This past week I have been particularly distracted by the political headlines in the run-up to the U.S. Presidential election, so I apologize if I have missed a few stories in the financial press.
The writedowns do continue unabated and we have now seen over $670 billion in losses and writedowns since the beginning of last year according to Bloomberg News. I fully expect this state of affairs to continue until the end of the Bush Presidency and well into the Obama Presidency because a number of harbingers of things to come are cropping up in the news, credit cards being the most obvious sign.
Now, it does bear remembering that we had only crossed the $500 billion writedown threshold in August. So, the bungled Lehman collapse and its aftermath has caused a torrent of banking losses.
Below are the writedowns from the previous week. These links are compiled in my credit crisis timeline, which now includes government actions as well as financial institution events.
However, let me make a few comments before you see the list. We have entered the stage where real economy effects are going to take center stage. Last month I said:
Despite what the monetary authorities have done, the credit markets are seizing up, letters of credit which control trade are being rejected, and stock markets are plunging. What will all of this mean?
First and foremost, this means that the real economy effects of the credit crisis will be much more severe than previously anticipated. Recessions have already been noted in places as far afield as Denmark, Singapore, the UK, and New Zealand. In all likelihood, Japan, the U.S. and Eurozone will all suffer major recessions due to the credit crisis. Few of the real economy effects from this have yet been felt. In recession, businesses go bust, people lose their jobs, consumers spend less, and credit defaults increase for businesses and individuals.
All of this translates into further credit writedowns from the following categories of debt, where credit excesses are concentrated in both North America and Europe:
- Residential Property (like Alt-A, Payment Option, Negative Amortization Mortgages)
- Commercial Property (Commercial Real Estate and Construction Loans)
- Leveraged Loans and High Yield Bonds (from Private Equity LBOs)
- Credit Card Receivables and Asset Backed Securities
- Auto Loan Receivables and Securitized Auto Loan Bonds
But, in addition, the following categories will see increased losses due to the real economy recession in Europe and North America:
- Bank Loans (general loan quality will sour)
- Corporate Debt (As recession hits, some previously credit worthy corporates will fail)
- Prime Residential Real Estate Loans (this is all ready occurring)
As far as Asia and Emerging markets go, it bears keeping in mind that demand for commodities is slowing rapidly as major industrialized economies slow. Therefore, Asia, Latin America, New Zealand, South Africa and Australia will not be immune. We have recently seen enormous currency moves in Australia and South Africa that are harbingers of impending recession there. Moreover, signs of slower export growth are evident all over Asia from Japan to China to South Korea. Other economies in Latin America that are highly dependent on commodity exports like Mexico, Venezuela, Argentina, Chile or Brazil will not decouple. They too will see a slowing in their economies.
Much of the turmoil in the Emerging markets has come to pass, but the other areas are in the headlines too. Chief among these is credit card debt.
Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.
A weakening job market and a looming recession are making it harder for consumers to make monthly payments, eroding confidence among investors about the safety of credit-card-backed bonds. It’s the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.
“Nobody is eager to put money to work given the uncertainty in the market,” said James Grady, a managing director at Deutsche Bank AG’s asset management unit. “When you think it can’t get worse, it continues to get worse. There is not a demand” for these bonds.
Top-rated credit card-backed securities maturing in three years traded at a gap, or spread, of 475 basis points over the London interbank offered rate during the week ended Oct. 30, JPMorgan Chase & Co. data show, 25 basis points higher than the previous week. The debt was trading at 50 basis points more than Libor in January.
This is not good. Expect to hear more from me on credit cards because they are tied to asset-backed securities and FAS 157 demands writedowns. Therefore, I anticipate his to be a category of debt to cause some financial pain in the very near term. Citigroup started the show on Oct. 31st with a $1.4 billion writedown – see the story below.
2008 11 05 Banking crisis wipes 56% off BNP Paribas profits
2008 11 05 MBIA, Ambac Losses Widen on Higher Claims Forecast
2008 11 04 Swiss Re reports surprise deficit
2008 11 04 UBS says money outflows slowing, wary on fourth quarter
2008 11 04 RBS sees more writedowns, eyes 2010 dividend restart
2008 11 03 Lloyds TSB urges takeover of HBOS, despite £5bn of writedowns
2008 11 03 Profits slump at Societe Generale
2008 10 31 Citigroup loses $1.4 bln on securitizations
2008 10 30 Generali Profit Falls on Writedowns, Life Insurance
2008 10 29 Fed Cuts Rate to 1% to Avert Prolonged Recession
2008 10 29 Norway cuts rates by half a point
2008 10 29 Sumitomo Mitsui First-Half Profit Falls on Bad Loans
2008 10 29 Lazard Posts Loss on Asset-Management Unit Purchase
2008 10 29 Citigroup, Credit Suisse Link Loans to Swaps in Shift
2008 10 29 GMAC Added to Commercial Paper Plan, May Become Bank
2008 10 29 Legg Mason Beats Estimates, Rises Most in 25 Years
2008 10 29 Kuwaiti Parliament Passes Law Guaranteeing All Bank Deposits
2008 10 29 HRE taps bailout fund for €15bn
2008 10 28 Bank of England estimates world credit loss at ‘£1.8 trillion’
2008 10 28 Nomura on Course for Record Loss on Lehman, Iceland
2008 10 28 Danske Cuts Outlook After Net Slumps on Loan Losses
2008 10 28 Santander buoyed by robust retail business
2008 10 28 Provident sees $5.4 million loss over portfolio devaluation
2008 10 28 EU approves German bail-out scheme
2008 10 28 Aegon gets €3bn in government capital
2008 10 28 Iceland raises rates sharply, others poised to cut
2008 10 27 Agricole brokerage arm takes pay cut