by JPMorgan's Christopher
Flanagan) is running at 27% of comparable 2007. Home Equity ABS issuance of
$303 million compares with 2007's $232bn. Year-to-date CDO issuance of $22.6bn
compares to the year ago $277.4bn.
Total Commercial Paper outstanding dropped $52.1bn this week to $1.763 TN, with
CP down $22.2bn y-t-d. Asset-backed CP declined $18.6bn last week to $772bn,
with 2008 now showing a decline of $11.2bn. Over the past year, total CP has
contracted $106bn, or 5.7%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 9/17) increased
$13.5bn to $2.409 TN. "Custody holdings" were up $352bn y-t-d, or 23.5%
annualized, and $421bn y-o-y (21.2%). Federal Reserve Credit surged $43.1bn to
a record $931bn. Fed Credit has expanded $57.8bn y-t-d (9.1% annualized) and
$78.3bn y-o-y (9.2%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.186 TN y-o-y, or 20.6%, to $6.929 TN.
Global Credit Market Dislocation Watch
September 19 - Bloomberg (Scott Lanman): "The Federal Reserve and Treasury
began a series of emergency measures to prop up the mortgage and money markets
ahead of congressional action on a broader lifeline for the US financial
system. The Treasury plans to double its purchases of mortgage- backed debt to
$10 billion and use a $50 billion fund to insure against losses on money-market
funds. The Fed plans to extend emergency loans to banks to purchase
asset-backed commercial paper from money funds, and to buy short-term debt from
Fannie Mae, Freddie Mac and other agencies. Today's announcements are aimed at
combating a record exodus of investors from money-market funds, long considered
to be among the safest investments."
September 19 - MarketNews International: "US Senator Jim Bunning today issued
the following statement regarding the Treasury Departments bailout of Wall
Street. 'Instead of celebrating the Fourth of July next year Americans will be
celebrating Bastille Day; the free market for all intensive purposes is dead in
America. The action proposed today by the Treasury Department will take away
the free market and institute socialism in America. The American taxpayer has
been misled throughout this economic crisis. The government on all fronts has
failed the American people miserably. My great grandchildren will be saddled
with the estimated $1 trillion debt left in the wake of this proposal.'"
September 19 - Bloomberg (Rebecca Christie and John Brinsley): "The US
government moved to cleanse banks of troubled assets and halt an exodus of
investors from money markets in the biggest expansion of federal power over the
financial system since the Great Depression. 'We're talking hundreds of
billions,' Treasury Secretary Henry Paulson said in a press conference. 'This
needs to be big enough to make a real difference and get to the heart of the
problem.' The Treasury is likely to run the program, which would involve
auctions where the government buys devalued assets, said House Financial
Services Committee Chairman Barney Frank. The plan is designed as a
comprehensive approach after a series of individual rescues failed to stem the
crisis."
September 19 - Bloomberg (Alison Vekshin): "House Financial Services Committee
Chairman Barney Frank said Congress within two weeks will pass legislation
letting the Treasury take on financial companies' soured assets to help revive
credit markets. 'I'm pretty sure this will be Treasury being the one that
executes it because you don't have time to create a new agency,' Frank said ...
The plan may cost taxpayers 'ultimately not a great deal,' because Treasury
will buy 'selectively,' Frank said."
September 19 - Bloomberg (Hugh Son, Erik Holm and Craig Torres): "American
International Group Inc. averted the worst financial collapse in history by
accepting an $85 billion federal loan and giving the government a majority
stake. The US reversed its opposition to a bailout of AIG, the nation's biggest
insurer by assets, after private efforts failed and the Federal Reserve
concluded that 'a disorderly failure of AIG could add to already significant
levels of financial market fragility,' according to a Fed statement ... "
September 15 - Bloomberg (Yalman Onaran and Christopher Scinta): "Lehman
Brothers Holdings Inc., the fourth-largest US investment bank, succumbed to the
subprime mortgage crisis it helped create in the biggest bankruptcy filing in
history. The 158-year-old firm, which survived railroad bankruptcies of the
1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital
Management a decade ago, filed a Chapter 11 petition with US Bankruptcy Court
... The collapse of Lehman, which listed more than $613 billion of debt, dwarfs
WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in
1990."
September 15 - Bloomberg (Jeff St.Onge): "Lehman Brothers Holdings Inc., the
fourth-largest US investment bank, owes its 10 largest unsecured creditors more
than $157 billion, including debts to bondholders totaling $155 billion."
September 16 - Bloomberg (John Glover): "Lehman Brothers Holdings Inc.
bondholders may lose more than $111 billion in the collapse of the investment
bank, based on contracts used to set a recovery value for the debt, according
to Bank of America Corp. analysts. So-called recovery swaps ... Lehman's $146
billion of outstanding senior debt traded at 35% of face value, the analysts
wrote, indicating a loss of as much as 65%. Holders of about $18 billion of
subordinated notes may recover 4% at the most ... "
September 19 - Financial Times (Jennifer Hughes): "Huge numbers of trades in
which Lehman Brothers was a counterparty remain unsettled a week after the US
bank collapsed and are likely to remain in limbo for some time. On Friday the
London Stock Exchange warned there was no certainty that all the trades that
dealers undertook with Lehman that were currently in the Crest settlement
system and marked as LSE trades were in fact such ... . Many dealers have been
caught in a limbo because of the sudden nature of Lehman's collapse. Most
trades, even 'those for immediate delivery', are settled in two or three days,
meaning that most of the deals done by Lehman traders in the last half of its
last week are not officially settled."
September 19 - Bloomberg (Shamim Adam and Nate Hosoda): "Central banks in Japan
and Australia pumped some $113 billion into money markets this week ... Central
banks injected more than $220 billion globally this week ... "
September 18 - Bloomberg (Scott Lanman): "The Federal Reserve lent a record
$59.8 billion to securities firms and $28 billion to American International
Group Inc. as of yesterday, while daily borrowing by commercial banks increased
in the past week to a fourth straight high."
September 18 - Bloomberg (Liz Capo McCormick): "The Federal Reserve added a
record $105 billion in temporary reserves to the banking system as part of its
efforts to break a logjam in lending spurred by financial market turmoil."
September 19 - Bloomberg (Liz Capo McCormick and Jody Shenn): "The Federal
Reserve bought $8 billion of short-term federal agency debt under a new
emergency program intended to help keep a run on money-market mutual funds from
worsening the credit crisis."
September 15 - Bloomberg (Rebecca Christie and Sandra Hernandez): "The US
Treasury has added almost $300 billion in extra borrowing to offset the impact
of Federal Reserve programs aimed at helping troubled financial markets and the
economy ... As Wall Street grappled with the credit crunch and a weaker economy
in the past year, the Fed has introduced lending programs to boost banks'
access to funds ... That 'resulted in nearly $300 billion in additional
Treasury issuance,' [said] Karthik Ramanathan, director of the Treasury's debt
management office ... "
September 18 - Bloomberg (Pierre Paulden): "The credit crisis that brought down
Lehman Brothers Holdings Inc. and Bear Stearns Cos. is pushing corporate
borrowing costs to the highest since at least November 2002 ... The average
yield on the most actively traded investment- grade bonds has risen to 7.43%
from 5.99% a year ago. High-yield borrowing costs have jumped to 13.6% from
9.17%."
September 18 - Dow Jones (Anusha Shrivastava): "In a replay of last year's
dramatic crunch in short-term corporate debt markets, the cost of borrowing in
the commercial paper market moved sharply higher Tuesday. The asset-backed
sector of the commercial paper market has felt the brunt of rising concerns
about cash shortages at financial companies such as American International
Group. Rates on asset-backed commercial paper spiked Tuesday, with investors
demanding a yield of 4% to 8% on paper that matures in one day, up from between
2.15% and 3.5% Monday ... "
September 16 - Wall Street Journal (Simona Covel, Kelly K. Spors and Raymund
Flandez): "As Wall Street quaked Monday, small and midsize businesses prepared
to feel the aftershocks in
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
