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Quotes For The Week

This week, the QFTW (plural!) have to do with the looming government bailout of Wall Street and the financial system:

It’s astonishing, devastating, and very harmful for America and American citizens. It means we’re in for the worst recession since World War II, as well as higher long-term interest rates, higher inflation, higher taxes, a weaker dollar and substantially lower stock prices.

-Jim Rogers, legendary investor and CEO of Rogers Holdings, in the September 22, 2008, issue of the New York Sun

CBS News found 21 former staffers from the Senate Banking, Housing and Urban Affairs and House Financial Services Committees are now lobbyists for financial firms. Their job? To lobby those in Congress who will shape the financial bailout. The former staffers now represent hedge funds, private equity firms, investment banks and the failed mortgage giants Fannie Mae and Freddie Mac.

-CBS News, September 26 2008

The bottom line is the Democrats want to give this money to the banks because most of it’s going to go to the large New York city banks, and those folks are generous supporters of the National Democratic Party, senators and congressmen running for re-election, and Barack Obama.

-Peter Morici, University of Maryland business professor and multiple-time winner of MarketWatch’s “Forecaster of the Month” award, September 28, 2008

You have the former Chairman of Goldman Sachs asking for 700 billion dollars, and in his initial request, asking for it in such an un-American way that I think he should have resigned. I think Paulson has terminally misunderstood the nature of the American system. Not just no review, no judicial review, no congressional accountability. Give me 700 billion dollars, 700 BILLION dollars! I’ll be glad to spend it for you. That’s a centralization of power that is totally un-American.

-Newt Gingrich, former Speaker of the House on ABC’s “This Week with George Stephanopoulos” roundtable, September 28, 2008

Manhattan Real Estate: Has The Day Of Reckoning Arrived?

I’ve been tracking the Manhattan real estate market for a while now. In spite of the carnage taking place in other regions of the country, this posh area has appeared to be pretty resilient. Not anymore, according to some Manhattan insiders. Last week, Brian Ross of ABC News looked at whether or not the “Day of Reckoning” had finally arrived for the Manhattan housing market, and wrote:

Manhattan’s finest co-op apartments may have already lost a fourth of their value as a result of the financial crisis, and the worst is yet to come, says leading New York estate broker Kathy Sloane, of Brown Harris Stevens.

An owner of a five-million dollar Park Avenue apartment, only an average residence by investment banker standards, “may be lucky to achieve $3.5 million” a month from now, said Sloane, whose clients have included celebrities, the super-rich and prominent families including the Clintons.

“If someone saw a bid between $3.8 million and $4.2 million from a qualified buyer, take that bid,” said Sloane in an interview to be broadcast on 20/20 Friday night.

“You can be Lehman Brothers or you can be Merrill Lynch, meaning you can go down with the ship,” she said, “or you can say, look, there’s a huge storm about to crash and we need to get to higher ground and make a plan.”

Ross also spoke to Newsweek contributing editor and Manhattan resident Holly Peterson about how the turmoil on Wall Street is affecting local real estate conditions. Ross wrote:

Prices for some apartments in premier Park Avenue and Fifth Avenue co-operative buildings have soared well beyond $50 million in recent years, pumped up by the super-sized salaries and bonuses of investment bankers and hedge fund operators.

Now, they may not be so welcome.

“Five years ago, if you were an investment banker that meant big bucks and automatic entry. And today it is a dirty word,” said author Holly Peterson, the wife of a multi-millionaire investment banker and the daughter of multi-billionaire financier Pete Peterson.

*Well known for her send-up of Park Avenue society in the book, Manny, Peterson says co-op boards will be afraid to approve investment bankers for sales “because they know your stock is worthless.”

Across Manhattan, says Peterson, “the gilded age is over.”

“People who are worth thirty, forty, fifty millions dollars lost it all,” she said. “And now they have their apartments, and their country houses and their ski houses but they have mortgage payments on all of those. And they have no cash.”

Source:

“Top Broker: NYC Real Estate Already In Steep Decline”
Brian Ross
ABC News, September 18, 2008

U.S. Economy Headed Towards Doom And Gloom?

This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:

An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.

Burton talked about Gundlach’s credentials for making such statements. He wrote:

As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.

The MarketWatch reporter noted:

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”

Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

In other words, $1 to $2 trillion. Rogoff continued:

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…

The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

A new banana republic?

Sources:

“The worst is yet to come”
Jonathan Burton
MarketWatch, September 18, 2008

“America will need a $1,000bn bail-out”
Kenneth Rogoff
Financial Times (UK), September 17, 2008

How Main Street Views Wall Street’s Crisis

Earlier today, Bloomberg’s Laurence Viele Davidson and Michael Janofsky wrote an interesting piece on the reaction of the American public to the chaos going on down on Wall Street. As I read the article, a number of words came to mind to describe how Main Street sees the latest financial crisis:

Ignorance

“I’m trying to absorb all this,” said Palladino, 48, a television writer, as he had coffee yesterday at the Farmer’s Market in Los Angeles and read newspaper accounts of the demise of Lehman Brothers Holdings Inc.

The significance of the 158-year-old New York firm’s bankruptcy filing eluded him, he said. “I don’t know more than anyone else, financially,” he said. “A bank to me is an ATM and a checking account.”

Blamethrowing

Linda Burke, 57, a customer service consultant with AT&T Inc. in Atlanta, said she figured her retirement savings would take a hit and added that she was angry, though she wasn’t sure at whom.

“If I knew more,” she said, “I could find someone to blame.”…

Jay Leslie, 60, of East Brunswick, New Jersey, said he may not be able to retire as planned in five years.

“I may have to work longer,” said Leslie, who sells women’s clothes. He said he blamed Washington, not Wall Street. “The government didn’t have any idea how serious this was,” he said.

Litigation

That wasn’t the view of Gary Jones, 67, an Atlanta retiree who said he was “so concerned I stayed up the last two nights moving my money into T-bills and other safe havens.”

“We ought to sue the heck out of every board of director for the last 10 years,” he said.

Apathy

For Shelley Sims, 44, who lives in Lawrenceville, Georgia, and works for Georgia Pacific LLC’s import-export division, the failure of storied companies was a wake-up call. She said she would start paying more attention to financial markets.

“When you see names like these in the news, it’s alarming,” Sims said. “It made me get my mortgage papers and investment documents.”

??????

For Chaz Harris, the developments didn’t convince him that the U.S. was in any trouble.

“The economy’s pretty bad, but people are still spending money on what they want,” said Harris, 20, an unemployed warehouse worker who lives with his parents in Weehawken, New Jersey. Referring to the Take-Two Interactive Software Inc. video game, he said, “I mean, ‘Grand Theft Auto’ did half a billion in seven days. So the economy’s not that bad.”

New economic indicator?
Source: WikiGTA

Source:

“Americans Certain Lehman’s Bad, Just Not Sure It’s Bad for Them”
Laurence Viele Davidson, Michael Janofsky
Bloomberg, September 16, 2008

A New York Nightmare

Wall Streeters and New Yorkers, you may want to skip reading the following post if you don’t want to ruin a good day. Reuters’ Joan Gralla reported Monday:

New York Gov. David Paterson on Monday said Wall Street might lay off 40,000 workers in a worst-case scenario following Lehman Brother’s bankruptcy filing and problems at other big financial firms…

New York’s banks and brokerages generate one of every five tax dollars in the state. The state’s budget is already suffering from declines on Wall Street, and Paterson last month had said that tax revenues would be hurt by declines in Wall Street bonuses.

Paterson, who got lawmakers to cut the state’s budget by more than $400 million in August in an emergency session, on Monday said he might have to recall lawmakers again, saying he would not be surprised if the deficit spiraled back up.

In addition to job cuts on Wall Street, Paterson said as many as 120,000 jobs might be cut if positions in service industries that rely on Wall Street are included…

Financial sector jobs help create as many as four other positions in services ranging from legal to sales, according to Ross DeVol, director of regional economics, for the Santa Monica, California-based Milken Institute.

Gralla also noted that:

Bankers, brokers and traders earned an average salary and bonus of $340,312 a year in 2006, according to James Brown, a labor market analyst with the state Labor Department…

Wall Street’s job force totaled 181,000 in July, which was down 11,000 from July 2007, Brown said. Employment on Wall Street peaked at 200,300 in December 2000.

Sounds like there’ll be a lot of used Maseratis for sale soon…

For Sale (model not included)

Source:

“NY gov sees Wall St losing up to 40,000 jobs”
Joan Gralla
Reuters, September 15, 2008

New York State Faces Worst Economic Hardship Since Great Depression

New York Governor David Paterson appeared on CNBC earlier today and warned that the state of New York is facing its worst economic hardship since the Great Depression. As a result of the crisis, New York state lawmakers were gathering for an emergency session. According to Governor Paterson:

• The state of New York is forecasting that Wall Street bonuses will be slashed 20% and capital gain losses will amount to 24% for the year.
• Governor Paterson’s “personal fear” is that investment bank and brokerage bonuses will be slashed by up to 40%, and capital gains reduced by the same amount.
• Wall Street supplies New York with one out of every five tax dollars.
• The state of New York could potentially lose $1.7 billion from slumping profits on Wall Street.

The New York governor told CNBC:

This is a combination of events. I wouldn’t compare it to the Great Depression, but I can’t cite a time since that period where we have had this amount of stress on our economy.

Paterson pointed out just how bad the financial situation is:

In June 2007, the sixteen banks that pay the most taxes on their corporate earnings remitted $173 million dollars to the New York state treasury. This June, those same sixteen banks paid $5 million. That’s a 97% decrease over last year. I don’t know if people really are getting how severe this problem is in New York and the ancillary effect it will have on the rest of the states, and even our federal economy.

You can view the 8 minute 33 second interview here.

Even Worse Than King Kong

Source:

“NY State’s Economic Emergency”
CNBC, August 20, 2008

Credit-Default Swaps May Produce Another Bear Stearns

Back on January 16, 2008, I wrote a post about an article I had read earlier that day by the Washington Post’s Steven Pearlstein. In “Caught in a Downdraft and Starting to Panic,” the 2008 Pulitzer Prize winner talked about the danger from credit-default swaps. He wrote:

Despite the brave exhortations from the CNBC Squawk Box, we are nowhere near the end of the financial unraveling that is necessary for an economic bottom to be reached…

Looking ahead, the final phase of this unraveling is likely to implicate the giant market in credit-default swaps. Those swaps are essentially contracts that allow sophisticated investors to bet on whether a company, a government entity, or even a securitized package of loans will default on its debt obligations. And they can place these bets whether they own the underlying security or not.

Because these contracts trade on unregulated derivatives markets, nobody knows who holds the losing side of the bets. But it’s a good guess that if defaults rise even to historically normal levels, a big hit will be taken by highly leveraged hedge funds, some of which may be unable to pay off on their bets and simply collapse. That, in turn, would trigger even further losses by banks and other investors that, unlike pure speculators, rely on those instruments to insure against default.

The credit-default swap has become so central to modern global finance that its size — the amount insured, in effect — is estimated at $43 trillion. If the losing side is unable to make good on even a fraction of a percent of those contracts, it could set in motion a financial chain reaction that could easily rival the subprime debacle.

Recently, I’ve noticed increased chatter about credit-default swaps in my research. Just today, I came across the following piece by the Wall Street Journal’s Donna Kardos in the MarketBeat Blog. Kardos wrote:

A growing proportion of U.S. firms are seeing credit-default-swap counterparty risk as a serious threat to global markets, and think another major financial company will go under due amid the global-markets crisis, according to a study by research firm Greenwich Associates.

The study’s results, which say the proportion seeing CDS counterparty risk as a serious threat is approaching 85%, highlight the perceived concern of another financial firm going down. Only 27% of the institutions surveyed think there won’t be another casualty along the lines of Bear Stearns, Greenwich consultant Frank Feenstra said in a statement.

The research firm said of the 146 U.S. and European banks, hedge funds and investors it surveyed, most “believe another major financial-services firm will fail as a result of the ongoing crisis in global markets — and they expect it to happen sooner rather than later.”

Almost 60% of the respondents expect another big financial firm will collapse within the next six months, while another 15% see it happening in six to 12 months.

Source:

“Who’s on the Other Side of That Trade, Anyway?”
Donna Kardos
Wall Street Journal (MarketBeat Blog), August 12, 2008

Write-Downs Approach $500 Billion, With More To Come

According to Bloomberg today, the world’s biggest banks and brokerages have reported $497 billion of write-downs since the start of 2007.

And the end is nowhere in sight, according to CNN Money’s Paul R. La Monica. The editor-at-large wrote this morning:

Make no mistake: The worst probably is not over for financial firms. Not by a long shot.

Many bank stocks have bounced sharply from their panic-induced lows of mid-July on hopes that the bleak second-quarter results represented the bottom.

But the bigger-than-expected losses reported by Freddie Mac and Fannie Mae this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come.

“The banks are still at the mercy of writedowns. I don’t think the worst is over for financials yet,” said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co.

The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It’s a widely used number, but Sonders thinks it’s “potentially very conservative.”

So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU’s Stern School of Business.

And based on the losses already reported, we’re not even halfway through the crisis.

Source:

“$1 trillion in losses? Bank on More”
Paul R. La Monica
CNN Money, August 8, 2008

Move Over Money Honey, It’s The Diva Of Doom

Maria Bartiromo? As my British footballing friends across the pond would say, “Who are yer?” While CNBC’s “Money Honey” was an icon of the nineties stock market boom, Oppenheimer analyst Meredith Whitney, who I refer to as “The Diva of Doom,” is seeing a meteoric rise in popularity as the global economic crisis unfolds. It’s not her looks that are winning over open-minded investors (okay, maybe a wee bit). But her gloomy forecasts, which are turning out to be uncannily correct. CNN Money’s Jon Birger wrote yesterday:

Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be “unprecedented credit losses” for subprime lenders.

Last October, the analyst correctly predicted Citibank would have to cut its dividend.

And now? Well, Whitney is saying U.S. home prices will fall another 33%. From the CNBC website yesterday:

Housing prices will fall more than 30 percent before the market recovers and banks will continue their reluctance to lend until the credit crisis clears up, Oppenheimer analyst Meredith Whitney said on CNBC.

In a wide-ranging interview, Whitney said the housing deterioration will be worse than even the doom-and-gloom predictions that already have circulated regarding the market…

“There’s one obvious area where the bad news isn’t all out yet, and that’s with home prices… Home prices are going to fall much more than people expect,” she said.

“I think it’s going to be well worse than 33 percent, and here’s why: If you look at the futures market, it’s indicating a range right around between 2002-2003 levels, when home ownership rates were actually higher, but fewer people can qualify for a mortgage because you’ve got to put 20 percent down, and that’s a lot of money for people,” she continued. “Furthermore, then you’ve got to find a bank to lend to you, because, Countrywide’s not lending to you.”

Meredith Whitney aka “The Diva of Doom”

In addition to a continuing housing slump, Whitney doesn’t see an end to the credit crunch anytime soon. CNN Money’s Jon Birger wrote yesterday:

The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.

Whitney, who audaciously - and correctly - predicted last October that Citigroup would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they’ve reported so far.

The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the “incestuous” relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.

How so? The CNN senior writer noted:

For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe.

With Moody’s and Standard & Poor’s now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening.

This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch and Washington Mutual now know.

“You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change,” Whitney tells the magazine.

Sources:

“Housing Prices Could Skid Another 33%, Analyst Says”
CNBC, August 4, 2008

“Whitney: Credit crunch far from over”
Jon Birger
CNN Money, August 4, 2008

Jim Rogers Was Right About Wall Street And Their Maseratis

Over the past several months, legendary investor Jim Rogers has made a few comments about a certain make of car— the Maserati. Now, it doesn’t appear that Mr. Rogers dislikes Maseratis for any reason in particular. Rather, he’s been mentioning the Italian manufacturer of racing and sports cars to make a point about how out of whack things have gotten down on Wall Street. Back on June 6, Rogers told Bloomberg in an interview:

You don’t see any 29-year old cotton farmers driving around in Maseratis, but you do see a lot of 29-year olds on Wall Street driving around in Maseratis. This is not the way the world is supposed to work.

The CEO of Rogers Holdings said such a situation exists due to the tremendous excesses that have taken place in the financial communities over the past several years.

And it’s not only Wall Street traders who have been associated with the exotic sports car. Investment bankers too. Yet, they almost came close to losing theirs a few months ago— if it weren’t for their pals over at the Federal Reserve. Rogers told Bloomberg on March 17:

And here he [Fed Chair Ben Bernanke] goes and gives more of our money to Bear Stearns so these guys can continue to drive around in their Maseratis… The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders Maseratis.

Looks like Jim was right about Maserati being the vehicle of choice down on Wall Street. While surfing the web yesterday, I happened to notice that Bloomberg.com had posted a review of the $115,000 Maserati GranTurismo on their site. Bloomberg’s Jason Harper wrote:

The Maserati GranTurismo delivers on a quality increasingly rare in the auto world: beauty. Put it against any dozen modern cars and the GT’s supple lines, perfect swells and ideal dimensions will outshine them all.

At $115,000 it’s not exactly a drop in the bucket, yet those exotic looks leave most people thinking it’s as expensive as a Ferrari.

Don’t fret, Wall Streeters. A few more taxpayer bailouts here, and some government interference/market manipulations there, and you’ll have enough of Main Street’s hard-earned cash to finally afford that Ferrari…

Jamiroquai, “Cosmic Girl” (1996)
YouTube Video Link

Sources:

Jim Rogers Interview
Bloomberg News Video
Bloomberg, June 6, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Maserati GT, $115,000, Evokes Classic Beauty of Italian Coupes”
Jason H. Harper
Bloomberg, July 23, 2008

Half Of Wall Street Bank Profits Up In Smoke

What a difference a year makes. Louise Story of the New York Times wrote today:

Only a year ago, Wall Street reveled in an era of superlatives: record deals, record profit, record pay. But a mere 12 months later, nearly half of the profits that major banks reaped during that age of riches have vanished.

The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits.

But since last July, those same banks — Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley — have written down the value of the assets they hold by $107.2 billion, gutting their earnings and share prices. Worldwide, the reckoning totals $380 billion, much of which reflects a plunge in the value of tricky mortgage investments.

Funny, but the word “tricky” doesn’t really come to mind when it come to describing those mortgage investments. Something with four letters beginning in “c” and ending in “p” seems to be a better fit.

Source:

“Nearly Half of Wall St. Bank Profits Are Gone”
Louise Story
New York Times, June 16, 2008

Top Credit Analysts Say Housing Decline Could Amount To $4 Trillion In Lost Capital

So far, credit crunch talk has revolved mainly around losses in the billions of dollars. No more. Reuters’ Walden Siew wrote today:

No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Siew interviewed Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc. The analyst informed him that:

• Wall Street write-downs and losses totaling at least $325 billion to date may ultimately mean $3.9 trillion in tighter credit conditions
• U.S. home prices may keep on falling until 2010, declining as much as 30% from their 2006 peak
• Further drops in subprime mortgage debt markets are expected
• High-yield corporate bond default rates, now at 0.75% from 0.34% at the beginning of 2008, may climb to 2.25% later this year and jump to 6.5% in 2009

Glenn Costello, a Fitch Ratings managing director, also said that there will be more defaults and delinquencies for U.S. home mortgages, with the highest default rates coming from mortgages originating in the last few years. The senior analyst warned:

There are a lot more mortgage defaults to come. We see an ongoing high level of default.

Source:

“Home price drop means $4 trillion in lost capital”
Walden Siew
Reuters, June 11, 2008

Goldman Sachs, Morgan Stanley Predict $150 Oil This Summer

First, it was legendary oilman Boone Pickens who uttered the obscenity. Now, Goldman Sachs and Morgan Stanley have joined in the chant. Reuters reported today that according to Jeffrey Currie, the global head of commodities research at Goldman Sachs, the price of crude oil is likely to reach $150 a barrel this summer as tighter supplies outweigh weakening demand. Currie told attendees at an oil and gas conference in Kuala Lumpur, Malaysia:

I would suggest that the likelihood of that happening sooner has increased tremendously… sometime in summer.

He added:

Demand for oil is weak but supplies are even weaker.

According to Reuters:

Goldman Sachs, the most active investment bank in energy markets and one of the first to point to triple-digit oil more than two years ago — a once unthinkable level — said last month oil could shoot up to $200 within the next two years as part of a “super spike.”

Last Friday, Morgan Stanley also predicted that the price of crude may reach $150 by July 4 due to significant demand from Asia along with falling inventories.

Source:

“Oil Is Likely to Hit $150 This Summer”
Reuters, June 9, 2008

Lacker: The Fed’s Fletcher Christian

Captain Bligh: I wonder why an alleged gentleman should give his first loyalty to ordinary seamen.
Fletcher Christian: Instead of to other alleged gentlemen?
Captain Bligh: Impertinence noted. It shall be logged. Do you care to enlarge the entry?
Fletcher Christian: Yes, only with this observation, which I will report to the Admiralty in any case: in my years of service I have never met an officer who inflicted punishment upon men with such incredible relish. Sickening.
Captain Bligh: Then go and be sick in your cabin, Mr Christian. I have never met a naval officer who was so proud of a weak stomach.

-from the film Mutiny On The Bounty (1962)

Earlier today, the Washington Post reported that Richmond Fed President Jeffrey M. Lacker told the European Economics and Financial Centre in London yesterday that the Federal Reserve’s “rescue” of Bear Stearns may make financial crises more common in the future. Lacker said:

The danger is that the effect of recent credit extension on the incentives of financial market participants might induce greater risk taking, which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central bank lending…

In times of financial crisis, the understandable central bank imperative is to alleviate the stress. But the expectations such actions engender could very well make future crises more likely.

According to staff writer Neil Irwin:

The comments by Richmond Fed President Jeffrey M. Lacker reflect a concern among people within the central bank and close to it that the emergency actions taken over a single weekend in March may have fundamentally recast the role of the institution — but without the lengthy, deliberative process that normally would precede such a move.

Irwin noted that others within the Fed apparatus have questioned the Bear Stearns action. He added:

There have been other signs of disagreement within the Fed, reflecting both the complicated challenges the economy is facing and Bernanke’s personal manner, which favors open debate. There has been at least one dissenter on every interest rate move at each meeting since the Fed’s policymaking committee began cutting rates in September. Two members of the committee have dissented at the past two meetings.

Such open disagreement in crisis was unheard of when Alan Greenspan was Fed chairman.

Mel Gibson as Fletcher Christian in “The Bounty” (1984)

Source:

“Fed Official Says Rescues May Create More Risks”
Neil Irwin
Washington Post, June 6, 2008