Posted on 06/26/2007 10:02:06 PM PDT by djf
The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.
Bear Stearns headquarters: Banks 'set to call in a swathe of loans' Bear Stearns headquarters in New York
The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.
"Excess liquidity in the global system will be slashed," it 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."
Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.
"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.
"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.
"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn."
US property writer Paul Muolo described the Bearn Stearns crisis as the “subprime Chernobyl”, saying the bank had created a “cone of silence”.
Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.
This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.
Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.
The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.
The Mortgage Lender Implode-Meter that tracks the US housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began.
The latest are Aegis Lending, Oak Street Mortgage and The Mortgage Warehouse.
“There isn’t a recovery about to happen,” said Ara Hovanian, head of the building group Hovanian Enterprise.
Nouriel Roubini, economics professor at New York University, said there were now concerns about “systemic risk fall-out” from the Bear Stearns debacle as investors look more closely at the real value of CDOs.
“These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit,” he said.
“They have not been rerated in a way that is consistent with rising subprime default rates. “That is why Wall Street is in a panic. “Losses will be massive once these assets are correctly priced to market.”
Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the “toxic tranches” of lower grade securities held by the banks.
Much-trumpeted claims that banks had shifted off the riskiest credit exposure on to the asset markets was “largely a fiction”, said Mr Dumas
. The worst of the US property crisis has yet to hit since there is an overhang of $2,000bn of mortgages with adjustable rates which have yet to be reset. Many borrowers could see payments jump by half, or even double.
At the same time, a spike in 10-year US bond yields by 0.65 percentage points over the last six weeks has drastically repriced the cost of fixed mortgages, knocking away a key prop for the US housing market.
“With defaults at their highest in the 37 years that records have been kept, it could be a long hot summer,” said Mr Dumas.
Pritchard’s wet his pants again?
makes me think of the 1929 margin calls
I had heard about the Bear Stearns stuff... it wasn’t talked about alot, but when it was, there was definitely an underlying current of fear and uncertainty.
Distressing news.
And that it could be big. Much bigger than nominally stated.
I read in another story that there were bids of only 30% of face value on this junk, which is what prompted Merrill to cancel the auction.
whoops never mind
>>Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May.<<
Right now we need at least 20 million foreign language speaking people who automatically qualify for welfare. I hope the Senate will do the right thing to help these people who have such fine work ethics, family values and no desire to become American citizens.
But they were MORe than happy to book those origination, consultation, and transaction fees, weren’t they?
Is this whole mess part of the derivatives market?
People have been predicting a collapse of the hedge funds stuff for a while, they’re just way, way too dam leveraged.
I admit I’m a little confused. Does it refer to people who will default on a loan and not pay, or is it a poorly funded loan?
If it is the former, what exactly is wrong with a little deflation in the housing market. It will allow first time buyers a way in, and in time the market recovers its losses. Housing value goes down, demand goes up, housing value goes up...
We need more of a saving culture and less borrowing.
subprime is the rate you pay if you are percieved not to be a good risk, and is an interest rate that is typically higher than what the average consumer pays.
Well, the Chinese, Japanese, SE Asians, wealthy Latin Americans, etc. provide us with our savings, as long as they keep depositing money and buying our debt...
Also, don't higher interest rates drive down the cost of housing. Perhaps a good thing for some who wish to enter into the market as new home owners.
BTW, thanks for straightening that out for me.
Do one simple thing: make savings and interest-bearing checking accounts up to US$100,000 tax free in terms of interest earned. The savings rate would rocket through the roof if that happens.
Yes.
Not a bad idea. I just don't think the average Joe worries about the tax on his meager savings account.
The problem is, the absolute exorbitant prices that have been paid for what is really not all that great real estate. Someone in California got, for a patch of land and a mobile home, something like 1.7 million dollars a few years ago, and that had purchased it, I think a year before, for $900,000.
It’s a real estate market that is nuts, and inflation that has gone into overdrive. And then people have been taking out even more loans against the property they have, trying to capitalize on equity. It’s all based on money that is not really there, and it is going to come crashing down, and it’s going to be disastrous in some areas, but more than that, the fact that alot of national mortgage companies are leveraged into this insane markets.
It’s a recipe for disaster, and it reflects in general the problem of the 1990’s onward economy. With the exception of a few small recession, we have been on economic full blast since the mid 80s. Because of government controls on the economy, we have eliminated deflation as the corrective measure that it used to be. Well, till now, but it’s only going to be a real estate deflation, which is going to bankrupt alot of people, while other prices keep rising.
The only thing that kept the 70’s from being deflationary were the various government controls we instituted after the New Deal to stop deflation. Problem is, the New Deal was meant to be temporary, it’s now permanent and it is setting up what could possibly be a worse economic collapse then that period. No politician has the courage to tell the average American worker that if they lack a college degree, their income in real value, has probably reached it’s eternal peak, we’re in a world market now. Non-college educated Americans will have to get used to lower wages.
But this is all going to have to happen with us taking a severe economic hit that I don’t think this generation is ready for. One thing the deflation and correction of the thirties did, salaries that no one would take in the 20’s, people were greatful for in the 40s. The correction hurt, but, in the end it made our economy stronger and helped equip us to defeat the Nazis. I think the next decade will prove what the entitlement generation is made of.
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