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HomeIMF Issues Warning on Credit Losses
Posted by Larry Doyle on April 8th, 2009 7:11 AM |
Forecasted credit losses across the residential mortgage, commercial mortgage, consumer credit, and corporate credit markets have been widely estimated to triple – if not potentially quadruple – in certain sectors. What does that mean in terms of total dollars? The IMF sheds light on these losses in an article this morning in the Financial Times:
The International Monetary Fund is likely to raise its estimate of total credit losses on US assets from $2,200bn to about $2,800bn when it releases its Global Financial Stability report later this month
Those figures equate to an increase of 27% in losses and a total figure of $2.8 trillion, which equates to 20% of GDP!!! Is there any wonder why credit is so constrained in the face of these impending losses? The IMF also sheds further light on these projected losses here in the U.S., as well as in Europe, and globally:
The new estimate, while up significantly from January, will almost certainly be lower than a $3,100bn (€2,350bn, £2,111bn) figure circulating on Tuesday, which contributed to pressure on US bank stocks.
The IMF is also expected to release for the first time an estimate of total losses on European assets, which is likely to exceed $1,000bn. The fund is likely to put total losses globally at slightly above $4,000bn, including some additional losses on Asian assets. (more…)
Uncle Sam To Throw Lifeline to Life Insurers
Posted by Larry Doyle on April 7th, 2009 9:06 PM |
No surprise here. Starting with my interview of Sean D’Arcy in early January, I have tried to highlight the expected capital shortfalls in the insurance industry.
Obviously not every life insurance company has the same issues but the models are largely similar.
Don’t expect the number of insurers looking to jump into this lifeboat to be only a few. State guaranteed funds for insurance companies total a whopping $8 billion.
Additionally, if consumers look to tap the cash value in their policies, the insurance industry will potentially need to raise more than a few hundred billion dollars. That capital can be generated by asset sales or “hello, Uncle Sam!”
The WSJ reports: Treasury Plans To Extend TARP to Life Insurers. (more…)
Games of Chance: TALF, PPIP, TARP, FDIC, FASB
Posted by Larry Doyle on April 7th, 2009 2:40 PM |
In thinking about the economy, markets, and our banking system, my memory brings me back to my early days in New York. While working my way along 8th Avenue back to my apartment in Hell’s Kitchen, I would happen upon numerous versions of the classic NYC “hustle.” The shell game (also 3 card monte) was rampant in NYC in the ’80s. Mayor Giuliani cleared out this game, along with a host of other street scenes. For those not familiar with this game, there was a constant need for new players with new money to keep the game alive.
Why do these games remind me of our current banking system? The similarities are scary. Let’s access the most recent piece from John Mauldin’s site to “view the games.”
Mauldin’s guest, John Hussman, comments on these various “games” (TALF, PPIP, TARP, FDIC, FASB), in which taxpayers bear the brunt of the risk in the government’s engagement with financial institutions. Hussman writes of the PPIP:
this is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.
Let’s Make a Deal…or Maybe Not
Posted by Larry Doyle on April 7th, 2009 11:50 AM |
Two conflicting stories struck me in today’s WSJ. The gist of these stories highlights how and why private enterprise would not want to have Uncle Sam as a partner, unless absolutely necessary. Let me share the stories with my thoughts:
1. Bailout Man Turns the Screws
I fully respect a tough and honest negotiator. A person who deals in the best interest of his shareholders represents the essence of capitalism.
Regrettably, our economy has been littered with executives at a wide array of companies who have negotiated more on behalf of select constituencies than shareholders. Plenty of executives have not played by either the spirit or the letter of the law.
Any negotiator needs to understand their counterparty and their goals. Additionally, the ability to adapt is critical. Without sacrificing principles, a level of intransigence can often render negotiations worthless. To that end, it does seem as if the government is learning some of these lessons.
I do not pretend these negotiations are easy but, given that not every counterparty is the same, I believe slightly different tactics must be utilized as appropriate. Otherwise, no matter how compelling a deal may appear, counterparties may back away from the table. To wit . . .
2. Investors Back Away From Fed’s TALF
Please recall how the equity markets surged 5% on the day Secretary Geithner announced the plans for the TALF and the PPIP. These programs are getting off to a very slow start. I just received some real time color from my friends at 12th Street Capital in regard to the TALF:
I’m not really sure why the government can’t get their act together and do multiple fundings during the month, but I guess I shouldn’t be surprised given that these were the same people that thought all of this paper should just trade on an exchange. If they fail to make this program work within a realistic market dynamic they run the risk of this falling by the wayside.
LD
Zombie & Co.
Posted by Larry Doyle on April 7th, 2009 5:45 AM |
I am no fan of George Soros. I often believe he does not draw a hard line between his political interests and his business interests. His active support with MoveOn.org has made a mockery of any attempt to achieve campaign finance reform.
That said, for those involved in global finance, whether you like George Soros or not, you need to know what he is thinking. Why? George Soros can move markets via his own investment strategies. Additionally, there is little doubt that George is the epicenter in a massive flow of market sensitive information.
To that end, Soros gave a stinging indictment of the change in the FASB’s mark-to-market by stating in a Bloomberg interview,
the change to fair-value accounting rules will keep troubled banks in business, stalling a recovery of the U.S. economy.
“This is part of the muddling through scenario where we are going to keep zombie banks alive,” Soros, 78, said today in an interview with Bloomberg Television. “It’s going to sap the energies of the economy.”
Is this statement a self-serving offering by Soros? Who knows? Is it an attempt to further promote the U.S. as a lessened power? Perhaps. That said, there are others, myself included, who believe the relaxation of the mark-to-market, especially for outfits like Freddie Mac, Fannie Mae, and the 12 regional Federal Home Loan Banks (FHLBs) is nothing short of a charade.
Did Soros’ statement have an impact on the market? Not today. The dollar has been improving of late. However, over the longer haul, the cost of having a number of zombie-like banking institutions will be pressure on the dollar along with increased borrowing costs for the zombie institutions or Uncle Sam who will be backing them.
From a personal perspective, would you lend money to a zombie?
And now, here’s a must-watch little treat. Crank up your speakers . . .
LD
A Fraud By Any Other Name
Posted by Larry Doyle on April 6th, 2009 4:30 PM |
A few loyal readers have graciously shared video clips of interviews with former banking regulator, William K. Black. These interviews address the fact that a tremendous amount of mortgage originations at the core of our current economic turmoil were fraudulently underwritten. The borrowers were never qualified only then to fall upon hard times. The loans were often NINJA (No income check, No job check or asset check) and the fraud was more often committed by the lender than the borrower.
Why and how did this happen? Let’s briefly revisit my writing from November 12th:
At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income, no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”
That money SUPPOSEDLY being made left tremendous risks on the books of the banks. The pursuit of ever greater SUPPOSED profits incorporated the use of CDS (credit default swaps) as synthetic collateral for structured deals. These CDS allowed for an enormous increase in volume and SUPPOSED profits. Don’t forget, though, at the core of the process a large percentage of the underlying loans were fraudulently underwritten. (more…)
Refinancing Risk Runs Rampant…Get To Higher Ground!
Posted by Larry Doyle on April 6th, 2009 10:27 AM |
The key for the global markets and economy is the ability to refinance outstanding debt. In the absence of a viable asset securitization market, will banks provide financing for current loans to be refinanced as they come due? Please remember the asset securitization market represented approximately 40% of total lending, so we are talking about a MAJOR segment of the market.
As banks assess applications for loan refinancings, they will impose ever more stringent underwriting standards as they will most likely put these loans on their books. Consumers, small businesses, and major corporations that do not have solid balance sheets and income statements will NOT get new financing. What happens to the existing loans that can’t get refinanced? The process is as such:
1. loan becomes delinquent
2. loan defaults
3. lender forecloses and takes possession of asset
4. lender attempts to liquidate asset via sale, pressuring valuation of assets in that sector.
5. original lender books loss on non-performing asset
What does it all mean? Losses on asset classes across the board. Can government programs plug the holes in the refinancing markets? Well, the Federal Reserve is known as the lender of last resort but their loans extend primarily to the banks themselves to plug holes in their balance sheets. The other governmental programs (TALF, PPIP) will hopefully restart the asset securitization markets and bring liquidity back in for refinancing. Will these programs hold the waves behind the dike? To a certain extent, but my recommendation is . . . get to higher ground. (more…)
Insurance Companies’ Ignorance Is Definitely Not Bliss!!
Posted by Larry Doyle on April 6th, 2009 5:20 AM |
I remain very concerned about potential liquidity and capital shortfalls within the insurance industry. The investment portfolios of insurance companies are chock full of the following:
1. commercial real estate loans: defaults expected to triple.
2. corporate loans and securities: defaults expected to triple
3. sub-prime and Alt-A (between prime and sub-prime) residential mortgages: defaults expected to quadruple.
4. prime mortgages: defaults expected to triple
I wrote What is Lincoln Thinkin’ to address the pressures that Lincoln Financial was facing. Those pressures are certainly not abating; in fact, the WSJ writes how Lincoln Faces Rising Stress As Its Debt Comes Due.
Over and above the pressures specific to Lincoln, the industry as a whole is facing strains due to the massive amount of annuities written by insurance companies. These annuities were written to provide policyholders a guaranteed fixed payout. With the significant selloff in the equity and bond markets, the insurance industry is facing an enormous capital shortfall on these annuities. (more…)
