Posts

Showing posts from June, 2008

Why Bennie Can't Lend

Those of us from a certain age will recall a book about the failings of the education system called Why Johnnie Can't Read . Well, we're about to see the failings of the financial system exposed in similar fashion. The Fed has gone from "savior" that will "bail out the market" to talking tough on inflation and pointedly refusing to promise further rate cuts. So when did this happen and why? The first thing to note about the Fed is they don't actually determine interest rates. They have the ability to set the Fed Funds target rate but then they have to go out and defend it in the marketplace - just like any other private entity seeking to set an arbitrary price. The strongest tool they have in this price-fixing scheme is the aura of omnipotence that they have acquired over the years so few other players are willing to take them on. A wise Fed chairman knows this and sets the target close to the market rate to avoid a test of wills that he might lose

More Credit Deflation

It is critically important to understand the decline in overall credit levels in order see just how powerful the emerging deflationary trend is. One of my favorite analysts is Doug Noland of Prudent Bear. His Credit Bubble Bulletin is an indispensable tool for anyone hoping to fully understand what is happening. From his latest edition : Total Commercial Paper increased $1.1bn to $1.753 TN. CP has declined $471bn over the past 46 weeks. Asset-backed CP fell another $5.0bn last week (46-wk drop of $447bn) to $748bn. Over the past year, total CP has contracted $390bn, or 18.2%, with ABCP down $412bn, or 35.5%. So there is a hole roughly $400 billion wide of destroyed credit in the shadow banking system of SIVs and other off-balance sheet entities. That would be pretty tough to fill. And in the immortal words of Ronco "But wait, there's more!" Bloomberg reported yesterday that CDO defaults since October now total 200, with a face value of $220 billion. Given the performanc

No Credit for You!

As the Universal Debt Bubble has begun to collapse under its own weight, various portions of the shadow banking sector have come under enormous pressure. These are the non-bank lenders that have magnified a credit bubble into the UDB. Starting last summer, the initial push shattered the most egregiously complex and levered structures - the CDOs. In the Fall of 2007, the conduits and SIVs joined the tankage - along with asset-backed commercial paper, their primary funding mechanism. The worst of the hedge funds have been closing their doors at an increasing rate. Now we are beginning to see simpler securitized products being shunned as well. From Prudent Bear's Doug Noland: Asset-Backed Securities (ABS) issuance slowed this week to $3.3bn. Year-to-date total US ABS issuance of $104bn (tallied by JPMorgan's Christopher Flanagan) is running at 27% of the comparable level from 2007. Home Equity ABS issuance of $303 million compares with 2007's $191bn. Year-to-date CDO iss