Page 3 of 4 CREDIT BUBBLE BULLETIN Misdirected credit runs unabated
Commentary and weekly watch by Doug Noland
the form of tighter credit and tougher borrowing standards. The financial
crisis is the latest blow to small businesses, which have suffered through a
tough year. As consumers pulled back on spending, these companies have faced
more-stringent requirements from bankers, higher rates on credit cards and
other loans, and the loss of funding sources from real estate, such as
home-equity loans. Now, the environment looks grimmer. Small and midsize
companies are likely to see tougher requirements from their bankers in coming
months. 'If you're seeking a new line of credit, [the effect] will be
instantaneous,' says Andrew Zacharakis, professor of entrepreneurship at Babson
College ... "
September 16 - Bloomberg (Gavin Finch and Kim-Mai Cutler): "Credit markets
seized up as the collapse of Lehman Brothers
Holdings Inc. and downgrades of American International Group Inc. drove the
cost of borrowing in dollars overnight to the highest level since 2001. The
London interbank offered rate, or Libor, that financial institutions charge
each other for loans soared 3.33 percentage points to 6.44%... The increase was
the biggest in its history. The rate was as low as 2.07 percent in June."
September 18 - Bloomberg (Sandra Hernandez): "Money-market funds are 'on the
cusp' of an investor run after Reserve Primary became the first such fund in 14
years to expose investors to losses, Paul McCulley, a portfolio manager at
Pacific Investment Management Co., told the financial news network CNBC. 'It's
an incredibly serious issue,' McCulley said. 'A tipping point in this crisis
would be when you have a run on money markets, and we are right on the cusp of
that.'"
September 16 - Bloomberg (Betty Liu and Elizabeth Stanton): "US financial
markets are facing the worst crisis since 1932 and require 'an enormous
overhaul' of regulations, said Roger Altman, the former deputy Treasury
secretary in the Clinton administration who founded investment bank Evercore
Partners. 'The outlook is very poor,' Altman said ... 'This is the worst
financial market environment it seems to me since 1932.'"
September 19 - Bloomberg (Jeff Plungis): "Ongoing turmoil in financial markets
may test the strength of the Securities Investor Protection Corp., the
securities industry's consumer safety net. Brokerage customers have emerged
largely intact as two of Wall Street's five largest brokerages have failed. The
... SIPC, a nonprofit corporation funded by Wall Street to ensure the safety of
customers' accounts, hasn't been tested on a bankruptcy on the scale of a
Morgan Stanley or Goldman Sachs Group Inc ... Unlike the Federal Deposit
Insurance Corp ... , the securities corporation doesn't have a direct line to
the US Treasury. The SIPC maintains about $1 billion in reserves ... "
September 18 - Bloomberg (Rich Miller): "The rapid-fire rescues of financial
firms may end up tarnishing America's free-market reputation as the moves
expose defects in the US economy, undermining its standing with foreign buyers
of the dollar and US Treasury securities. The government's actions might add
hundreds of billions to a budget deficit already expected to hit a record next
year. The salvage operations, which include Tuesday's takeover of American
International Group Inc., also raise questions about the US commitment to a
free-market economy that, until recently, was the envy of the world. America's
credit 'profile is now weaker because contingent risks have become actual risks
to the US government,' said John Chambers, managing director of sovereign
ratings at Standard & Poor's ... "
September 18 - Wall Street Journal (Jon Hilsenrath, Serena Ng and Damian
Paletta): "The financial crisis that began 13 months ago has entered a new, far
more serious phase. Lingering hopes that the damage could be contained to a
handful of financial institutions that made bad bets on mortgages have
evaporated. New fault lines are emerging beyond the original problem --
troubled subprime mortgages -- in areas like credit-default swaps, the credit
insurance contracts sold by American International Group Inc. and others firms
... Each episode seems to bring intervention by the government that is more
extensive and expensive than the previous one, and carries greater risk of
unintended consequences."
September 18 - Dow Jones (Matthias Rieker): "The dominance of commercial banks
over the capital market business will lead to a fundamental re-adjustment of
risk: Leverage will leave the capital markets in the United States overall.
Those bankers willing to take risk would demand to be paid for it. This change
to a calmer Wall Street - albeit one with slower growing profits - could
encourage a more stable economy. What exactly the impact of the shrinking
leverage is going to have on the financial system, ranging from the innovation
of capital markets products to trading and underwriting and leveraged lending,
is uncertain. Most likely - and some say, ideally - there will be a little less
of everything"
September 19 - Bloomberg (Christine Richard): "MBIA Inc. and Ambac Financial
Group Inc. fell after Moody's ... said it's considering cutting the two bond
insurers' financial-strength ratings by several grades."
September 19 - Bloomberg (Linda Shen): "The American Bankers Association
objected to the US Treasury's plan to insure money-market mutual funds, saying
it may compromise the ability of banks to attract and keep deposits."
September 16 - Bloomberg (Robert Schmidt): "FBI Director Robert Mueller told
lawmakers that his agency won't hesitate to pursue top financial executives as
it investigates the subprime mortgage meltdown. The Federal Bureau of
Investigation is now probing 24 large companies for possibly misstating their
assets, up from 21 in July, Mueller told the US House Judiciary Committee in
Washington. 'The FBI will pursue these cases as far up the corporate chain as
necessary to ensure those responsible receive the justice they deserve,' he
said. The FBI has come under pressure to hold companies responsible as the loan
crisis has rocked Wall Street and led to the biggest housing slump since the
Great Depression."
September 18 - Bloomberg (Alexis Xydias and Mark Gilbert): "Falling currency
reserves will stall emerging-market growth and turn assets linked to developing
economies into 'toxic waste,' according to Albert Edwards, global strategist at
Societe Generale ... 'All things connected with emerging markets will become
toxic waste,' Edwards wrote ... 'The emerging-market liquidity squeeze will
intensify ferociously and, much to the shock of most commentators, recessions
will unfold in the emerging-market universe.'"
September 19 - New York Times (Andrew E. Kramer): "The Russian government will
inject up to $20 billion into domestic stocks in an effort to halt the free
fall of the Russian stock markets, President Dmitri A. Medvedev said ... , in
the most direct effort yet to use oil profits to ease a deepening stock market
crisis here. The two main Russian stock exchanges remained closed Thursday
after authorities halted trading Wednesday afternoon. By that time, they had
each lost about 57% since their peaks in May ... "
September 18 - Bloomberg (Denis Maternovsky): "Russian bonds dropped to the
lowest in four years after the government poured $44 billion into its three
largest banks to stem its worst financial crisis since the nation defaulted in
1998."
September 15 - Bloomberg (Christopher Swann): "About one-third of the world's
biggest government-run investment funds are considering plans to overhaul their
operations, according to a survey by an International Monetary Fund ... "
Currency Watch
September 18 - Dow Jones: "The next cause for concern in the battered US
economy is whether there will be buyers abroad for the nation's billions in
debt, New York Mayor Michael Bloomberg warned ... In a speech at Georgetown
University in Washington, the billionaire political leader said the tumult in
financial markets is being felt worldwide and it's unclear who will continue to
buy US Treasury bills."
It was another wild ride in currency markets. The dollar index dropped 1.6% to
77.68. For the week on the upside, the New Zealand dollar increased 4.5%, the
Australian dollar 3.4%, the Swedish krona 2.3%, the Canadian dollar 2.3%, the
South African rand 2.0%, the British pound 1.7%, and the Euro 1.6%. For the
week on the downside, the South Korean won declined 2.7%, the Japanese yen
2.6%, the Brazilian real 0.8%, the Taiwanese dollar 0.4%, and the Singapore
dollar 0.3%.
Commodities Watch
September 18 - Bloomberg (Stewart Bailey and Millie Munshi): "While TV camera
crews staked out American International Group Inc.'s Wall Street headquarters
following its takeover by the US government, Jules Karp was quietly trading
gold coins in 'unbelievable' numbers from his basement dealership across the
street. Karp ... has traded physical gold, including one-ounce Canadian Maple
Leafs, American Eagles and South African Krugerrands, since 1974. Demand has
'hit a crescendo,' he said ... while an assistant prepared the special packages
used to send gold coins to a growing list of mail-order customers."
The merits of precious metals became a little clearer this week. Gold recovered
14.1% to $874 and Silver 15.6% to $12.475. October Crude rallied $3.67 to
$104.55. October Gasoline dropped 6.1% (up 5% y-t-d), while October Natural Gas
added 2.2% (up 0.6% y-t-d). December Copper slipped 0.5%. December Wheat was
little changed, while December Corn fell 3.7%. The CRB index ended the week
about unchanged (up 0.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) was
almost exactly unchanged (up 5% y-t-d and 17.6% y-o-y).
China Watch
September 18 - Market News International: "China's tax revenue growth slowed
sharply in August to the lowest level seen so far this year on the back of a
slowing economy ... The government's take from stamp duties on share
transactions also plunged in the face of a slumping stock market. Revenues rose
just 11% year-on-year to 355.1 billion yuan last month compared with the 30.2%
spike in revenues seen during the first seven months of this year ... "
Japan Watch
September 18 - Bloomberg (Kathleen Chu): "Land prices in Japan fell by 1.2% in
the twelve months through the end of June, with the rate of decline
accelerating for the first time in five years as lenders tightened credit after
the US subprime market collapse."
Asia Bubble Watch
September 19 - Bloomberg (Seyoon Kim): "South Korea said it plans to build 5
million homes over the next 10 years to meet demand for property and bolster
economic growth."
Unbalanced Global Economy Watch
September 18 - Bloomberg (Tariq Panja): "Manchester United's shirts read AIG.
They might as well say USA. The US government's $85 billion takeover of
American International Group Inc. gave it control of United's shirt
sponsorship, one of the most visible in sports after the team won two of
soccer's biggest club championships last season. The English Premier League is
becoming a scoreboard for the global credit crisis. Newcastle players wear the
logo of Northern Rock Plc, a U.K. mortgage-lender that was nationalized in
February; West Ham lost XL Leisure Group Plc last week when the tour operator
grounded all its flights because it ran out of money ... 'There's not that much
money sloshing about,' said Nigel Currie, director of sports marketing at ...
Rapport. 'Football clubs are not immune from the credit crunch. They are
absolutely in the same boat as everybody else.'"
September 18 - Bloomberg (Jennifer Ryan): "The U.K. budget
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