Credit Crunch Update
With the Christmas season at hand, like many of you, I’m starting to feel a bit over tasked with family, parties, shopping, etc, so this message will merely be a quick attempt to bring you up to date with the ongoing, deteriorating Credit Crunch.
Banks are feeling the pain and it’s only going to get worse:
Merrill Lynch downgrades banks
Bank of America, J.P. Morgan, Wachovia cut on credit, recession risks. BOSTON (MarketWatch) -- Analysts at Merrill Lynch & Co. downgraded several banking stocks Wednesday, saying rising credit risks and an economic slowdown could further pressure corporate earnings.
UBS writes down $10 bln, Singapore injects capital
ZURICH (Reuters) - Swiss bank UBS unveiled $10 billion in shock subprime writedowns on Monday and said it had obtained an emergency capital injection from the Singapore government and an unnamed Middle East investor.UBS, which has been severely battered by the U.S. subprime mortgage meltdown, issued a profit warning and cancelled plans for a cash dividend in moves that depressed the company's shares and those of its rivals.The $10 billion charge was one of the largest writedowns by any global bank since the subprime crisis broke and was the latest sign of the devastation wrought upon some of the world's largest financial institutions from the credit crisis.The announcement sent UBS's shares tumbling as investors took fright from the anticipated dilution of their share of earnings.
Bank of America Corp will liquidate a $12 billion cash fund
Dec. 10 (Bloomberg) -- Bank of America Corp. will liquidate a $12 billion cash fund for wealthy clients and institutions, the largest investment of its type to close because of losses tied to the collapse of the subprime-mortgage market.The fund, Columbia Strategic Cash Portfolio, was sold as an alternative to money-market funds, offering a higher yield by taking more risk. It was the biggest so-called enhanced cash fund, with $33 billion in assets two weeks ago before an investor pulled more than $20 billion, said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence.``This could be the death of enhanced cash funds,'' Crane said. Such funds hold about $850 billion in assets.
Washington Mutual Cutting Dividend and Jobs
Washington Mutual, one of the country's largest lenders, said yesterday that it would exit the subprime lending business, cut its dividend and eliminate 3,150 jobs.The company said it was acting in the face of an "unprecedented challenge" in the mortgage and credit market, which it expected to continue through next year.The company said the mortgage market was undergoing a fundamental transformation and predicted a prolonged period of reduced lending. It said national mortgage originations would shrink by 40 percent next year, falling to $1.5 trillion, compared with $2.4 trillion this year.
MBIA Gets $1 Billion From Warburg
MBIA Gets $1 Billion From Warburg Pincus, Sees LossesMBIA Inc., seeking to avert a crippling reduction of its AAA credit rating, will raise as much as $1 billion by selling a stake to private equity firm Warburg Pincus LLC. The added capital may help avoid a cut in MBIA's AAA credit rating, which is under scrutiny by Moody's Investors Service, Fitch Ratings and Standard & Poor's. MBIA stands behind $652 billion of state, municipal and structured finance bonds, and losing the AAA stamp would endanger those ratings. Without the top ranking, MBIA may be unable to guarantee debt, a business that made up 90 percent of revenue last year.
Desperate Central Bankers to the Rescue:
In one of the largest concerted Central Banking operations ever, five of the world’s key Central Banks joined together last week in an effort to restore confidence in the world’s financial system.
Central bank liquidity plan hatched at G20-sources
Kleinmond, South Africa, is where the world's top central bankers last month first gave shape to Thursday's unprecedented shot in the arm for money markets gripped by fear and panic ahead of the holidays. Heads of the various central banks involved -- the Fed, the ECB, the Bank of England, the Bank of Canada, and the Swiss National Bank -- were in further contact last week, the sources said. The Bank of Japan also offered its support. "It all came together last Friday," said one G7 source. With the ECB representing France, Germany and Italy, and the Bank of Japan also being involved, this was a coordinated G7 operation between the central banks as much as anything. Sentiment has been deteriorating fast in the global financial markets," the source said. "This operation is less about liquidity and more an attempt to restore confidence."
Confidence is just what the market is lacking. Trading between financial institutions has all but dried up and interbank lending rates have shot up. The fear is banks have still to announce huge losses linked to investments in dodgy U.S. mortgage debt in addition to multi-billion dollar write-offs already announced.
Central bank moves to inject more capital into banking system
WASHINGTON — In a joint move with European central banks designed to ease the grip of a dangerous credit crunch, the Federal Reserve unveiled a plan Wednesday to pump billions of dollars into tight-fisted U.S. banks so they will be more willing to lend to people, businesses and each other. Sharply criticized by Wall Street on Tuesday for a modest interest rate cut that critics labeled as too timid, the nation's central bank announced the biggest concentrated injection of funds into the economy since the Sept. 11, 2001, terrorist attacks. In doing so, it signaled its profound concern that the financial crisis could spawn a deep recession.
The Fed's novel plan for providing more funds to the economy establishes temporary "auctions" of loans to banks that will total $40 billion in December and an unspecified amount in January. Fed officials said the temporary auctions could be extended and could become a permanent monetary feature. In addition, the U.S. central bank will make $24 billion available to the European Central Bank and the Swiss National Bank in a complex swap arrangement that will increase the supply of dollars in Europe. The Bank of England increased the amount of funds it will auction in its money-market operations.
The aim of the action is to inject more liquidity, or funds available for lending, into a banking system that has been reeling from the housing-induced credit crunch. Some banks have been reluctant to make loans to each other, economists said, because interest rates have been too high. Commercial banks can now borrow directly from the Federal Reserve through its so-called discount window. The Fed has cut its discount rate several times in recent months to induce banks to use it, but it has been disappointed at the response. Many banks are reluctant to borrow from the Fed because the discount rate has long been viewed as a "penalty rate" that carries a stigma for a borrowing bank.
The new Temporary Auction Facility, as it will be called, would seek to avoid this problem. The Fed said it would keep the names of borrowers secret. "There is no reason to believe there would be a stigma associated with the use of this facility," a senior Fed official told reporters. In addition, the interest rate on these loans will be determined competitively. Under the new system, banks could put up a wide range of collateral, including subprime-mortgage-backed securities, which have been a central element in the credit problems, Fed officials said.
The Fed Comes Out Blazing
The next Federal Reserve policy meeting isn't scheduled until the end of January, but there will be no winter break for the central bank or its chairman, Ben Bernanke. The continuing global credit crunch stemming from the tumbling U.S. housing market has pushed the Fed and other major central banks into their most activist role since the Asian currency crisis in 1997. First up are two $20 billion loan auctions this week for cash-strapped banks at rates far below what the Fed charges for loans from its "discount window." (Two more auctions will be held in January.) They are one half of a two-pronged financial rescue effort announced by the Fed and other big central banks the day after the financial markets booed a skimpy quarter-percentage-point cut in the federal funds rate. In addition, the Fed set up lines of credit with foreign central banks to allow them to pump dollars into their banking systems.
"In effect, the Fed will lend dollars to these central banks, which can then lend them to commercial banks in Europe," says Jay Bryson, global economist at Wachovia. "The actions have the potential to end the crunch that has paralyzed credit markets for the past few months.... I think the Fed is getting ahead of the curve." (My 2 cents—I don’t think so)
So Will The Central Banking Rescue Plan Work?
Central bankers fire off their last cannon
Central bankers have now fired off their last cannon, so we had all better hope it does. There hasn't been a banking crisis quite like this one in decades. The Bank of England's mistake was to think that by providing any assistance to markets at all it would be bailing out those who had been reckless in their lending and funding and would therefore create moral hazard. What has now been recognized is that the sickness has afflicted the banking system as a whole. The good are being punished alongside the bad. Without treatment, what is at present still just a banking crisis of limited impact on the real world threatens quickly to turn into an all-encompassing economic malaise. Let's hope that policymakers haven't left the medicine too late.
Money-Market Rates Fail to Respond to Bank Measures
(Bloomberg) -- The biggest concerted effort by central banks in six years to restore confidence in global money markets is showing little sign of success. The rates banks charge each other for three-month loans held at seven-year highs for a second day after policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed to ease the logjam in short-term credit markets. The cost of borrowing in euros stayed at 4.95 percent, the British Bankers' Association said today, up from last month's low of 4.57 percent and 3.68 percent a year ago. ``The market clearly doesn't believe central banks can do anything about this crisis,'' said Nathalie Fillet, senior interest-rate strategist at BNP Paribas SA in London. ``This is not going to be a magical solution to the problem.'' Policy makers are reacting to more than $70 billion of losses announced by financial institutions this year and estimates of about $300 billion more on securities linked to subprime mortgages, collateralized-debt obligations and structured investment vehicles, or SIVs. Citigroup Inc. said yesterday it will take over seven investment funds and assume $58 billion of debt to avoid forced asset sales.
The surge in money-market rates since August is fueling concern that the slump in bank lending will exacerbate a slowdown in global economic growth. Goldman Sachs Group Inc. in a report last month estimated losses related to record home foreclosures may be as high as $400 billion for financial companies. If accurate, banks, brokerages and hedge funds would need to cut lending by $2 trillion, triggering a ``substantial recession,'' the firm said. In a sign of banks' increased perception that loans are becoming riskier, they are demanding 95 basis points more than the European Central Bank's key interest rate to lend three- month cash in euros, up from an average of 25 basis points in the first half of the year.
Economic cross-currents hit Wall Street
NEW YORK (AFP) — Wall Street's outlook remains cautious after a turbulent week as investors confront rising concerns about an economic downturn as well as resurgent inflation data. Even with the Federal Reserve joining forces with central banks around the world to combat a global credit squeeze, investor’s tensions are still running high. To make matters worse, data this week showed inflation gaining momentum, making it harder for central banks to cut rates and stimulate growth. Consumer prices rose at the fastest pace in more than two years last month, and wholesale prices posted the biggest gain in more three decades.
As I’ve stated numerous times in the past, the Fed is in a panic trying to battle deflation. With new concerted efforts, such as those mentioned above, they may be able to slow the hemorrhaging of our system, but they CANNOT save it—it’s far too late for that.
Looking at the graph above, I personally believe our equities markets are somewhere between “Denial and Fear”, whereas Bernanke and the Boyz are somewhere between “Desperation and Panic”. Once the markets finally wake up to reality (that the crunch is getting worse) we are probably going to see huge sell offs--to be followed by more Fed Panic, more financial intervention, etc.
Bottom Line: The Fed will continue to intervene and will stop at nothing to save our banking systems. This incessant intervention will eventually hyper-inflate our currency, but the lending crisis will still remain/get worse (credit will become unavailable). These issues will probably take several more years to play out, so I don't think we will see the ultimate bottom, and the ensuing Economic Depression/Kondratieff Winter, till 2010-12.