Friday, April 18, 2008
The light at the end of the credit crunch?
I'm on dangerous ground here, since all three of my co-bloggers know more about this stuff than I do, but I think our credit markets have moved beyond the end of the beginning.
In my job, I am delighted with the almost constant attention of bankers. I've noticed in the last few weeks that they are more expansive about lending than they were for most of the winter. This has made me wonder whether the credit crunch, at least for corporate debt, is easing. There's a nuanced answer, which is that it depends on who you are and what you want to do with the money (it is best not be the equity sponsor for a highly-leveraged acquisition). The simple answer, however, is "yes, Virginia, the credit crunch is easing."
Floyd Norris is on to this in his column in today's New York Times.
Business is bad, but the capital keeps pouring in.
Since the big banks first realized last fall that their capital situations were perilous, more than $100 billion has been poured into them. Without all that cash, the system would be in horrid shape, and there would be a lot more blood on the Street.
Some Wall Street bosses now profess to see light at the end of the tunnel, and they may be right.
Norris notes that various financial executives have proved to be too optimistic, predicting the end of big write-offs for their company only to cough up another few billion in losses a quarter or two down the road. But losses are only one side of it. If big investors, who get access to information that is not necessarily available to the public, keep pumping in money they must be believing the happy stories I keep hearing of progress in cleaning up bank balance sheets. That does not mean that the next unemployed guy with $10,000 in credit card debt will be able to take out a jumbo mortgage any time soon, but it does mean that there will be money available to move assets around, which is the first thing that needs to happen for the economy to restructure.
The Norris column does contain one interesting bit that was more than a little curious. He essentially alleged accounting fraud at Merrill Lynch:
Three months ago, at the World Economic Forum in Davos, Switzerland, I commented to one of the best-known men in American finance that he seemed pretty glum.
He agreed, and said that was true for virtually every financial executive there.
But he said, there was one exception. John Thain, the newly appointed chief executive of Merrill Lynch, was smiling a lot, he said, and with good reason.
He asserted that Mr. Thain knew that Merrill had taken at least $2 billion more in write-offs than were really needed, leaving him an ample cushion for any new problems that might appear.
If so — and Mr. Thain would not comment when I asked him about it — the optimism was misplaced. On Thursday, Merrill announced an additional $6.5 billion in new write-offs.
Of course, it is not good accounting to take "more write-offs than [are] needed" or to have any sort of "cushion" to lie on, and Norris should know that. As events unfolded it was factually untrue, insofar as Merrill took massive additional charges, but if the opposite had happened then Norris would have essentially accused Thain of spring-loading his earnings. Since I doubt that John Thain would be stupid enough to confess such a thing even after a few glasses of wine among friends at Davos*, Norris' "source" was probably just flapping his gums and acting like a know-it-all. It is surprising that Norris did not realize that.
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*Arrogance watch: If my company was blowing out billions in write-offs, I would not be seen hobnobbing among the glitterati in Davos while it was happening. But maybe that is just me.
11 Comments:
By 
, at
Fri Apr 18, 08:34:00 AM:
My own experience with a BIG home improvement loan, at a decent interest rate, would support your hypothesis.
By 
Charlottesvillain, at
Fri Apr 18, 08:59:00 AM:
I'm glad to hear some good anecdotes to go with the bad. Of course one of the big sources of funding for bank debt has been the CLO market. I've heard some signs of thawing there too, so maybe things are starting to move.
On the other hand, we've had historically low corporate defaults for several years. Even a reversion to the historical mean would mean a pretty large bulge coming.
Its very hard to handicap this stuff, for sure. I will say that, based on what I'm reading, residential real estate has not bottomed, and that will continue to create problems on the consumer credit side.
By Andrew Hofer, at
Fri Apr 18, 09:36:00 AM:
If easing the turmoil in the interbank market is critical to a functioning banking system (and I would argue it is), we are not there. Here is some skepticism with which I am in general agreement.
By Cardinalpark, at
Fri Apr 18, 09:39:00 AM:
I would tend to agree with TH that the gravest part of the liquidity contraction and therefore credit crunch is receding. The Fed has taken extraordinary steps to minimize the results of their substantial increases in rates which preceded the crunch. And they prevented (for the most part) a damaging loss of confidence in the financial markets that would have resulted from a bankrupt Bear Stearns or like institution.
However, this too will have a next act. The Fed, by bringing rates down substantially, has fueled significant growth in the money supply as measured by M2. By comparison, for the 3 month period ended 3/31, M2 accelerated by 12.6%; whereas during the 3 month period of 4/07 - 7/07, M2 only grew by 3.5%.
As Milton Friedman said, inflation is always a monetary phenomenon -- a product of excessive growth in the money supply. It explains in part why you've seen remarkable increases in commodity prices and a dollar decline.
So the Fed has opted to accept some inflation to minimize the disruption to the overall financial system. When the Fed feels compelled to restore price discipline and pop the next bubble (the commodity markets) and drive rates higher again, the mess next time will instead hit main street -- driving up corproate defaults and fueling a proper recession.
Watch the Fed.
By , at
Fri Apr 18, 10:16:00 AM:
"...more write offs than are needed..." is ALWAYS a desired objective. Your local and state politicians are masters at this.Take any major cost issue, decrease on capital, your next daughter's wedding, putting a new roof on the church or building a new sewage treatment plant. It is always better to err on the high side rather than on the low low.
So, if you don't spend all the money allocated for the purpose, you can return it and claim "under budget" efficiency or you can quietly spend it on other items.
At a bank, an unused writeoff would probably be declared a miracle of fine management and split up among the senior staff.
By Who Struck John, at
Fri Apr 18, 10:26:00 AM:
I think the crunch has temporarily moderated, but that it is still with us. Look at how wide the TED spread remains; that signals that banks are still reluctant to lend to each other.
I'm glad to hear that you're seeing banks willing to lend to creditworthy businesses and individuals. That suggests that the first dip will not be as deep or long as I feared.
Longer term, there's still a huge second peak of resetting loans in 2010-2011 that will probably result in a second wave of foreclosures and short sales.
I think we're in for a W recession (two dips). I hope we avoid a lazy W recession (two down legs separated by a plateau instead of a peak).
By , at
Fri Apr 18, 11:21:00 AM:
I'm not in the market every day, or anything close to it, and so my "knowledge" isn't knowledge but only a guess, but the credit issues have always looked to me to be disproportionately applied to different sectors of the economy. Corporate debt has been O.K., as you would think looking at defaults, but inter-bank lending, hedge fund lending and even lending to non-bank financials (like AMEX) has seemed especially stressed. To me, this doesn't look like a "recession". It looks more like a giant short squeeze against the dollar and banks. Short squeezes don't end quietly, and if this were truly "over" I think you'd be looking at healthy bank stocks leading a charge upwards. I don't see that yet, though I admit to buying a bit of Lehman and USB two weeks ago. We'll see how that turns out.
By Escort81, at
Fri Apr 18, 01:22:00 PM:
Different segments of the debt market might recover at different times, obviously. Lots of corporate borrowers are OK, and banks will now lend to them, which is a good thing. Institutions are still getting new infusions of capital (see Wachovia, as relates to the mortgages from the recently acquired Golden West business), so the process is ongoing. I think there is still some marking to market to go through in certain residential real estate markets, that, until that process is relatively complete, we won't have a full return to normalcy in terms of mortgage origination and securitization (hopefully without the crap, this time.)
And Thain is not that stupid. Anyone who knows anyone who works/worked at GS when he was there (before the NYSE job) knows that. The only really dumb GS partner was Jack Ryan, for marrying Jeri, which led to kinky divorce and custody records being unsealed and Ryan dropping out of a certain Senate race ultimately won by a certain soon-to-be presidential nominee.
By Cardinalpark, at
Fri Apr 18, 01:50:00 PM:
E81 - LOL. FWIW, I used to work there, and knew both of them reasonably well. And you are right, Thain is infinitely brighter than Ryan. Furthermore, as Goldman's former CFO, Thain would never, ever have a) publicly disclosed anything like what Norris reports for legal compliance reasons and b) would never be so confident as to assert that he knew the future direction of where marks on dodgy securities were headed. Norris's reporting is pure gossip, and not credible.
Merrill is exceedingly lucky to have secured Thain for the job.
As for Ryan, it is funny to imagine what might have happened had he won the Senate election. Amazing the toll marital and extramarital foibles have had on Hillary.
By , at
Fri Apr 18, 08:34:00 PM:
if you think being a senator is somehow more "rewarding" than being married to jeri ryan, than there's a bthroom stall in the minneapolis airport waiting for you :)
By Escort81, at
Fri Apr 18, 09:31:00 PM:
cjm -
Good one! I don't have a wide enough stance for that stall, however.
I do know that if I had a legally binding relationship with any woman, and especially one that looked like Jeri Ryan (but without the Star Trek makeup, which never did much for me), I would keep it out of the arena of team sports and maintain it as a one-on-one endeavor. I am pretty secular, but it turns out there is something to that one flesh concept after all, if you are married. But hey, whatever floats your boat.
Anyway, since CP knew both of them at GS, I'll go with his take on it.
