Tuesday, Jun 26, 2007
Bad news for US Optimists
Telegraph Online: Banks 'set to call in a swathe of loans'
"Excess liquidity in the global system will be slashed," Lombard Street Research said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing." Report By Ambrose Evans-Pritchard.
Will this effect the UK?
Posted by talking rot @ 04:59 AM (262 views) Add Comment
27 Comments
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1. sovietuk said...
This crisis is excellent. What is even better is the background of rising interest rates which is going to make the situation a lot worse(better!!!) . Of course it's going to effect the UK. Probably a good idea to start researching which banks are exposed to the major bad debt risks here and then move your savings somewhere else. There are some big names that have been dealing in the dodgy end of the market.
2. tyrellcorporation said...
Some comment from some of the finance bods on this forum would be useful. From a layman's point-of-view this all sounds very significant.
3. The Capitalist said...
Prepare yourself now! This is the "credit event" that sensible economists have been warning about for some months now. Get out of all shares, buy some gold stay mostly in cash. No more than £30,000 per account (as the govt will pay you back if bank defaults).
About to exit your fixed rate mortgage? Then let that spare room...
4. This comment has been removed as it was found to be in breach of our Blog Policies.
5. El Papasito said...
This is the most bearish article I've ever read in the mainstream UK press
6. sold 2 rent 1 said...
US property writer Paul Muolo described the Bearn Stearns crisis as the “subprime Chernobyl”, saying the bank had created a “cone of silence”.
More bad news to come then
As far as I am concerned things are going according plan.
The stock markets are peaking this summer.
There will be a continuous stream of bad news from now on.
The big 10-20% stocks crash is still set for the autumn.
7. Stoatgobbler said...
I'm a financial bod who runs a hedge fund. I guess it'll be significant for Bear Stears as Wall St takes revenge for LTCM, and of course those holders of CDOs will be shifting uneasily in their seats - particulary those who are highly leveraged, but this is not the end of the world for anyone as the Fed will bail out/slash rates to save the day, as usual. Watch China, not America for the big debacle, in my view.
8. Realist said...
Be careful what you wish for. Many people consider there to be some serious systemic risk in the financial system as a result of hedge funds and their associated activities. While any serious collapse would of course suck house prices down with it, it would also suck a whole load of other things as well. While all of us would like to see a return to sensible house prices, I am not sure I want to see a 1930s style economic depression to achieve this....
9. wage slave said...
I'd like to know which high street banks and building societies are over-exposed too, if anyone knows.
10. royston said...
Cockroaches, dear boy! Cockroaches! They don't come in ones & twos.
"There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn."........YIKES - THIS IS VERY SERIOUS!!!!!!!!!!!!!!!!!
This article basically says that a lot of the bonds floating around the global banking system, in pension funds and in hedge funds are not worth nearly as much as people think. Bear Stearns tried to sell off the assets of one of their bankrupted hedge funds in a "fire sale". Even with discounts of 15%, they could only sell less than one-quarter of the bonds they wanted to sell. In the end, Bear Stearns itself had to buy these bonds. That took 25% of the bank's total capital.
"These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit”.
Translation: Mortgage bonds are not worth nearly as much as holders think. Their values should have been 'rerated', i.e. valued downwards, as interest rates and default rates started to rise. But the rating agencies, who are supposed to be independent, did not do so. Who pays the rating agencies to issue their ratings? The banks who issue the bonds! So, the rating agencies are not really independent and were in the pocket of their paymasters all the time.
"The greatest risk lies in the 'toxic tranches' of lower grade securities held by the banks." How CDOs work is that a large number of mortgages are put together into a portfolio. The owner of that portfolio is entitled to receive the future interest payments on those mortgages. Initially, the bank owns this mortgage portfolio. The bank then creates 3 types of bond based on the mortgage portfolio. The safest bond, carries a fairly low interest rate (but higher than government debt, which is deemed bulletproof). The safest bond gets its interest payment before either of the other 2 bonds get paid. At the end, the safest bonds gets all its capital repayment before either of the other 2 bonds. The second bond, is a bit more risky. It gets paid after the safest bond but before the third bond. The third bond is what is referred to as the 'toxic waste'. It gets what is left over after the 2 safer bonds have been paid. There has been a ready market for the first 2 kinds of bonds, but most of the toxic waste remains on the books of the banks who issued the CDOs.
The situation emerging is that the toxic waste is worthless. The 'slightly risky bond' is actually very risky and is worth a lot less than claimed, often even these are worthless. Even the so-called safe bond may be substantially overvalued.
The problem is 'systemic risk'. It has 2 components in this situation. 1) The systemic failure of the credit rating agencies to rerate failing bonds, and 2) the failure of diversification brought about by the concentration of mortgage-bond toxic-waste throughout the banking industry globally.
11. dohousescrashinthewoods said...
With the out-of-control levels of global debt, is there now any way to avoid the second great depression (or at best a major contraction)? The longer we borrow our way out of it, the bigger it gets - and we have been borrowing for a decade now?
I started the process of transferring my (sub-1K) ISA from shares to bonds a couple of weeks ago and am switching my "monthly contribution" to the cash ISA. That was the day before the markets started declining. Apparently it can take 4 weeks to complete. ho hum.
I am looking for a job outside the old economies (I'd rather take my chances with a developing economy than the titanic, even though they will be caught in the wash) and am itching to get to the airport before Autumn.
12. mrmickey said...
Stoatgobbler spoken like a true hedge fund manager, oh yes the fed will save the day they will drop interest rates and the dollar will crash it's already weak and their raising interest rates.
13. dohousescrashinthewoods said...
@Royston, good explanation
@Wage slave - presumably HSBC is amongst the most exposed?
@S2R1 I thnk you're on the money. Trouble develops over summer, Autumn recession in the US and HPC gets underway in the UK
14. Stoatgobbler said...
No Fed hikes since February, and rates will probably be lower in a year - i.e. the Fed aren't hiking at all. Segregating noise from signal is hard with all the garbage the press produce, but the simple facts are pretty clear. Plus not all Hedge Funds are up to their t*ts in CDOs - some are doing very nicely indeed this year thankyou!
15. little professor said...
Should be Affect, not Effect.
16. royston said...
Stoatgobbler,
I know what the Fed did for LTCM. But this is a much bigger problem and the Fed is powerless. US interest rates are already stuck in neutral. Any attempt to move them out of there will cause more harm than good. Printing money won't help. They have no means of restricting the flow of credit in the market. And no amount of moral suasion will convince traders to overpay for failed or moribund assets - especially coming from a neutered Fed.
17. Stoatgobbler said...
Don't misunderstand me, I think we'll see some blood on the floor as Hedgies that picked up the higher yielding elements share classes of CDOs take a hit, but it just isn't the stuff of nightmares - it's important to keep the actual value at risk in perspective. What is the stuff of nightmares is China. China in the present day resembles Japan in the 80's, but with a bigger population to feed, a bigger bubble by miles and nuclear bombs. This is the key issue today, not a load of fuss about a few billion being lost from those who can well afford to lose it. Beware the Black Swan!
18. talking rot said...
Little Prof
Ta. I could never get those two the right way around.
19. sold 2 rent 1 said...
dohousescrashinthewoods,
You said.
"I started the process of transferring my (sub-1K) ISA from shares to bonds a couple of weeks ago and am switching my "monthly contribution" to the cash ISA. That was the day before the markets started declining. Apparently it can take 4 weeks to complete. ho hum."
The problem is if inflation carries on rearing its ugly head then bonds get wacked too.
The dilema is what to do with ISA wrapped shares. I tried to convert them to Fidelity Cash but this it is not possible with the ISA rules.
I finally went for large cap Japan unit trust. At 245 GBP/YEN the exchange rate will offset any fall in Japanese stocks.
20. sold 2 rent 1 said...
Stoatgobbler
Glad to have your comments.
"but this is not the end of the world for anyone as the Fed will bail out/slash rates to save the day, as usual"
Not according to the FT today.
Once the markets realise that there will be no "Bernanke put" theey will tumble.
You cannot keep expanding debt to infinity
21. tipping point said...
sold 2 rent 1
I agree, Paul Muolo description is right on the money
I think there has been a wake up call and I suspect credit is going to get harder for us all. This will of course slow growth and reduce share prices but any talk of a major banking collapse is too far fetched. As usual the main looses will be pension funds who always have a knack of holding all the wrong cards when a downturn happens and over stretched home owners who will get shafted by only getting access to the worst mortgage rates.
22. Stoatgobbler said...
I give up - takes far too long to post comments! Interesting chat though. Cheers!
23. sold 2 rent 1 said...
tipping point,
You said
"As usual the main losers will be pension funds"
So Joe public can expect to see his pension/investments shrink massively and his house price to tumble too.
Add into the mix: falling disposable incomes, higher taxes, inflation, and interest rates and we have the ingredients of consumption falling off a cliff.
Stir into the pie falling currencies and imported inflation and out of the oven comes one fully baked deflationary depression.
Remember the k-autumn is all about consumers keeping the econmy roaring by increasing levels of debt.
All this is about to change.
24. Stillthinking said...
I work as a salaried IT consultant. Just before Christmas I was sent to a client site where they needed someone who could pull data from different systems. It was interviewed. Turns out it was a bank, I won't mention the name but if you turn left out of Liverpool street main entrance and walk ten minutes its on the left. Anyway, they were in a mad rush(quick start etc) because they hadn't got sufficient data in-house on their loans and they were being inspected by the Financial Services Authority. The reason for putting as many IT monkeys on the job at once was because they were extremely worried about being mandated to increase their reserves. This was 6 months ago. As it happened I got stuck on something else which is a shame as it sounds like that will be very lucrative in the future.
25. sold 2 rent 1 said...
It is interesting that Stoatgobbler pushes the China concern a few times.
Many mainstream economists see China as being the world economy saviour when America stalls.
My view is that Stoatgobbler may well be right with this issue but we may have to wait until 2009 before a real crisis emerges
26. Matt_the_hat said...
Gents don't worry the banks can print more money (fractional reserve banking), all that needs to happen is we all keep borrowing and the economy grows exponentially forever to keep up with interest payments. Its simple - boom and bust irradicated - welcome to Gordon Browns stable mirical economy. After all if there was no debt money would be worthless!!!!
watch this vid all will become clear ;) http://video.google.com/videoplay?docid=-9050474362583451279
27. Stoatgobbler said...
sold 2 rent 1 ... thanks - I am seriously worried about this one. I think the nexus is US consumers failing to buy Chinese imports which means Chinese failing to buy US paper whic results in one big issue. 2009 could be a good call, timewise.