Friday, September 14, 2007
Credit Constipation Continues
A quick check over at the Mortgage Implode-o-Meter shows the tally of imploded mortgage leders now stands at 156 since December, with more no doubt to come. A companion site lists 18 imploded hedge funds.
The asset-backed commercial paper market has essentially closed, meaning that tens of billions of commercial paper coming due over the next couple of weeks may not be rolled over. ABCP is usually backstopped by a bank liquidity facility, which is supposed to take out the paper if it can't be rolled over. This means that a lot of hard-to-value off-balance sheet assets may soon go on balance sheet. Will banks conduct collateral fire sales to stay within capital requirements, and will anyone be there to buy the collateral? Business Week suggest that problems in this market are of far more significance than the overhyped "sub-prime" problem.
Today in the UK, an old fashion bank run is occurring . The is the second is the last few weeks, as there was a run on the Countrywide Bank in August. This kind of stuff isn't supposed to happen! But with the mortgage-backed securities markets also essentially closed, large lending businesses that were built on the foundation of those markets are, not surprisingly, running into trouble. What happens if the MBS market remains closed for months? How long will Central Banks prop up these failing businesses, and what will happen if they are allowed to fail?
If one just followed the DJIA, one might feel that the August trouble was only a Fed Funds rate cut away from being history. Yet the fact that this profound lack of confidence in the credit markets has persisted now for six weeks has to at least raise the possibility that maybe this is a bit more than a temporary liquidity problem. Certainly some see it that way, and some strange dark humor is starting to emerge. Today's posting over at Sudden Debt is a case in point:
Just a liquidity crisis? If you believe that, you probably also believe that baloney is made from meat.
Definition of a liquidity crisis: a bank, or anyone else for that matter, has a portfolio of fine, productive assets but for whatever reason is short of quick cash - for a very limited amount of time. The crisis is very quickly resolved by providing the assets to a lender as collateral and getting a quickie loan. Crisis over. In fact, the whole thing never even reaches the condition of "crisis".
Definition of credit crisis: the same as above, but now the lender takes one look at the collateral proffered and instead of "fine and productive" deems them baloney, i.e. it looks like "meat" but is mostly starch, water, salt and preservatives. He tells the potential borrower "no can do" and to kindly take his collateral elsewhere, e.g. some Lender Of Last resort (LOLr) that is not very particular about the difference between proteins and carbs.
Definition of an asset crisis: The same as a credit crisis, but the LOLr can no longer accept any more baloney as collateral without becoming a luncheon meat merchant. At that point the LOLr runs to the politicians and lays it all on their lap and asks them to make the decision: Print or sink?
Definition of an economic crisis: The politicians form a committee to study the matter of the asset crisis.
If you want to follow along as events continue to unfold in these markets, and want to understand some of the complicated issues being played out, I highly recommend the blog Calculated Risk. A read through the recent archives will bring you up to speed quite quickly.
4 Comments:
By 
Papa Ray, at
Fri Sep 14, 05:05:00 PM:
While I don't pretend to understand much of this, being as how, even after decades of learning by doing it the wrong way with my own budget and business ventures...
I think that the failures and the lessons learned will ultimately be good for the country and for the business world.
Not to say that blood won't run, people go homeless, jobs evaporate and other terrible things won't go on for a few years, but in the end, after the bodies are carried away, the floors washed and the sobbing over, things will work out to the good.
Or at least that is my take on it.
Papa Ray
West Texas
USA
By 
, at
Fri Sep 14, 06:36:00 PM:
The actions that got us where we are and this explanation are great examples of "herd mentality". The herd mentality takes us from one extreme to the other.
Carry on. This too will pass.
-noprisoners
By Don Cox, at
Sun Sep 16, 05:27:00 AM:
The underlying problem is that many people can't keep up their mortgage payments. Why? Isn't the commonest reason medical bills? In other words, the credit crisis is a symptom of the real problem, which is the health care crisis.
By Counter Trey, at
Sun Sep 16, 06:08:00 PM:
CV
There are many smart people preparing funds (as we write) to pluck these hard-to-value assets from the desperate and fearful. As long as Congress keeps its hands to itself, the crisis will be over before you know it. Prices will fall, markets will clear, and we'll be back on that long-run trajectory that is driven by technological progress.
Of course, some smart people will become very rich in the process at the expense of the fearful.
Counter
Go Skins
