US Could Be Heading for a Recession

Discussion in 'Wall St. News' started by wareco, Aug 26, 2007.

  1. Former US Treasury Secretary Larry Summers warned that the United States may be heading into recession as the biggest victim to date of the sub-prime mortgage debacle was humiliatingly sold for a token sum in Germany.

    Traders are braced for another week of turmoil after the near breakdown of America's $2,200bn (£1,100bn) market for commercial paper.

    "It would be far too premature to judge this crisis over," Mr Summers said. "I would say the risks of recession are now greater than they've been any time since the period in the aftermath of 9/11."

    In Germany, it emerged that the state-bank SachsenLB may have accumulated $80bn of exposure to risky assets through a set of Irish funds kept off balance sheet.


    The regional government of Saxony agreed yesterday to sell the East German bank - the biggest victim so far of the worldwide credit rout - for a token €300m (£204m) to the Landesbank Baden-Württemberg in Stuttgart (LBBW), ending a three-week saga that has revealed the extent of German involvement in the some of the most treacherous areas of US sub-prime debt.

    Georg Milbrandt, prime minister of Saxony, said the sale of state-owned lender was the only viable option.

    "Given the market turbulence and the pressures on the bank, it could not have gone on without a partner. We want to get our ship off the high waves and into a safe port," he said.

    Sachsen LB, founded in 1992 after the fall of the Berlin Wall, was rescued two weeks ago in a state orchestrated bail-out. A consortium of banks agreed to provide a €17.3bn credit lifeline, but only on the understanding that it agreed to be sold to a stronger player.

    It allegedly used no fewer than five Irish 'conduits' (off-balance sheet vehicles) to invest in collateralised debt obligations (CDOs) and other high-risk instruments, according to German newspaper Süddeutsche Zeitung.

    The biggest losses stemmed from structured investment vehicles (SIVs) which involve using short-term credit to buy longer-term assets, creating a mismatch in maturities.

    The rescue deal comes as investors waited to learn whether the US Federal Reserve would succeed in stabilising the US commercial paper market, the latest - and biggest -domino to fall in the spreading contagion from sub-prime debt. Investors have suddenly lost trust in this form of debt, fearing it may be tainted by exposure to CDOs.

    Stock markets rallied strongly late last week on the belief that the Federal Reserve would start to cut its key lending rate in September, and that the European Central Bank would refrain from further tightening. Goldman Sachs said any hint the banks may prove more hawkish could quickly dampen investor spirits again, warning it was too early to give "all clear" on equities.

    Federal Reserve data shows that the outstanding stock of US commercial paper has fallen by $255bn over the last three weeks, a sign that borrowers have been unable to roll over huge amounts of debt. The fall is comparable to the sudden shrinkage that occurred at the onset of the dotcom bust, and may have the effect of draining liquidity.

    The New York Fed issued a statement on Friday stressing that asset-backed commercial paper (ABCP) would be accepted as collateral for loans to banks from the discount window. The move has helped trim the average yield slightly to 6.04pc, helping to calm a key part of the money market that lubricates the financial system.

    Even so, the cost of this credit is still up roughly 80 basis points since late July - for those borrowers who can obtain it at all. Bill Gross, head of the US bond-giant PIMCO, said parts of the commercial paper industry were now so discredited that it may be impossible to revive them.

    A string of Germany banks have run into trouble after taking leveraged bets on CDOs and the even more deadly 'synthetic' or derivative CDOs - bond-like securities that often contain slices of US mortgage debt.

    The scale of carnage in Europe explains the series of emergency actions by ECB, which injected a further $85bn in liquidity through various mechanisms last week. IKB was the first German bank to crumble earlier this month, requiring an €8.1bn state-rescue just days after it denied any significant exposure to sub-prime debt. By Ambrose Evans-Pritchard

    http://www.telegraph.co.uk/money/ma...CBQWIV0?xml=/money/2007/08/27/cnusecon127.xml
     
  2. Larry Summers needs to check himself into the Mayo clinic to get an Alzheimer's test.
     
  3. The good part of this (from a US point of view) is that:

    the market did its job - the risk was spread onto the risk takers. The risk takers just seemed to have been asleep at the switch here...

    since there was a significant appetite for these worldwide (Germany, Australia and many other places), a lot of cost was offshored from the USA, saving some loss here.
     
  4. The US doesnt have much of economy anymore, just Disney World and consumer spending. Once consumer spending disappears, so long America.
     
  5. We've been hearing this "the consumer is done" nonsense since five years now. That doesn't mean it will never come true, it's just like a broken clock.

    I see no need to join the tinfoil perma bears before the fact happens. Let's see non-farm payroll, let's see consumer confidence, let's see ISM numbers.
     
  6. S2007S

    S2007S

    "could be"


    I think the US is already in a Recession.
     
  7. check credit card debt MoM changes. and you will see the consumer is clearly done.
    Fed can do nohing but inflate.
    Consumers borrow and borrow and borrow. Then bad credit happens.Then Fed bails out banks
    It buys some time but makes things worse.
     
  8. With a 4.5% unemployment rate, I disagree. The Rocky Mountain states are at full employment, it is a major struggle to find workers.

    The USA still manufacturs twice the dollar value of China.

    The US economy still dominates any other country. The dollar still rules worldwide.

    Nobody touches the USA in creativity or new development in many areas, from software development to medical to many other industries
     
  9. Just so you understand what you're saying with the above statement. After +0.6% (Q1) and +3.4% (estimate for Q2)

    a) you're saying the Q2 number will be revised to negative growth after the 3.4% estimate
    b) you're saying Q3 growth (current quarter) will come in negative

    Thus you'd have two consecutive quarters of negative GDP growth which would match your opinion "we are in a recession already". Objective conclusion after looking at the facts:Enjoy wearing the tinfoil hat, you are completely out of your mind and delusional.
     
  10. Sounds like the Rothschilde's and Warburg's created a fire sale for themsleves yet again
     
    #10     Aug 27, 2007