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Friday, November 02, 2007


nabe podcast: the credit crunch

through itunes here. among many interesting observations:

-- the fed and treasury, by super-sivs and rate cuts, are desperately trying to slow the process of (impaired) credit repatriation back into the banking system.

-- they have to because the banks -- notably citi -- don't have sufficient capital to withstand a fast flow; this magnifies the importance of a capital-light super siv; in other words, the banking system has profound solvency issues.

-- the monolines are on their way to bankruptcy, and their role and credits may have to be assumed by fannie mae among other pools of capital.

-- what is going on now is the first of two waves of trauma the credit markets related to mortgages are in for; we are currently repricing risk from highly levered levels, and that is very painful; but there is a second wave coming for mortgage-backed debts related to actual asset price deflation, where falling home prices combine with rate resets to fuel credit destruction.

-- the expectation is for real housing price falls in the area of 30% nationally; estimates of direct credit contraction related to a 15% decline by the end of 2008 were in the $1.2tn range.

-- recession is now and will fuel a potential third wave of credit destruction, as job losses send whole new groups of defaults into not only mortgages but auto loans and credit card debt, which is also becoming strained in the absence of mortgage-equity withdrawal (mew).

-- it is probably inevitable that the federal government will step in with tremendous bailout proposals in order to further slow the clearing mechanisms of the market; the result is likely to be a japan-style malaise lasting many years.

one of the questions not addressed, particularly as relates to the super siv: it requires investors, and a LOT of them. are traditional commercial paper buyers going to be willing to buy? if they are not, the super siv is dead on arrival and credit repatriation will accelerate. will there be an explicit government guarantee of capital?

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