Page 3 of 5 CREDIT BUBBLE BULLETIN A changed financial landscape
Commentary and weekly watch by Doug Noland
returned for a 'considerable time,' according to PricewaterhouseCoopers,
administrator for the largest bankruptcy. 'Our current view is that this
process could take several months to conclude,' PwC said ... Lehman had the
right to lend clients' prime brokerage securities as collateral for loans and
margins in the stock loan and repo markets, PwC said. 'The assets, once 'used,'
were no longer held for the client on a segregated basis, and as a result the
client may cease to have any proprietary interest in them,' PwC said in the
statement."
September 26 - Bloomberg (Katherine Burton and Saijel Kishan): "The financial
crisis that crippled mortgage lenders, shut down leveraged buyouts and ended
the era of independent investment
banks is bearing down on the $1.9 trillion hedge-fund industry. Managers are
bracing for a surge in client withdrawals after average returns fell 8% through
Sept. 19, the worst first nine months of a year since Chicago-based Hedge Fund
Research Inc. started tracking the data in 1990. Investment gains are being
squeezed by higher bank lending rates, and regulators are now clamping down on
short selling, undermining hedge-fund managers' trading strategies ... Since
1990, the industry has posted one losing year, in 2002, when funds dropped an
average 1.45%..."
September 23 - Wall Street Journal (Elizabeth Williamson): "Automobile-finance
companies lead a growing list of liquidity-starved industries trying to get in
on the huge government rescue plan targeted originally at cleaning up bad
mortgage bets. As Congress crafts a $700 billion federal government plan to buy
up financial companies' troubled assets, auto-finance-company lobbyists are
pressing for specific language including them in the plan, according to a
lobbyist for one of the Big Three auto makers. Other businesses, such as
student and credit-card lenders, also could eventually access the program."
September 26 - Bloomberg (Oliver Biggadike): "The fastest-growing part of the
global corporate debt market, samurai bonds, has come to a standstill since
Lehman Brothers Holdings Inc. became the first borrower to default on the
securities since Argentina in 2002 ... 'The Lehman shock is fatal to the
samurai bond market for now,' said Koyo Ozeki, head of Asia-Pacific credit
research at ... Pacific Investment Management Co ... 'Investors believed Lehman
and others were too big to fail.'"
September 23 - Wall Street Journal (John Hechinger): "About a quarter of the
nation's banks lost a combined $10 billion to $15 billion in the wake of the
federal government's takeover of mortgage giants Fannie Mae and Freddie Mac ...
In the survey, the American Bankers Association reported that 27% of the
nation's 8500 banks held preferred shares in Fannie and Freddie in their
investment portfolios. The shares are expected to be worthless. The survey
found that 85% of the affected institutions were community banks -- those with
less than $1 billion in assets ... Until recently, the shares were considered
rock-solid investments ... It says the losses are galling to small bankers
because they took pains to avoid the exotic loans and loose underwriting
standards that have hobbled Wall Street titans and some huge banks."
September 22 - Bloomberg (Bei Hu): "Treasury Secretary Henry Paulson's $700
billion plan to buy devalued assets from financial companies is 'a joke'
because it doesn't go far enough to calm markets, said Kenichi Ohmae, president
of Business Breakthrough Inc. Ohmae, nicknamed 'Mr. Strategy' during his 23
years as a McKinsey & Co. partner, called for a $5 trillion 'international
facility'' to be made available to financial institutions. The system could be
modeled on one used by Sweden during its banking crisis in the early 1990s, he
said. 'This is a liquidity crisis. The liquidity has to be so big that people
won't get panicky.'"
September 22 - Bloomberg (Pierre Paulden and Jody Shenn): "The US Treasury may
purchase 10%, or $1 trillion, of non-agency residential and commercial
mortgages at distressed prices under plans to revive capital markets, Merrill
Lynch & Co. analysts said. The government is likely to buy the assets at
above the prices financial firms could sell to private-sector buyers ...
strategists Akiva Dickstein, Roger Lehman and Kamal Abdullah wrote ... "
September 22 - Bloomberg (Haris Anwar): "Banks and companies in emerging
markets may struggle to refinance $111 billion of bonds maturing over the next
year because of the credit crisis, the Financial Times reported, citing ING
Wholesale Banking. 'Many corporates and banks in the emerging markets are
highly levered without cash to fall back on,' said David Spegel, global head of
emerging markets strategy at ING ... 'These will struggle should they need to
raise money in the markets.'"
September 25 - Dow Jones (Rob Curran, Geoffrey Rogow and Joseph Checkler): "The
short-selling ban is taking the 'hedge' out of hedge funds. The Securities and
Exchange Commission has banned short sales of roughly 950 financial-related
stocks until Oct. 2 ... With their hands tied on those stocks and the
algorithms that do much of their trading running into technical hitches, many
quantitative and other 'market neutral' hedge funds are drastically reducing
trading activity ... Once major buyers and sellers on the stock market, these
funds may have to reinvent their models in the event of an extension of the
rule beyond Oct. 2. 'There are very, very few short-only funds on Wall Street,
so the ban mainly removed long/short funds from the market,' said Dan
Mathisson, head of the algorithmic trading unit at Credit Suisse ... 'If they
can't put on their short positions, they can't put on their long positions,
either. It's just breaking down a lot of their models, and the end result is
they're walking away. A lot of funds are reducing the size of their books.'"
September 25 - Dow Jones (Joseph Checkler): "Dude, where's my arbitrage? That's
what merger arbitrage hedge funds are asking in the Bank of America Corp.
purchase of Merrill Lynch & Co.. The typical arb play in an all-stock deal
is to buy shares of the acquirer and short the target, but Bank of America's
stock is on the Securities and Exchange Commission's 'do-not-short' list, which
also puts it on the 'do not arbitrage' list."
September 24 - Bloomberg (Cathy Chan): "Private equity dealmakers' pay may drop
by 75% after the credit crunch as firms take longer to invest their funds,
British financier Guy Hands said. 'Compensation for everyone in the financial
services industry is clearly going to fall over the next few years,' Hands, 49,
said ... "
September 26 - Bloomberg (Jeremy Naylor and Ben Sills): "Marc Faber, managing
director of Marc Faber Ltd. in Hong Kong, said the US government's rescue
package for the financial system may require as much as $5 trillion, seven
times the amount Treasury Secretary Henry Paulson has requested."
Currency Watch
September 26 - Wall Street Journal (Andrea Thomas): "The Wall Street financial
crisis will reconfigure the world economy and the US will fade as the world's
dominant economic force, German Finance Minister Peer Steinbruck said in German
parliament Thursday. 'The US will lose its status as the superpower of the
global financial system, not abruptly but it will erode,' Mr. Steinbruck said.
'The global financial system will become more multipolar.'"
September 24 - Bloomberg (Garfield Reynolds): "Treasury Secretary Hank
Paulson's $700 billion proposal to bail out the US financial system may send
the dollar to record lows by swelling the budget deficit. Paulson's proposal to
buy devalued securities from banks would drive government debt above 70% of
gross domestic product, the most since 1954. The annual deficit may balloon to
as much as $1 trillion ... "
The dollar index declined 0.9% to 76.95. For the week on the upside, the Swiss
franc increased 1.4%, the Japanese yen 1.4%, the Canadian dollar 1.3%, the Euro
1.0% and the Danish krone 1.0%. For the week on the downside, the South African
rand declined 2.0%, the South Korean won 1.9%, the Mexican peso 1.2%, the
Brazilian real 0.8%, and the New Zealand dollar 0.5%.
Commodities Watch
Gold added 0.7% to $880, while Silver surged 7.4% to $13.395. November Crude
jumped $4.32 to $107.07. October Gasoline rose 2.6% (up 7.7% y-t-d), while
October Natural Gas slipped 0.8% (unchanged y-t-d). December Copper dropped
3.7%. December Wheat and Corn were little changed. The CRB index rallied 1.4%
(up 1.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) gained 2.6% (up
7.7% y-t-d and 20.3% y-o-y).
China Watch
September 26 - Bloomberg (Judy Chen and Belinda Cao): "China's banks are
limiting foreign- exchange transactions with US and European financial
companies on concern tighter global credit markets will cause more failures.
Domestic banks are cutting trading with international firms in the interbank
market, according to Zhuang Zhiqiang, a trader at Xiamen International Bank
Co., which is partially owned by the Asian Development Bank. The move aims to
control risks after the bankruptcy of Lehman Brothers Holdings Inc. stunned
domestic investors, said Zhao Qingming, an analyst in Beijing at China
Construction Bank Corp., the nation's second-largest lender."
September 23 - Bloomberg (Luo Jun): "Chinese banks face worsening asset quality
and slower profit growth as the nation's tight monetary environment and a
worsening global credit crisis cause more borrowers to default, Fitch Ratings
said. The nation's 14 publicly traded banks ... have already shown signs of
rising borrower defaults and tighter liquidity, the ratings agency said.
'Chinese banks appear to be approaching their first real test of resilience,'
... analysts Charlene Chu and Chunling Wen wrote ... 'Increased vigilance is
warranted as Chinese banks take on the growing challenges ahead.'"
Asia Bubble Watch
September 25 - Bloomberg (Kelvin Wong and Theresa Tang): "Hong Kong's
government, regulators and richest man came to the aid of Bank Of East Asia
Ltd. after 'malicious rumors' about its financial stability spurred the city's
first bank run in more than a
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