Credit Crunch: What me Worry?

Discussion in 'Economics' started by plugger, Nov 22, 2007.

  1. plugger


    Here's a story that appeared on Bloomberg:

    Europe Suspends Mortgage Bond Trading Between Banks (Update3)

    By Esteban Duarte and Steve Rothwell

    Nov. 21 (Bloomberg) -- European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.

    The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.

    Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded banks pay the highest interest premiums on covered bonds in five years.

    ``We are in a deteriorating situation,'' Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview. ``A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.''

    Sales Pulled

    Covered bonds are securities backed by mortgages or loans to public sector institutions. The notes offer more protection to bondholders than asset-backed debt because the issuing bank is liable for repayments. They typically have the highest credit ratings.

    ``There's a crisis of confidence for everything but AAA government bonds,'' Arnd Stricker, a management board member at Corealcredit AG, the German commercial property lender owned by Lone Star Funds, said at a conference in Frankfurt. ``Covered bonds are being thrown in the same basket'' as mortgage securities, even though they are safer, he said.

    Abbey National in London said today it postponed its sale of covered bonds because of ``poor'' demand. AIB Mortgage Bank, a unit of Dublin-based Allied Irish Banks Plc, pulled a covered bond sale in euros yesterday and Ahorro y Titulizacion, an investment unit controlled by Spanish savings banks, decided against issuing the debt on Nov. 16.

    Northern Rock Plc, which suffered the first run on a U.K. bank in more than a century, may have the top credit ratings on its covered bonds cut by Moody's Investors Service, the ratings firm said yesterday.

    Spreads Widen

    ``In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads,'' the committee of banks and borrowers ``recommends that inter-bank market making be suspended,'' the council said in an e-mailed press statement.

    The extra yield, or spread, that investors demand to hold covered bonds sold by German banks instead of government debt has climbed to 38 basis points from 23 basis points six weeks ago, according to Merrill Lynch & Co. indexes. The premium is the widest in more than five years.

    Some banks agreed to stop providing prices on covered bonds for half a day on Aug. 16 to stem losses from widening spreads, according to Johannes Rudolph, a covered bond analyst at HSBC in Dusseldorf. Today's suspension is the first from the industry association, ECBC's Amat said.

    ``Conditions have really weakened over recent days,'' said Andreas Denger, a covered bond analyst at Calyon SA in London. ``Most investors are not willing to invest in the current volatile market.''

    Pfandbrief `Solidarity'

    Trading in Germany's pfandbrief market was also suspended in a sign of ``solidarity,'' said Helga Bender, a spokeswoman for the German Pfandbrief Association VDP's German Market Maker and Issuer Committee. Pfandbrief bonds are a subset of covered bonds with stricter regulations.

    The European covered bond market grew in out of the pfandbrief market. The first covered bond was issued in 1769 when King Frederick the Great of Prussia needed to rebuild the country after the Seven Years War against Austria an d Saxony. Spain, Ireland, Sweden, Denmark, Norway, Finland, France, Portugal, and Italy have new created laws to expand the market, according to Standard & Poor's.

    The ECBC started in September an ``8-to-8 committee'' of eight banks that arrange covered bond sales and eight representatives for issuers of the debt to set recommendations in deteriorating markets.

    ``Without market making between banks, investors will shun the sales of new covered bonds,'' said Santiago Rubio, who oversees 14 billion euros ($21 billion) of assets as head of fixed income at La Caixa's asset management arm in Madrid.

    A very clever way to keep prices from falling further, simply suspend trading. Very confidence inspiring.

    Meanwhile credit spreads continue to widen. The CMBS spread has widened from from 136 bp on Feb 23 to 672 bp on November 21.

    But in the words of stockhold3r, there is no credit crunch. If you see someone in a store using their credit card, that's proof there is no credit crunch.
  2. America's only trade surplus: Panic
  3. I love PANIC ! :D
  4. I am thinking out loud here...

    Opportunity comes to us disguised as problems.

    I wonder what kinds of businesses can benefit from a crisis such as this?

    Houses might be sold. Perhaps houses might be beautified before and after sale.

    Paint companies Sherwin Williams SHW

    Interest rates might decrease as The Government finances these mortgages. High yielding stocks in basic goods and services might be attracting capital.

    Utility stocks pay a high yield and are defensive investments. I observe the Dow Jones Utility index is near the highest value in ten years.

    The banks might be planning this: Banks package all their junk mortgage securities into an exchange traded fund (ETF) and sell it to public investors during the next big rally. If interest rates go lower then public investors might be interested in the high yielding ETF. Underwriters could manipulate price higher during the next rally and securities brokers could call up clients and talk bullish. CNBC could have guests recommending such funds. Perhaps an academic person could publish a study showing similar investments add valuable diversification to a portfolio and are especially suited for IRA's. The result is the losers get transferred out of the banks and onto the general investing public. It's like for high yielding junk mortgages.

    I search the internet and observe recent activity in the area:

    July/August 2007, Wealth Manager magazine

    What Should Investors Expect From The New High-Yield Bond ETF.

    By James Picerno

    It was easy to overlook the news amid the
    avalanche of ETF launches. But recognized or not, the April
    launch of the new Barclays iBoxx $ High Yield Corporate Bond
    ETF (Amex: HYG) is a minor milestone for strategic investors.

    And one that’s been a long time coming. Barclays first sought
    regulatory approval for the security in the summer of 2003.
    Nearly four years later, the shares finally started trading. What
    took so long? Because this is the first ETF offering exposure to
    the high- yield market, there was a greater level of scrutiny than
    there might be for other products, says Matthew Tucker, head of
    investment solutions at Barclays Global Investors.

    The ETF is the first junk bond index fund of any kind in the
    U.S. market. Even among the dozens of mutual funds plying the
    lower-grade debt market, no publicly traded portfolio formally
    tracks an index.{73646ACB-43E3-4F0D-828F-87A4B8292540}&dist=rss

    Adding junk to the ETF pile
    Barclays Global Investors registers high-yield corporate bond product
    By John Spence, MarketWatch
    Last Update: 1:28 PM ET Jan 18, 2007
    BOSTON (MarketWatch) -- Barclays Global Investors has junk in the trunk.

    BCS 40.46, -1.81, -4.3%) filed a registration statement Wednesday with the Securities and Exchange Commission for an exchange-traded fund tracking the high-yield corporate bond market.
  5. credit seems to be locking up in the capitalist "free" economies...

    where are Chindia and the middle east buyers for the Euro mortgage debt??

    sure helped the gold market today...on what was supposed to be a nothing session...
  6. M3 is smokin' ....

    10 year treasuries yielding 4%, I mean who's buying that other than scared critters from the mortgage market...

    the 10 year is a warehouse for the "dont know what to do" crowd

    an opinion of course and I could be wrong...
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