by Jerome a Paris
Wed Feb 13th, 2008 at 04:53:06 AM EST
After years in which banks and investors have lent money on especially easy terms, "You've had the biggest credit bubble -- probably the biggest credit bubble we have ever had," says Jim Reid, credit strategist at Deutsche Bank AG in London. Part of the bubble has already been unwound, he says. The problem is, "nobody quite knows where that ends."
"Subprime was a symptom of the problem," said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. "The problem was we had a debt or credit bubble."
The bursting of that bubble has led to steep losses across the financial industry.
Today's markets have ended on a positive note, buoyed by Warren Buffett's apparent call of a bottom in the market, through his announcement that he was willing to back municipal bonds. But this sounds more like desperation, clinging at any good news to avoid looking at the precipice.
Because frankly, Buffett is trying to buy really cheap assets that have no reason to see their price go down, because they are high quality. That his offer is not laughed off shows how far we have gone in mistrusting the value of whole chunks of assets - and that before the shit has even really hit the fan!
Mortgage Crisis Spreads Past Subprime Loans (NYT)
The credit crisis is no longer just a subprime mortgage problem.
As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.
The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.
This is what one calls a vicious circle, where bad news feed one another. And just like the previous cycle was all positive (with inflating asset prices allowing to back more debt, which could be used to bid more for assets, which increased in prices, generating income or profit along the way, after paying back the debt...), this one is all negative: falling asset prices make it impossible to pay back debt, defaults make banks tighten credit, causing buyers to lose purchasing capacity and jobs to be lost, further reducing their ability to borrow and buy assets or pay off previous debt; defaults increase and trigger forced sales, thus further depressing sale prices.
We're just at the beginning of that cycle, right now.
We had the biggest bubble ever; thus the bust that follows will be ... exactly what you'd expect after 30 years of an ideology that had as its main goal to eliminate all the policies set up over the previous half-century to ensure that economic cycles were not as violent as they were until the 1930s...
New Hitches In Markets May Widen Credit Woes (WSJ)
A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession.
In the past few days, low-rated corporate loans -- the kind that fueled the buyout boom of recent years -- have plummeted in value. As a result, banks are expected to try to unload some of those loans this week at fire-sale prices.
Nervous buyers also have retreated in recent days from the market for securities backed by student loans and municipal bonds, roiling some corners of the short-term money markets. Similarly, investors have recoiled from debt backed by commercial real estate, such as office buildings.
As could be expected (if you're not a cheerleader for the 'ownership society'), this is spreading to other asset classes, with the same results across the board - just on a much larger scale.
The Rise of the Mortgage 'Walkers'
Fitch Ratings, while telling investors last Friday to expect additional "widespread and significant downgrades" on $139 billion worth of subprime loans, has cited a new factor in their "worsening performance."
"The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.
26 f-ing percent. If there was ever a need for proof that was happened in the past couple of years was insane, that number should cover it. Banks lost a quarter of their loans in less than a year! - Or created loans that lost a quarter of their value in the year after they were dumped onto naive/greedy/stupid/incompetent investors. Banks thought this was a fine business for them, but forgot that they were also lending to these investors...
But it's all coming back now. And banks now that they did insane stuff (hey, people were actually bragging about NINJA loans until not so long ago - the "No income, No Job or Assets" borrowers) and they, rightly, from their own internal experience, mistrust one another.
So the financial system is slowly choking on the toxic waste. Just like pollution a few decades ago, when the lesson of "the solution to pollution is dilution" was that everything turned toxic, we similarly see that the garbage assets spread around the financial system are eroding trust in every single kind of asset.
Thus the irrational response today to Buffett offering to back up securities that really don't need it. Even muni bonds are suspect today. And it's going to take a lot of coming clean to change that. Until then, credit is scarce, and business is no longer oiled up.