Bear Stearns Wheel Comes Off the Cart: “Subprime Chernobyl,” “Systemic Risk Fall-Out,” “We Don’t Know What the Value of This Debt Is”
June 26th, 2007If I had one of those lame, flashing siren images, I’d use it here.
Brace for impact.
Via: Telegraph UK:
The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.
The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.
“Excess liquidity in the global system will be slashed,” it said. “Banks’ capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing.”
Charles Dumas, the group’s global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.
“The banks were not prepared to bid over 85pc of face value for CDOs rated “A” or better,” he said.
“God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.
“We don’t know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn.”
US property writer Paul Muolo described the Bearn Stearns crisis as the “subprime Chernobylâ€, saying the bank had created a “cone of silenceâ€.
Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.
This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.
Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.
The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.
The Mortgage Lender Implode-Meter that tracks the US housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began.
The latest are Aegis Lending, Oak Street Mortgage and The Mortgage Warehouse.
“There isn’t a recovery about to happen,†said Ara Hovanian, head of the building group Hovanian Enterprise.
Nouriel Roubini, economics professor at New York University, said there were now concerns about “systemic risk fall-out†from the Bear Stearns debacle as investors look more closely at the real value of CDOs.
“These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit,†he said.
“They have not been rerated in a way that is consistent with rising subprime default rates. “That is why Wall Street is in a panic. “Losses will be massive once these assets are correctly priced to market.â€
Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the “toxic tranches†of lower grade securities held by the banks.
Much-trumpeted claims that banks had shifted off the riskiest credit exposure on to the asset markets was “largely a fictionâ€, said Mr Dumas.
The worst of the US property crisis has yet to hit since there is an overhang of $2,000bn of mortgages with adjustable rates which have yet to be reset. Many borrowers could see payments jump by half, or even double.
At the same time, a spike in 10-year US bond yields by 0.65 percentage points over the last six weeks has drastically repriced the cost of fixed mortgages, knocking away a key prop for the US housing market.
“With defaults at their highest in the 37 years that records have been kept, it could be a long hot summer,†said Mr Dumas.
This is the first thing I’ve read that makes me feel like a Roman general in 476 AD seeing the barbarian hoards appear on the horizon. Only for the metaphor to be fully accurate here, they’re not on the horizon, they’re charging over the crest of the Aventine Hill.
Been waiting for the beginning of the end for a few years now. Looks like in may finally be here.
I know this sounds strange and impressionistic, but I’ll say it anyway. The only thing that makes me think this isn’t the final bell is that it’s summer in the US. I think the finance crowd wants to enjoy their vacations before this mess gets out of control, and in some subjective but important way, that psychological element plays a role in the unraveling.
Thoughts?
It’s the end of the world as we know it.
It’s the end of the world as we know it.
It’s the end of the world as we know it and I feel fine.
@Paul
Agree. Collapses don’t just happen, they are allowed to happen. Certainly a repricing of assets is long overdue, but it won’t be allowed to happen during the northern hemisphere summer vacation season. Look for a blizzard of encouraging works from the US Fed tomorrow, and PPT intervention to create another sucker rally to carry through July and into mid August. After US labour day (1st Monday in September), comes the deluge.
Paul said: “The only thing that makes me think this isn’t the final bell is that it’s summer in the US.”
I suspect you’re right about that. Financial crises always seem to begin in the fall.
http://www.zealllc.com/2000/october.htm
Alek:
Every collapse an planned and wanted collapse, right? Seriously, I wasn’t intellectually aware of the factors other posters have listed that will prevent the big shakedown from happening in the summer, but in my gut, I just had this feeling that it wasn’t going to go down during the warm-weather/longer-day months.
I read/heard $10 billion re Bear Sterns last night, now it’s $850 billion for all in bad loans. Grrr. Somewhere a bear is growling.
Wish I could remember to save interesting links. Read once that the Depression was caused by banks overlending to the U.S. Government for the war effort. The only way the bankers could get their money back was to devalue stocks, money, etc,etc, etc. D’ya think this current subprime lending spree was all about giving the Bush Cheney gang money for Iraq? Yes, methinks the whole kettle of subprime fish has a STENCH that will stink for a long time to come for those of us NOT in the Banking/Millionaire/Investor Yacht Club Group.
I’m saving “things” like leather boots, and wool coats. Stuff that will be priceless in the near future. Money??? It will be no object of value.
Allah is GREAT!
from Goldfinger ?
October 1987 – Happenstance
October 1997 – Coincidence
October 2007 – Enemy Action
I have to agree that this is the stongest signal I’ve seen yet. But I also tend to agree that the repricing will be delayed at least until September, if not later.
Remember, the TWO Japanese banking crises in the 90s happened in slow motion. The first one over several years, the second one over several months. This isn’t like a stock market crash, it’s more like an approaching tsunami.
I think we just saw the beginning of the water disappearing off the beach…and we know what comes next.
“How Wall Street Stoked The Mortgage Meltdown.”
http://www.realestatejournal.com/buysell/mortgages/20070628-hudson.html?refresh=on
You’ll love this. It’s about how a major Wall Street firm (ever heard of Lehman Brothers?) contributed to the subprime disaster. Contrary to the opinion of conspiracy-minded bloggers, Brother Lehman was never secretive about its involvement in the subprime market. It was public info after all, and they were really quite proud of it.
Well, not any more.
Hey, have you been Lehmanized?