Page 2 of 5 CREDIT BUBBLE BULLETIN Ponzi dynamics still at play
Commentary and weekly watch by Doug Noland
sentiment towards Russia has soured sharply since the conflict in Georgia began
this month, triggering a steep stock market sell-off and chilling corporate
efforts to raise funds. ‘So many deals have fallen by the wayside; debt,
equity, cross-border M&A and financing of all sorts,' a banker in Moscow
said. Since the start of the month, the RTS index, the benchmark for Russian
equities, has fallen 18.2%, dropping 6.6% this week ... after the Kremlin
recognised the independence of South Ossetia and Abkhazia ... Debt raised by
Russian companies in August has fallen 87% from July levels to $1.18bn
(ฃ643m). Equity market issuance has plummeted ... "
German 10-year bund yields declined 4 bps to 4.17%. The
German DAX equities index rallied 1.3% (down 20.4% y-t-d). Japanese 10-year
"JGB" yields fell 3.5 bps to 1.405%. The Nikkei 225 jumped 3.2% (down 14.6%
y-t-d). Emerging markets were mixed. Brazil's benchmark dollar bond yields
dropped 9 bps to 5.84%. Brazil's Bovespa equities index dipped 0.3% (down 12.8%
y-t-d). The Mexican Bolsa declined 2.2% (down 11% y-t-d). Mexico's 10-year $
yields declined 2 bps to 5.645%. Russia's RTS equities index sank 3.3% (down
28.1% y-t-d). India's Sensex equities index increased 1.1%, lowering y-t-d
losses to 28.2%. China's Shanghai Exchange was little changed, with 2008 losses
at 54.4%.
Freddie Mac 30-year fixed mortgage rates fell 7 bps to 6.40% (down 5 bps
y-o-y). Fifteen-year fixed rates dropped 7 bps to 5.93% (down 19bps y-o-y),
while one-year ARMs rose 4 bps to 5.33% (down 51bps y-o-y). Bankrate's survey
of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates this week down 4
bps to 7.36% (up 20bps y-o-y).
Bank Credit increased $9.4bn to $9.438 TN (week of 8/20). Bank Credit has
expanded $225bn y-t-d, or 3.7% annualized. Bank Credit posted a 52-week rise of
$623bn, or 7.1%. For the week, Securities Credit dropped $13.4bn. Loans &
Leases jumped $22.7bn to $6.958 TN (52-wk gain of $498bn, or 7.7%). C&I
loans fell $5.0bn, with y-t-d growth of 7.0%. Real Estate loans rose $12.3bn
(up 2.5% y-t-d). Consumer loans gained $3.8bn, and Securities loans jumped
$15.2bn. Other loans declined $3.5bn.
M2 (narrow) "money" supply declined $10.5bn to $7.718 TN (week of 8/18). Narrow
"money" has expanded $255bn y-t-d, or 5.4% annualized, with a y-o-y rise of
$378bn, or 5.2%. For the week, Currency dipped $0.3bn, and Demand &
Checkable Deposits fell $16.1bn. Savings Deposits increased $7.5bn, and Small
Denominated Deposits gained $4.7bn. Retail Money Funds fell $6.5bn.
Total Money Market Fund assets (from Invest Co Inst) were unchanged at $3.572
TN, with a y-t-d increase of $459bn, or 22.6% annualized. Money Fund assets
have posted a one-year increase of $809bn (29.3%).
There was no Asset-Backed Securities (ABS) issuance this week. Year-to-date
total US ABS issuance of $120bn (tallied by JPMorgan's Christopher Flanagan) is
running at 26% of comparable 2007. Home Equity ABS issuance of $303 million
compares with 2007's $219bn. Year-to-date CDO issuance of $20bn compares to the
year ago $207bn.
Total Commercial Paper outstanding rose $7.1bn this week to $1.794 TN, with CP
up $8.9bn y-t-d. Asset-backed CP jumped $8.4bn last week to $758bn, reducing
2008's decline to $14.5bn (2.8% annualized). Over the past year, total CP has
contracted $185bn, or 9.4%, with ABCP down $241bn, or 24.1%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 8/27) declined
$1.0bn to $2.405 TN. "Custody holdings" were up $348bn y-t-d, or 25.2%
annualized, and $426bn y-o-y (21.5%). Federal Reserve Credit declined $3.3bn to
$884bn. Fed Credit has expanded $10.8bn y-t-d (1.8% annualized) and $34.4bn
y-o-y (4.0%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.286 TN y-o-y, or 23%, to $6.970 TN.
Global Credit Market Dislocation Watch
August 27 - Wall Street Journal (Carrick Mollenkamp): "US and European banks,
already burdened by losses and concerns about their financial health, face a
new challenge: paying off hundreds of billions of dollars of debt coming due.
At issue are so-called floating-rate notes - securities used heavily by banks
in 2006 to borrow money. A big chunk of those notes, which typically mature in
two years, will come due over the next year or so ... That's forcing banks to
sell assets, compete heavily for deposits and issue expensive new debt. The
crunch will begin next month, when some $95 billion in floating-rate notes
mature. JP Morgan Chase ... analyst Alex Roever estimates that financial
institutions will have to pay off at least $787 billion in floating-rate notes
and other medium-term obligations before the end of 2009. That's about 43% more
than they had to redeem in the previous 16 months. The problem highlights how
the pain of the credit crunch, now entering its second year, won't end soon for
banks or the broader economy ... As banks scramble to pay the floating-rate
notes, they could see profit margins shrink as wary investors demand higher
interest rates for new borrowings. They're also likely to become less willing
to make new loans to consumers and companies, aggravating economic downturns in
both the US and Europe ... "
August 26 - Bloomberg (Pierre Paulden): "Merrill Lynch & Co., Wachovia
Corp., Lehman Brothers Holdings Inc. and the rest of the US finance industry
are about to find out how expensive credit has become. Banks, securities firms
and lenders have a record $871 billion of bonds maturing through 2009,
according to JPMorgan Chase & Co., just as yields are at their most
punitive compared with Treasuries. The increase in yields may cost them as much
as $23 billion more in annual interest versus a year ago based on Merrill Lynch
index data. Higher refinancing expenses will restrict the ability of banks to
borrow in the capital markets and lend, further cutting off credit to consumers
and businesses and curbing what is already the slowest growing economy since
2001. S&P said last week that it had a ‘negative' outlook on almost half of
the 50 highest-rated financial institutions in the US as of June 30, the
highest proportion in 15 years. ‘The gears of capitalism are grinding to a
halt,' said Mirko Mikelic, senior bond fund manager at ... Fifth Third Asset
Management ... ‘There is a tremendous concern over the banking sector and a
scramble right now for capital.'"
August 29 - Bloomberg (Bryan Keogh): "Sales of US high-yield bonds fell this
month to the lowest in at least a decade as investors shunned the market and
defaults on the debt accelerated ... Caribbean Restaurants LLC ... and ...
Texas Industries Inc. were the only speculative-grade issuers in August,
raising a total of $449 million of debt, the lowest since at least 1999 ...
Sales of junk bonds this year fell 46% from a year ago to $58.8 billion, the
slowest pace since 2002 ... "
August 26 - Bloomberg (Alison Vekshin): "The US Federal Deposit Insurance Corp.
said its ‘problem list' of banks increased 30% in the second quarter to the
highest total in five years. The list had 117 ‘problem' banks as of June 30, up
from 90 in the first quarter and the highest since mid 2003, the agency said
... FDIC-insured lenders reported net income of $4.96 billion, down from $36.8
billion in the same quarter a year ago. ‘Quite frankly, the results were pretty
dismal, and we don't see a return to the high earnings levels of previous years
any time soon,' FDIC Chairman Sheila Bair said ... Nine banks have failed this
year, including ... IndyMac Bancorp Inc., the third-largest federally insured
institution to be seized by US regulators... Second-quarter [bank] earnings
fell from $19.3 billion in the previous quarter. It was the second-lowest net
income reported since the fourth quarter of 1991 behind the fourth quarter of
2007, the agency said."
August 26 - Dow Jones (Jessica Holzer): "The Federal Deposit Insurance Corp.
said that it had increased its estimate of its expected losses from taking over
IndyMac. The FDIC said it expected the bank's failure to cost its deposit
insurance fund $8.9 billion, rather than $4 billion to $8 billion it had
originally estimated."
August 29 - Dow Jones (Marshall Eckblad): "The credit crisis is pushing a
growing number of small and community banks to reduce or eliminate shareholder
dividends. The goals of the painful move are both preserving capital to offset
future loan losses, and appeasing bank regulators determined to avoid as many
bank failures as possible."
August 26 - Bloomberg (William Selway and Lisa Harris): "Jefferson County,
Alabama, officials told their lawyers to prepare a bankruptcy filing if the
county can't reach an agreement with creditors over how to escape from $3
billion of bonds with soaring interest rates. The Jefferson County Commission
voted unanimously today to have the law firm Bradley, Arant, Rose and White LLP
and the county attorney take over negotiations with creditors led by JPMorgan
Chase & Co. and draw up bankruptcy papers should talks falter."
August 25 - Bloomberg (Jeremy R. Cooke): "Credit quality is falling at not-
for-profit US hospitals and health-care systems as debt costs and capital needs
rise, according to S&P. Rating cuts outnumbered increases by more than
2-to-1 this year for the first time since 2003 ... ‘We expect the number of
downgrades to exceed upgrades for the rest of 2008 and probably in 2009, as
business and financial challenges squeeze operating margins and weaken balance
sheets,' Martin Arrick, lead S&P analyst ... said ... "
August 28 - Financial Times (Paul J Davies): "The eurozone mortgage-backed bond
market and the banks which rely on it are braced for some potentially harsh
medicine following increasing hints from governors of the European Central Bank
about some form of crackdown on banks' use of its liquidity facilities. The use
of mortgage-backed debt and other ABS as collateral for central bank funding in
Europe has increased significantly since the credit crunch. Strong signs that
the ECB is now about to take action over this have the potential to unsettle
not just securitisation markets, but other areas too. ‘Increasing
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