Page 2 of 5 CREDIT BUBBLE BULLETIN The Uppers
Commentary and market watch by Doug Noland
Asset-Backed Securities (ABS) issuance increased somewhat to $3.5bn.
Year-to-date total US ABS issuance of $117bn (tallied by JPMorgan's Christopher
Flanagan) is running at 26% of comparable 2007. Home Equity ABS issuance of
$303 million compares with 2007's $211bn. Year-to-date CDO issuance of $16bn
compares to the year ago $257bn.
Total Commercial Paper outstanding dropped $16bn this week to $1.728 TN, with a
y-t-d decline of $57.3bn (5.4% annualized). Asset-backed CP declined $6.1bn
last week to $744bn, boosting
2008's decline to $28.9bn (6.3% annualized). Over the past year, total CP has
contracted $485bn, or 21.9%, with ABCP down $449bn, or 37.6%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 7/30) rose
$14.2bn to a record $2.368 TN. "Custody holdings" were up $311bn y-t-d, or
25.4% annualized, and $358bn y-o-y (17.8%). Federal Reserve Credit expanded
$9.8bn to $892.8bn. Fed Credit has expanded $19.3bn y-t-d (3.7% annualized) and
$35.2bn y-o-y (4.1%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.336 TN y-o-y, or 23.6%, to a record $6.994 TN.
Global Credit Market Dislocation Watch
July 29 - Wall Street Journal (Jonathan House): "The International Monetary
Fund said it sees increased danger of economic fallout from the continuing
financial crisis and urged the US government to review the business model of
housing-finance giants Fannie Mae and Freddie Mac. 'As economies slow, credit
deterioration is widening and deepening, and as banks deleverage and rebuild
capital, lending is beginning to be squeezed, restricting household spending
and clouding the outlook for the real economy,' according to Jaime Caruana,
director of the IMF's monetary and capital markets division. ... Mr Caruana
said banks have successfully raised equity to cover around three-quarters of
$400 billion in write-downs of bad debt. He added, however, that US credit
problems are moving beyond the subprime-mortgage market ... 'With delinquencies
and foreclosures rising sharply and house prices continuing to fall, a bottom
for the housing market is not yet visible, and the credit deterioration is
spreading to even prime-mortgage loans.'"
July 29 - Dow Jones (Andrew Dowell and Andrew Morse): "In a major fire sale of
toxic assets by a struggling investment bank, Merrill Lynch said ... it has
agreed to unload $30.6 billion in securities to private equity firm Lone Star
at 22 cents on the dollar. In addition, Merrill Lynch said it will sell $8.5
billion in new shares to beef up its capital - less than two weeks after Chief
Executive John Thain indicated such a move wouldn't be necessary ... Merrill
will book $10.6 billion in write-downs and additional expenses in the third
quarter stemming from the moves."
July 28 - Bloomberg (Christine Harper): "Bondholders are demanding the highest
interest rates for Wall Street debt since 2000, threatening the industry's
business model of acquiring assets with borrowed money. Lehman Brothers ... has
seen borrowing costs for its five-year bonds rise to 7.7%, up from 5.2% six
months ago ... The yield offered on Lehman's $1.5 billion of bonds maturing in
January 2012 is 4.3 percentage points more than the yield for five-year US
Treasury notes, a premium almost double what it was in late January."
August 1 - Bloomberg (Bryan Keogh): "Sales of US corporate bonds in July fell
to the lowest since 2003 as borrowing costs reached the highest in six years
... Near-record-high corporate bond spreads pushed borrowing costs to the
highest since April 2002 ... "
July 29 - Dow Jones (Jason Womack): "Small oil producers across the southern
Plains states are getting pinched by the collapse of SemGroup L.P., a major
buyer of crude from across the region. SemGroup filed for bankruptcy protection
last week after losing $2.4 billion on trading in the oil futures market ...
Many producers haven't been paid for oil that was delivered to SemGroup in June
or July, leaving some of them strapped for cash."
July 29 - Bloomberg (Pierre Paulden and Jonathan Keehner): "MGM Mirage and
Dubai World are late in raising as much as $3.5 billion for their $11.2 billion
CityCenter project in Las Vegas because banks saddled with debt to casinos and
hotels are wary of making new loans. Deutsche Bank AG and Credit Suisse Group
... are among the holdouts ... Funding was supposed to be completed by the end
of June ... President James Murren said ... Deutsche Bank has been part of
every MGM loan since 1998. 'No company in America is having an easy time doing
bank deals right now,' Murren said ... 'There will be some banks that can't
commit because they have a lot of exposure in the area or don't like the
pricing.'"
July 29 - Wall Street Journal (David Enrich): "It isn't just souring loans that
are giving banks fits. A number of small lenders also gambled too heavily on
bank stocks. The 45% swoon by bank stocks from their October highs is hurting
the investment portfolios of many small US banks, which usually are much more
heavily concentrated in financial stocks than the portfolios of the largest
banks. Write-downs to reflect the fallen stock prices essentially erased
second-quarter profits at some banks, deepening the misery caused by bad loans.
'It's almost like doubling down,' said Gerard Cassidy, a bank analyst at RBC
Capital Markets. 'At times like this, you're getting hit twice as hard.'"
July 29 - Financial Times (Paul J Davies and Joanna Chung): "Banks have been
given a one-year reprieve by US accounting standard-setters from having to take
up to $5,000bn of debt assets on to their balance sheets, easing fears that
they would be forced to raise large amounts of new capital quickly. The
Financial Accounting Standards Board voted to delay until January 2010 the
introduction of rules that will force banks to consolidate more
off-balance-sheet vehicles directly in their accounts. However, Robert Herz,
FASB chairman, said that the move was made reluctantly after a staff
recommendation for a delay because there might not be enough time for all
companies to adjust to the up-heaval. 'It does pain me to allow something that
has been abused by certain folks, to let that go on for another year,' he
said."
July 29 - Bloomberg (Michael B Marois): "States including Florida and
Connecticut are conducting a coordinated investigation into bid-rigging of
financial products sold to US local governments, following similar federal
probes, XL Capital Ltd. said in a regulatory filing ... The state probes mirror
those under way for more than a year by US prosecutors and the Securities and
Exchange Commission looking for evidence of anticompetitive practices and price
fixing by banks in the $2.66 trillion municipal bond market. They have focused
on contracts to invest bond-sale proceeds, known as guaranteed investment
contracts, and derivatives, such as interest-rate swaps tied to bonds."
July 29 - Reuters (Kevin Krolicki): "GMAC and Ford Motor Credit disclosed steps
on Tuesday to cut back on auto leases in a move that leaves automakers facing
the risk of even more pressure on auto sales already at decade lows. The steps
by GMAC and Ford Motor Credit stopped short of Chrysler Financial's wholesale
abandonment of lease financing that shocked the struggling carmaker's dealers
on Friday. Analysts said the steps could protect the balance sheets of the auto
finance companies, but cautioned the new financial constraints could make a
tough market even harder for the Detroit-based automakers. 'The pullback could
provide another negative for US auto sales this year,' Deutsche Bank said ...
GMAC confirmed it would no longer offer leasing incentives on vehicles sold in
Canada."
July 30 - Globe & Mail (Lori McLeod): "The global credit crisis has claimed
another victim in the Canadian mortgage industry as General Electric Co. winds
up its mortgage operations here. After three years in the business, GE Money
Canada said it will stop taking new mortgage applications tomorrow. It's the
latest in a string of alternative lenders that have decided to scale back
operations or close shop amid the credit crunch. Lenders who relied on bundling
and selling loans to fund new mortgages have run into trouble as the
securitization market went dry."
July 29 - Bloomberg (Reed V. Landberg): "The UK Treasury should rule out
creating a government-backed agency like Fannie Mae of the US to bolster
mortgage funding, a study for Chancellor of the Exchequer Alistair Darling
showed today. Former HBOS Plc Chief Executive James Crosby, who was asked by
Darling in April to consider improvements to the home-loan market, said it
would take too long to create such an agency."
July 28 - Bloomberg (John Glover): "Companies in eastern Europe had more credit
rating downgrades than upgrades for the first time in a year last quarter as
damage from the financial crisis triggered by US mortgages spread worldwide,
Moody's ... said."
Global Inflation Turmoil Watch
July 28 - Bloomberg (Shamim Adam): "Asian governments from India to Malaysia,
clinging to budget-busting fuel subsidies, may end up paying an even higher
price: saddling their economies with an extended period of stagflation.
'Subsidies will come increasingly in the way of future growth,' says Kalpana
Kochhar, a senior adviser for the IMF's Asia-Pacific Department ... 'Not
passing prices through and keeping artificial price and wage controls never
works.' Governments are being forced to choose between two unattractive
alternatives: run up bigger deficits by continuing to shield citizens from
soaring energy prices, or start to withdraw subsidies, fueling inflation and
political backlash. Inflation has already reached decade highs throughout the
continent and played a role in destabilizing politics."
July 29 - Bloomberg (Khalid Qayum and Farhan Sharif): "Pakistan's central bank
increased its benchmark interest rate for a third time this year to tame
inflation running at the fastest pace in three decades. The State Bank of
Pakistan raised the discount rate at which it lends to commercial banks to 13%
... Governor Shamshad Akhtar told reporters ... 'Inflationary pressures are
more alarming than ever before ... Global crude and commodity prices have
induced recessionary trends in global economies. Pakistan is no exception.'"
July 29 - Reuters (C Bryson Hull): "At a forgotten edge of Kenya's economy,
remoteness has been no protection from the global pain of rising prices for the
mountain town of Moyale. It perches at the Ethiopian border, far north of the
capital Nairobi across mountains that descend to a forbidding desert of black
volcanic stones, sand and armed bandits before rising again into the frontier
town's green scrub hills. Few trucks reach Moyale, at the end of a tire-chewing
(310 mile) rock road ... But its distance and the lack of a good road has only
magnified the impact of world fuel and food price rises ... "
Currency Watch The dollar index gained 0.8% to 73.42. For the
week on the upside, the South African rand increased 4.4%, the Mexican peso
1.2%, and the Brazilian real 1.0%. On the downside, the Australian dollar
declined 2.9%, the New Zealand dollar 2.3%, the Swiss franc 1.4%, the Swedish
krona 1.2%, the Euro 1.1%, the Danish krone 1.1%, the Taiwanese dollar 1.0%,
and the British pound 1.0%.
Commodities Watch
July 30 - Financial Times (Javier Blas): "After years of strong growth,
liquidity in commodities futures markets, particularly crude oil, is falling
abruptly as the credit crunch finally hits leveraging in the sector and
contributes to a sharp increase in price volatility. The number of outstanding
contracts - known as open interest in industry jargon - in key US commodities
markets has fallen 5.5% since March and is now at its lowest level since
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