Are the Credit Markets Still Healthy?

By Felix Salmon, An SA Author.

Robert Higgs has a long list of healthy-credit-market datapoints to support his contention that any talk of a frozen market is "hyperbole".

Commercial and industrial loans of all commercial banks, which are reported monthly, have grown rapidly. The most recent report, for August 2008, shows outstanding loans of $1,514 billion, an all-time high. This loan volume is 15.5 percent greater than it was a year earlier, and 30.8 percent greater than it was two years earlier. Frozen credit?
Consumer loans at all commercial banks, which are reported monthly, have also grown rapidly. The most recent report, for August 2008, shows outstanding loans of $845 billion, an all-time high. This loan volume is 9.2 percent greater than it was a year earlier, and 16.5 percent greater than it was two years earlier. Frozen credit?
Even real estate loans at all commercial banks, which are reported monthly, grew rapidly until very recently. The most recent report, for August 2008, shows outstanding loans of $3,642 billion, only slightly below the all-time high (in May 2008). This loan volume is 4.1 percent greater than it was a year earlier, and 15.5 percent greater than it was two years earlier. Frozen credit?
Lest one suspect that I have cherry-picked my examples, consider finally the amount of all bank credit at all commercial banks, which is reported weekly. For the most recent week reported, the one that ended on September 9, this credit amounted to $9,406 billion, which is only slightly less than the all-time peak of $9,485 reached in the week that ended on March 26, 2008. For the past six months, total commercial bank credit has remained on a high plateau, well above the levels reached in previous years, when everybody seemed to think that credit was ample.

I would make a few points in response to these intriguing numbers.

Firstly, they're year-on-year numbers, which don't give much of an impression of what's happened over the past six months.

Secondly, remember that most of these loans were extended at very low interest rates. As a result, they don't get paid down very fast. So even if you're only lending a little, if it's on top of a stock of existing loans which is basically staying steady, then your total loans outstanding will generally rise.

Thirdly, if banks are deleveraging, the direct bilateral loans to their relationship customers are the last things they're going to want to cut. The first thing you do is try to sell off assets without damaging relationships. Most banks own a lot of debt securities, for instance: they'll sell those before cutting back on their own lending, which is their most profitable business.

Finally, and most importantly, remember that bond issuance has crashed this year. The number to look at isn't total lending, from banks: it's total borrowing. And that's gone down substantially: disintermediation preceded deleveraging.

What we've seen is that a lot of companies who would normally have issued bonds or other securities in the debt markets have chosen instead to tap their lines of credit and relationships with banks. So bank lending might well have gone up, even as the total supply of credit has gone down. That doesn't mean credit markets aren't in crisis: quite the opposite.

(Via Tabarrok, who adds interesting points of his own.)

Related Posts :

TED Spread: Back in "Credit Hell".

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Dollar Rally Could be Short Lived

By Kathy Lien, An SA Author.

It is now confirmed that the US housing and labor market is in serious trouble. New home sales broke below the 500k make or break mark for the first time in 17 years. The last time we saw new home sales at these levels was during Bush Senior’s Administration. Jobless claims also climbed to 493k, the highest since 2001. To add salt to the wound, durable goods orders dropped 4.5 percent last month.

However these depression like numbers failed to put a dent into the US dollar as investors hold their breath for the approval of Paulson’s Troubled Asset Relief Program. With Congress going on recess at the end of next week, something needs to happen over the next few days. The euphoria in the markets could be short lived since the stock and currency markets have been very fickle.

Gold prices are higher and everyone is hungry for US Treasuries, driving the TED spread and the LIBOR/OIS spread near historic highs. This tells us one thing - which is that lending between banks have frozen and big investors are still risk averse. Therefore I would not trust the USD/JPY and carry trade rally.

Paulson’s Plan Could be a Lose-Lose for the US Dollar

Paulson’s plan is ultimately a lose-lose situation for the US dollar. If it is approved, it would cause a destruction of the US balance sheet by increasing the nation’s debt ceiling by 6.6 percent to $11.315 trillion. If it is not approved or if Paulson and Bernanke only get a trimmed down version of the plan, they would have to go back to the drawing board to come up with other solutions to unclog the mess. If we end up being between rescue plans, the uncertainty would weigh on the US dollar. Therefore I still believe that the US dollar could fall another 5 percent over the next few months.

Related Posts :

Warren Buffett Reveals Bailout's Dirty Little Secret

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Warren Buffett Reveals Bailout's Dirty Little Secret

By Henry Blodget, ClusterStock.Com, Sep 24, 08 1:08 PM.

The critical part of the bailout is the price the government pays for the trash assets it buys from banks. In short, if the government pays too much, the taxpayers will get hosed.

So it is interesting to note the difference between the price the government is proposing to pay and the price one of the world's smartest investors--Warren Buffett--would be willing to pay. To wit:

Bernanke and Paulson want to pay a phantom "hold-to-maturity" price that is above the prices at which the banks are currently valuing their trash assets. The logic is that the banks' carrying value is somehow artificially depressed by a lack of liquidity. (This logic is weak: If anything, the banks are trying to conceal how badly off they are by overstating the value of the assets).

Warren Buffett, meanwhile, thinks the appropriate price would be the "market value," which he believes is below the price at which the banks are currently carrying their trash:

[If] they do [the bailout] right, I think they'll make a lot of money.... They shouldn't buy these debt instruments at what the institutions paid. They shouldn't buy them at what they're carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually...

You can be pretty fanciful in marking positions in Wall Street, particularly when things aren't trading. The one thing you want to make sure, when the Treasury is buying things, is the marks they have don't make any difference. Like I said, it wouldn't be a bad idea, if you're buying ten billion of a security and you're the Treasury, to have them sell five-hundred million, or something like that into the market, so you find out what the real market price is and then buy the other 9-1/2 billion at that price. I really think, I really think the Treasury will make -- I think they'll pay back the 700 billion and make a considerable amount of money, if they approach it in that manner.

Read that again. Warren Buffett is not talking about paying any theoretical "hold-to-maturity" price. He's not even talking about the "don't-give-your-shareholders-all-the-bad-news-yet" carrying price (the "fanciful" ones he describes above). He's talking about the market price. And, unlike Bernanke, he's not suggesting that market price is somehow artificially depressed by a lack of liquidity. On the contrary, he's saying the market price is the market price because that's the price intelligent investors need to pay to offset their risk. The goverment should not pay one cent more than the market price.

Why aren't Bernanke and Paulson suggesting that the government pay a "market price." Because they know the banks will continue to insist that this price is too low and won't play ball. Fine. The answer is NOT to pay them to help the country--especially since they are a primary reason the company has gotten into this mess.

The answer is either to let them crash and burn and come begging for a bailout--at which point you nuke their shareholders completely AND/OR put a time-limit on the bailout offer, so they have to weigh their own self-interest vs. possible self-destruction. And in any case, you take equity, too, so you don't get screwed while their shareholders zoom.

Remember: You don't need to save all the banks to save the country. You only need to save some.

Related Posts :

Buffett On The Bailout: The CNBC Interview

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Buffett On The Bailout: The CNBC Interview

By Henry Blodget, ClusterStock.Com, Sep 24, 08 12:23 PM

CNBC had another awesome interview with Warren Buffett this morning. In addition to featuring the usual wisdom of one of the most charming men alive, it was also the first interview in a while in which Warren might have been talking up his book (The pitch: I love the bailout, we need the bailout, and I sure hope the government goes through with the bailout or I'm going to lose my shirt in Goldman Sachs).

Here's the transcript, courtesy CNBC:

BECKY QUICK: We know you get all kinds of deals, all kinds of people who come knocking asking you to jump in. You've said no to everything to this point. Why is this the right deal at the right time?

WARREN BUFFETT: Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.

BECKY: Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?

BUFFETT: Well, I would say this. If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price?

CNBC.COM POLL: BUFFETT'S BET, A BOOST OF CONFIDENCE?

BUFFETT: Well, there's just no telling what would happen. Last week we were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.

CARL QUINTANILLA: Warren, we can almost hear you measuring your words as you speak, because what we're talking about has such gravity. There are people out there who either don't, or are unwilling, to acknowledge what exactly, how serious the situation was last week. And I'm hearing you say is that, was it the most frightening experience you've had in your lifetime, in terms of evaluating where this economy stands?

BUFFETT: Yeah, well, both the economy and the financial markets, but there're so intertwined that what happens, they're joined at the hip. And it doesn't pay to get into horror stories in terms of naming institutions or anything. But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week. And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do. there's no Plan B for this.

BECKY: Warren, you mentioned that Wall Street could not have taken another week like that. But what does that mean to the American taxpayer who's sitting at home saying, 'Why is this my problem?'

BUFFETT: Yeah, well, it's everybody's problem. Unfortunately, the economy is a little like a bathtub. You can't have cold water in the front and hot water in the back. And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business. Look, right now business is having trouble throughout the economy. But a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt. It was, and still is, a very, very dangerous situation. No plan is going to be perfect, but thanks heavens that Paulson had the imagination to step up with something that is of the scope that can really do something about it. And what he did with the money market funds, that was not an idea that I had, but as soon as I heard about it, that was an important stroke. Because the money, pulling out of the money market funds and going to Treasuries, and driving Treasury yields down to zero. That -- a few more days of that and people would have been reading about lots and lots of troubles.

JOE KERNEN: People listen, Warren, when you speak. And I don't know if you watched the hearings yesterday ...

BUFFETT: I got to watch some of them.

JOE: But when the more dire it looked, in terms of communicating, with some of these Senators, the three-month or one-month bill, again, started acting similar to what was happening on Thursday. Now we averted that disaster on Thursday, but it's already been three or four days. It's almost as if these guys already forgot about the position that we were in. Do you think that accounted -- we're still susceptible to that happening again if it looked like they're not going to go through with this?

BUFFETT: No, it would get worse. Last week will look like Nirvana (laughs) if they don't do something. I think they will. I understand where they're very mad about what's happened in the past, but this isn't the time to vent your spleen about that. This is the time to do something that gets this country back on the right track. What you have, Joe, you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they're trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that's willing to leverage up. And there's no one that can leverage up except the United States government. And what they're talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that's going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won't do it perfectly right, I think they'll make a lot of money. Because if they don't -- they shouldn't buy these debt instruments at what the institutions paid. They shouldn't buy them at what they're carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

BECKY: Are you buying instruments like these in the market?

BUFFETT: Well, I don't want to leverage up. No one wants to leverage up in this thing. So, if I could buy a hundred billion of these kinds of instruments at today's prices, and borrow non-recourse 90 billion, which I can't, but if I could do that, I would do that with the expectation of significant profit.

JOE: But the government can do that. You can't. And that's why the private sector can't, even you, can't save the system.

BUFFETT: I can't come close to it. But they have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don't have covenants. They don't have -- I mean, they are in the ideal position. So, for example, if I were hiring advisers, as I talked about doing to buy these things, I would tell those advisers, 'Look it! People are buying these instruments to make 15 percent. So if you're going to charge me any fees, I'm going to defer those fees until I get rid of these instruments later on. If I don't make at least ten percent on my assets, you know, your fee goes down the drain. Because it should be a lead-pipe cinch to make 10 percent at the kind of prices that exist now. I wouldn't try to write that into the legislation. I don't think you should -- I think they should punish, in many cases, the people -- I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years. They should, maybe, eliminate bonues. They may wish to do some of those things. I don't think you should try to write it into the instrument, though. I think that gets so damn complicated and ties people's hands. But if I were administering the program, I think I'd be fairly tough about some of those things, and I'd make sure that the advisers earned me a return that was well above my cost of borrowing before they got paid a dime.

BECKY: Would you administer the program?

JOE: Yeah, can you be on the oversight board? (Buffett laughs.) Can you be on the oversight board?

BUFFETT: I'd love to administer (laughs). I'd love to administer it for nothing, but I would really love to administer and get some kind of an override in terms of the profits, which is naturally the way Wall Street thinks. No, it's not my game to do that, but I will tell you that the buyers of the instruments these days are going to do better than the sellers. And the big buyer, if they -- they shouldn't pay any attention to the cost of these instruments to the selling institutions. They shouldn't pay any attention to the carrying value. In fact, one thing you might do, is if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don't want the Treasury to be a patsy. But I'll tell you, with Hank Paulson on top of it, you couldn't have any better guy to do that. The important thing is that if this program extends into the next administration is to have somebody in the next administration that has similar market savvy.

Related Posts :

Goldman and Buffett: Salvation or Desperation?

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Goldman and Buffett: Salvation or Desperation?

9/23/2008
by John Rubino, DollarCollapse Blog.


If the Fed can’t save us, maybe Warren Buffett can. That seems to be what U.S. markets are hoping in Tuesday after-hours trading, as they rally on the announcement that Goldman Sachs has attracted $5 billion from Buffett’s Berkshire Hathaway. The deal comes just in time, since investors seem to have finally figured out that the government isn’t omnipotent. Despite the mother of all bailout programs, the Dow declined more on September 22nd and 23rd than in any other two-day period since 2002. Goldman, meanwhile, is a logical candidate for a market-saving deal, since it’s the last investment bank standing and has a cool name. Buffett might reasonably see it as a platform for building a legitimate business.

But a closer look at the deal paints a different picture, of a desperate investment bank giving away the store to an investor who is now in a position to demand a sweet deal from guys who not so long ago considered him a dinosaur. Consider:

• Goldman recently announced plans to convert its structure from investment bank (lightly regulated and able to operate, in effect, as a giant hedge fund, leveraging itself to the hilt and making aggressive, sometimes wildly unethical bets) to commercial bank, more tightly regulated and less able to use leverage to goose returns. In other words, to make money it now has to find investments that pay more than its cost of funds.

• In return for his $5 billion, Buffett gets preferred stock that yields 10% a year, plus warrants enabling him to buy $5 billion of Goldman common stock at $115 per share anytime in the next five years. The stock was $135 in Tuesday evening trading.

A bank operates by borrowing low and lending high. So if Goldman’s cost of funds is 10% plus potentially massive stock dilution, and home mortgages, car loans and business loans all yield considerably less than 10%, how does it turn a profit on that cash? Clearly it can’t. This deal isn’t about getting money to operate a profitable business. It’s about keeping Goldman's stock from declining further (it’s down over 100 points in the past year) and maybe enabling it to raise cheaper capital from other sources later. But as far as this $10 billion goes, whatever it earns will flow not to Goldman’s current stockholders, but to Warren Buffett. The old guy wins again.

Related Posts :

1. Berkshire to GS: "I Got $5 Billion, but Its Gonna Cost Ya"
2. Warren Buffett Invests Billions in Goldman Sachs

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A Defense of the Paulson Plan

By Greg Mankiw's Blog

The Treasury proposal to rescue the financial system has gotten a lot of grief lately, especially from the community of economics professors. A smart friend, who knows more about this topic than I do, emails me his response to the critics:

Academic economists don't like the Treasury plan, but nearly all of the Wall Street economists are for it. You don't have to be all that cynical to say that the Wall Street economists are talking their book. But I'd like to think that there is at least in part a sense in which they are more attuned to the reality of the situation in credit markets -- that last week we were a day or two away from a breakdown of the financial system.

Here are three common critiques from the academics and journalists and what they are missing:

1. "Treasury must overpay for this to work because otherwise you are not injecting new capital, only adding liquidity."

Treasury is talking with the experts you would expect -- prominent academics who have designed auctions. It's complex because there are so many different MBS, but Treasury is committed to get the market price as best as it can. It will not intentionally overpay. But the assertion that the plan will not boost capital is wrong. If Treasury gets the asset prices exactly right next week when the reverse auction starts, those prices will be higher than the prices that would have obtained before the program was announced. That difference means that by paying the correct price next week we will be injecting capital relative to the situation ex-ante. Treasury does not need to overpay. And the taxpayer can still see gains -- say if the announcement and enactment removes some uncertainty about the economy and asset performance, but not all. Then prices could rise further over time. But the main point is that it is not necessary to overpay to add capital. I think Krugman is a leading purveyor of the "they must be intending to overpay" assertion.

2. "Taxpayers will be better off if Treasury gets warrants."

This is essentially the assertion made in David Leonhart's column in the NY Times on Wednesday. And it again illustrates that we would all be better off if high schools taught the Modigliani-Miller theorem. MM implies that the price of the asset (again,assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives. In this case of a reverse auction, imagine that the price is set at $10. If Treasury instead demands a warrant for future gains of some sort, then the price will rise in the expected amount of the warrant -- say that's $2. Then the price Treasury pays for the asset will be $12. Some people might prefer to get $12 in cash and give up a warrant worth $2 in expected value. Fine, that's a choice to be made. But the assertion that somehow warrants are needed is simply wrong.

3."The plan should be to inject capital instead."

This is the Luigi Zingales criticism. Again, that's a fine plan and might be a good idea. But that's a complement to an asset purchase plan, not a substitute -- and it's one allowed by the Treasury proposal and indeed envisaged in some cases. But that will take much longer to implement than an asset purchase. That's why it's a complement not a substitute -- Treasury needs to act now. The particular ideas from Zingales et al that there should be a forcible capital injection are pure ivory tower, unfettered by the practicalities of legality, enactment, or implementation.

Related Posts :

The Theory behind the Rescue Plan

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The Theory behind the Rescue Plan

By Greg Mankiw's Blog

Here is the key passage from President Bush's speech last night:

as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

In other words, the premise appears to be that the market is irrationally pessimistic. That might be so. Nonetheless, one has to be at least a bit skeptical about the idea that government policymakers gambling with other people's money are better at judging the value of complex financial instruments than are private investors gambling with their own.

Related Posts :

1. Sorry, RTC History Suggests Stock Market Not At Bottom
2. $5 Trillion Cash Pool Needed to Stop Rout, Ohmae Says
3. Bottom Line on Paulson-Bernanke Bailout Plan

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Durable Goods Orders Drop 4.5%

By Spencer
Angry Bear Blog : Advance Durable Goods Orders

The advance durable goods numbers are not reassuring. The unsmoothed total orders were down 4.5%. Although the monthly data is very noisy, the smoothed data is also showing weakness as the apparent rebound over the previous two months disappeared. Clearly, the data peaked last year and is trending down with no signs of a trend reversal.

Click to Enlarge

Much the weakness is in aircraft, but this is bad news for exports, the only source of growth in the last quarter.

Click to Enlarge

But the most worrisome data is the weakness in capital goods orders where the smoothed year over year change is -4.9%. Capital goods shipments fell 2.5%, a very bad indicator for third quarter GDP growth.

Click to Enlarge

GE confirmed this poor data this morning when it revises its earnings guidance down.


Related Posts :

Although Harder to File... Bankruptcies are on the Rise

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Although Harder to File... Bankruptcies are on the Rise

President Bush stated the Bankruptcy Abuse Prevention and Consumer Protection Act (effective October 17, 2005):

Will also allow us to clamp down on bankruptcy mills that make their money by advising abusers on how to game the system.

Ahhh... the eternal hope of small government when things were going well. I guess levering a firm out the ass isn't "gaming" the system when former co-workers will bail you out, but I digress...

Click to Enlarge

Among its many changes to consumer bankruptcy law, BAPCPA enacted a "means test", which was intended to make it more difficult for a significant number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code.

Well, at least when the consequences of our levered economy come crashing down, U.S. taxpayers that financed the bailout will have similar support... or not.

Source : Econompicdata Blog

Related Posts :

Please Note!
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More Stocks You Can't Short

The SEC allowed the exchanges to add stocks to the No-Short List. Here's what the NYSE has added:

1. GLG GLG Partners, Inc.
2. GE General Electric Co.
3. OCN Ocwen Financial Corporation
4. KBW KBW, Inc.
5. GFG Guaranty Financial Group Inc.
6. MFG Mizuho Financial Group, Inc.
7. FMR First Mercury Financial Corporation
8. STC Stewart Information Services Corporation
9. FCF First Commonwealth Financial Corporation
10. MTB M&T Bank Corporation
11. DFS Discover Financial Services
12. BMO Bank of Montreal
13. TD Toronto Dominion Bank
14. CM Canadian Imperial Bank of Commerce
15. FMD The First Marblehead Corporation
16. BBV Banco Bilbao Vizcaya SA
17. CIB BanColombia SA
18. LM Legg Mason, Inc.
19. NFP National Financial Partners Corp.
20. AXP American Express Company
21. CIT CIT Group Inc.
22. GM General Motors Corporation
23. HIG The Hartford Financial Services Group
24. ADS Alliance Data Systems Corporation
25. ALD Allied Capital Corporation
26. RAS RAIT Financial Trust
27. DRL Doral Financial Corporation
28. FSR Flagstone Reinsurance Holdings
29. MCO Moody's Corporation
30. COF Capital One Financial Corporation
31. CS Credit Suisse Group AG

Source : http://www.crossingwallstreet.com/

You can see the other 799 of financial stocks banned list at here

Related Posts :

Hedge Funds Finding New Ways to Short

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