Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Credit Crisis Continues as Banks Sell Assets to Cover Losses

Interest-Rates / Credit Crisis 2008 Aug 06, 2008 - 01:50 PM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: "Have we seen the worst from the financial sector?"

The question - a very good one - came from an audience member following my global investing presentation at the Agora Wealth Symposium in Vancouver, British Columbia. During my entire time there, the interest in the ongoing credit crisis was intense.


I took a deep breath and launched into my three-point response.

First, I'm encouraged by what I see lately but still believe there is a fair distance to travel before all the skeletons are cleaned out of the financial sector's closet .

There is a growing body of data that suggests banks have recognized only a fraction of the overall potential losses - approximately $50 billion to $75 billion so far on subprime debt alone. And a variety of estimates suggest that total subprime losses may be more than $300 billion before we're through.

And that figure, incidentally, doesn't include the additional losses from secondary-prime mortgage loans, auto loans, credit card balances, student loans and the other credit-related flotsam and jetsam floating around in the debt markets.

That suggests that the hundreds of billions of dollars in emergency capital infusions from the world's central bankers we've seen to date may only be a fraction of what's ultimately needed by the time fully leveraged figures are thrown into the mix.

Second, liquidity conditions now may actually be worse than when the entire credit-crisis mess began to unravel this time last year . For example, the benchmark London Interbank Offered Rate (LIBOR) remains higher than so-called "policy rates" and U.S. Treasuries of comparable maturities (Please see accompanying chart).

This suggests that banks still don't trust each other and therefore are keeping so-called "Interbank" borrowing rates high in order to reflect what they perceive to be the added risk of doing business. We've been warning investors to watch out for this since as far back as April , and have generally been preaching caution since the credit crisis began last year.

In other words, the fact that Libor-Treasury spreads are wider today than they were a year ago suggests that the banks really don't know who continues to hold the toxic debt instruments the entire world has come to fear - despite a recent earnings parade of CEOs making claims to the contrary.

The upshot: Many institutions are hoarding cash - something you'd hardly expect to see if the credit crisis were really on the mend.

Third, judging from recent reports, it's beginning to dawn on financial regulators that this crisis was never about a lack of liquidity in the first place , which is something I suggested in an open letter to U.S. Federal Reserve Chairman Ben S. Bernanke some time ago.

Instead, this crisis is about three things:

  • Too much liquidity.
  • Fundamental structural problems in the credit industry, including the almost-total lack of regulation.
  • And the lack of transparency of complex financial instruments for which there is no public market, making them tough to value and nearly impossible to trade.

It is becoming clearer by the day that - partly because of these three factors - a good deal of money has been made fraudulently, if not illegally.

Granted recent changes surrounding the " mark-to-market" accounting of so-called "Level 3" assets are a step in the right direction. But what few people realize is that, in the short-term, these new requirements could involve the immediate recognition of even larger losses than we've seen to date.

The reason is that many of the firms involved - think Merrill Lynch & Co. Inc. ( MER ), Lehman Brothers Holdings Inc. ( LEH ) and Citigroup Inc. ( C ), for example - will no longer be able to hide their losses in Level 3 assets, as they have in the past.

As you might expect, there's a counterargument to this, and it's a highly popular one on Wall Street - especially inside the CEO set, whose members desperately want to stop the financial hemorrhaging their firms are enduring. They claim they're "selling" risky assets and "de-leveraging" their balance sheets.

But here's what they are not telling you.

Even though these folks are technically "selling" assets - particularly the distressed "Level 3" assets I mentioned a bit earlier - what they are really doing is assigning the upside to hedge funds, private equity firms, and sovereign wealth funds in exchange for cash.

But here's the kicker: The banks actually are holding onto the downside liability in the event the underlying securities go bad. That brings us back to the start of this commentary, when I said that I expect more securities to go bad.

No matter how you look at it, these financial institutions are playing a vicious shell game, hoping all the while that they're not the loser who is taken to the cleaners when he picks up the wrong shell.

Where this goes from bad to worse is that at the same time they're playing more fancy accounting tricks, these firms continue to pony up to the Fed's private backdoor lending window for sweetheart financing. After all, they can't get the financing anywhere else.

That means that every taxpayer in this country is involuntarily being put in the bailout business.

As for whether or not we're near the end of the credit crisis as a whole, it depends on whom you ask.

When this crisis started a year ago, I was asked a similar question and answered it by saying that we would not even begin to approach the end of the line until the total losses exceeded $1 trillion.

My audience chuckled politely.

Fast-forward 12 months, and nobody's laughing anymore - especially when I say that I'm now raising my industry loss estimate to nearly $2 trillion.

Increasingly, other analysts are embracing a similar viewpoint. UBS AG ( UBS ) raised it's estimate of the total cost of the credit crisis to $600 billion, while noted hedge fund manager John Paulson suggested $1.3 trillion is not unthinkable. Meanwhile, in a report issued last May, the International Monetary Fund (IMF) projected the bailout costs at $1 trillion.

All of this leads us to a single conclusion: At least for now, this is a "recovery" in name only.

News and Related Story Links :

Keith Fitz-Gerald writes:

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in